-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BMtBZJDzQKX91uE4IOo/LPXYQqkv7L0gMePMRgUoi1Z56OK/LClATDisyRyiuVi8 OI3pVk9/qpf9r4OoqJ0bxw== 0001045969-00-000218.txt : 20000329 0001045969-00-000218.hdr.sgml : 20000329 ACCESSION NUMBER: 0001045969-00-000218 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WEBB INTERACTIVE SERVICES INC CENTRAL INDEX KEY: 0001011901 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 841293864 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-28462 FILM NUMBER: 580144 BUSINESS ADDRESS: STREET 1: 1800 GLENARM PLACE STREET 2: STE 800 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3032969200 MAIL ADDRESS: STREET 1: 1800 GLENARM PL STREET 2: SUITE 800 CITY: DENVER STATE: CO ZIP: 80202 FORMER COMPANY: FORMER CONFORMED NAME: ONLINE SYSTEM SERVICES INC DATE OF NAME CHANGE: 19960410 10KSB 1 FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number December 31, 1999 0-28462 WEBB INTERACTIVE SERVICES, INC. (Exact name of registrant as specified in its charter) Colorado 84-1293864 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1800 Glenarm Place, Suite 700, Denver, CO 80202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 296-9200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [__]. Registrant's revenues for fiscal year ended December 31, 1999: $1,944,283 Aggregate market value of voting stock held by non-affiliates of registrant as of March 17, 2000: Approximately $356,122,556. Number of shares outstanding as of March 17, 2000: 8,995,371 shares of common stock, no par value. Documents incorporated by reference: Definitive Proxy Statement for 2000 Annual Meeting of Shareholders for Part III. 1 PART I Item 1. DESCRIPTION OF BUSINESS. General Webb Interactive Services, Inc. ("Webb") provides innovative advanced online commerce and communication solutions for small businesses, with a particular emphasis on local commerce interaction. Our AccelX(TM) product line of XML-based commerce and buyer-seller interaction services provide businesses with powerful web site development and communication tools to attract customers, generate leads, increase buyer-seller interaction and strengthen customer relationship management. The AccelX services are divided into two categories: Customer Relationship Management (CRM) services and Marketplace Services. We license our services on a private-label basis to high-volume distribution partners such as yellow page directory publishers, newspapers, city guides, vertical market portals and other aggregators of local businesses. Our products are designed to be delivered on an application service provider (ASP) business model whereby we host the software on our servers and deliver and manage the service on behalf of our distribution partners. Generally, these services are provided on a revenue-share basis providing us with recurring revenues as our distribution partners sell these services to their small business customers. This distribution model is designed to provide us with a growing base of businesses using one or more of our services who are ideal customers for additional AccelX services. Prior to the third quarter of 1997, our focus generally was on three markets: general web site development, maintenance and hosting; rural or small market Internet service providers (ISPs); and healthcare information services and continuing medical education. Each of these activities involved, to varying degrees, the building of online communities and the development of tools and services to allow for the building of strategic and customized web sites. As an outgrowth of these activities, since mid 1997, our business has evolved to the development of online communities. Most recently, we have combined our community-building and communications expertise with acquired expertise in local commerce to develop applications for small businesses. The combining of community communications and e-commerce for the unique needs of small businesses and local commerce interaction represents Webb's primary business focus. We also provide e-banking services for financial institutions and have recently initiated an effort to commercialize the Jabber.org instant messaging technology. Our strategy is to grow our local commerce business by: o Delivering first-to-market execution and expert technical solutions that capitalize on our expertise in commerce, community building and communication; o Securing additional distribution partnerships to rapidly expand the deployment of our services; o Expanding our value-added services to enhance buyer-seller interaction; and o Developing strategic alliances in order to more rapidly gain market share. AccelX services utilize instant messaging to enhance the interactive communications between buyers and sellers. In 1999, we became the initial sponsor of the open-source XML-based instant messaging software development initiative known as Jabber.org. as we believed it provided the best instant messaging platform for our application services. We believe that instant messaging will evolve from its primary use today by personal computer users for instant chat communications to provide a foundation for an entire new class of programs, with applications such as voice over the Internet, mobile communications, enterprise communications and collaboration, real-time online auctioning and customer relationship management. For this reason, we have formed a subsidiary, Jabber, Inc., in order to commercialize this business opportunity separately from our local commerce business. We were incorporated under the laws of the State of Colorado on March 22, 1994. Our executive offices are located at 1800 Glenarm Place, Suite 700, Denver, Colorado 80202, telephone number (303) 296-9200. 2 Investment Considerations Investors should consider all of the information contained in this report including the factors discussed under "Item 1 - Description of Business - General, Competition and Factors That May Affect Future Results," and "Item 6 - Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Item 7 - Financial Statements" before making an investment decision with regard to our securities. Some of the statements made in this report in the sections above and elsewhere in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to the safe harbor provisions of the reform act. Forward- looking statements may be identified by the use of the terminology such as may, will, expect, anticipate, intend, believe, estimate, should, or continue or the negatives of these terms or other variations on these words or comparable terminology. To the extent that this report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of Webb, you should be aware that our actual financial condition, operating results and business performance may differ materially from that projected or estimated by us in the forward-looking statements. We have attempted to identify, in context, some of the factors that we currently believe may cause actual future experience and results to differ from their current expectations. These differences may be caused by a variety of factors, including but not limited to adverse economic conditions, intense competition, including entry of new competitors, ability to obtain sufficient financing to support our operations, progress in research and development activities, variations in costs that are beyond our control, adverse federal, state and local government regulation, unexpected costs, lower sales and net income, or higher net losses than forecasted, price increases for equipment, inability to raise prices, failure to obtain new customers, the possible fluctuation and volatility of our operating results and financial condition, inability to carry out marketing and sales plans, loss of key executives, and other specific risks that may be alluded to in this report. The Market The Internet is a global web of computer networks. Developed over 25 years ago, this "network of networks" allows any computer attached to the Internet to talk to any other using Internet protocols. Increased Internet use and the availability of powerful new tools for the development and distribution of Internet content have led to a broad and substantial proliferation of Internet based services. In what by historical standards is a remarkably short period of time, the Internet has become an important mass medium for information collection and distribution, communication, commerce, entertainment and other forms of communication. Internet Data Corporation estimates that the number of Internet users worldwide will grow from approximately 69 million users in 1997 to 320 million users in 2002. The commercial potential for the Internet has given rise to web sites through which businesses, communities, media companies, news services, affinity-based groups and individuals can inform, entertain, communicate and conduct business with each other worldwide. Market Facts, an Internet research company, reports that approximately 88% of Internet users go online to seek additional information, 31% to communicate and 18% to shop. Forrester Research, Inc. has estimated that local online sales will rise from $680 million in 1998 to more than $6 billion by 2003 and that online advertising to support these sales will increase from $135 million to $1.7 billion during this same period. This compares to expenditures reported to exceed $85 billion per year by local businesses for traditional media for locally-focused advertising and business promotion. The success of early e-commerce pioneers such as Amazon.com is in large part due to their ability to aggregate retail content and enable simplified comparison shopping. In "national" consumer goods markets, this is relatively straightforward, since many of the catalog databases underlying this approach already existed and could be easily web-enabled. In the "local market", however, the challenge is radically different. Unlike the national market that is made up primarily of catalog-oriented merchandisers, the local market is dominated by service companies and retailers who have a relatively limited ability to manage information technology. The content underlying local e-commerce, representing millions of individual merchants and service companies, exists in a far less structured form than for national markets. In business-to-business markets, the use of CRM and Marketplace Exchange Services has 3 demonstrated significant growth opportunities. However, for small businesses, their online activities have largely been limited to the creation of an initial web site presence, as they have had few alternatives for active online promotion of their businesses and interaction with online customers. In a recent study, the Kelsey Group (Local Commerce Monitor, May 1999) interviewed 1,400 small and medium-sized businesses that met the "local market focus" criterion of receiving more than 75% of their business from customers located within 50 miles of their establishment. The survey found that: o The number of local businesses with a Web presence is projected to grow 20% per year for the next five years, reaching in excess of 5 million by 2004. o Currently 1.9 million businesses have a web site and another 1.3 million plan to have one by the end of 2000. o Those 1.9 million web sites cost $2.8 billion per year, including access, design and hosting, and it is projected to exceed $7 billion by 2004. o E-commerce transaction capability exists on only 10% of today's local web sites while over 26% of the study participants stated that it was essential to be able to sell their products over the Web. In separate releases, the Kelsey Group has indicated that local businesses drive $3 trillion in local revenues each year and that e-service business will capture $3.4 billion in revenues by 2004. According to the Kelsey Group, small businesses are looking for online services that will allow them to: o Contact suppliers and vendors - 73%. o Distribute information to customers - 66% o Advertise or promote their business - 65% o Provide customer service and support - 41% o Qualify leads - 36% o Send promotional messages to customers - 36% Webb's Strategy Webb is developing easy-to-use online services specifically designed for the needs of small businesses, with special emphasis on local market interaction. Our AccelX services are focused on bringing the essential value of CRM and Marketplace Exchange services to small businesses, by providing our distribution partners with application services that package new methods of promotion, lead management and buyer-seller interaction. Our products and services are offered on an application services provider (ASP) basis, enabling local businesses to use one or more of our services on a cost-effective basis and to easily expand the services they use as their needs evolve and grow. We license our products and services on a private-label basis to high- volume distribution companies such as yellow page directory publications, newspapers, city guides, vertical market portals and other aggregators of small businesses. Our business model is designed to create a strong distribution network selling our application services to a large number of small businesses without incurring the high cost of marketing our services to end users. This distribution network is intended to provide Webb with a growing base of businesses using one or more of our services who are ideal customers for additional AccelX services. Our strategy is to grow our business by: o Developing first-to-market execution and expert technical solutions that capitalize on our expertise in commerce, community design and communication. Our products are based on XML (Extensible Mark-up Language) technologies which constitutes a significant improvement from the current HTML (Hypertext Mark-up Language) generally used on the Internet. The use of XML technologies enables us to create a flexible structure for the content of web pages, simplifying web site development and design and making searching more 4 meaningful; to separate the content of a web site from its presentation, for example, content such as a special offer can be dynamically presented in a variety of forms, such as a web page, a searchable database of specials, a banner ad or incorporated into an e-mail newsletter targeted to a particular zip code. We are also developing advanced communications services that incorporate instant messaging as a key application for commerce-oriented dialogs between businesses and consumers. We were the initial sponsor of the Jabber.org instant messaging system. The Jabber instant messaging system is open source, simple, fast, highly modularized and platform independent. It is designed for compatibility and interoperability with other proprietary messaging systems. Jabber was the first instant messaging system to integrate XML technologies. o Securing additional distribution partners to rapidly expand the development of our technologies. Our distribution strategy is focused on large aggregators of small businesses rather than on end users. We believe that this will enable us to reach large numbers of end users much more rapidly than we would be able to do by marketing directly to end users and to avoid the high costs associated with attracting, servicing and supporting potentially millions of consumers and businesses. As of the date of this report, we have established distribution partnerships with CBS Switchboard, Inc., Bell Actimedia, Inc., SmallOffice.com, Corel Corporation and RE/MAX International, Inc. These distributors pay us a fee based on a transactional, membership or per application basis. o Expanding our value-added services to enhance buyer-seller interaction. We are currently marketing our AccelX Site Builder and Notify products and our e-banking services for small to medium-sized financial institutions. During 2000 we intend to increase our AccelX product line to include a suite of offer management services and an exchange service for local businesses and to create a marketplace solution which will enable our distributors to create Internet marketplaces for their small-business customers. We also plan to introduce a version of our Notify product for our e-banking services. o Developing strategic alliances in order to more rapidly gain market share. In order to increase the value of our e-banking services business with minimal impact on our primary market focus, we are seeking a strategic alliance with a financial service business. We have also recently announced the formation of a subsidiary, Jabber, Inc., to pursue the commercialization of our instant messaging business separately from our local commerce business. We seek to acquire new technologies or capabilities through the acquisition of other businesses. On June 30, 1999, we acquired Durand Communications, Inc. in order to expand our Internet communications and community building capabilities. During June 1999 we also acquired NetIgnite, Inc., a recently- formed company emphasizing the early deployment of XML-based technologies. During January 2000, we acquired the business of Update Systems, Inc., a leading customer relationship management solutions company for small businesses. See Notes 9 and 16 of the Notes to Financial Statements. Products and Services Webb is primarily focused on its core AccelX businesses. In addition, we have a business unit focused on e-banking and another on instant messaging. In the local commerce segment, we target distribution of application services for small and medium-sized local businesses with our AccelX product line supporting XML-based commerce and buyer-seller interaction. Our e-banking business targets credit unions, community banks and savings and loan institutions with a full line of e-banking transaction processing account management services. Jabber, Inc., a new subsidiary, was recently formed to commercialize the Jabber.org open source instant messaging system. AccelX The AccelX product platform centralizes the management of online interaction with a suite of integrated advanced communication technologies. The platform combines messaging applications and community-building tools with powerful storage technology. With a foundation based on XML technologies and open communications, the platform is designed for growth and the integration of future communications-based commerce modules. Features include: 5 o Commerce communications are stored in a Message Warehouse for Message Mining, allowing buyer-seller interaction to be tracked, analyzed and reported. o Forms can be created interactively for data collection and display, enabling small businesses and aggregators to quickly customize solutions for their markets. o Unified messaging will allow communications to be delivered between the devices of choice, whether a pager, fax machine, e-mail or instant messager. o Integrated community and communication components. The AccelX product design is based on the fact that most local businesses are either service-based businesses or have limited information technology infrastructures. Our solutions enable these businesses to leverage the web to attract, retain, and manage customer relationships by applying the web to better match their products and services to meet customer demand. AccelX products and services are divided into two categories: Customer Relationship Management (CRM) Services; and Marketplace Services. CRM Services. The AccelX CRM solution is an integrated suite of services designed to allow local businesses to better manage their customer life-cycle, from lead generation to customer acquisition and retention. Fashioned as a powerful but very intuitive suite of services for local businesses, AccelX CRM provides businesses with a simple means of leveraging the power of online promotion and e-mail to attract and retain customers as well as to help create new online-relationships with their customers. AccelX CRM modules include: Site Builder; Notify; Request; and Promote. We are currently offering the Site Builder and Notify modules and expect to begin offering the Request and Promote modules in the second half of 2000. Site Builder. Site Builder is a template driven web site publishing service. The service is easy to use, permitting the computerized creation of XML-enabled web sites. Features include: o Use of professional graphics design rules, allowing high-quality sites to be generated following simple questionnaires that can be completed in minutes. o Use of an XML database of all content, permitting this content to be leveraged for enhanced shopping, promotion and marketplace services. o Ability to be used in our distribution partners' telephone sales operations. o Easy to expand to allow local businesses to interact and communicate with their customers utilizing other AccelX CRM services. AccelX Notify. Notify is an email and instant messaging notification system that enables local businesses to strengthen their customer relationships and to expand their cross-selling capabilities to their existing customer base. Features include: o Opt-in Email - an easy to use service for delivering thousands of individually targeted email messages. o Profile - a self-populating and subscriber-edited form for collecting a database of subscribers based on their needs and interests. o Preferences - easy to use administrative functions to design sign-up pages. AccelX Request. Request is an interactive communication service that enables local businesses to more efficiently qualify leads, process customer inquiries and maintain high qualify customer service. Features include: 6 o Request for Information - services to automate customer requests for information such as price, order status, inventory availability and appointments o Unified Messaging - delivery of leads and information via fax, e-mail, pager, instant messaging or chat o Real-time Interaction - communication tools for buyer-seller interaction including instant messaging and chat AccelX Promote. Promote offers management services that enable local businesses to have greater control over their promotional offers. It also provides alternative online delivery channels for targeting local buyers. Features include: o Offer Creation and Delivery - a template-driven service for creating and delivering banner ads, coupons, business specials/sales and emails o Prospect Database - an online database for maintaining a current list of prospects and relevant profile information o Enhanced Directory Listing - ability to expand a business' current online listing to include additional data such as hours and product or services offered. Marketplace Services - The AccelX Marketplace Services will allow businesses that aggregate local buyers and sellers to create more dynamic and interactive marketplaces. These services are intended to package common requests between buyers and sellers that can be published for simplified buyer-seller interaction and can be the foundation for advanced community-centric commerce. Solutions that are planned to be offered late in 2000 include: o Group Buying - buying services that will provide limited-time buying opportunities during which consumers can directly influence pricing. o Buying and Pricing Services - will enable customers to fill out online forms detailing the service or product they are looking for. The form will then be sent to multiple local businesses that can fulfill their request. Customers would no longer have to browse multiple web sites or make multiple telephone calls with the same request. Sellers can gain qualified leads from customers who are looking for their product or service, and who are ready to buy. o Direct Marketing - will provide consumers with an opt-in notification service. Consumers could then sign up to be emailed with relevant promotions and offers in their local market. Businesses will get a highly targeted channel for reaching local buyers. o Sales Calendars - will provide consumers with an online calendar that will organize and display all of the aggregated local sales, discounts and specials of interest to a customer. Local businesses will get a new channel for promoting their business. o Local Communities - will provide online forums for local groups of consumers to share and exchange information and opinions. Businesses will also be given the ability to target local consumer groups. E-Banking Services We have developed an online banking solution specifically targeted at smaller financial institutions having less than $500 million in assets. Our financial services solution is based on transactional foundation software from Edify Corporation. The Edify software has been chosen by many corporations and financial institutions and is the foundation of the web-banking systems of some of the nation's largest banks. We have taken a service bureau approach to e-banking, which enables us to provide smaller community banks and credit unions with many of the capabilities and services available to the larger banks without the cost associated with the development of bank-specific systems. Our e-banking system includes access to account activity, history and current account balance information 24 hours a day, seven days a week, the ability to obtain electronic statements and transfer funds between accounts, pay bills, make loan applications and download transactions into personal financial software such as Quicken or Microsoft Money. We are currently providing online banking services for the Rockwell Federal Credit Union and the Hewlett Packard Rocky Mountain Credit Union. 7 During February 1999, we entered into an agreement with CU Cooperative Systems, Inc., a national co-operative association representing over 600 credit unions, pursuant to which we are developing an Internet e-banking solution for the co-op's members with applications customized for the needs of the co-op and its members. Under terms of the agreement, we are receiving income for system development and will receive fees from individual credit unions who belong to the co-op and who elect to use our e-banking services and ongoing fees based on these credit unions' members' use of the system. Our primary focus is on the development of online commerce and communication solutions for small businesses. For this reason, we are seeking a strategic partner to help us accelerate the development and marketing of our e- banking business. Instant Messaging Our AccelX product line incorporates instant messaging as a key application for commerce-oriented dialogs between businesses and consumers. In 1999 we were the initial sponsor of the Jabber.org instant messaging system, an XML-based open-source initiative, as we believed it provided the best instant messaging platform for our application services. As an open source movement, Jabber.org is able to leverage a large development community, with over 800 registered developers and nearly 300 active developers working on Jabber instant messaging software. The Jabber system is designed for compatibility and interoperability with other proprietary messaging systems and is the first to integrate XML technologies. We believe that instant messaging will evolve from its primary use today by personal computer users for instant chat communications to provide a foundation for an entirely new class of programs, with applications such as voice over the Internet, global communications, enterprise communications and collaboration, real-time online auctioning and customer relationship management. For this reason, we believe that the potential market for the Jabber instant messaging system is much greater than just for use in connection with our services. We have, therefore, formed a subsidiary, Jabber, Inc., in order to commercialize this business opportunity separately from our local commerce business. We have formed an advisory board of industry experts to assist us in developing this business. Current members, in addition to Perry Evans, President and CEO of Webb, include Doc Searls, senior editor of Linux Journal, co-author of "The Clue Train Manifesto," and organizer for the "Linux for Suits" events and web sites; and Eric Raymond, renowned open-source movement advocate, board member of VA Linux, Inc., author of "The Cathedral and the Bazaar" and founder of the Open Source Initiative. Marketing Our distribution strategy is focused on high-volume distributors of products and services to local business, such as yellow page directory publishers, newspapers, city guides, vertical market portals and other aggregators of local businesses. This focus enables us to avoid the high costs associated with attracting, serving and supporting a large number of end users. Typically, we license our applications on a private-label basis to distribution partners who pay us recurring fees calculated on a transactional, membership or per application basis. For example, we will receive from CBS Switchboard.com during the three-year term of the agreement a fee of from $3 to $5 per month per web site created utilizing our AccelX Site Builder service. CBS Switchboard.com also may maintain limited exclusivity for the Site Builder service in a segment of the United States market by paying us minimum quarterly payments, initially $250,000 and increasing to $312,500 in the third year of the agreement. By distributing our services through multiple distribution partners, we believe that we will be able to more rapidly develop a large base of small businesses who are ideal candidates for use of additional AccelX services as these services are developed and as the end user's online needs evolve and grow. The AccelX platform is designed to permit additional services to be added without requiring our customers to make expensive investments in new software or equipment. We employ an executive-level direct marketing and sales model to sell our products and services. During 1999, we limited our marketing and sales efforts as our primary focus was on the development of the AccelX 8 platform. In 2000, we are increasing significantly our marketing and sales activities. Our marketing activities include advertising in trade publications, developing public relations programs featuring us and our products and services and attendance at key industry trade shows. A substantial portion of our sales have historically been derived from a limited number of customers. During 1999 and 1998, four customers accounted for 67% and 71%, respectively, of our sales for the period. During 1999, Switchboard, Inc., Rockwell Federal Credit Union, and CU Cooperative Systems, Inc. accounted for 26%, 19%, and 17%, respectively, of our sales for the period. During 1998, Starstream, Inc., American Telecasting, Inc., Rockwell Federal Credit Union, and Intermedia Partners accounted for 28%, 14%, 14% and 12%, respectively, of our sales for the period. While major customers in one fiscal period are not necessarily anticipated to be major customers in future fiscal periods, the loss of a major customer could have an adverse effect on our business. Trademarks and Proprietary Protection We rely primarily on a combination of copyright, trade secret, trademark laws, and nondisclosure and other contractual provisions to protect our proprietary rights. As a part of our confidentiality procedures, we generally enter into written nondisclosure and nonsolicitation agreements with our officers and employees which restrict the use and disclosure of proprietary information and the solicitation of customers for the purpose of selling competing products or services. We generally have not entered into noncompetition agreements with our officers, directors or employees. Because the policing of proprietary rights may be difficult and the ideas and other aspects underlying our products and services may not in all cases be protectable under intellectual property laws, there can be no assurance that we could prevent competitors from marketing the same or similar products and services. In addition, competitors may independently develop products and services that compete with our products and services. Competition Our current and prospective competitors include many companies that have substantially greater financial, technical, marketing, and other resources than we do. We attempt to distinguish our products primarily on the basis of: o Focus on needs of small businesses; o Use of XML-based technologies; o Integration of instant messaging and community-building technologies; o Breadth and depth of communications capabilities; o Customizability; o Ease of use; and o Distribution of our products through business aggregators on a private- label basis. We believe that competition will intensify in the future. Increased competition could result in price reductions and increased spending on marketing and product development. Any of these events could have a material adverse effect on our financial condition and operating results. There is no assurance that we will be able to compete successfully against current and future competitors or that competitive pressures faced by us will not materially adversely affect our business, financial condition and results of operations. We believe that the primary factors that will impact competition are technical expertise and development, price, sales and marketing abilities, customer support, reliability and security. For web site publishing, we compete with net Objects/Sitematic Corporation and Nextron Communications, Inc., two companies that provide web site publishing and hosting services for local merchant service providers. Their distribution strategies are similar to ours, although neither of these companies is believed to have significant capabilities with XML technologies. As we move to customer relationship management and enhanced shopping and promotional services, we anticipate that we may encounter competition from a larger number of companies, including online advertisers such as Microsoft Corporation's Link Exchange and DoubleClick, Inc., and infrastructure companies such as Inktomi Corporation and Commerce One, Inc. There are also a large number of software development companies that are selling software that performs particular functions of individual modules of 9 our AccelX services. We also expect to compete with in-house development efforts by some of our targeted customers. There are several online banking services that offer financial services similar to those we offer to small to medium-sized financial institutions. These companies generally are serving many more financial institutions than those we are currently servicing. The Jabber.org instant messaging system competes with systems offered by companies such as America Online, Inc., which currently has substantially more instant messaging users than any other company providing instant messaging services. There are no competing open source instant messaging systems. We believe that the Jabber.org system can be distinguished from that offered by America Online, Inc. and others based on Jabber.org's use of open-source development and XML technologies and Jabber.org's more flexible platform for instant messaging applications. Government Regulation Our products and services pertaining to web site content and development are not currently subject to direct regulation by the Federal Communications Commission or any other federal or state agency, other than regulations applicable to businesses generally. Changes in the regulatory environment relating to the Internet could have a material adverse effect on our business. We cannot predict the impact, if any, that future regulation or regulatory changes may have on our business. Employees At February 25, 2000, we employed 85 full time employees, which included 20 in management and administration, 5 in sales and marketing, and 55 in development. In addition to these company personnel, we contract with other creative and production resources, as required for peak load situations. Our employees are not represented by a labor union, and we consider our employee relations to be good. Management The officers of Webb are as follows:
Name Age Position - ------------------------------ ------- ---------------------------------------------------- Perry Evans................... 40 President and Chief Executive Officer William Cullen................ 58 Chief Financial Officer Lindley Branson............... 57 Vice President and General Counsel Gwenael Hagan................. 39 Vice President, Corporate Development Andre Durand.................. 32 General Manager, JabberIM Commercialization Simon Greenman................ 30 General Manager, AccelX Commerce Services Chris Fanjoy.................. 34 Chief Technology Officer Mike Murphy................... 48 General Manager, Electronic Banking Deborah Gerard................ 46 Vice President, Business Development and Sales Gwen Nail..................... 38 Vice President, Marketing Kevin Schaff.................. 26 Vice President, AccelX Development Fred Puls..................... 39 Vice President, Technology
Perry Evans, has served as President of Webb since June 24, 1999 and Chief Executive Officer since February 1, 2000. Mr. Evans founded NetIgnite in 1998, which was acquired by Webb in 1999. Mr. Evans was founder of and served as President of the MapQuest Publishing Group, a widely licensed Internet locator application service from December 1995 to October 1997. Prior to MapQuest, Mr. Evans managed the new media development group within RR Donnelley that was responsible for interactive yellow pages, travel and real estate products from December 1993 to December 1995. 10 William Cullen, has served as Chief Financial Officer of Webb since April 1999 and a director since March 1998. From March 1998 to April 1999, Mr. Cullen served as Chief Operating Officer of Webb. From May 1997 to March 1998, Mr. Cullen worked as a consultant to businesses in the cable industry. From April 1994 to May 1997, Mr. Cullen was Chairman and CEO of Access Television Network, Inc., a privately held company specializing in providing paid programming to local cable systems. From January 1992 to March 1994, Mr. Cullen was President and CEO of California News Channel, a programming project of Cox Cable Communications. From July 1984 to December 1991, Mr. Cullen was employed by United Artist Cable Corporation (and its predecessor United Cable Television Corporation) as Vice President of Operations and President of its subsidiary, United Cable of Los Angeles, Inc., and as its Senior Vice President of the Southwest Division. Prior to joining United Artist Cable Corporation, Mr. Cullen was President of Tribune Company Cable of California, Inc. and CEO of its United-Tribune Cable of Sacramento joint venture, served as a top financial officer of three companies and worked in banking. Lindley Branson, joined Webb as Vice President and General Counsel in May 1999. Mr. Branson has been a senior partner with the Minneapolis law firm of Gray, Plant, Mooty, Mooty and Bennett, PA for more than twenty years, specializing in corporate finance, mergers and acquisitions and general corporate law. Gwenael Hagan, has served as Vice President, Corporate Development of Webb since November 23, 1999. Mr. Hagan joined Webb in January 1998. From June 1996 to January 1998, Mr. Hagan served as Vice President of New Business Development with International Channel, a cable television network, where he was responsible for new revenue opportunities, both domestically and internationally, and developing and implementing strategies to increase revenue and position International Channel for growth via evolving digital cable and satellite platforms. From December 1994 to June 1996, Mr. Hagan served as the Internet Marketing Manager for Microsoft's western region. Mr. Hagan's work with Microsoft encompassed competitive strategy development, sales resource allocation, presentations and public relations. Andre Durand, has served as General Manager, JabberIM Commercialization since November 23, 1999. Mr. Durand joined Webb in November 1998. Mr. Durand was the founder of and served as President and Chief Executive Officer of Durand Communications, Inc. from January 1993 to June 1999. Mr. Durand is a regular guest speaker at computer fairs, conferences and expositions, and regularly contributes articles to trade publications discussing Internet technologies, trends and predictions. From January 1991 to January 1993, Mr. Durand was an auditor with KPMG Peat Marwick in Los Angeles, California. Simon Greenman, has served as General Manager, AccelX Commerce Services since November 23, 1999. Mr. Greenman joined Webb in August 1999 after graduating from Harvard with an MBA in May 1999. Previously, Mr. Greenman was Vice President of Internet Engineering at MapQuest.com, an Internet locator application service, from January 1994 to December 1997, where he oversaw MapQuest's technical development. While at Harvard, Mr. Greenman consulted on strategy and marketing for Expedia and Network Computers and was named by Internet Standard magazine as its "Number 1 MBA draft choice" in the technical sector for 1999. Chris Fanjoy, has served as the Chief Technology Officer of Webb since June 1999. Mr. Fanjoy co-founded and served as the Vice President of Engineering of NetIgnite, before the company was acquired by Webb in 1999. Prior to NetIgnite, Mr. Fanjoy was the director of engineering and lead architect for MapQuest.com, an Internet locator application service, from August 1995 to January 1998, and a senior technology director for MCI Systemhouse, a geographic information solutions provider company, from January 1998 to April 1999. Mr. Fanjoy has more than 12 years experience with complex database driven enterprise and web applications. Mike Murphy, has served as General Manager, Electronic Banking since 1997. Prior to that, Mr. Murphy founded and was Vice President of Operations at Requisite Technology, Inc, an early e-commerce company from May 1994 until December 1996. Leading up to that, Mr. Murphy was with Ball Aerospace where he was an operations general manager from July 1987 to November 1992, and then director of strategic business development from December 1992 to May 1994. Before that, Mr. Murphy was an operations manager with Verac, Inc., a high-tech software company, from July 1979 to July 1987. Mr. Murphy's technical background is a system engineer and functional architect, and Mr. Murphy holds a Ph.D. in Electrical Engineering. 11 Deborah Gerard, has served as Vice President, Business Development and Sales of Webb since January 2000. Ms. Gerard served as the Rocky Mountain Regional Sales Manager (15 states) with Genesys Telecommunications Labs from April 1999 to January 2000. Prior to that, Ms. Gerard worked as a strategic planning consultant with SELCOR, Inc. from January 1998 to April 1999. Ms. Gerard worked as a Rocky Mountain Territory Manger with XcelleNet, Inc. from January 1997 to December 1997. From January 1994 to December 1996, Ms. Gerard worked at Oracle Corporation in the capacity as practice manager to a business development manager. In 1996, Ms. Gerard was promoted to Partner Applications Sales Manager and then promoted to National NT sales manager in the same year. Gwen Nail, has served as Vice President, Marketing of Webb since March 2000. Ms. Nail is responsible for all product marketing and marketing communications for AccelX small business and local commerce solutions. Prior to joining Webb, Ms. Nail was Director of New Products and Ventures with US West Dex overseeing all of US West Dex.com activities from November 1997 to March 2000. From October 1995 to November 1997, she was the Internet Marketing Manager with US West Dex.com where she developed US West Dex.com. Ms. Nail was Product Manager for non-traditional US West directory products from August 1994 to September 1995. Previous experience includes brand marketing with the Coca Cola bottling company. Kevin Schaff has served as Vice President of Business Development of Webb since January 2000. Mr. Schaff is responsible for developing and managing strategic business relationships, bringing to bear leading industry expertise in ecommunication strategies for small businesses. Prior to joining Webb, Mr. Schaff was President of Update Systems, a leader in Customer Relationship Management and communication solutions for the small and medium sized business from May 1999 to January 2000. From December 1994 to April 1999 Mr. Schaff was President and CEO of Wind River Visual Communication, Inc where he oversaw annual growth of 100% with prestigious clients such as US West, Motorola, Coopers and Lybrand and Macys. Mr. Schaff holds a degree in Communications from the University of Wyoming. Fred Puls, has served as Vice President, Technology of Webb since January 2000. Mr. Puls is responsible for the development of new Local Commerce applications that are part of the AccelX product line. Prior to joining Webb, Mr. Puls was Vice President, R&D, Update Systems from September 1999 to January 2000 and a Director from June 1999 to September 1999. At Update, Mr. Puls was responsible for all design, development and research activities resulting in the launch of its ISP Server product and design of the Enterprise Server. From September 1998 to June 1999, Mr. Puls was Founder and Owner of Sharpkids.com, a browser based children's educational software and resources company. From July 1996 to September 1998, Mr. Puls was a district manager for AT&T Bell Labs and from June 1994 to July 1996 a manager with AT&T Bell Labs. Factors That May Affect Future Results Factors that may affect our future results include, but are not limited to, the following items as well as the information in "Item 1 -Description of Business - General and Competition" and "Item 6 - Management's Discussion and Analysis of Financial Condition and Results of Operations." Our limited operating history could affect our business. We were founded in March 1994 and commenced sales in February 1995. Accordingly, we have a limited operating history upon which you may evaluate us. Our business is subject to the risks, expenses and difficulties frequently encountered by companies with a limited operating history including: o Limited ability to respond to competitive developments; o Exaggerated effect of unfavorable changes in general economic and market conditions; o Ability to attract qualified personnel; and o Ability to develop and introduce new product and service offerings. There is no assurance we will be successful in addressing these risks. If we are unable to successfully address these risks our business could be significantly affected. 12 We have accumulated losses since inception and we anticipate that we will continue to accumulate losses for the foreseeable future. We have incurred net losses since inception totaling approximately $42.6 million through December 31, 1999. In addition, we expect to incur additional substantial operating and net losses in 2000 and for one or more years thereafter. We expect to incur these additional losses because: o We currently intend to increase our capital expenditures and operating expenses to expand the functionality and performance of our products and services; and o We recorded goodwill and other intangible assets totalling approximately $24 million in connection with the acquisitions of three businesses which will be amortized over their estimated useful lives of approximately three years. The accumulated deficit at December 31, 1999, included approximately $17.6 million of non-cash expenses related to the issuance of preferred stock and warrants in financing transactions, stock and stock options issued for services, warrants issued to four customers and interest expense on a 10% convertible note payable. We will be required to record significant additional non-cash charges of approximately $12.5 million in the first quarter of 2000 in connection with the issuance of the series B preferred stock and warrants in January 2000. The current competitive business environment may result in our issuance of similar securities in future financing transactions or to other companies as an inducement for them to enter into a business relationship with us. While these transactions represent non-cash charges, they will increase our expenses and net loss and our net loss available to common shareholders. If we are unable to raise additional working capital funds, we may not be able to sustain our operations. We believe that our present cash and cash equivalents, working capital and commitments for additional equity investments will be adequate to sustain our current level of operations through 2001. There is no assurance that we will be able to raise additional funds in amounts required or upon acceptable terms. In addition, we may discover that we have underestimated our working capital needs, and we may need to obtain additional funds to sustain our operations through fiscal 2001. If we cannot raise additional funds when needed, we may be required to curtail or scale back our operations. These actions could have a material adverse effect on our business, financial condition or results of operations. We may never become or remain profitable. Our ability to become profitable depends on the ability of our products and services to generate revenues. The success of our revenue model will depend upon many factors including: o The success of our distribution partners in marketing their products and services; and o The extent to which consumers and businesses use our services and conduct e-commerce transactions and advertising utilizing our services. Because of the new and evolving nature of the Internet, we cannot predict whether our revenue model will prove to be viable, whether demand for our products and services will materialize at the prices we expect to be charged, or whether current or future pricing levels will be sustainable. Additionally, our customer contracts may result in significant development revenue in one quarter, which will not recur in the next quarter for that customer. As a result, it is likely that components of our revenue will be volatile, which may cause our stock price to be volatile as well. Our business depends on the growth of the Internet. Our business plan assumes that the Internet will develop into a significant source of communication and communication interactivity. However, the Internet market is new and rapidly evolving and there is no assurance that the Internet will develop in this manner. If the Internet does not develop in this manner, our business, operating results and financial condition would be materially adversely affected. Numerous factors could prevent or inhibit the development of the Internet in this manner, including: o The failure of the Internet's infrastructure to support Internet usage or electronic commerce; 13 o The failure of businesses developing and promoting Internet commerce to adequately secure the confidential information, such as credit card numbers, needed to carry out Internet commerce; and o Regulation of Internet activity. Use of many of our products and services will be dependent on distribution partners. Because we have elected to partner with other companies for the distribution of many of our products and services, many users of our products and services are expected to utilize our services through our distribution partners. As a result, our distribution partners, and not us, will substantially control the customer relationship with these users. If the business of the companies with whom we partner is adversely affected in any manner, our business, operating results and financial condition could be materially adversely affected. We may be unable to develop desirable products. Our products are subject to rapid obsolescence and our future success will depend upon our ability to develop new products and services that meet changing customer and marketplace requirements. There is no assurance that we will be able to successfully: o Identify new product and service opportunities; or o Develop and introduce new products and services to market in a timely manner. If we are unable to accomplish these items, our business, operating results and financial condition could be materially adversely affected. Our products and services may not be successful. Even if we are able to successfully identify, develop, and introduce new products and services there is no assurance that a market for these products and services will materialize to the size and extent that we anticipate. If a market does not materialize as we anticipate, our business, operating results, and financial condition could be materially adversely affected. The following factors could affect the success of our products and services: o The failure of our business plan to accurately predict the rate at which the market for Internet products and services will grow; o The failure of our business plan to accurately predict the types of products and services the future Internet marketplace will demand; o Our limited experience in marketing our products and services; o The failure of our business plan to accurately predict our future participation in the Internet marketplace; o The failure of our business plan to accurately predict the estimated sales cycle, price and acceptance of our products and services; o The development by others of products and services that renders our products and services noncompetitive or obsolete; or o Our failure to keep pace with the rapidly changing technology, evolving industry standards and frequent new product and service introductions that characterize the Internet marketplace. The intense competition that is prevalent in the Internet market could have a material adverse effect on our business. Our current and prospective competitors include many companies whose financial, technical, marketing and other resources are substantially greater than ours. There is no assurance that we will have the financial resources, technical expertise or marketing, sales and support capabilities to compete successfully. The presence of these competitors in the Internet marketplace could have a material adverse effect on our business, operating results or financial condition by causing us to: o Reduce the average selling price of our products and services; or o Increase our spending on marketing, sales and product development. There is no assurance that we would be able to offset the effects of any such price reductions or increases in spending through an increase in the number of our customers, higher sales from premium services, cost reductions or otherwise. Further, our financial condition may put us at a competitive disadvantage relative to our competitors. If 14 we fail to, or cannot, meet competitive challenges, our business, operating results and financial condition could be materially adversely affected. A limited number of our customers generate a significant portion of our revenues. We had four customers representing 67% of revenues for the year ended December 31, 1999, and four customers representing 71% of revenues for the year ended December 31, 1998. There is no assurance that we will be able to attract or retain major customers. The loss of, or reduction in demand for products or services from major customers could have a material adverse effect on our business, operating results, cashflow and financial condition. The sales cycle for our products and services is lengthy and unpredictable. While our sales cycle varies from customer to customer, it typically has ranged from one to six months. Our pursuit of sales leads typically involves an analysis of our prospective customer's needs, preparation of a written proposal, one or more presentations and contract negotiations. We often provide significant education to prospective customers regarding the use and benefits of our Internet technologies and services. Our sales cycle may also be affected by a prospective customer's budgetary constraints and internal acceptance reviews, over which we have little or no control. In order to quickly respond to, or anticipate, customer requirements, we may begin development work prior to having a signed contract, which exposes us to the risk that the development work will not be recovered from revenue from that customer. We may be unable to adjust our spending to account for potential fluctuations in our quarterly results. As a result of our limited operating history, we do not have historical financial data for a sufficient number of periods on which to base planned operating expenses. Therefore, our expense levels are based in part on our expectations as to future sales and to a large extent are fixed. We typically operate with little backlog and the sales cycles for our products and services may vary significantly. As a result, our quarterly sales and operating results generally depend on the volume and timing of and the ability to close customer contracts within the quarter, which are difficult to forecast. We may be unable to adjust spending in a timely manner to compensate for any unexpected sales shortfalls. If we were unable to so adjust, any significant shortfall of demand for our products and services in relation to our expectations would have an immediate adverse effect on our business, operating results and financial condition. Further, we currently intend to increase our capital expenditures and operating expenses to fund product development and increase sales and marketing efforts. To the extent that such expenses precede or are not subsequently followed by increased sales, our business, operating results and financial condition will be materially adversely affected. We may be unable to retain our key executives and research and development personnel. Our future success also depends in part on our ability to identify, hire and retain additional personnel, including key product development, sales, marketing, financial and executive personnel. Competition for such personnel is intense and there is no assurance that we can identify or hire additional qualified personnel. Executives and research and development personnel who leave us may compete against us in the future. We generally enter into written nondisclosure and nonsolicitation agreements with our officers and employees which restrict the use and disclosure of proprietary information and the solicitation of customers for the purpose of selling competing products or services. However, we generally do not require our employees to enter into non-competition agreements. Thus, if any of these officers or key employees left, they could compete with us, so long as they did not solicit our customers. Any such competition could have a material adverse effect on our business. We may be unable to manage our expected growth. If we are able to implement our growth strategy, we will experience significant growth in the number of our employees, the scope of our operating and financial systems and the geographic area of our operations. There is no assurance that we will be able to implement in whole or in part our growth strategy or that our management or other resources will be able to successfully manage any future growth in our business. Any failure to do so could have a material adverse effect on our operating results and financial condition. We may be unable to protect our intellectual property rights. Intellectual property rights are important to our success and our competitive position. There is no assurance that the steps we take to protect our intellectual 15 property rights will be adequate to prevent the imitation or unauthorized use of our intellectual property rights. Policing unauthorized use of proprietary systems and products is difficult and, while we are unable to determine the extent to which piracy of our software exists, we expect software piracy to be a persistent problem. In addition, the laws of some foreign countries do not protect software to the same extent as do the laws of the United States. Even if the steps we take to protect our proprietary rights prove to be adequate, our competitors may develop services or technologies that are both non-infringing and substantially equivalent or superior to our services or technologies. Computer viruses and similar disruptive problems could have a material adverse effect on our business. Our software and equipment may be vulnerable to computer viruses or similar disruptive problems caused by our customers or other Internet users. Our business, financial condition or operating results could be materially adversely affected by: o Losses caused by the presence of a computer virus that causes us or third parties with whom we do business to interrupt, delay or cease service to our customers; o Losses caused by the misappropriation of secured or confidential information by a third party who, in spite of our security measures, obtains illegal access to this information; o Costs associated with efforts to protect against and remedy security breaches; or o Lost potential revenue caused by the refusal of consumers to use our products and services due to concerns about the security of transactions and commerce that they conduct on the Internet. Future government regulation could materially adversely affect our business. There are currently few laws or regulations directly applicable to access to, communications on, or commerce on the Internet. Therefore, we are not currently subject to direct regulation of our business operations by any government agency, other than regulations applicable to businesses generally. Due to the increasing popularity and use of the Internet, however, federal, state, local, and foreign governmental organizations are currently considering a number of legislative and regulatory proposals related to the Internet. The adoption of any of these laws or regulations may decrease the growth in the use of the Internet, which could, in turn: o Decrease the demand for our products and services; o Increase our cost of doing business; or o Otherwise have a material adverse effect on our business, results of operations and financial condition. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, copyright, trademark, trade secret, obscenity, libel and personal privacy is uncertain and developing. Our business, results of operations and financial condition could be materially adversely affected by the application or interpretation of these existing laws to the Internet. Our articles of incorporation and bylaws may discourage lawsuits and other claims against our directors. Our articles of incorporation provide, to the fullest extent permitted by Colorado law, that our directors shall have no personal liability for breaches of their fiduciary duties to us. In addition, our bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Colorado law. These provisions may reduce the likelihood of derivative litigation against directors and may discourage shareholders from bringing a lawsuit against directors for a breach of their duty. The price of our common stock has been highly volatile due to factors that will continue to affect the price of our stock. Our common stock closed as high as $67.75 per share and as low as $7.44 per share between January 1, 1999 and March 17, 2000. Historically, the over-the-counter markets for securities such as our common stock have experienced extreme price and volume fluctuations. Some of the factors leading to this volatility include: o Price and volume fluctuations in the stock market at large that do not relate to our operating performance; o Fluctuations in our quarterly revenue and operating results; o Announcements of product releases by us or our competitors; o Announcements of acquisitions and/or partnerships by us or our competitors; and 16 o Increases in outstanding shares of common stock upon exercise or conversion of derivative securities. These factors may continue to affect the price of our common stock in the future. We have issued numerous options, warrants, and convertible securities to acquire our common stock that could have a dilutive effect on our shareholders. As of March 17, 2000, we had issued warrants and options to acquire 4,116,824 shares of our common stock, exercisable at prices ranging from $1.63 to $58.25 per share, with a weighted average exercise price of approximately $14.07 per share. In addition to these warrants and options, we have reserved 1,875,000 shares of common stock for issuance upon conversion of our 10% convertible note and series B convertible preferred stock. During the terms of these derivative securities, the holders will have the opportunity to profit from either an increase or, in the case of the preferred stock and note, decrease in the market price of our common stock with resulting dilution to the holders of shares who purchased shares for a price higher than the respective exercise or conversion price. In addition, the increase in the outstanding shares of our common stock as a result of the exercise or conversion of these derivative securities could result in a significant decrease in the percentage ownership of our common stock by the purchasers of our common stock. The potentially significant number of shares issuable upon conversion of our 10% convertible note and series B convertible preferred stock could make it difficult to obtain additional financing. Due to the significant number of shares of our common stock which could result from a conversion of our 10% convertible note and series B convertible preferred stock, new investors may either decline to make an investment in Webb due to the potential negative effect this additional dilution could have on their investment or require that their investment be on terms at least as favorable as the terms of the 10% convertible note or series B convertible preferred stock. If we are required to provide similar terms to obtain required financing in the future, the potential adverse effect of these existing financings could be perpetuated and significantly increased. Future sales of our common stock in the public market could adversely affect the price of our common stock. Sales of substantial amounts of common stock in the public market that is not currently freely tradable, or even the potential for such sales, could have an adverse affect on the market price for shares of our common stock and could impair the ability of purchasers of our common stock to recoup their investment or make a profit. As of March 17, 2000, these shares consist of: o Approximately 310,000 shares owned by our executive officers and directors of our outstanding common stock ("Affiliate Shares"); o Up to 1,875,000 shares issuable upon conversion of the 10% convertible note and series B preferred stock; and o Approximately 4,116,824 shares issuable to warrant and option holders. Unless the Affiliate Shares are further registered under the securities laws, they may not be resold except in compliance with Rule 144 promulgated by the SEC, or some other exemption from registration. Rule 144 does not prohibit the sale of these shares but does place conditions on their resale which must be complied with before they can be resold. The common stock issuable upon conversion of our convertible note and preferred stock may increase as the price of our common stock decreases, which may adversely affect the price of our common stock. On March 17, 2000, we had issued and outstanding $2,500,000 principal amount of a 10% convertible note and 12,500 shares of series B convertible preferred stock. The number of shares of common stock that may ultimately be issued upon conversion of these securities is presently indeterminable and could fluctuate significantly. Purchasers of common stock could therefore experience substantial dilution upon conversion of the convertible note and preferred stock. In addition, the significant downward pressure on the market price of our common stock could develop as the holders convert and sell material amounts of common stock which could encourage short sales by the holders or others, placing further downward pressure on the market price of our common stock. To illustrate the potential dilution that may occur upon conversion of the convertible note and preferred stock, the following table sets forth the number of shares of common stock that would be issued upon conversion of 17 the principal of the convertible note and the shares of preferred stock if the market price for our common stock on the dates that the conversion prices of these securities are subject to adjustment is $41.00, the closing sale price for our common stock on March 17, 2000, and at assumed market prices of 75%, 50%, 25% and 10% of the market price on March 17, 2000, assuming that the conversion price for the 10% note is adjusted after September 29, 2000. At March 17, 2000, the lowest potential conversion price was $8.00 per share.
Shares Issued Upon Conversion ------------------------------------------------------------- Market Price 10% Notes (Conversion Series B Preferred Stock Total (Percentage of Price) (Conversion Price) Outstanding) - ---------------------------------- -------------------------- -------------------------------- ----------------------- $41.00 (actual price at 03/17/00) 248,262 ($10.07) 625,000 ($20.00) 873,262 (9.7%) $30.75 (75% of 03/17/00 price) 248,262 ($10.07) 625,000 ($20.00) 873,262 (9.7%) $20.50 (50% of 03/17/00 price) 248,262 ($10.07) 625,000 ($20.00) 873,262 (9.7%) $10.25 (25% of 03/17/00 price) 248,262 ($10.07) 1,219,512 ($10.25) 1,467,774 (16.3%) $ 4.10 (10% of 03/17/00 price) 312,500 ($ 8.00) 1,562,500 ($8.00) 1,875,000 (20.8%)
Future sales of our common stock in the public market could limit our ability to raise capital. Sales of substantial amounts of our common stock in the public market pursuant to Rule 144, upon exercise or conversion of derivative securities or otherwise, or even the potential for such sales, could affect our ability to raise capital through the sale of equity securities. Provisions in our articles of incorporation allow us to issue shares of stock that could make a third party acquisition of us difficult. Our Articles of Incorporation authorize our Board of Directors to issue up to 20,000,000 shares of common stock and 5,000,000 shares of preferred stock in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by our shareholders. Preferred stock authorized by the Board of Directors may include voting rights, preferences as to dividends and liquidation, conversion and redemptive rights and sinking fund provisions. If the Board of Directors authorizes the issuance of preferred stock in the future, this authorization could affect the rights of the holders of common stock, thereby reducing the value of the common stock, and could make it more difficult for a third party to acquire us, even if a majority of the holders of our common stock approved of an acquisition. The issuance of our 10% convertible note payable and series B convertible preferred stock required us to record non-cash expenses which will, in turn, increase our net loss available to common shareholders. Based on current accounting standards, we recorded a non-cash expense of approximately $2.1 million as additional interest expense for the year ended December 31, 1999, as a result of the issuance of our 10% convertible note. We will record additional non-cash expenses of approximately $643,000 during the three years ending December 31, 2002 related to the issuance of the note and approximately $12.5 million during the first quarter of 2000 in connection with the issuance of the preferred stock. We do not anticipate paying dividends on our common stock for the foreseeable future. We have never paid dividends on our common stock and do not intend to pay any dividends on our common stock in the foreseeable future. Any decision by us to pay dividends on our common stock will depend upon our profitability at the time, cash available therefor, and other factors. We anticipate that we will devote profits, if any, to our future operations. Item 2. DESCRIPTION OF PROPERTY. Our principal offices are located in approximately 16,800 square feet of space in Denver, Colorado, leased at a current base monthly rental of $25,401. Commencing in May 2000, our principal offices will be located in approximately 21,400 square feet of space in Denver, Colorado, leased for a period of five years at a base monthly rental of $46,362 during the first three years and of $49,929 thereafter. 18 We also have offices with approximately 5,620 square feet in Boulder, Colorado, leased until March 31, 2001. From April 1, 2001 until March 31, 2002, the base monthly rental will be $5,308, and from April 1, 2002 until March 31, 2003, the base monthly rental will be $5,494. Item 3. LEGAL PROCEEDINGS. Not Applicable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 19 PART II Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The number of record holders of our common stock on February 25, 2000 was 130. Based on information provided by nominee holders of our common stock, we believe that the number of beneficial holders of our common stock is in excess of 11,000. The table below sets forth the high and low bid prices for the common stock as reported on the Nasdaq Small Cap Market during the two years ended December 31, 1999. The information shown is based on information provided by the Nasdaq Stock Market. These quotations represent prices between dealers, and do not include retail markups, markdowns or commissions, and may not represent actual transactions. COMMON STOCK ---------------------------------- Quarter Ended High Bid Low Bid - ------------- ----------------- --------------- 1998 - ---- March 31 $10.38 $ 6.50 June 30 $15.63 $ 8.50 September 30 $15.69 $ 4.88 December 31 $14.75 $ 3.25 1999 - ---- March 31 $20.81 $10.75 June 30 $18.75 $10.81 September 30 $16.50 $ 7.44 December 31 $23.25 $ 8.25 We have never paid a cash dividend on our common stock. The payment of dividends, if any, in the future rests within the discretion of our Board of Directors and will depend, among other things, upon our earnings, capital requirements and financial condition. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General Webb provides innovative advanced online commerce and communication solutions for small businesses, with a particular emphasis on local commerce interaction. Our AccelX product line of XML-based commerce and buyer-seller interaction services provide businesses with powerful web site development and communication tools to attract customers, generate leads, increase buyer-seller interaction and strengthen customer relationship management. The AccelX services are divided into two categories: Customer Relationship Management Services and Marketplace Services. We license our services on a private-label basis to high-volume distribution partners such as yellow page directory publishers, newspapers, city guides, vertical market portals and other aggregators of local businesses. Our products are designed to be delivered on an application service provider business model whereby we host the software on our servers and deliver and manage the service on behalf of our distribution partners. Generally, these services are provided on a revenue-share basis providing us with recurring revenues as our distribution partners sell these services to their small business customers. This distribution model is designed to provide us with a growing base of businesses using one or more of our services who are ideal customers for additional AccelX services. To date, we have generated revenues through the sale of design and consulting services for web site development and network engineering services, resale of software licenses, mark-ups on computer hardware and software sold to customers, maintenance fees charged to customers to maintain computer hardware and web sites, license fees based on a portion of revenues from our products and services, training course fees, and monthly fees paid by customers for Internet access which we have provided. We commenced sales in February 1995, and were in the development stage through December 31, 1995. We have incurred losses from operations since inception. At December 31, 1999, we had an accumulated deficit of approximately $42.6 million. Prior to the third quarter of 1997, our focus generally was on three markets: general web site development, maintenance and hosting; rural or small market Internet service providers; and healthcare information services and continuing medical education. Each of these activities involved, to varying degrees, the building of online communities and the development of tools and services to allow for the building of strategic and customized web sites. As an outgrowth of these activities, since mid 1997, our business has evolved to the development of online communities. Most recently, the focus on community communications was enhanced with our development of applications that apply these capabilities to e-commerce services for large numbers of small businesses. Prior to January 2000, we were organized around our primary market focus on local commerce services, with an additional business unit dedicated to e-banking services. In the local commerce segment, we target small and medium sized businesses with our AccelX application services supporting XML-based commerce and buyer-seller interaction. The electronic banking unit targets credit unions, community banks, and savings and loan institutions with a full line of e-banking transaction processing and account management services. In January 2000, we formed a new subsidiary in order to commercialize separately from our AccelX application services business, the Jabber.org instant messaging system. We intend to seek significant participation from external partners to help us maximize the value of the e-banking and instant messaging businesses. The accumulated deficit at December 31, 1999, included approximately $17.6 million of non-cash expenses related to the issuance of preferred stock and warrants in financing transactions, stock and stock options issued for services, warrants issued to four customers and interest expense on the 10% convertible note payable. Based on applicable current accounting standards, we estimate that we will be required to record a non-operating expense of approximately $250,000 in 2001 and $160,000 in 2002 in connection with the issuance of our 10% convertible note. We will be required to record additional non-cash charges of $12.5 million in the first quarter of 2000 in connection with the issuance of series B convertible preferred stock. Non-operating expenses of approximately $4.6 million were charged to earnings in connection with a private placement of preferred stock during 1999. While these charges do not affect our operating losses or working capital, they do result in a decrease in our net income available to common stockholders. Additionally, we recorded a non-cash charge for preferred stock dividends during 1999 of approximately $273,000. Results of Operations The following table sets forth for the periods indicated the percentage of net revenues by items contained in the Statements of Operations. All percentages are calculated as a percentage of total net revenues, with the exception of cost of revenues which are calculated based on the respective net revenue amounts. 20
For the Year Ended December 31, --------------------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- ------------------- Net revenues: Licenses 20.2% 6.2% - Service bureau fees 13.6% 8.4% 1.1% Services 60.2% 16.0% 58.9% Hardware and software sales 6.0% 69.4% 40.0% ------------------- ------------------- ------------------- Total net sales 100.0% 100.0% 100.0% Cost of revenues: Cost of licenses 97.5% 219.8% - (as percentage of license revenues) Cost of service bureau revenues 28.5% 27.1% 25.0% (as percentage of service bureau revenues) Cost of services 101.0% 53.0% 60.5% (as percentage of service revenues) Cost of hardware and software 80.1% 82.0% 87.0% (as percentage of hardware and software revenues) ------------------- ------------------- ------------------- Total cost of revenues 89.2% 81.3% 71.4% Gross margin 10.8% 18.7% 28.6% ------------------- ------------------- ------------------- Operating expenses: Sales and marketing expenses 88.8% 156.0% 42.9% Product development expenses 148.7% 79.5% 39.7% General and administrative expenses 341.4% 374.9% 65.8% Customer acquisition costs 48.4% 35.3% - Depreciation and amortization expenses 156.2% 49.8% 7.1% ------------------- ------------------- ------------------- Total operating expenses 783.5% 695.5% 155.5% Loss from operations (772.7)% (676.8)% (126.9)% ------------------- ------------------- ------------------- Net loss (888.6)% (668.0)% (120.9)% Preferred stock dividends (14.0)% (20.7)% - Accretion of preferred stock to redemption value (162.4)% (258.6)% - Accretion of preferred stock for guaranteed return in excess of redemption value (59.6)% (44.5)% - ------------------- ------------------- ------------------- Net loss available to common stockholders (1124.6)% (991.8)% (120.9)% =================== =================== ===================
21 Twelve Months Ended December 31, 1999 and 1998. Components of net revenues and cost of revenues are as follows:
For the Year Ended December 31, ----------------------------------------- 1999 1998 ------------------ ------------------ Net revenues: Licenses $ 392,810 $ 97,892 Service bureau fees 263,888 132,959 Services 1,170,076 254,812 Hardware and software 117,509 1,103,717 Total net revenues 1,944,283 1,589,380 ------------------ ------------------ Cost of revenues Cost licenses 382,951 215,142 Cost of service bureau fees 75,313 35,986 Cost of services 1,181,895 135,175 Cost of hardware and software 94,155 905,234 ------------------ ------------------ Total cost of revenues 1,734,314 1,291,537 ------------------ ------------------ Gross margin $ 209,969 $ 297,843 ================== ==================
License revenues represent fees earned for granting customers licenses to use our software products and services and are calculated on the usage of our products based on a fixed amount or on a per consumer basis or as a portion of revenues our customers earn from consumers. Our net revenues from software license fees were $392,810 for the year ended December 31, 1999, which represents an increase of 301.3% when compared with the year ended December 31, 1998. The increase is primarily due to fees earned from Switchboard, Inc. in the form of quarterly guaranteed minimum revenue and from a 192% increase in revenues from Re/Max International, Inc. Service bureau revenues represent fees earned for providing monthly online banking application service provider services to our e-banking customers. Our net revenues from service bureau fees were $263,888 for the year ended December 31, 1999, which represents an increase of 98.5% when compared with the year ended December 31, 1998. The increase is due to higher monthly revenues from Rockwell Federal Credit Union as well as revenue from HP Rocky Mountain Federal Credit Union which went online during the fourth quarter of 1999. Services revenues consists principally of revenue derived from professional services for the customization of our software to customer specifications, assisting our customers in configuring and integrating our software applications, network engineering fees and hosting fees as well as fees for ongoing maintenance, which consists of unspecified product upgrades and enhancements on a when-and-if-available basis. Our net revenues from services were $1,170,076 for the year ended December 31, 1999, which represents an increase of 359.2% when compared with the year ended December 31, 1998. The increase is primarily due to fees we earned for developing and integrating our local directory software for Switchboard, Inc. and design and integration fees from CU Cooperative Systems, Inc. we are recognizing on a percentage of completion basis. In addition, during July 1999, we sold two customer contracts to an unrelated third party, including related computer hardware, for approximately $270,000. We provided services and equipment under the terms of the original contracts enabling our customers to provide Internet access to their end users. We recorded $138,504 of service revenue for the year ended December 31, 1999 related to providing services to the purchaser of these two contracts. We recognized revenue from these contracts totaling approximately $6,000 for the year ended December 31, 1999. Revenues from hardware and software include the resale of computer hardware and third party software to customers generally in connection with implementing our local directory/enterprise products and services. During the second quarter of 1998, we changed our pricing structure whereby we supply any required equipment and the 22 products and services. Consequently the customer is not required to pay any significant fees upon the delivery of such items. Our net revenues from the resale of hardware and software was $117,509 for the year ended December 31, 1999 compared to $1,103,717 for the year ended December 31, 1998. During 1999, we sold equipment to customers with whom we have existing contracts to provide equipment. We do not anticipate significant revenues from hardware and equipment sales in future periods. We had four customers representing 67% of revenues and four customers representing 71% of revenues for the years ended December 31, 1999 and 1998, respectively. These customers for the 1999 period are as follows:
For the Year Ended December 31, -------------------------------------------- Customer 1999 1998 - ------------------------------------------------------------ ------------------- Switchboard, Inc. 26% -- Rockwell Federal Credit Union 19% 14% CU Co Operative Systems, Inc. 16% -- Intermedia Partners 6% 12%
As of December 31, 1999, we have revenue backlog totaling approximately $1,372,000 which we expect to recognize as revenue during 2000. Cost of revenues as a percentage of net revenues was 89.2% for the year ended December 31, 1999 compared to 81.3% for the year ended December 31, 1998. License revenues - Cost of license revenues consist of compensation costs associated with assisting our customers in delivering our services to end users, third party content software license fees, and third party transaction fees. Cost of license revenues were $382,951 for the year ended December 31, 1999, or 97.5% of net license revenues, as compared to $215,142 for the year ended December 31, 1998, or 219.8% of 1998 net license revenues. The absolute dollar increase was primarily attributable to the amortization of a one-year third party software license we purchased to integrate directory functionality into our products. Service bureau fees - Cost of service bureau fees consist of compensation costs for customer service, help desk fees, third party software support agreements and Internet connectivity costs. Cost of service bureau fees were $75,313 for the year ended December 31, 1999, or 28.5% of net service bureau fees, as compared to $35,986 for the year ended December 31, 1998, or 27.1% of 1998 net license revenues. The absolute dollar increase was primarily attributable to an increase in the number of credit union members using the services, including costs associated with a second credit union which began using our services during the fourth quarter of 1999. Service revenues - Cost of service revenues consist of compensation costs and consulting fees associated with performing custom programming, installation and integration services for our customers and support services as well as costs for hosting services which consist of costs to operate our network operating center. Cost of service revenues were $1,181,895 for the year ended December 31, 1999, or 101.0% of net service revenues, as compared to $135,175 for the year ended December 31, 1998, or 53.0% of 1998 net service revenues. The increases in costs were due to providing professional services for four new customers at lower margins as the contracts specify future revenue sharing arrangements and/or subscriber based fees or were entered into to establish strategic alliances. We also incurred costs to operate our network operating center, which we began operating during the second quarter of 1999, including costs associated with delivering Internet access and content to the customers of our cable operator distribution partners. We constructed the network operating center to accommodate our current customer base, our contract backlog and our projected future growth. Consequently, during 1999, the cost to operate the network operating center out paced our current revenues resulting in a lower gross margin. 23 Hardware and software revenues - Cost of hardware and software revenues consist of computer and third party software purchased for resale to cable operators. Cost of hardware and software revenue was 80.1% of net revenues for the year ended December 31, 1999 compared to 82.0% of net revenues for the year ended December 31, 1998. Cost of hardware and software revenues as a percentage of net revenues decreased slightly between periods because we sold equipment to existing customers at somewhat lower margins during 1998. Due to the change in our business model whereby we offer services to our customers, equipment sales are not expected to be significant in future periods. Sales and marketing expenses consist primarily of employee compensation, advertising, trade show expenses, and costs of marketing materials. Sales and marketing expenses were $1,726,004 for the year ended December 31, 1999, or 88.8% of net revenues as compared to $2,479,029, or 156.0% of net revenues for the year ended December 31, 1998. The decrease in absolute dollars was primarily attributable to (i) a net decrease of six employees; (ii) the phase out of our international marketing efforts; and (iii) a decrease in advertising dollars as a result of our focus on distribution partners (rather than on consumers). These decreases were partially off-set by an increase in trade show expenses, and new product support materials for our local directory/enterprise products. We expect sales and marketing expenses to increase on an absolute dollar basis in future periods but decrease as a percentage of net revenues as our revenues increase from current levels as we continue to market our products and services. Product development expenses consist primarily of employee compensation and programming fees relating to the development and enhancement of the features and functionality of our AccelX services. Product development expenses were $2,891,569 for the year ended December 31, 1999, or 148.7% of net revenues as compared to $1,264,287, or 79.5% of net revenues for the year ended December 13, 1998. During 1999, all product development costs have been expensed as incurred. We capitalized $281,775 of development costs during 1998, which were written off to depreciation and amortization expense during 1998. The increase in absolute dollars was due primarily to (i) an increase in technology personnel from 12 to 31 and an increase in contract labor to support the continued development of our products; and (ii) an increase in third party software maintenance and support costs. We believe that significant investments in product development are critical to attaining our strategic objectives and, as a result, we expect product development expenses to increase in future periods. General and administrative expenses consist primarily of employee compensation, consulting expenses, fees for professional services, and the non- cash expense of stock and warrants issued for services. General and administrative expenses were $6,637,601 for the year ended December 31, 1999, or 341.4% of net revenues as compared to $5,958,617, or 374.9% of net revenues for the year ended December 31, 1998. The increase in absolute dollars was primarily attributable to (i) an increase in compensation costs; (ii) increases in legal and accounting fees generally associated with securities filings; (iii) increases in office rent expense; (iv) increases in investor relation expenses; and (v) costs incurred associated with operating the DCI California office through November 1999. These increases were partially offset by a decrease in non-cash expenses for stock and options we issued for services and a decrease in fees we paid to consultants. We expect general and administrative expenses to decrease as a percentage of revenues as our revenues increase. Customer acquisition costs consist of the value of warrants to purchase our common stock we issued to customers in connection with customer contracts for our products and services. We expense the value of warrants on the date of issuance unless the related contract specifies minimum guaranteed revenues. Customer acquisition costs were $941,684 for the year ended December 31, 1999, or 48.4% of net revenues as compared to $560,824, or 35.3% of net revenues for the year ended December 31, 1998. During 1999, we issued warrants to three customers to purchase an aggregate of 161,667 shares of our common stock. Depreciation and amortization was $3,036,773 for the year ended December 31, 1999, compared to $791,155 for the year ended December 31, 1998, which included approximately $403,000 of capitalized development costs that we wrote- off during 1998. We recorded more depreciation expense in 1999 as a result of an increase in fixed assets primarily from construction of our network operating center and computer hardware and third party software to support the launch of our AccelX services, two new e-banking customers, and computer equipment 24 to support our product development team. We also began amortizing the intangible assets and goodwill we acquired in the DCI and NetIgnite acquisitions and recorded $2,523,351 of amortization expense in 1999. As a result of these acquisitions as well as the acquisition of Update Systems we completed in January 2000, we expect to record approximately $9,200,000 of such expenses in 2000 and 2001 and approximately $6,700,000 of such expenses in 2002. Because our business has never been profitable, and due to the other risk and uncertainties discussed herein, it is possible that an analysis of these long-lived assets in future periods could result in a conclusion that they are impaired, and the amount of the impairment could be substantial. Interest income was $225,712 for the year ended December 31, 1999, compared to $146,830 for the year ended December 31, 1998. During 1999, we also recorded $22,050 of interest income from our note receivable from DCI. Interest expense was $2,352,062 for the year ended December 31, 1999, compared to $7,024 for the year ended December 31, 1998. During 1999, we recorded $2,311,026 of interest expense related to the 10% convertible note payable we issued in August 1999, including (i) $173,973 of cash interest expense and (ii) non-cash charges of $2,092,137 related to amortization of the beneficial conversion feature and the discount recorded for the issuance of a common stock purchase warrant; and (iii) $44,916 related to the amortization of financing fees. Net losses allocable to common stockholders were $21,866,012 for the year ended December 31, 1999, compared to $15,762,372 for the year ended December 31, 1998. We recorded non-cash expenses for the following items:
Year Ended December 31, --------------------------------------------- 1999 1998 ------------------- ------------------- Amortization of intangible assets and goodwill $ 2,523,351 $ - Customer acquisition costs 941,684 560,824 Amortization of beneficial conversion, discount and placement fees to interest expense related to the 10% convertible note payable 2,137,053 - Stock and warrants issued for services 1,814,683 2,309,804 Preferred stock dividends 272,663 329,120 Accretion of preferred stock 4,316,254 4,816,989 ------------------- ------------------- Total $12,005,688 $8,016,737 =================== ===================
The increase in losses reflect expenses in sales and marketing, product development, and general and administrative areas that have increased at a faster rate than revenues. This is due to the time lag associated with product development and market introduction as well as the long sales cycle for most of our products and services. We expect to continue to experience increased operating expenses and investments during 2000, as we continue to develop new product offerings and the infrastructure required to support our anticipated growth. We expect to report operating and net losses for 2000 and for one or more years thereafter. Twelve Months Ended December 31, 1998 and 1997. Net sales for the twelve months ended December 31, 1998 totaled $1,589,380, including $485,663 for service and license sales and $1,103,717 for hardware and software sales. This represents a decrease of 43% below 1997 net sales of $2,791,556, which consisted of $1,674,198 for service sales and $1,117,358 for hardware and software sales. We had four customers representing 71% of sales and four customers representing 47% of sales for the years ended December 31, 1998 and 1997, respectively. The decrease in sales for the 1998 period compared to the 1997 period was due to the reduction of certain of our web site development, maintenance and hosting activities during the fourth quarter of 1997 and due to a new revenue-based pricing structure for our products and services for broadband operators. During the second quarter of 1998, we implemented a new pricing structure for these products and services whereby we supply any required equipment and the products and services and the customer is not required to pay any significant fees upon the delivery of such items. This structure results in a lower front-end cost 25 for the operator and lower initial revenues for us, in consideration for which we expect to receive a higher percentage of advertising and transaction fees received from the broadband operators' subscribers. Cost of sales as a percentage of net sales was 81.3% for the twelve month 1998 period and 71.4% for the comparable 1997 period. Service Sales - Cost of service sales increased in the 1998 period as a percentage of service sales as the mix of sales changed from custom web page development, hosting and maintenance activities, which were at higher margins, to transactional services, such as e-banking, our Re/MAX Main Street product, and our enterprise products, which were at lower margins. We incurred development expenses to assist our customers in enabling and launching their sites, which included charges such as help desk set-up fees, credit card processing set-up fees, and costs associated with integrating the billing system through the Internet, totaling $49,100 related to the Re/Max Main Street product, and also provided programming services to our e-banking customer at discounts, which contributed to lower gross margins on service sales. In addition, the increase in cost of service sales in the 1998 period reflect an increase in direct costs, such as telephone line costs (on a per customer basis) related to the our Internet connectivity business coupled with decreasing revenues from that activity as we are selling these services to fewer customers as a result of our decision to emphasize our Internet content services. Hardware and Software Sales - Cost of hardware and software sales increased in the 1998 period as a percentage of hardware sales because we sold equipment to existing customers at lower margins. Sales and marketing expenses were $2,479,029 for the twelve months ended December 31, 1998, compared to $1,197,038 for the 1997 period. Sales and marketing expenses as a percentage of net sales increased from 42.9% in 1997 to 156.0% in 1998. During the 1998 period, we incurred new market development costs associated with developing our enterprise business. These costs consist of expenses incurred by us, principally labor, travel and other third-party costs such as software licenses, in connection with getting our customer's ISP presence established, including design and branding of the customer's Internet start page, developing local area content, and assisting our customers in developing our Internet business presence. We also incurred costs in the 1998 period associated with opening international markets, principally in Mexico and Argentina, costs associated with developing sales collateral materials, including brochures and PC based presentation software as well as additional compensation expense as a result of employing more experienced sales people. Product development expenses were $1,264,287 for the twelve months ended December 31, 1998, compared to $1,108,456 for the 1997 period. Product development expense as a percentage of net sales increased from 39.7% in 1997 to 79.5% in 1998. We capitalized $281,776 of development costs during 1998 and $124,097 during 1997 related to the development of our enterprise product offerings. (See discussion below regarding depreciation and amortization.) During 1998, we continued developing our enterprise products and services, including the development of e-commerce and the integration of DCI's CommunityWare(R) with our software. During 1997, we developed our initial enterprise product, wireless cable capabilities, and initial product offerings targeted at the medical education market. General and administrative expenses were $5,958,617 for the twelve months ended December 31, 1998, compared to $1,837,330 for the 1997 period. General and administrative expenses as a percentage of net sales increased from 65.8% in 1997 to 374.9% in 1998. During the 1998 period, we recorded non-cash charges of $2,870,628 for grants of common stock and options and warrants to purchase common stock to non-employees in exchange for services, including $1,925,000, which we incurred during the fourth quarter of the year to enhance our activities in corporate finance, mergers and acquisitions, and public and investor relations. We also added (in the aggregate) nine individuals in 1998 in the finance, strategic development, and network operations areas to support our business segments, and we incurred costs in connection with the administration of our operating segments, including additional personnel costs, particularly for our Chief Operating Officer, as well as administration of our financial services business segment. Additionally, in the 1998 period we incurred costs of $179,562 in connection 26 with unsuccessful business acquisition efforts and accounting, legal and other expenses associated with capital raising activities. Depreciation and amortization was $791,155 for the twelve months ended December 31, 1998, compared to $198,788 for the 1997 period. During the 1998 period, we fully amortized our software costs and recorded $403,805 of amortization expense. We also recorded more depreciation expense as a result of an increase in fixed assets, including our e-banking service bureau based solution, and equipment and software to support our product development and testing. Interest income was $139,806 during the twelve-month period ended December 31, 1998, compared to $168,298 for the 1997 period. During the 1998 period, we utilized more of our cash reserves to fund our operations, which resulted in less cash available for investment in interest bearing securities. We also recorded interest income on the note receivable to DCI, which partially offset the decrease in interest income from our cash investments. Our investments consist of corporate bonds and cash equivalents. Net losses allocable to common stockholders were $15,762,372 for the twelve-month period ended December 31, 1998 compared to $3,375,279 for the 1997 period. During the 1998 period, we recorded non-operating expenses for preferred stock dividends and accretion of preferred stock to redemption value of $329,120 and $4,110,060, respectively. In addition, during 1998 we recorded $706,929 of accretion of preferred stock for the guaranteed return in excess of the redemption value. Additionally, the increase in losses reflect expenses in sales and marketing, product development, and general and administrative areas that have increased at a faster rate than net sales. This is due to the time lag associated with product development and market introduction as well as the long sales cycle for most of our products and services. Liquidity and Capital Resources As of December 31, 1999, we had cash and cash equivalents of $4,164,371 and working capital of $2,752,052. We financed our operations and capital expenditures and other investing activities during 1999 primarily through the sale of securities (See Notes 6 and 7 of Notes to Consolidated Financial Statements for information regarding these sales of securities). We used $8,603,881 in cash to fund our operations for the year ended December 31, 1999, compared to $5,228,646 for the year ended December 31, 1998. The increase in net cash used resulted primarily from the following: (i) an increase in costs paid for continued development of our XML-based technologies and e-banking core applications; (ii) higher compensation costs paid to employees; (iii) payment of costs to operate the DCI California office; and (iv) payment of 1998 accounts payable and accrued liabilities in the first quarter of 1999. We used an additional $2,388,592 in cash for capital expenditures and other investing activities during the year ended December 31, 1999, compared to $2,380,462 during the year ended December 31, 1998. We purchased $1,692,532 of property and equipment, advanced DCI $593,649 for working capital and invested $240,564 in NetIgnite prior to the consummation of the respective mergers. Planned capital expenditures for 2000 are approximately $2.5 million, including computer equipment, software and leasehold improvements for our new corporate offices. We received $14,458,505 in operating capital from financing activities for the year ended December 31, 1999, compared to $4,627,165 for the year ended December 31, 1998. During 1999, we received funds from the following financing transactions: o During August 1999, we issued a 10% convertible note payable and received $4,616,816 in net proceeds; o During January and June 1999, we sold 3,000 and 2,000 shares, respectively, of series C preferred stock with a stated value of $1,000 per share, which resulted in total net proceeds of $4,615,500; o During 1999 we received $7,197,462 in cash from the issuance of our common stock as a result of the exercise of common stock options and warrants. 27 During the first two months of 2000, we have received additional net operating capital of $11,660,000 from the sale of our series B preferred stock with warrants attached and approximately $4,976,000 from the exercise of outstanding stock purchase warrants and options. We believe that based on our cash and cash equivalents and working capital at February 29, 2000, we have sufficient working capital to fund operations through at least January 1, 2002. Item 7. FINANCIAL STATEMENTS. See Financial Statements beginning on page F-1. Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. Incorporated by reference to Webb's definitive proxy statement for the 2000 Annual Meeting of Shareholders. Item 10. EXECUTIVE COMPENSATION. Incorporated by reference to Webb's definitive proxy statement for the 2000 Annual Meeting of Shareholders. Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated by reference to Webb's definitive proxy statement for the 2000 Annual Meeting of Shareholders. Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated by reference to Webb's definitive proxy statement for the 2000 Annual Meeting of Shareholders. Item 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) For Financial Statements filed as a part of this Report, reference is made to "Index to Financial Statements" on page F-1 of this Report. For a list of Exhibits filed as a part of this Report, see Exhibit Index page following Audited Financial Statements and Notes thereto. (b) During the last quarter for the period covered by this Report, we did not file any reports on Form 8-K. 28 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WEBB INTERACTIVE SERVICES, INC. Date: March 24, 2000 By /s/ Perry Evans ------------------------------------ Perry Evans, Chief Executive Officer In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Perry Evans March 24, 2000 - ---------------------------- Perry Evans (President, Chief Executive Officer and a Director) /s/ William R. Cullen March 24, 2000 - ---------------------------- William R. Cullen (Chief Financial Officer and a Director) /s/ Stuart Lucko March 24, 2000 - ---------------------------- Stuart Lucko (Controller) /s/ Robert J. Lewis March 24, 2000 - ---------------------------- Robert J. Lewis (Director) /s/ Richard C. Jennewine March 24, 2000 - ---------------------------- Richard C. Jennewine (Director) 29 Item 7. FINANCIAL STATEMENTS. WEBB INTERACTIVE SERVICES, INC. ------------------------------- (FORMERLY KNOWN AS ONLINE SYSTEM SERVICES, INC.) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------
Page ---- Report of Independent Public Accountants F-2 Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3 Consolidated Statements of Operations for the Years Ended December 31, 1999 and 1998 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999 and 1998 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999 and 1998 F-6-F-7 Notes to Consolidated Financial Statements F-8
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Webb Interactive Services, Inc.: We have audited the accompanying consolidated balance sheets of WEBB INTERACTIVE SERVICES, INC. (a Colorado corporation), formerly known as Online System Services, Inc., as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity 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 auditing standards generally accepted in the United States. 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 Webb Interactive Services, Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Denver, Colorado February 25, 2000. F-2 WEBB INTERACTIVE SERVICES, INC. (FORMERLY KNOWN AS ONLINE SYSTEM SERVICES, INC.) CONSOLIDATED BALANCE SHEETS
December 31, ----------------------------- 1999 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 4,164,371 $ 698,339 Accounts receivable, net (Note 2) 103,132 124,912 Accounts receivable from related party (Note 13) 4,000 22,925 Note and accrued interest receivable (Note 9) - 896,787 Inventory, net - 55,126 Prepaid expenses 399,217 74,179 Deferred acquisition costs - 229,404 Short-term deposits 444,545 101,441 ------------ ------------ Total current assets 5,115,265 2,203,113 Property and equipment, net (Note 3) 2,352,489 1,178,628 Intangible assets, net (Notes 1 and 9) 12,503,047 - Deferred financing costs 2,649,517 - Other assets 4,216 3,535 ------------ ------------ Total assets $ 22,624,534 $ 3,385,276 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of capital leases payable (Note 4) $ 108,525 $ 21,766 Accounts payable and accrued liabilities 841,440 873,901 Accrued salaries and payroll taxes payable 1,059,338 329,755 Accrued interest payable 126,028 - Customer deposits and deferred revenue 227,882 100,600 ------------ ------------ Total current liabilities 2,363,213 1,326,022 Capital leases payable (Note 4) 115,493 39,915 Commitments and contingencies (Note 14) 10% convertible note payable, net (Note 6) 4,052,290 - Stockholders' equity (Note 7): Preferred stock, no par value, 5,000,000 shares authorized: 10% redeemable, convertible preferred stock, 10% cumulative return; 85,000 and 245,000 shares issued and outstanding, respectively, including dividends payable of $170,295 and $241,172, respectively 1,020,295 2,691,172 Series A redeemable, convertible preferred stock, 5% cumulative return; 0 and 1,400 issued and outstanding, respectively, including dividends payable of $0 and $10,164, respectively - 1,410,164 Common stock, no par value, 20,000,000 shares authorized, 7,830,028 and 4,642,888 shares issued and outstanding, respectively 49,513,769 16,410,300 Warrants and options 8,612,322 2,281,832 Deferred compensation (412,707) - Accumulated deficit (42,640,141) (20,774,129) ------------ ------------ Total stockholders' equity 16,093,538 2,019,339 ------------ ------------ Total liabilities and stockholders' equity $ 22,624,534 $ 3,385,276 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-3 WEBB INTERACTIVE SERVICES, INC. (FORMERLY KNOWN AS ONLINE SYSTEM SERVICES, INC.) CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, -------------------------------- 1999 1998 ------------ ------------ Net revenues $ 1,822,163 $ 1,403,612 Net revenues from related party (Note 13) 122,120 185,768 ------------ ------------ 1,944,283 1,589,380 ------------ ------------ Cost of revenues 1,656,021 1,163,537 Cost of revenues from related party (Note 13) 78,293 128,000 ------------ ------------ 1,734,314 1,291,537 ------------ ------------ Gross margin 209,969 297,843 Operating expenses: Sales and marketing expenses 1,726,004 2,479,029 Product development expenses 2,891,569 1,264,287 General and administrative expenses 6,637,601 5,958,617 Customer acquisition costs 941,684 560,824 Depreciation and amortization 3,036,773 791,155 ------------ ------------ 15,233,631 11,053,912 ------------ ------------ Loss from operations (15,023,662) (10,756,069) Interest income 225,712 146,830 Interest expense (2,352,062) (7,024) Equity in loss of subsidiary (127,083) - ------------ ------------ Net loss (17,277,095) (10,616,263) Preferred stock dividends (Note 7) (272,663) (329,120) Accretion of preferred stock to redemption value (Note 7) (3,157,691) (4,110,060) Accretion of preferred stock for guaranteed return in excess of redemption value (Note 7) (1,158,563) (706,929) ------------ ------------ Net loss available to common stockholders $(21,866,012) $(15,762,372) ============ ============ Loss per share, basic and diluted $ (3.31) $ (4.35) ============ ============ Weighted average shares outstanding, basic and diluted 6,610,836 3,621,585 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. F-4 WEBB INTERACTIVE SERVICES, INC. (FORMERLY KNOWN AS ONLINE SYSTEM SERVICES, INC.) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
10% Preferred Stock Series C Preferred Stock ----------------------------------- ----------------------------------- Shares Amount Shares Amount ----------------- --------------- ----------------- --------------- Balances, December 31, 1997 245,000 $ 1,226,376 - $ - Stock issued in conjunction with private placements- Preferred stock 22,500 159,559 - - Common stock - - - - Common stock warrants - - - - Offering costs - (18,980) - - Warrants issued for placement fees - - - - Guaranteed return on preferred stock - (56,250) - - Preferred stock dividends - 259,822 - - Preferred stock and dividends converted to common stock (22,500) (243,650) - - Exercises of stock options and warrants - - - - Accretion of preferred stock to redemption value - 1,364,295 - - Accretion of preferred stock for guaranteed return in excess of redemption value - - - - Stock and stock options issued for services and to customer - - - - Net loss available to common stockholders - - - - ---------------- ------------ --------- ----------- Balances, December 31, 1998 245,000 2,691,172 - - Stock issued in conjunction with private placement- Series C preferred stock - - 5,000 5,000,000 Offering costs - - - (384,500) Guaranteed return on preferred stock - - - (3,931,754) Preferred stock dividends - 94,216 - 29,121 Common stock and common stock warrants issued in connection with DCI merger - - - - Common stock issued in connection with - - - - NI merger Preferred stock and dividends converted to common stock (160,000) (1,765,093) (5,000) (5,029,121) Preferred stock beneficial conversion feature on dividends paid through the issuance of common stock - - - - Convertible notes payable converted to common stock - - - - Exercises of stock options and warrants - - - - 10% Note Payable beneficial conversion feature - - - - Common stock warrant issued in connection with 10% Note Payable - - - - Accretion of preferred stock to redemption value - - - 3,157,691 Accretion of preferred stock for guaranteed return in excess of redemption value - - - 1,158,563 Stock and stock options issued for services and to customers - - - - Deferred compensation - - - - Net loss available to common stockholders - - - - ---------------- ------------ --------- ----------- Balances, December 31, 1999 85,000 $ 1,020,295 - $ - ================ ============ ========= =========== 5% Preferred Stock Series A Preferred Stock Common Stock ---------------------------- ---------------------------- ------------------------- Shares Amount Shares Amount Shares Amount ------------ ------------- ------------- ------------- ------------ ----------- Balances, December 31, 1997 - $ - - $ - 3,315,494 $ 8,726,554 Stock issued in conjunction with private placement- Preferred stock 3,000 2,597,500 1,400 764,400 - - Common stock - - - - - 46,406 Common stock warrants - - - - 5,625 - Offering costs - (626,855) - (103,001) - (5,520) Warrants issued for placement fees - - - - - - Guaranteed return on preferred stock - (316,410) - (1,368,328) - 1,740,988 Preferred stock dividends - 59,134 - 10,164 - _ Preferred stock and dividends converted to common stock (3,000) (3,059,134) - - 685,538 3,302,784 Exercises of stock options and warrants - - - - 262,231 494,088 Accretion of preferred stock to redemption value - 1,345,765 - 1,400,000 - - Accretion of preferred stock for guaranteed return in excess of redemption value - - - 706,929 - - Stock and stock options issued for services and to customer - - - - 374,000 2,105,000 Net loss available to common stockholders - - - - - - ------------ ------------- ------------- ------------- ------------ ----------- Balances, December 31, 1998 - - 1,400 1,410,164 4,642,888 16,410,300 Stock issued in conjunction with private placement- Series C preferred stock - - - - - - Offering costs - - - - - - Guaranteed return on preferred stock - - - - - 3,931,754 Preferred stock dividends - - - 2,301 - - Common stock and common stock warrants issued in connection with DCI merger - - - - 947,626 9,239,358 Common stock issued in connection with NI merger - - - - 71,429 984,400 Preferred stock and dividends converted to common stock - - (1,400) (1,412,465) 904,981 8,206,679 Preferred stock beneficial conversion feature on dividends paid through the issuance of common stock - - - - - 147,025 Convertible notes payable converted to common stock - - - - 82,402 894,879 Exercises of stock options and warrants - - - - 1,144,205 7,197,462 10% Note Payable beneficial conversion feature - - - - - 1,967,522 Common stock warrant issued in connection with 10% Note Payable - - - - - - Accretion of preferred stock to redemption value - - - - - - Accretion of preferred stock for guaranteed return in excess of redemption value - - - - - - Stock and stock options issued for services and to customers - - - - 36,497 534,390 Deferred compensation - - - - - - Net loss available to common stockholders - - - - - - ------------ ------------- ------------- ------------- ------------ ----------- Balances, December 31, 1999 - $ - - $ - 7,830,028 $49,513,769 ============ ============= ============= ============= ============ =========== Warrants and Deferred Accumulated Stockholders' Options Compensation Deficit Equity ------------ ------------- ------------- ------------- Balances, December 31, 1997 165,427 $ - $ (5,011,757) $ 5,106,600 Stock issued in conjunction with private placements- Preferred stock - - - 3,521,459 Common stock - - - 46,406 Common stock warrants 1,057,135 - 1,057,135 Offering costs (184,806) - - (939,162) Warrants issued for placement fees 478,448 - - 478,448 Guaranteed return on preferred stock - - - - Preferred stock dividends - - - 329,120 Preferred stock and dividends converted to common stock - - - - Exercises of stock options and warrants - - - 494,088 Accretion of preferred stock to redemption - - - 4,110,060 value Accretion of preferred stock for guaranteed return in excess of redemption value - - - 706,929 Stock and stock options issued for services and to customer 765,628 - - 2,870,628 Net loss available to common stockholders - - (15,762,372) (15,762,372) ------------ ------------- ------------- ------------- Balances, December 31, 1998 2,281,832 - (20,774,129) 2,019,339 Stock issued in conjunction with private placement- Series C preferred stock - - - 5,000,000 Offering costs - - - (384,500) Guaranteed return on preferred stock - - - - Preferred stock dividends - - - 125,638 Common stock and common stock warrants issued in connection with DCI merger 2,158,837 - - 11,398,195 Common stock issued in connection with NI merger - - - 984,400 Preferred stock and dividends converted to common stock - - - - Preferred stock beneficial conversion feature on dividends paid through the issuance of common stock - - - 147,025 Convertible notes payable converted to common stock - - - 894,879 Exercises of stock options and warrants (1,846,830) - - 5,350,632 10% Note Payable beneficial conversion feature - - - 1,967,522 Common stock warrant issued in connection with 10% Note Payable 3,383,800 - - 3,383,800 Accretion of preferred stock to redemption value - - - 3,157,691 Accretion of preferred stock for guaranteed return in excess of redemption value - - - 1,158,563 Stock and stock options issued for services and to customers 2,634,683 - - 3,169,073 Deferred compensation - (412,707) - (412,707) Net loss available to common stockholders - - (21,866,012) (21,866,012) ------------ ------------- ------------- ------------- Balances, December 31, 1999 $ 8,612,322 $ (412,707) $ (42,640,141) $ 16,093,538 ============ ============= ============= =============
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 WEBB INTERACTIVE SERVICES, INC. (FORMERLY KNOWN AS ONLINE SYSTEM SERVICES, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ---------------------------------------------- 1999 1998 -------------------- ------------------ Cash flows from operating activities: Net loss $(17,277,095) $(10,616,263) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,211,532 791,155 Loss on sale and disposal of property and equipment 249,468 - Provision for excess and obsolete inventory 55,126 - Accrued interest income on advances to DCI (46,379) (49,304) Reduction in note receivable for services received from DCI 368,643 540,372 Stock and stock options issued for services and to customers 2,756,366 2,870,628 Loss from investment in subsidiary 127,083 - Interest expense on 10% convertible note from beneficial conversion feature 1,967,522 - Amortization of 10% convertible note payable discount 124,615 - Amortization of 10% convertible note payable financing costs 45,142 - Changes in operating assets and liabilities: Decrease in accounts receivable 22,533 719,961 Decrease (increase) in accounts receivable from related party 18,925 (22,925) Decrease in inventory - 180,315 (Increase) decrease in prepaid expenses (302,083) 175,331 (Increase) decrease in short-term deposits and other assets (342,985) 73,579 Decrease in accounts payable and accrued liabilities (490,049) (96,036) Increase in accrued salaries and payroll taxes payable 690,832 113,262 Increase in accrued interest payable 107,333 - Increase in customer deposits and deferred revenue 109,590 91,279 ------------------- ------------------ Net cash used in operating activities (8,603,881) (5,228,646) ------------------- ------------------ Cash flows from investing activities: Cash acquired in business combinations 32,484 - Proceeds from the sale of property and equipment 133,137 - Purchase of property and equipment (1,692,532) (481,427) Capitalized software development costs - (281,776) Cash advances to DCI (593,649) (1,387,855) Payment of acquisition costs (27,468) (229,404) Investment in subsidiary (240,564) - ------------------- ------------------ Net cash used in investing activities (2,388,592) (2,380,462) ------------------- ------------------ Cash flows from financing activities: Payments on capital leases and convertible notes payable (124,443) (31,209) Proceeds from issuance of common stock and warrants - 65,441 Proceeds from issuance of 10% convertible note payable 5,000,000 - Proceeds from exercise of stock options and warrants 5,350,632 494,088 Proceeds from issuance of Series C Preferred Stock 5,000,000 - Proceeds from issuance of 10% Preferred Stock - 159,559 Proceeds from issuance of 5% Preferred Stock and warrants - 3,000,000 Proceeds from issuance of Series A Preferred Stock and warrants - 1,400,000 10% convertible note payable financing costs (383,184) - Stock offering costs (384,500) (460,714) ------------------- ------------------ Net cash provided by financing activities 14,458,505 4,627,165 ------------------- ------------------ Net increase (decrease) in cash and cash equivalents 3,466,032 (2,981,943) Cash and cash equivalents, beginning of year 698,339 3,680,282 ------------------- ------------------ Cash and cash equivalents, end of year $ 4,164,371 $ 698,339 =================== ==================
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 WEBB INTERACTIVE SERVICES, INC. (FORMERLY KNOWN AS ONLINE SYSTEM SERVICES, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended December 31, ---------------------------------------------- 1999 1998 ------------------- -------------------- Supplemental disclosure of cash flow information: Cash paid for interest $ 59,056 $ 7,024 Supplemental schedule of non-cash investing and financing activities: Common stock and warrants issued in business combinations $12,382,595 $ - Accretion of preferred stock to redemption value 3,157,691 4,110,060 Accretion of preferred stock for guaranteed return in excess of redemption value 1,158,563 706,929 Preferred stock dividends paid or to be paid in common stock 272,663 329,120 Preferred stock and dividends converted to common stock 8,206,679 3,302,784 Stock and stock options issued for services and value to customers 2,756,366 2,870,628 Common stock warrants issued for offering costs - 478,448 Beneficial conversion of 10% convertible note payable 1,967,522 - Discount of 10% convertible note payable 124,615 - Convertible notes payable converted to common stock 894,879 - Capital leases for equipment 195,405 68,750
The accompanying notes to consolidated financial statements are an integral part of these statements. F-7 WEBB INTERACTIVE SERVICES, INC. (FORMERLY KNOWN AS ONLINE SYSTEM SERVICES, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND BUSINESS Webb Interactive Services, Inc. (the "Company"), formerly known as Online System Services, Inc., was incorporated on March 22, 1994, under the laws of Colorado, and principal operations began in 1995. The Company develops next generation Internet applications for unlocking the potential of local market e- commerce, including the development of XML-based technologies that facilitate buyer-seller interaction and enable individuals and local businesses to easily manage their web-based communications. In addition, the Company also provides an online banking solution, marketed generally to financial institutions having less than $500 million in assets, using a service bureau approach to e-banking, which enables institutions to provide many of the capabilities and services available to the larger financial institutions without the cost associated with the development of institution-specific systems. On June 2 and June 30, 1999, the Company consummated its acquisitions of NetIgnite, Inc. ("NI") and Durand Communications, Inc. ("DCI"), respectively. DCI's and NI's shareholders exchanged all of their shares for shares of the Company's common stock in business combinations that were recorded using the purchase method of accounting. The consolidated financial statements of the Company reflect the results of operations of NI and DCI from the consummation of the acquisitions through December 31, 1999. The consideration paid in excess of the fair market value of the tangible assets acquired was recorded as intangible assets and goodwill. Because the business now operated by the Company has never been profitable, and due to the other risks and uncertainties discussed herein, it is reasonably possible that an analysis of these long-lived assets in future periods could result in a conclusion that they are impaired, and the amount of the impairment could be substantial. The Company derives revenues principally from licenses of its software; professional services fees for customization of its software, assisting its customers in configuring and integrating the Company's software applications; service bureau application fees; and hosting and support services. Prior to June 1999, the Company also earned revenues from the sale of design and consulting services for web site development, network engineering services, resale of software licenses, mark-ups on computer hardware and software sold to customers, maintenance fees charged to customers to maintain computer hardware and web sites, training course fees, and monthly fees paid by customers for Internet access which the Company provided. The Company has not been profitable since inception. The Company competes in an intensively competitive industry, which has been characterized by price erosion, rapid technological change, short product life cycles, and rapidly changing business models. Significant technological changes in the Internet access and broadband data delivery require that the Company expend significant funds in order to compete in an ever-changing marketplace. The Company has expended significant funds to develop its current product offerings. During 2000, the Company anticipates increased operating expenses and research and development expenditures, which are necessary for the Company to further develop and market its products, and to achieve market acceptance of its products in sufficient quantities to achieve positive cash flow from operations. Based on its cash balances at February 25, 2000, the Company believes that it has sufficient cash to fund operations through December 2001. The Company's future revenues are highly dependent upon the use of its products by the customers of its distribution partners who have entered into business relationships with the Company. The Company is also highly dependant on certain key personnel. There can be no guarantee that the Company will be successful in marketing its products or that it will be able to achieve positive cash flow from operations. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Business Combinations Business combinations which have been accounted for under the purchase method of accounting include the results of operations of the acquired businesses from the date of acquisition. Net assets of the companies acquired are recorded at their fair value to the Company at the date of acquisition (See Note 9). F-8 Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions may affect the 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. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of reporting cash flows, the Company considers cash and cash equivalents to include highly liquid investments with original maturities of 90 days or less that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company has no significant off balance-sheet concentrations of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company maintains the majority of its cash with financial institutions that it believes to be of high credit quality in the form of demand deposits, and denominates the majority of its transactions in U.S. dollars. The Company performs ongoing evaluations of its customers' financial condition and generally does not require collateral, except for billings in advance of work performed, and maintains reserves for potential credit losses. Accounts receivable are shown net of allowance for doubtful accounts of $4,000 and $18,000 at December 31, 1999 and 1998, respectively. As discussed in Note 11, the Company has three and five customers that accounted for more than 10% of 1999 and 1998 revenues, respectively, and four and three customers that accounted for more than 10% of accounts receivable as of December 31, 1999 and 1998, respectively. Inventory At December 31, 1998, inventory consisted of computer hardware purchased for resale to its customers and was stated at the lower of cost (first-in, first-out) or market. Property and Equipment Property and equipment is stated at cost and depreciation is provided using the straight-line method over the estimated useful lives of the respective assets. Maintenance and repairs are expensed as incurred and improvements are capitalized. Long-Lived Assets Long-lived assets and certain identifiable intangibles to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Any long-lived assets and certain identifiable intangibles to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. Intangible Assets and Goodwill Intangible assets and goodwill relate to purchase transactions and are being amortized on a straight-line basis over three years. Subsequent to acquisitions which result in goodwill, the Company continually evaluates whether later events and circumstances have occurred that indicate the remaining useful life of goodwill may F-9 warrant revision or that the remaining balance of goodwill may not be recoverable. When factors indicate that intangible assets and goodwill should be evaluated for possible impairment, the Company uses an estimate of the undiscounted cash flows over the remaining life of the intangible assets and goodwill in measuring whether the intangible assets and goodwill are recoverable. The Company recorded $2,523,351 of intangible assets and goodwill amortization expense for the year ended December 31, 1999. Capitalized Software Development Costs and Research and Development Costs The Company capitalizes software development costs in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" ("SFAS 86"). Capitalization of development costs of software products begins once the technological feasibility of the product is established. The establishment of technological feasibility is highly subjective and requires the exercise of judgment by management. Based on the Company's product development process, technological feasibility is established upon completion of a detailed program design. Capitalization ceases when such software is ready for general release, at which time amortization of the capitalized costs begins. During 1998 and 1999, the Company determined that the time between technological feasibility and general release is short, consequently, the Company did not capitalize software development costs but expensed those costs as incurred. During 1998, $403,805, representing all capitalized software costs, were fully amortized. Product development costs relating principally to the design and development of non-software products are generally expensed as incurred. The cost of developing routine software enhancements are expensed as product development costs as incurred. Fair Value of Financial Instruments The Company's financial instruments consist of cash and cash equivalents, short-term trade receivables, payables, and capital leases. As of December 31, 1999 and 1998, the carrying values of such instruments approximated their fair values. Based upon interest rates currently available to the Company, the fair value of the Note Payable is estimated to be $4,167,822. Customer Acquisition Costs The Company capitalizes acquisition costs to acquire customers if the related customer contract contains guarantees of minimum revenue which supports the amount paid and amortizes those costs over the term the guaranteed revenue is recognized. When the contract does not specify guaranteed revenue, the Company expenses the acquisition costs when incurred. Revenue Recognition The Company recognizes software license revenue in accordance with the American Institute of Certified Public Accountants Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), which requires the Company to recognize revenue on software transactions only when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant Company obligations remain, the fee is fixed or determinable, and collectibility is probable. Revenue from software license fees is recognized upon delivery, provided that no future Company obligation exists. If obligations do exist, revenue is deferred until the obligation is satisfied, which may require the Company to recognize revenue from software licenses over the term of the contract. In instances where the Company charges monthly license fees, revenue is recognized in the month the license is provided. Guaranteed minimum revenue is recognized on a straight-line basis over the period the minimum applies. Revenue from professional services billed on a time and materials basis is recognized as performed. Revenue from fixed price long-term contracts are recognized on the percentage of completion method for individual contracts, commencing when progress reaches a point where experience is sufficient to estimate final results with reasonable accuracy. Revenues are recognized in the ratio that costs incurred bear to total estimated contract costs. The Company's use of the percentage of completion method of revenue recognition requires estimates of percentage of project completion. Changes in job performance, estimated profitability and final contract settlements may result in revisions to costs and income in the period in which the revisions are determined. Provisions for any estimated losses on uncompleted contracts are made in the period in which such losses are determinable. In instances when the work performed on fixed price agreements is of relatively short duration, the Company uses the completed contract method F-10 accounting whereby revenue is recognized when the work is completed. Customer advances and billed amounts due from customers in excess of revenue recognized are recorded as deferred revenue. Revenue from service bureau fees is recognized in the month the service is provided. Revenue from hosting, maintenance and support agreements is recognized on a straight-line basis over the life of the related agreement. In multiple element arrangements when vendor specific objective evidence does not exist for the individual elements, all revenue from the arrangement is deferred until the earlier of the point at which (a) such sufficient vendor- specific objective evidence does exist or (b) all elements of the arrangement have been delivered. In some instances, the Company recognizes all the revenue from the arrangement on a straight-line basis over the life of the related agreement. Revenue from hardware sales is recognized upon shipment, or when title passes to the customer. Estimates of returns and allowances are recorded in the period of the sale based on the Company's historical experience and the terms of individual transactions. Income Taxes The current provision for income taxes represents actual or estimated amounts payable on tax return filings each year. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying balance sheets, and for operating loss and tax credit carryforwards. The change in deferred tax assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to the tax provision or benefit in the period of enactment. The Company's deferred tax assets have been reduced by a valuation allowance to the extent it is more likely than not, that some or all of the deferred tax assets will not be realized (See Note 12). Stock-Based Compensation The Company accounts for its employee stock option plans and other employee stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25") and related interpretations. As such, compensation expense related to employee stock options is recorded if, on the measurement date, the fair value of the underlying stock exceeds the stock option exercise price. The Company adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and provide pro forma disclosures for employee stock grants made in 1996 and future years as if the fair-value-based method of accounting in SFAS 123 had been applied to these transactions. The Company accounts for warrants issued for services to non-employees in accordance with SFAS 123 and related interpretations. Certain grants of warrants require the use of variable plan accounting whereby the warrants are valued using the Black-Scholes option pricing model at the date of issuance and at each subsequent balance sheet date with final valuation on the vesting date. The Company records deferred compensation expense based on the calculated values and records expense over the vesting term of the warrant. Net Loss Per Share Net loss per share is calculated in accordance with SFAS No. 128, "Earnings Per Share" ("SFAS 128"), and Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS 128 and SAB 98, basic net loss per share is computed by dividing net loss available to common shareholders F-11 for the period by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. As a result of the Company's net losses, all potentially dilutive securities, as indicated in the table below, would be anti-dilutive and are excluded from the computation of diluted loss per share.
December 31, ----------------------- 1999 1998 ---------- ---------- Stock options 2,770,055 1,758,665 10% convertible note payable 496,524 - Warrants and underwriter options 973,149 1,190,612 10% Preferred Stock 102,030 300,401 Series A Preferred Stock - 246,964 ---------- ---------- Total 4,341,758 3,496,642 ========== ==========
The number of shares excluded from the earning per share calculation because they are anti-dilutive, using the treasury stock method, were 1,489,286 and 1,317,854 for the years ended December 31, 1999 and 1998, respectively. Comprehensive Income Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. From its inception through December 31, 1999, the Company has not had any material transactions that are required to be reported in comprehensive income as compared to its net loss. Accounting for the Costs of Computer Software Development or Obtained for Internal Use Effective January 1, 1999, the Company adopted the provisions of Statement or Position 98-1, "Accounting for the Costs of Computer Software Development or Obtained for Internal Use" ("SOP 98-1"). This statement establishes standards for the capitalization of costs related to internal use software. In general, costs incurred during the development stage are capitalized, while the costs incurred during the preliminary project and post-implementation stages are expensed. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The Statement establishes accounting and reporting standards for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - An amendment of FASB Statement No. 133" ("SFAS 137"). SFAS 137 delays the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. The Company does not typically enter into arrangements that would fall under the scope of SFAS 133 and thus, management believes SFAS 133 will not significantly affect its financial condition and results of operations. In December 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions," ("SOP 98-9"). SOP 98-9 amends certain paragraphs of SOP 97-2, to require the application of a residual method of accounting for software revenue when certain conditions exist. SOP 98- 9 also amends SOP 98-4, F-12 "Deferral of the Effective Date of a Provision of SOP 97-2" ("SOP 98-4"), to extend the deferral of the application of certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or before March 25, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. Earlier adoption is permitted, however, retroactive application is prohibited. The Company believes SOP 98-9 will not materially impact its financial statements. In December 1999, the Securities and Exchange Commission Staff released SAB No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides interpretive guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB 101 must be applied to financial statements no later than the first fiscal quarter of 2000. The Company is currently reviewing SAB 101 to determine what impact, if any, adoption of this SAB will have on its financial position or results of operations. Reclassifications Certain reclassifications to prior year financial statements have been made to conform to the current year's presentation. (3) PROPERTY AND EQUIPMENT Property and equipment consists of the following: December 31, ------------------------- 1999 1998 ----------- ---------- Computer equipment $ 2,658,213 $1,238,966 Office furniture and equipment 222,494 207,639 Purchased software 807,283 243,492 Leasehold improvements 66,657 66,657 Assets under construction - 163,426 ----------- ---------- 3,754,647 1,920,180 Less accumulated depreciation (1,402,158) (741,552) ----------- ---------- Net property and equipment $ 2,352,489 $1,178,628 =========== ========== Certain office equipment, computer equipment and software is pledged as collateral for capital leases payable (See Note 4). The Company depreciates computer equipment, office equipment, and software over three to five years, office furnishings over seven years, and leasehold improvements over the life of the lease. Depreciation expense was $687,661 and $387,181 for the years ended December 31, 1999 and 1998, respectively. F-13 (4) CAPITAL LEASES PAYABLE Capital leases payable consist of the following:
December 31, ------------------- 1999 1998 --------- -------- Capital lease payable in monthly principal and interest payments of $2,828, for thirty-six months beginning November 1, 1998, effective interest rate of 16%, secured by software $ 58,261 $ 47,393 Capital lease payable in monthly principal and interest payments of $624, for twenty-four months beginning May 1, 1998, effective interest rate of 12.3%, secured by computer equipment 2,957 9,684 Capital lease payable in monthly principal and interest payments of $195, for thirty-six months beginning March 10, 1998, effective interest rate of 22%, secured by office equipment 2,395 4,016 Capital lease payable in quarterly principal and interest payments of $22,994, for eight quarters beginning January 1, 2000, effective interest rate of 16.47%, secured by cash certificate of deposit 160,405 - Capital lease payable in monthly principal and interest payments of $198, for thirty-six months beginning April 26, 1996, effective interest rate of 19.7%, secured by a phone system - 588 --------- -------- 224,018 61,681 Less current portion (108,525) (21,766) --------- -------- $ 115,493 $ 39,915 ========= ========
Future minimum lease payments under capital leases as of December 31, 1999 are as follows: 2000 $ 131,274 2001 125,643 --------- Total minimum lease payments 256,917 Less amount representing interest (32,899) --------- $ 224,018 =========
The net book value of assets under capital lease was $239,296 and $64,641 for the years ended December 31, 1999 and 1998, respectively. F-14 (5) CONVERTIBLE NOTES PAYABLE Subsequent to the agreement to acquire DCI (See Note 9), the Company issued convertible notes payable to DCI creditors totaling $942,885. The notes were convertible at the election of the holder into a number of common shares at conversion prices equal to $9.61 and the greater of $9.75 or the closing bid price on the conversion date. During 1999, holders of the convertible notes payable converted $894,879 of principal and accrued interest payable into 82,402 shares of the Company's common stock at conversion prices per share ranging from approximately $9.61 to $14.75 as summarized in the following table:
Note Payable and Accrued Common Stock Common Stock Interest Shares Conversion Conversion Date Converted Issued Price per Share - ---------------------- ------------------- ------------------- -------------------- July 15, 1999 $236,509 16,034 $14.75 September 27, 1999 144,150 15,000 9.61 September 28, 1999 49,011 5,100 9.61 September 29, 1999 112,437 11,700 9.61 September 30, 1999 50,938 5,000 10.19 October 1, 1999 106,250 10,000 10.63 October 4, 1999 78,501 7,753 10.13 October 5, 1999 15,684 1,600 9.61 to 10.13 October 7, 1999 72,308 7,231 10.00 October 15, 1999 29,091 2,984 9.75 ------------------- ------------------- Total $894,879 82,402 =================== ===================
(6) 10% CONVERTIBLE NOTE PAYABLE On August 25, 1999, the Company entered into a Securities Purchase Agreement and executed a $5,000,000 three-year 10% Convertible Promissory Note (the "Note Payable"). Net proceeds to the Company were $4,616,816 after deducting $383,184 in financing costs. The financing costs were recorded as a deferred asset and are being amortized as additional interest expense over the term of the Note Payable. During 1999, the Company recorded $45,142 of additional interest expense as a result of amortizing the deferred financing costs. On December 18, 1999, the terms of the Note Payable were amended at the Company's request as the Company believed this would facilitate its ability to raise additional working capital (See Note 16). In consideration for the holder's agreement to exchange the Note Payable for an amended note with terms the Company believed to be more favorable to the Company, the Company issued to the holder a five-year warrant representing the right to acquire 136,519 shares of the Company's common stock at an exercise price of $18.51 per share. The material amendments to the Note Payable and the warrant are as follows: (i) the conversion price for the Note Payable was set at $10.07 per share until March 22, 2000; (ii) to eliminate the variable conversion price feature of the Note Payable (iii) to enable the Company to require the conversion of one-half of the principal amount of the Note Payable upon certain events; (iv) to eliminate certain of the Company's rights to pre-pay the Note Payable; (v) in the event that the Company forces the conversion of one-half of the principal amount of the Note Payable, to permit the holder to elect to have the interest thereafter due and payable on the Note Payable paid in shares of the Company's common stock or additional Notes Payable similar to the 10% convertible Note Payable; and (vi) to provide for the amendment in the exercise price of the warrant on September 30, 2000, if the market price for the Company's common stock is then less than $11.44. The Note Payable is convertible into shares of common stock at a conversion price of $10.07 per share. The conversion price between March 22, 2000 and September 30, 2000 is $10.07 per share. The conversion price after September 29, 2000 will continue to be $10.07 per share unless the market price for the Company's common stock at that time is less than $10.07. In this event, the conversion price will be adjusted and will be the greater of (i) the average of the five lowest closing bid prices during the period from September 1, 2000 through September 29, 2000 and (ii) $8.00. The Company can prepay the Note Payable at any time after August 25, 2000, if the closing bid price for its common stock for 20 consecutive trading days is at least 200% of the conversion price then in effect. The redemption price would equal 115% of the face amount of the Note Payable, plus accrued and unpaid interest. F-15 The Note Payable bears interest at the rate of 10% per annum. If the Company forces the conversion of one-half of the Note Payable, the holder may thereafter elect to have the interest on the Note Payable paid either in shares of the Company's common stock or by the issuance of additional Notes Payable. The holder of the Note Payable has been granted two five-year warrants for 136,519 shares each, one exercisable at $11.44 per share and one exercisable at $18.51 per share. The exercise price for both warrants will be subject to adjustment on September 29, 2000, if the market price for the Company's common stock is then less than the exercise price of the warrants. In this event, the exercise price will be equal to the average closing bid prices for the period from September 1, 2000 through September 29, 2000. Each of the warrants is also subject to anti-dilution protection in the event of the issuance of our common stock at prices less than the exercise prices for the warrant or the then current price for our common stock and for stock splits, stock dividends and other similar transactions. The Company valued the warrants utilizing the Black-Scholes option pricing model using the following assumptions:
Issue Date ------------------------------------------------------ August 25, 1999 December 18, 1999 ---------------------- ------------------------ Recorded value $1,072,325 $2,311,475 Exercise price $ 11.44 $ 18.51 Fair market value of common stock on grant date $ 10.13 $ 21.06 Option life 5 years 5 Years Volatility rate 104% 104% Risk free rate of return 6% 6% Dividend rate 0% 0%
The fair value of the warrant issued on August 25, 1999 was recorded as an additional discount to the Note Payable and will be amortized as additional interest expense over the term of the Note Payable. For the year ended December 31, 1999, the Company recorded $124,615 of additional interest expense related to this warrant. The value of the warrant issued on December 18, 1999 was recorded as a deferred placement costs related to the sale of the Company's Series B Preferred Stock (See Note 16). Due to the conversion feature associated with the Note Payable, the Company accounted for a beneficial conversion feature (a "Guaranteed Return") as additional interest expense. Based on current generally accepted accounting principles, the computed value of the Guaranteed Return of $1,967,522 was initially recorded as a reduction of the Note Payable and an increase to additional paid-in capital on the date of issuance, even though the Note Payable was not then convertible and was subject to redemption prior to the date that it first becomes convertible. The Guaranteed Return reduction to the Note Payable totaling $1,967,522 was amortized as additional interest expense from the date of issuance to the earliest date of conversion which was during the fourth quarter of 1999. On February 18, 2000, the holder converted $2,500,000 of the outstanding Note Payable into 248,262 shares of the Company's common stock and also exercised a warrant to purchase 136,519 shares of the Company's common stock, resulting in proceeds to the Company of $1,561,777 (See Note 16). (7) STOCKHOLDERS' EQUITY Series C Preferred Stock On January 11, 1999, the Company completed a private placement of preferred stock which resulted in gross proceeds of $3,000,000. The Company sold 3,000 shares of its Series C cumulative, convertible, redeemable F-16 preferred stock (the "Series C Preferred Stock"). Net proceeds to the Company were $2,755,500 after deducting $244,500 in offering costs. In addition, the Company also issued a warrant which entitled the holder to purchase, at a price of $1,000 per share, up to 2,000 shares of the Company's Series C Preferred Stock. This warrant also granted the Company the right to require the holder to exercise such warrants. On June 18, 1999, the Company exercised this right and sold 2,000 shares of the Series C Preferred Stock for net proceeds of $1,860,000 after deducting $140,000 in offering costs. The Series C Preferred Stock specified a 4% per annum cumulative, non- compounding dividend based on the stated value of $1,000 per share. Each share of Series C Preferred Stock was convertible, at the option of the holder thereof, at any time after February 1, 1999, into the number of shares of common stock equal to $1,000 divided by the lesser of (i) 140% of the closing bid price of the common stock on the date of the issuance of the Series C Preferred Stock being converted (initially $20.48), or if less and if the conversion is occurring at least 120 days after the issuance of the Series C Preferred Stock being converted, 100% of the closing bid price of the Company's common stock on the trading day closest to the date that is 120 days after the Series C Preferred Stock that is being converted was issued or (ii) the average of the five lowest closing bid prices of common stock during the 44 consecutive trading days immediately preceding the conversion of the Series C Preferred Stock conversion date. Due to the conversion feature associated with the Series C Preferred Stock, the Company accounted for a beneficial conversion feature (a "Guaranteed Return") as additional preferred stock dividend. The computed value of the Guaranteed Return of $3,931,754 was initially recorded as a reduction of the Series C Preferred Stock and an increase to additional paid-in capital. The Guaranteed Return reduction to the Series C Preferred Stock was accreted, as additional dividends, by recording a charge to income available to common stockholders from the date of issuance to the earliest date of conversion. The Company also recorded annual dividends of $40 per share as a reduction of income available to common stockholders which totaled $29,121 for the year ended December 31, 1999. The difference between the stated redemption value of $1,000 per share and the recorded value on January 11, 1999, and June 18, 1999 (the dates upon which the Series C Preferred Stock were issued) totaling $4,316,254 (which includes $1,158,563 of accretion of preferred stock for the Guaranteed Return in excess of the redemption value) was accreted as a charge to income available to common stockholders on the date that the Series C was first convertible, which occurred in the first and second quarters of 1999, respectively, and was comprised of the following:
Closings --------------------------------------------------- June 18, 1999 January 11, 1999 ---------------------- ---------------------- Guaranteed Return $ 17,691 $ 3,914,063 Series C Preferred Stock offering costs 140,000 244,500 ---------------------- ---------------------- Total accretion recorded $ 157,691 $ 4,158,563 ====================== ======================
During 1999, the investor converted all of the 5,000 shares of the Series C Preferred Stock, including accrued dividends payable of $29,121 into 480,508 shares of the Company's common stock at conversion prices per share ranging from approximately $8.59 to $11.13 as summarized in the following table: F-17 Number of Shares -------------------------------------------- Series C Common Stock Preferred Conversion Conversion Date Stock Common Stock Price per Share - ------------------- ------------------ ------------------- ------------------- February 10, 1999 1,500 140,157 $10.74 February 11,1999 500 46,724 10.74 February 26, 1999 500 45,683 11.00 July 6, 1999 1,000 90,843 11.13 July 20, 1999 700 63,141 11.13 August 25, 1999 150 17,597 8.59 September 7, 1999 650 76,363 8.59 ------------------ ------------------- Total 5,000 480,508 ================== ===================
10% Preferred Stock On March 12, 1998, as a result of a private placement completed on December 31, 1997, the Company sold an additional 2.25 units of its 10% cumulative, convertible, redeemable preferred stock (the "10% Preferred Stock") which resulted in gross proceeds of $225,000, consisting of an aggregate of 22,500 shares of 10% Preferred Stock, 5,625 shares of common stock, and warrants to purchase 4,500 shares of common stock. Net proceeds to the Company were $198,236 after deducting $26,764 in offering costs. The 10% Preferred Stock entitles the holder to voting rights of one vote per share and specifies a 10% per annum cumulative, non-compounding dividend based on the stated value of $10 per share. The Company may redeem the 10% Preferred Stock at any time for $10 per share. Each share of 10% Preferred Stock is convertible at any time after September 30, 1998, at the election of the holder thereof, into the number of shares of common stock of the Company equal to $10 divided by the lesser of (i) $10 or (ii) 80% of the average per share closing bid price of the Company's common stock for the five trading days immediately preceding the 10% Preferred Stock conversion date. Due to the conversion feature associated with the 10% Preferred Stock, the Company accounted for a beneficial conversion feature (a "Guaranteed Return") as additional preferred stock dividend. The computed value of the Guaranteed Return of $56,250 was initially recorded as a reduction of the 10% Preferred Stock and an increase to additional paid-in capital. The Guaranteed Return reduction to the 10% Preferred Stock was accreted, as additional dividends, by recording a charge to income available to common stockholders during 1998 from the date of issuance to the earliest date of conversion. The Company will also record annual dividends of $1 per share as a reduction of income available to common stockholders, whether or not declared by the Board of Directors, which totaled $94,216 and $259,822 for the years ended December 31, 1999 and 1998, respectively. The Company has the option to pay the dividends either in cash or in common stock upon conversion. It is the Company's intention to pay the accrued dividends on the 10% Preferred Stock through the issuance of its common stock at the time the 10% Preferred Stock is converted. Consequently, the Company has recorded the dividends payable within the preferred stock balance in the accompanying balance sheets, which totaled $170,295 and $241,172 as of December 31, 1999 and 1998, respectively. The difference between the stated redemption value of $10 per share and the recorded value was accreted as a charge to income available to common stockholders during the year ended December 31, 1998 and was comprised of the following: F-18 Guaranteed return $ 56,250 Value of common stock 46,406 Value of common stock warrants 19,035 10% Preferred Stock offering costs 18,980 ---------- Total accretion recorded $140,671 ---------- The common stock was valued based on the closing price of the Company's common stock March 12, 1998 of $8.25. The 4,500 common stock warrants issued with the 10% Preferred Stock, valued at $19,035, entitle the holder to purchase one share of the Company's common stock for a purchase price of $15 per share at any time during the three-year period commencing on the closing date. The warrants were valued utilizing the Black-Scholes option pricing model using the following assumptions: Exercise price $15.00 Fair market value of common stock on grant date $ 8.25 Option life 3 years Volatility rate 98% Risk free rate of return 5.13% Dividend rate 0%
During January and February 2000, holders exercised warrants to purchase 12,000 shares of the Company's common stock, resulting in proceeds to the Company of $180,000 (See Note 16). During 1999 and 1998, 182,500 shares of the Company's 10% Preferred Stock, including accrued dividends payable of $183,747, were converted into 235,348 shares of the Company's common stock with conversion prices per share ranging from approximately $3.64 to $10.00 as summarized in the following table:
Number of Shares --------------------------------------------- 10% Common Stock Preferred Common Conversion Conversion Date Stock Stock Price per Share ---------------------- ------------------- ------------------- --------------------- November 4, 1998 10,000 29,321 $ 3.64 November 10, 1998 10,000 23,798 4.49 November 11, 1998 2,500 5,123 5.14 January 5, 1999 10,000 11,590 9.46 January 7, 1999 10,000 11,039 9.98 January 14, 1999 5,000 5,422 10.00 January 15, 1999 60,000 66,248 10.00 January 19, 1999 10,000 10,858 10.00 January 20, 1999 25,000 27,636 10.00 January 28, 1999 10,000 11,077 10.00 February 2, 1999 20,000 22,083 10.00 February 25, 1999 10,000 11,153 10.00 ------------------- ------------------- Total 182,500 235,348 =================== ===================
During January and February 2000, 85,000 shares of the 10% Preferred Stock were converted into 102,302 shares of the Company's common stock (See Note 16). Series A Preferred Stock On November 9, 1998, the Company completed a private placement which resulted in gross proceeds of $1,400,000. The Company sold 1,400 shares of its Series A cumulative, convertible, redeemable preferred stock F-19 (the "Series A Preferred Stock") and warrants to purchase 140,000 shares of common stock. Net proceeds to the Company were $1,287,300 after deducting $112,700 in offering costs. The Series A Preferred Stock specified a 5% per annum cumulative, non- compounding dividend based on the stated value of $1,000 per share. Each share of Series A Preferred Stock was convertible, at the option of the holder thereof, into such number of shares of common stock of the Company equal to $1,000, plus the amount of any accrued and unpaid dividends the Company elected to pay in common stock, divided by the lesser of (i) $5.71 or (ii) 80% of the average closing bid price of the shares of common stock for the lowest five consecutive trading days within the 20 days immediately preceding the Series A Preferred Stock conversion date. Due to the conversion feature associated with the Series A Preferred Stock, the Company accounted for a beneficial conversion feature (a "Guaranteed Return") as additional preferred stock dividend. The computed value of the Guaranteed Return of $1,368,328 was initially recorded as a reduction of the Series A Preferred Stock and an increase to additional paid-in capital. The Guaranteed Return reduction to the Series A Preferred Stock was accreted, as additional dividends, by recording a charge to income available to common stockholders on the date of issuance. The Company also recorded annual dividends of $50 per share as a reduction of income available to common stockholders, which totaled $2,301 and $10,164 for the years ended December 31, 1999 and 1998, respectively. The Company had the option to pay the dividends either in cash or in common stock upon conversion. The Company paid the accrued dividends on the Series A Preferred Stock through the issuance of its common stock at the time the Series A Preferred Stock was converted. Consequently, the Company recorded the dividends payable within the preferred stock balance in the accompanying balance sheets, which totaled $10,164 as of December 31, 1998. The difference between the stated redemption value of $1,000 per share and the recorded value on November 9, 1998, totaling $2,106,929 (which includes $706,929 of accretion of preferred stock for the Guaranteed Return in excess of the redemption value), was accreted as a charge to income available to common stockholders during 1998 and was comprised of the following: Guaranteed return $1,368,328 Value of common stock warrants 635,600 Series A Preferred Stock offering costs 103,001 ---------- Total accretion recorded $2,106,929 ==========
The 140,000 common stock purchase warrant issued in the above private placement, valued at $635,600, entitled the holder to purchase one share of the Company's common stock for a purchase price of $5.71 per share at any time during the five-year period commencing on November 9, 1998. The warrant was valued utilizing the Black-Scholes option pricing model using the following assumptions: Exercise price $ 5.71 Fair market value of common stock on grant date $ 6.03 Option life 5 years Volatility rate 94.7% Risk free rate of return 5.13% Dividend rate 0%
During January 1999, the holder converted all 1,400 shares of the Series A Preferred Stock into 247,367 shares of the Company's common stock at a conversion price of $5.71 per share and exercised the warrant to purchase 140,000 shares of the Company's common stock, resulting in proceeds to the Company of $799,400. In connection with services provided with the issuance of the Series A Preferred Stock, the Company also issued to the placement agent a warrant to purchase 20,000 shares of the Company's common stock for a purchase price of $5.71 per share at any time during the three-year period commencing November 1998. The Company F-20 recorded $75,948 in offering costs related to the warrants, which were valued utilizing the Black-Scholes option pricing model using the following assumptions: Exercise price $ 5.71 Fair market value of common stock on grant date $ 6.03 Option life 3 years Volatility rate 94.7% Risk free rate of return 5.13% Dividend rate 0%
During July 1999, the holders exercised the warrant and purchased 20,000 shares of the Company's common stock, resulting in proceeds to the Company of $114,200. 5% Preferred Stock On May 22, 1998, the Company completed a private placement which resulted in gross proceeds of $3,000,000. The Company sold 3,000 shares of its 5% cumulative, convertible, redeemable preferred stock (the "5% Preferred Stock") and warrants to purchase 50,000 shares of common stock. Net proceeds to the Company were $2,678,750 after deducting $321,250 in offering costs. The 5% Preferred Stock specified a 5% per annum cumulative non-compounding dividend based on the stated value of $1,000 per share. Each share of 5% Preferred Stock was convertible, at the option of the holder thereof, into such number of shares of common stock equal to $1,000, plus the amount of any accrued and unpaid dividends the Company elected to pay in common stock, divided by the lesser of (i) $16.33 or (ii) 86% of the average closing bid price of the Company's common stock for the five trading days immediately preceding the 5% Preferred Stock conversion date. Due to the conversion feature associated with the 5% Preferred Stock, the Company accounted for a beneficial conversion feature (a "Guaranteed Return") as additional preferred stock dividend. The computed value of the Guaranteed Return of $316,410 was initially recorded as a reduction of the 5% Preferred Stock and an increase to additional paid-in capital. The Guaranteed Return reduction to the 5% Preferred Stock was accreted, as additional dividends, by recording a charge to income available to common stockholders from the date of issuance to the earliest date of conversion. The Company also recorded annual dividends of $50 per share as a reduction of income available to common stockholders which totaled $59,134 for the year ended December 31, 1998. The difference between the stated redemption value of $1,000 per share and the recorded value on May 22, 1998, totaling $1,345,765, was accreted as a charge to income available to common stockholders during 1998 and was comprised of the following: Guaranteed return $ 316,410 Value of common stock warrants 402,500 5% Preferred Stock offering costs 626,855 ----------- Total accretion recorded $ 1,345,765 ===========
The 50,000 common stock purchase warrants issued with the 5% Preferred Stock, valued at $402,500, entitle the holder to purchase one share of the Company's common stock for a purchase price of $16.33 per share at any time during the three-year period commencing on May 22, 1998. In addition, the Company also issued 50,000 common stock purchase warrants, valued at $402,500, to the placement agent as offering costs with the same terms. The warrants were valued utilizing the Black-Scholes option pricing model using the following assumptions: F-21 Exercise price $ 16.33 Fair market value of common stock on grant date $ 13.50 Option life 3 years Volatility rate 98% Risk free rate of return 5.13% Discount rate 0%
During January 2000, the holder exercised the warrant and purchased 100,000 shares of common stock resulting in proceeds to the Company of $1,633,000 (See Note 16). During 1998, all 3,000 shares of the 5% Preferred Stock, including accrued dividends payable of $59,134, were converted into 627,296 shares of the Company's common stock at conversion prices per share ranging from approximately $3.28 to $8.87 as summarized in the following table:
Number of Shares Common Stock --------------------------------------------- 5% Preferred Common Conversion Conversion Date Stock Stock Price per Share ---------------------- ------------------- ------------------- -------------------- July 30, 1998 500 56,907 $8.87 September 16, 1998 250 54,950 4.62 September 25, 1998 325 74,646 4.43 October 30, 1998 75 23,379 3.28 November 3, 1998 100 29,722 3.44 November 5, 1998 500 122,617 4.17 November 10, 1998 1,250 265,075 4.83 -------------- ------------- Total 3,000 627,296 ============== =============
Liquidation Preference of Preferred Stock The Company's 10% Preferred Stock has preference in involuntary liquidation before any distribution to the holders of the Company's common stock as follows: Holders of the 10% Preferred Stock are entitled to receive from the Company's remaining net assets (after payment of the Company's debts and other liabilities) the amount of $10 per share of 10% Preferred Stock in cash plus payment of all accrued but unpaid cumulative dividends. Holders of the 10% Preferred Stock are not entitled to receive any other payments if the Company liquidates, dissolves or winds-up its business. Common Stock On November 5, 1999 and 1998, the Company executed a four-month and one- year consulting agreement, respectively, with a financial consulting firm to enhance Company activities in corporate finance, mergers and acquisitions, and public and investor relations. In addition, if the consulting firm introduces the Company to a lender or equity purchaser, the Company is required to pay the consultant a cash fee at the time of closing. To date, the Company has not paid a cash fee for this service. In connection with the agreements, the Company issued restricted shares of its common stock for commencement bonuses as follows:
November 5, --------------------------------------------------- 1999 1998 ---------------------- ---------------------- Common shares issued 30,000 350,000 Date of issuance December 2, 1999 November 5, 1998 Fair market value on date of issuance $ 14.81 $ 5.50 Value of common stock $444,390 $1,925,000
F-22 The Company recorded expense on the date of issuance for the commencement bonuses equal to the value of the common stock granted as the shares are not refundable to the Company, even if the agreement is terminated by either party. In February 1999, the Company entered into a third consecutive six-month agreement with an individual to provide the Company consulting services in his capacity as the Company's Chief Operating Officer and subsequent duties as Chief Financial Officer. Pursuant to the terms of the agreement, in addition to a monthly cash fee of $15,000, the consultant earned shares of the Company's common stock determined by dividing $15,000 by the fair market value of the common stock on the last trading day of the month. During the year ended December 31, 1999, the Company issued 6,497 shares of common stock under this agreement valued in the aggregate $90,000. In February 1998, the Company entered into two consecutive six month agreements with an individual to provide the Company consulting services in his capacity as the Company's Chief Operating Officer. Pursuant to the terms of the agreement, the consultant was paid $30,000 per month, each month, which was comprised of $15,000 in cash payments and 2,000 shares of the Company's common stock. During the year ended December 31, 1998, the Company issued 24,000 shares of common stock under this agreement. Stock Option Plan During 1995, the Company adopted the 1995 Stock Option Plan (the "Plan"). Under the terms of the Plan, the Company may grant options for up to 3,500,000 shares, at exercise prices equal to the stock's fair market value on the date of grant. The options vest over various terms with a maximum vesting period of 42 months and expire after a maximum of ten years. As of December 31, 1999, the Company had options outstanding for 2,770,055 shares. A summary of the status of the Plan as of December 31, 1999 and 1998 and changes during the years then ended is presented in the tables and narrative below:
1999 1998 ----------------------------------------------- ---------------------------------------- Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ------------------- ----------------------- -------------- --------------------- Outstanding at beginning of year 1,758,665 $ 5.93 1,002,910 $2.26 Granted 2,101,897 12.03 1,416,350 8.09 Exercised (452,773) 2.71 (240,331) 1.89 Forfeited and canceled (637,734) 9.24 (420,264) 6.76 -------------- ------------ Outstanding at end of year 2,770,055 $10.31 1,758,665 $5.93 ============== ========= ============ ============ Exercisable at end of year 468,861 $ 7.62 346,401 $2.50 ============== ========= ============ ============ Weighted average fair value of options Granted during year $8.83 $5.34 ============== ============
F-23 The status of total stock options outstanding and exercisable under the Plan as of December 31, 1999 is as follows:
Stock Options Outstanding Stock Options Exercisable ------------------------------------------ -------------------------------------- Weighted Weighted Weighted Average Weighted Average Range of Average Remaining Average Remaining Exercise Number of Exercise Contractual Number of Exercise Contractual Prices Shares Price Life (Years) Shares Price Life (Years) - ------------------ ------------ ---------- -------------- ----------- ---------- ------------- $ 1.63 - 4.08 120,550 $ 2.76 4.99 53,250 $ 3.02 5.55 4.09 - 10.21 1,610,040 8.54 5.74 389,611 7.85 5.13 10.22 - 21.06 1,039,465 13.93 6.36 26,000 13.37 6.55 ----------- ---------- $ 1.63 - 21.06 2,770,055 $10.31 5.72 468,861 $ 7.62 5.76 =========== ========== ============= ========== ========== ============
Pro Forma Fair Value Disclosures The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1999 and 1998, respectively: risk-free interest rate of 5.68 and 5.01 percent, no expected dividend yields, expected lives of 3.0 years, and expected volatility ranging from 118 and 104 percent, respectively. Fair value computations are highly sensitive to the volatility factor assumed; the greater the volatility, the higher the computed fair value of options granted. Cumulative compensation costs recognized in pro forma net loss available to common stockholders with respect to options that are forfeited prior to vesting are adjusted as a reduction of pro forma compensation expense in the period of forfeiture. Had compensation cost for options granted been determined consistent with SFAS 123, the Company's net loss available to common stockholders and net loss available to common stockholders per common and common equivalent share would have been increased to the following pro forma amounts:
1999 1998 ------------------------------------------- ------------------------------------------- As Reported Pro Forma As Reported Pro Forma ------------------- ------------------ ------------------- ------------------ Net loss available to common stockholders $(21,866,012) $(24,897,608) $(17,124,629) =================== ================== =================== ================== Net loss available to common stockholders per share-basic and diluted $ (3.31) $ (3.77) $ (4.35) $ (4.73) =================== ================== =================== ==================
Because the fair value method of accounting required by SFAS 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. IPO Common Stock Warrants- In connection with the initial public offering ("IPO") in May 1996, the Company issued 1,265,000 units, each unit consisting of one share of common stock and one common stock purchase warrant and 110,000 similar warrants to the underwriter (collectively the "IPO Warrants"). Two IPO Warrants entitled the holders to purchase one share of common stock at a price of $9.00 per share or the holders had the option of using a cashless exercise provision whereby holders could surrender a portion of the stock received upon exercise of their IPO Warrants as consideration for the exercise price for the IPO Warrants exercised. In May 1999, the Company received $3,056,871 in net proceeds, after deducting offering costs of $17,387 from the exercise of the IPO Warrants and issued 341,578 shares of common stock. In addition, the Company F-24 issued 131,614 shares of common stock as a result of holders of the IPO Warrants utilizing the cashless exercise provision of the Warrant. As of December 31, 1999, all of the IPO Warrants have been exercised or have expired. In connection with the initial public offering in May 1996, the Company issued to the underwriters an option to purchase 110,000 shares of the Company's common stock at an exercise price of $8.10 per share for a period of four years beginning May 1997. As of December 31, 1999 and 1998, 3,300 units had been exercised. During January and February 2000, holders exercised their warrants to purchase 84,042 shares of common stock resulting in proceeds to the Company of $645,789 (See Note 16). Stock Option Based Compensation Expense During 1999 and 1998, the Company granted stock options under the Plan to several consultants in connection with agreements to provide the Company with services related to developing financing sources and strategic alliances as well as investor relations. The terms of the agreements range from approximately six months to three years. The Company issued in the aggregate 52,168 and 89,000 shares during 1999 and 1998, respectively, of its common stock at exercise prices ranging from $4.00 to $11.00. The Company applied variable plan accounting pursuant to SFAS 123 and valued these options utilizing the Black- Scholes option pricing model on the vesting dates using the following assumptions:
Exercise price $4.00 to $11.00 Fair market value of common stock on grant date $5.50 to $16.25 Option life 1 to 7 years Volatility rate 95% to 104% Risk free rate of return 4.52% to 6.00% Dividend rate 0% Vesting period Date of grant to 3 years
The Company recorded expense for these options totaling $1,074,432 and $160,328 for the years ended December 31, 1999 and 1998, respectively. On November 24, 1998, in connection with the merger with DCI (See Note 9), the Company granted stock options to the employees of DCI under the Plan to purchase an aggregate of 83,000 shares of the Company's common stock at an exercise price of $7.63 per share. The options were granted to these individuals in their capacity as employees of the Company and vest over a three-year period and can be exercised over a seven-year period. On June 30, 1999, as a result of the consummation of the merger with DCI, the Company recorded the intrinsic value of the options whereby the difference between the fair market value of the Company's common stock on June 30, 1999 ($17.50 per shares) and the exercise price of the options ($7.63 per share) is expensed over the vesting period of the options. The Company recorded expense for these options totaling $205,861 and $13,549 for the years ended December 31, 1999 and 1998, respectively. Exercise of Common Stock Warrants In November and December 1999, holders of warrants to purchase common stock issued in connection with the acquisition of DCI (See Note 9) exercised 78,577 warrants, including 66,644 utilizing the cashless exercise provision of the Agreements. As a result, the Company issued 44,740 shares of its common stock, including 32,807 from the cashless exercises, resulting in proceeds to the Company totaling $121,238. Common Stock Warrants Issued in Private Placement In connection with a private placement of the Company's common stock in March 1996, the Company issued warrants to purchase 18,450 shares of the Company's common stock at an exercise price of $2.25 per share, which vested immediately and are exercisable for 5 years. On the date of issuance, the Company determined the F-25 warrants had a nominal value. During 1999 and 1998, 13,500 and 3,600 warrants were exercised, respectively, and as of December 31, 1999, 900 warrants were outstanding. Summary of Outstanding Warrants and Options For Common Stock Issued Outside the Plan
December 31, 1999 December 31, 1998 -------------------------------------- ---------------------------------------- Underwriter Underwriter Options and Common Options and Common Conversion Warrants Share Warrants Share Description Ratio Outstanding Equivalents Outstanding Equivalents - ------------------------- ---------- ------------------ --------------- ---------------- ----------------- Common stock warrants issued in IPO 2:1 - - 1,265,000 632,500 Option to purchase common stock issued to underwriter in IPO (See Note 16) 1:1 106,700 106,700 106,700 106,700 Option to purchase common stock warrants issued to underwriter in IPO 2:1 - - 106,700 53,350 Common stock warrants issued in common stock private placement 1:1 900 900 14,400 14,400 Common stock warrants issued in connection with 10% Preferred Stock (See Note 16) 1:1 53,500 53,500 53,500 53,500 Common stock warrants issued in connection with 5% Preferred Stock (See Note 16) 1:1 100,000 100,000 100,000 100,000 Common stock warrants issued in connection with Series A Preferred Stock 1:1 - - 140,000 140,000 Common stock warrants issued to placement agent in Series A Preferred Stock 1:1 - - 20,000 20,000 Common stock warrants issued in connection with DCI merger (See Notes 9 and 16) 1:1 207,182 207,182 - - Common stock warrants issued to 10% convertible Note Payable 1:1 273,038 273,038 - - Common stock warrants issued to customers (See Note 16) 1:1 231,829 231,829 70,162 70,162 ------------ ----------- ------------ -------------- Total 973,149 973,149 1,876,462 1,190,612 ============ =========== ============ ==============
F-26 (8) NET REVENUES Net revenues consist of software license fees; service bureau application provider service fees; service fees for professional services for software integration, configuration, custom programming, hosting and software support and maintenance; and computer hardware sales. Net revenues are comprised of the following:
Year Ended December 31, ---------------------- 1999 1998 ---------- ---------- Net revenues: License $ 392,810 $ 140,914 Service bureau application provider service fees 263,888 132,959 Services 1,170,076 211,790 Hardware and software 117,509 1,103,717 ---------- Total net revenues $1,944,283 $1,589,380 ========== ==========
During July 1999, the Company sold two customer contracts to an unrelated third party, including computer hardware, for approximately $270,000. The Company provided services and equipment under the terms of the original contracts enabling the customers to provide Internet access to their end users. The Company recorded $138,504 of service revenue for the year ended December 31, 1999 related to providing services to the purchaser of these two contracts. Revenue recognized by the Company from these contracts totaled approximately $6,000 for the year ended December 31, 1999. (9) ACQUISITIONS DURAND COMMUNICATIONS, INC. On June 30, 1999, Durand Acquisition Corporation ("DAC"), a wholly owned subsidiary of the Company, completed a merger with DCI, a developer and marketer of Internet "community" building tools, by exchanging 947,626 of the Company's common stock for all of the common stock of DCI at an exchange ratio of 2.46 shares of the Company's common stock for each share of DCI's common stock. In addition, outstanding DCI options and warrants to purchase common stock were converted at the same exchange ratio into 242,293 options and warrants to purchase the Company's common stock. The acquisition of the assets and liabilities was recorded using the purchase method of accounting whereby the consideration paid of $14,216,876 was allocated based on the fair values of the assets and liabilities acquired with the excess consideration over the fair market value of tangible assets of $14,132,445 recorded as intangible assets. The Company has determined that substantially all of the intangible assets acquired are represented by the value of the developed technology, workforce and goodwill acquired from DCI. Total consideration for the merger is as follows: Value of common stock issued $ 9,239,358 Value of warrants and options issued 1,504,349 (a) Liabilities assumed 2,190,566 (b) Acquisition expenses 1,282,603 ----------- Total purchase price $14,216,876 ===========
The purchase price was allocated to the assets acquired based on their fair market values as follows: F-27 Cash and cash equivalents $ 23,739 Other current assets 23,708 Property and equipment 36,984 ----------- Total tangible assets acquired 84,431 Developed technologies, goodwill and other intangibles 14,132,445 ----------- Total assets acquired $14,216,876 ===========
(a) 242,293 warrants and options issued, which were valued using the Black- Scholes option pricing model using the following assumptions: Exercise prices $4.30 to $20.33 Fair market value of common stock on measurement date $9.75 Option lives 1 to 9 years Volatility rate 104% Risk free rate of return 5.0% Dividend rate 0%
(b) The liabilities assumed by the Company included a $1,168,173 note payable and accrued interest from DCI to the Company which was forgiven at the consummation of the transaction. In connection with the merger, the Company issued a warrant to financial advisory firm to purchase 50,150 shares of the Company's common stock at an exercise price of $8.85. The warrant is exercisable for a period of five years. The Company recorded $654,488 in acquisition costs for the warrant, which was valued using the Black-Scholes option pricing model utilizing the following assumptions: Exercise price $ 8.85 Fair market value of common stock on grant date $15.50 Option life 5 Years Volatility rate 104% Risk free rate of return 5.0% Dividend rate 0%
The transaction with DCI resulted in $14,132,445 of intangible assets (primarily developed technologies, workforce and goodwill). These intangible assets will be amortized over their estimated economic lives of three years. The purchase price allocation is subject to adjustment based on the final determination of the fair value of the assets and liabilities assumed, which could take as long as one year from June 30, 1999. The results of operations of DCI are included in the Company's results from the date of the DCI acquisition and all significant intercompany balances and transactions have been eliminated in consolidation. NETIGNITE, INC. On March 10, 1999, the Company acquired a controlling interest in a newly formed company, NetIgnite 2, LLC ("NetIgnite"). NetIgnite was a development stage company which the Company formed with a predecessor company by the name of NetIgnite, Inc. ("NI"), the sole shareholder and founder of which was Perry Evans, the founder and past President of MapQuest.com. The Company was, as a result of this transaction, entitled to 99.5% of NetIgnite's operating income and approximately 60% of any proceeds upon the sale of NetIgnite. NI was entitled to .5% of NetIgnite's operating income and approximately 40% of any proceeds upon the sale of NetIgnite. Mr. Evans entered into an Employment Agreement with the Company which has an initial term of two years, provides for a minimum annual salary of $190,000 and the granting of stock options to purchase 80,000 shares of F-28 common stock at an exercise price of $12.25, one-third of such option shares to vest annually during the next three years subject to Mr. Evans' continuous employment by the Company. Prior to June 2, 1999, the Company utilized the equity method of accounting for this subsidiary and recorded a loss from this investment totaling $127,083 for the year ended December 31, 1999. On June 2, 1999, the Company acquired the assets and liabilities of NI in exchange for 71,429 shares of common stock valued at $984,400. The acquisition of these assets and liabilities was recorded using the purchase method of accounting whereby the consideration paid was allocated based on the fair values of the assets and liabilities acquired with the excess consideration of $893,953 being recorded as an intangible asset, primarily developed technologies and goodwill. These intangible assets will be amortized over their estimated economic lives of three years. The purchase price allocation is subject to adjustment based on the final determination of the fair value of the assets and liabilities assumed, which could take as long as one year from June 2, 1999. The results of operations of NetIgnite are included in the Company's results from the date of the NI acquisition and all significant intercompany balances and transactions have been eliminated in consolidation. The following table summarizes the results of operations for the Company on a pro forma basis as if both the acquisitions had occurred on January 1, 1998: PRO FORMA YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 ------------ ------------ Net revenues $ 1,928,118 $ 1,606,896 Net loss available to common stockholders $(27,434,184) $(21,735,056) Loss per share, basic and diluted $ (4.15) $ (6.00) (10) CUSTOMER ACQUISITION COSTS During 1999 and 1998, the Company granted warrants to three and one customers, respectively, to purchase in the aggregate 161,667 and 70,162 shares, respectively, of the Company's common stock at exercise prices ranging from $8.77 to $9.94 per share which may be exercised at any time during the one to three-year periods from the date of issuance. Because the agreements entered into by the Company did not contain minimum guaranteed revenue and due to the start-up nature of these services and other uncertainties regarding these arrangements, the Company recorded expense for customer acquisition costs of $941,684 and $560,824 for the years ended December 31, 1999 and 1998, respectively. The Company valued these options utilizing the Black-Scholes option pricing model using the following assumptions:
1999 1998 ------------------ -------------------- Exercise prices $9.19 to $9.94 $ 8.77 Fair market value of common stock on grant date $8.81 to $15.50 $11.69 Option lives 1 to 3 Years 3 years Volatility rate 104% 98% Risk free rate of return 5.0% to 6.0% 4.52% Dividend rate 0% 0%
In January 2000, a warrant holder exercised its warrant to purchase 7,000 shares of the Company's common stock resulting in proceeds to the Company of $68,250 (See Note 16). F-29 (11) MAJOR CUSTOMERS A substantial portion of the Company's sales is derived from a limited number of customers. The Company's sales to customers in excess of 10% of net sales for the years ended December 31, 1999 and 1998, are as follows:
1999 1998 ----------------- ---------------- Customer A $500,000 $ - Customer B 364,365 227,098 Customer C 325,000 - Customer D - 440,109 Customer E - 277,301 Customer F 122,120 185,768
The Company's accounts receivable balances from customers in excess of 10% of the accounts receivable and accrued revenue receivables balance for the years ended December 31, 1999 and 1998, are as follows: 1999 1998 ------- ------- Customer B $21,825 $18,350 Customer D - 72,821 Customer F 4,000 22,925 Customer G 19,000 - Customer H 35,000 - Customer I 17,056 - (12) INCOME TAXES The provision for income taxes includes the following: Year Ended December 31, ------------------------------- 1999 1998 ----------- ----------- Current: Federal $ - $ - State - - ----------- ----------- Total current provision - - ----------- ----------- Deferred: Federal (5,497,115) (3,583,883) State (533,543) (347,847) Valuation allowance 6,030,658 3,931,730 ----------- ----------- Total deferred provision (benefit) - - ----------- ----------- Total provision $ - $ - =========== =========== The statutory federal income tax rate was 34% for the years ended December 31, 1999 and 1998. Differences between the income tax expense reported in the statements of operations and the amount reported by applying the statutory federal income tax rate to loss available to common shareholders before income taxes are as follows: Year Ended December 31, ------------------------------ 1999 1998 ----------- ----------- Benefit at statutory rate $(7,434,444) $(5,359,206) Increase (decrease) due to: State income taxes (721,578) (520,158) Nondeductible expenses 2,125,364 1,947,634 Valuation allowance 6,030,658 3,931,730 ----------- ----------- Income tax provision $ - $ - =========== =========== F-30 Components of net deferred assets (liabilities) as of December 31, 1999 and 1998 are as follows: Year Ended December 31, ------------------------------ 1999 1998 ------------ ----------- Current: Accrued liabilities and other reserves $ 77,920 $ 21,894 Deferred revenue 85,000 - Non-current: Depreciation 21,788 14,137 Book amortization in excess of tax 44,035 123,202 Net operating losses 11,882,482 5,921,334 ------------ ----------- Total net deferred tax assets 12,111,225 6,080,567 Valuation allowance (12,111,225) (6,080,567) ------------ ----------- Net deferred tax assets $ - $ - ============ =========== For income tax purposes, the Company has approximately $31,856,000 of net operating loss carryforwards that expire at various dates through 2019. The Tax Reform Act of 1986 contains provisions that may limit the net operating loss carryforwards available to be used in any given year in the event a significant change in ownership. Realization of net operating loss carryforwards is dependent on generating sufficient taxable income prior to its expiration dates. During 1999 and 1998, the Company increased its valuation allowance by $6,030,658 and $3,931,730, respectively, due mainly to uncertainty relating to the realizability of the 1999 and 1998 net operating loss carryforwards. The amount of the deferred tax assets considered realizable could be adjusted in the near term if future taxable income materializes. (13) RELATED PARTY TRANSACTIONS Customer A director of the Company is also the general partner and chief executive officer for one of the Company's customers. The Company entered into a contract during August 1997, as amended, whereby the Company provides its products and services to the customer for several markets. The expiration dates of the contract and related amendments range from August 1999 to July 2000. The Company earns revenue from the sale of computer hardware, engineering fees, equipment installation fees, and royalties from subscriber Internet access and content fees. The Company recognized revenue totaling $122,120 and $185,768 for the years ended December 31, 1999 and 1998, respectively. Included in accounts receivable at December 31, 1999 and 1998 are amounts due from the customer totaling $4,000 and $22,925, respectively. Legal Services The Company's vice-president of administration and corporate counsel, who began his employment with the Company in 1999, is also a partner in the firm the Company retains for its legal services. During the year ended December 31, 1999, the Company paid $268,412 in legal fees to the firm and $8,013 was included in the Company's accounts payable balance as of December 31, 1999. F-31 (14) COMMITMENTS AND CONTINGENCIES Minimum future annual lease payments as of December 31, 1999 are as follows: 2000 $ 837,813 2001 847,335 2002 556,348 2003 584,878 2004 599,136 Thereafter 299,568 ---------- $3,725,078 ========== The total operating lease expense for the years ended December 31, 1999 and 1998, was $368,168 and $363,709, respectively. In November 1999, the Company entered into a three-year application service provider agreement whereby the Company pays approximately $7,300 per month for financial application software hosting services. The term of the agreement is for three years and the Company has the right to terminate the agreement at any time for a termination fee of 30% of the remaining monthly payments. Total payments under this agreement are expected to be approximately $265,000. On January 14, 2000, the Company entered into a two-year software lease agreement which specifies an initial payment of $50,000 and thereafter quarterly lease payments of $54,412 beginning January 2000. Total lease payments are $485,296 (See Note 17). On February 2, 2000, the Company entered into a three-year lease for a second office location. Total lease payments are $61,539 in 2000, $63,693 in 2001 and $65,922 in 2002. The Company has entered into employment agreements with R. Steven Adams and its executive officers, including William R. Cullen, Perry Evans, Gwenael Hagan and Andre Durand which takes effect only if a change of control of 30% or more of our outstanding voting stock occurs. If a change of control occurs, these agreements provide for the continued employment (at similar responsibility and salary levels) of the employee for a period of three years after the change of control. During this three year period, if the Company (or a successor entity) terminates the employee's employment without cause or if the employee terminates his employment for a good reason, then the Company (or a successor entity) must pay a lump sum severance to the employee equal to three years salary (including bonus), accelerate the vesting of all outstanding options held by the employee and allow the employee to continue to participate in our benefit and welfare plans (or those of the successor entity) for a period of three years after the employment terminates. (15) BUSINESS SEGMENT INFORMATION The Company supports products and services that simplify and support e- commerce transactions in local markets by providing an interactive framework of local commerce and community-based services comprised of publishing, content management, community-building and communications. In addition, the Company supports products and services for electronic banking applications, targeting credit unions, community banks, and savings and loan institutions with a full line of e-banking transaction processing and account management services. The Company has two reportable business segments: Local Commerce/Enterprise and e- Banking. Local Commerce/Enterprise consists of Internet application solutions which provide merchants options for reaching their target customers through simple tools that publicize their company, product and service offerings; buyers to quickly find rich information about merchants and their offerings; and buyers and sellers a more effective and efficient transaction. e-Banking consists of an online banking solution, marketed generally to financial institutions having less than $500 million in assets, using a service bureau approach to e-banking, which enables institutions to provide many of the capabilities and services available to the larger financial institutions without the cost associated with the development of institution-specific systems. Corporate Activities consists of general corporate expenses, including capitalized costs that are not allocated to specific business segments. Assets of corporate activities include unallocated cash, receivables, prepaid expenses, note receivable, deferred acquisition costs, deposits, intangible assets acquired in mergers, and corporate use of property and equipment. F-32 Net Sales - -------------------------------------------------------------------------------- Year Ended December 31, ---------------------------- 1999 1998 ----------- ---------- Local commerce/enterprise $1,193,196 $1,362,282 e-Banking 751,087 227,098 ---------- ---------- Total net sales $1,944,283 $1,589,380 ========== ========== Net Loss - -------------------------------------------------------------------------------- Year Ended December 31, ------------------------------ 1999 1998 ------------ ------------- Local commerce/enterprise $ (5,378,071) $ (4,578,160) e-Banking 30,193 (309,523) Corporate activities (11,929,217) (5,728,580) ------------ ------------ Net loss $(17,277,095) $(10,616,263) ============ ============ Assets - -------------------------------------------------------------------------------- December 31, ----------------------------- 1999 1998 ------------ ---------- Local commerce/enterprise $ 1,651,481 $ 696,219 e-Banking 714,216 416,071 Corporate activities 20,258,837 2,272,986 ----------- ---------- Total $22,624,534 $3,385,276 =========== ========== F-33 Property and Equipment, net - -------------------------------------------------------------------------------- December 31, --------------------------- 1999 1998 ---------- ---------- Local commerce/enterprise $1,378,408 $ 516,918 e-Banking 683,890 397,721 Corporate activities 290,191 263,989 ---------- ----------- Total $2,352,489 $ 1,178,628 ========== =========== Depreciation and Amortization - -------------------------------------------------------------------------------- Year Ended December 31, --------------------------- 1999 1998 ---------- ---------- Local commerce/enterprise $ 576,306 $ 546,824 e-Banking 134,250 140,953 Corporate activities 2,500,976 103,378 ---------- ---------- Total $3,211,532 $ 791,155 ========== ========== Property and Equipment Additions - ----------------------------------------------------------------------------- Year Ended December 31, ------------------------------ 1999 1998 ---------- -------- Local commerce/enterprise $1,121,102 $221,672 e-Banking 420,418 124,652 Corporate activities 151,012 135,103 ---------- -------- Total $1,692,532 $481,427 ========== ======== (16) SUBSEQUENT EVENTS Business Acquisition On January 7, 2000, the Company acquired assets of Update Systems, Inc. ("Update"), a developer and provider of e-communication solutions for businesses in the highly competitive world of Internet relationships, by issuing 278,411 shares of the Company's common stock. In addition, outstanding Update options to purchase common stock were exchanged into 49,704 options to purchase the Company's common stock. The acquisition of the assets was recorded using the purchase method of accounting whereby the consideration paid of $10,060,417 was allocated based on the fair values of the assets acquired with the excess consideration over the fair market value of tangible assets of $10,014,485 recorded as intangible assets. The Company has determined that substantially all of the intangible assets acquired are represented by the value of the developed technology and workforce acquired from Update. Total consideration for the merger is as follows: Value of common stock issued $ 8,630,741 Value of options issued 1,364,676 (a) Acquisition expenses 65,000 ----------- Total purchase price $10,060,417 =========== The purchase price was allocated to the assets acquired based on their fair market values as follows: Acquired property and equipment $ 45,932 Developed technologies, goodwill and other intangibles 10,014,485 ----------- Total assets acquired $10,060,417 =========== (a) 49,704 warrants and options issued, valued using the Black-Scholes option pricing model using the following assumptions: Exercise prices $ 4.33 Fair market value of common stock on measurement date $29.50 Option lives 5 years Volatility rate 104% Risk free rate of return 5.0% Dividend rate 0% F-34 The transaction with Update resulted in $10,014,485 of intangible assets (primarily developed technologies, workforce and goodwill). These intangible assets will be amortized over their estimated economic lives of three years. The purchase price allocation is subject to adjustment based on the final determination of the fair value of the assets acquired, which could take as long as one year from January 7, 2000. Series B Preferred Stock On February 18, 2000, the Company completed a private placement which resulted in gross proceeds of $12,500,000. The placement was made pursuant to a securities purchase agreement entered into on December 31, 1999. The Company sold 12,500 shares of its Series B convertible preferred stock (the "Series B Preferred Stock"), including warrants to purchase 343,750 shares of the Company's common stock. Net proceeds to the Company were approximately $11,660,000 after deducting approximately $840,000 in offering costs. The Series B Preferred Stock is convertible into shares of the Company's common stock, initially at $20.00. The conversion rate for the Series B Preferred Stock is subject to potential resets. The first will be on the date that a registration statement relating to the common stock issuable upon conversion of the Series B Preferred Stock is declared effective by the SEC and the second will be on the later of November 18, 2000 or three months after the effective date of the registration statement. The adjustment price on each such date shall be the then market price for the Company's common stock if lower than the then effective conversion price but will not be less than $8.00 per share. Due to the conversion feature associated with the Series B Preferred Stock, the Company must account for a beneficial conversion feature (a "Guaranteed Return") as additional preferred stock dividend. The computed value of the Guaranteed Return of $2,434,957 is limited to the relative fair value of the Series B Preferred Stock, which totaled $2,434,957 and is initially recorded as a reduction of the Series B Preferred Stock and an increase to additional paid- in capital. The Guaranteed Return reduction to the Series B Preferred Stock will be accreted, as additional dividends, by recording a charge to income available to common stockholders from the date of issuance to the earliest date of conversion. In connection with the 10% convertible note payable (See Note 6), the terms of the note payable agreement were amended on December 18, 1999 whereby the Company issued the note holder a five-year warrant to purchase 136,519 shares of the Company's common stock at an exercise price of $18.51 per share in consideration for the note holder's agreement to exchange the note for an amended note with terms more favorable for the Company to facilitate the sale of the Company's Series B Preferred Stock. The Company recorded deferred offering costs related to the Series B Preferred Stock for the issuance of the warrant valued at $2,311,475. The difference between the stated redemption value of $1,000 per share and the recorded value on February 18, 2000, totaling $12,500,000, will be accreted as a charge to income available to common stockholders on the date the Series B Preferred Stock is first convertible is comprised of the following: Guaranteed return $ 2,434,957 Value of common stock warrants 6,913,568 Value of common stock warrant issued to holder of 10% note payable 2,311,475 Series B Preferred Stock offering costs 840,000 ----------- Total accretion recorded $12,500,000 =========== The 343,750 common stock purchase warrants issued with the Series B Preferred Stock, valued at $7,038,891 based on the relative fair value of the warrants using the Black-Scholes option pricing model compared to the net proceeds received by the Company, entitles the holder to purchase one share of the Company's common stock for a purchase price initially set at $20.20, equal to 101% of the initial conversion price of the preferred stock at any time during the five-year period commencing on February 18, 2000. The exercise price for the warrants is subject to being reset based upon future market prices for the Company's common stock. The warrant was valued utilizing the Black-Scholes option pricing model using the following assumptions: F-35 Exercise price $20.20 Fair market value of common stock on grant date $66.88 Option life 5 Years Volatility rate 120% Risk free rate of return 0% Discount rate 6.7% Conversion of 10% Convertible Note Payable On February 18, 2000, the holder converted $2,500,000 of the outstanding Note Payable into 248,262 shares of the Company's common stock at an exercise price of $10.07 per share. Exercise of Common Stock Warrants During January and February 2000, holders of warrants exercised their right to purchase 451,515 shares of the Company's common stock resulting in proceeds to the Company totaling $4,976,226 as summarized in the following table:
Common Stock Exercise Common Proceeds Warrant Price Stock To the Warrant Exercised Exercised Per Share Issued Company - -------------------------------- --------- ------------- ------- ----------- 10% preferred stock warrants 12,000 $15.00 12,000 180,000 IPO representative warrants 90,727 8.10 84,042 645,789 Warrants issued in connection with the DCI merger 105,269 6.61 to 10.16 103,607 887,410 Warrant issued in connection with 5% Preferred Stock 100,000 16.33 100,000 1,633,000 Warrant issued to customer 7,000 9.75 7,000 68,250 Warrant issued to 10% convertible note holder 136,519 11.44 136,519 1,561,777 ------- ------- ---------- 451,515 443,168 $4,976,226 ======= ======= ==========
Included in the common stock issued in connection with the exercise of the IPO representative warrants and the warrants issued in connection with the DCI merger are 8,992 and 6,865 shares, respectively, issued to the holders as a result of utilizing the cashless exercise provision of the Agreements for the exercise of 11,000 and 8,527 warrants, respectively. F-36 Conversion of 10% Preferred Stock During January and February 2000, 85,000 shares of the 10% Preferred Stock, including accrued dividends payable of $173,027, were converted into 102,302 shares of the Company's common stock at conversion prices of $10.00 as summarized in the following table: Number of Shares ------------------------- 10% Common Stock Preferred Common Conversion Conversion Date Stock Stock Price per Share --------------- --------- ------ --------------- January 11, 2000 80,000 96,240 $ 10.00 February 14, 2000 5,000 6,062 10.00 ------ ------- 85,000 102,302 ====== ======= Lease Agreements On January 14, 2000, the Company entered into a two-year software license lease agreement which specifies an initial payment of $50,000 and thereafter quarterly payments of $54,412. Total lease payments will be $485,296. The lease is secured by a one-year cash certificate of deposit totaling $267,685. On February 2, 2000, the Company entered into a three-year lease for a second office location. Total lease payments are $61,539 in 2000, $63,693 in 2001 and $65,922 in 2002. F-37 WEBB INTERACTIVE SERVICES, INC. INDEX TO EXHIBITS FORM 10-KSB (For Year Ended December 31, 1999) (a) Listing of Exhibits: 2.1 Agreement and Plan of Merger dated March 19, 1998 among Webb, Durand Acquisition Corporation and Durand Communications, Inc. (1) 2.2 Asset Purchase Agreement, including exhibits thereto, dated December 27, 1999, between Webb Interactive Services, Inc., Update Systems, Inc. and Kevin Schaff. (2) 2.3 Agreement and Plan of Merger between Webb and NetIgnite, Inc., dated June 1, 1999 (3) 3.1 Articles of Incorporation, as amended, of Webb (4) 3.2 Bylaws of Webb (5) 4.1 Specimen form of Webb's Common Stock certificate (6) 4.2 Stock Option Plan of 1995 (5) 4.3 Form of Incentive Stock Option Agreement for Stock Option Plan of 1995 (5) 4.4 Form of Nonstatutory Stock Option Agreement for Stock Option Plan of 1995 (5) 4.5 Form of Warrant issued in 1996 to private investors (5) 4.6 Form of Warrant Agreement issued in 1997 and 1998 to private investors (1) 10.1 Form of Nondisclosure and Nonsolicitation Agreement between Webb and its employees (4) 10.2 Office Lease for Webb's principal offices commencing May 2000* 10.3 Form of Change of Control Agreement between Webb and certain employees (7) 10.4 Operating and Member Control Agreement dated March 10, 1999, among NetIgnite2, LLC, Webb and NetIgnite, Inc., Buy-Sell Agreement dated March 10, 1999, among NetIgnite2, LLC, Webb and NetIgnite, Inc. and Employment Agreement dated March 10, 1999, among Webb, NetIgnite2, LLC and Perry Evans (7) 10.5 Electronic Banking Service Contract dated May 28, 1997 between Webb and Rockwell Federal Credit Union (7) 10.6 Online Banking Service Agreement dated February 10, 1999 between Webb and CU Cooperative Systems, Inc. (7) 10.7 Internet/Business Site Development & Host Agreement dated November 12, 1997, as amended January, 2000, between Webb and ReMax International, Inc.* 10.8 Securities Purchase Agreement dated August 25, 1999 between Webb and Castle Creek (8) 10.9 Promissory Note dated August 25, 1999 issued by Webb to Castle Creek (8) 10.10 Amendment dated December 18, 1999 to Securities Purchase Agreement dated August 25, 1999 between Webb and Castle Creek (9) 10.11 First Amendment dated December 18, 1999 to Promissory Note dated August 25, 1999 issued by Webb to Castle Creek (9) 10.12 Stock Purchase Warrant dated December 18, 1999 issued by Webb to Castle Creek (9) 10.13 Securities Purchase Agreement dated December 31, 1999, between Webb, Marshall Capital Management and Castle Creek. Included as exhibits to the Securities Purchase Agreement are the proposed form of Warrant and the Registration Rights Agreement (10) 10.14 Articles of Amendment setting forth the terms of the Series B Convertible Preferred Stock (11) 10.15 Development, Access and License Agreement, as amended, effective June 30, 1999 between Webb and Switchboard, Inc. (12) 10.16 Engineering Services Agreement, effective June 30, 1999, between Webb and Switchboard, Inc. (12) 13 The registrant intends to deliver to its shareholders a copy of 1999 Annual Report on form 10-KSB (without exhibits), in lieu of a separate Annual Report to Shareholders 21 Subsidiaries of Webb Interactive Services, Inc.* 23.1 Consent of Arthur Andersen LLP* 27 Financial Data Schedule* - ----------------------------- * Filed herewith. (1) Filed with the Form 10-KSB Annual Report for the year ended December 31, 1997, Commission File No. 0-28462. (2) Filed with the Form 8-K Current Report, filed January 14, 2000, Commission File No. 0-28642. (3) Filed with the Form 10-QSB for the quarter ended June 30, 1999, Commission File No. 0-28642. (4) Filed with the Registration Statement on Form S-3, filed January 29, 1999, Commission File No. 333-71503. (5) Filed with the initial Registration Statement on Form SB-2, filed April 5, 1996, Commission File No. 333-3282-D. (6) Filed with the Registration Statement on Form S-3, filed September 24, 1999, Commission File No. 333-86465. (7) Filed with the Form 10-KSB Annual Report for the year ended December 31, 1998, Commission File No. 0-28462. (8) Filed with the Form 8-K Current Report, filed September 2, 1999, Commission File No. 0-28642. (9) Filed with Amendment No. 2 to Webb's Registration Statement on Form S-3, filed January 3, 2000, Commission File No. 333-87887 (10) Filed with the Form 8-K Current Report, filed January 5, 2000, Commission File No. 0-28642. (11) Filed with the Form 8-K Current Report, filed February 25, 2000, Commission File No. 0-28642. (12) Filed with the Registration Statement on Form S-3, filed September 2, 1999, Commission File No. 333-86465. EX-10.2 2 OFFICE LEASE Exhibit 10.2 1899 WYNKOOP OFFICE BUILDING LEASE BETWEEN CENTENNIAL VENTURE I, LLC, LANDLORD, AND WEBB INTERACTIVE SERVICES, INC., TENANT TABLE OF CONTENTS ----------------- 1. Premises......................................................... 1 2. Term and Possession.............................................. 1 3. Rent............................................................. 3 4. Security Deposit................................................. 4 5. Rent Adjustment.................................................. 4 6. Character of Occupancy........................................... 8 7. Services and Utilities........................................... 9 8. Quiet Enjoyment.................................................. 11 9. Maintenance and Repairs; Building Management..................... 11 10. Alterations and Additions........................................ 12 11. Entry by Landlord................................................ 13 12. Mechanic's Liens................................................. 13 13. Damage to Property; Injury to Persons............................ 14 14. Insurance........................................................ 14 15. Damage or Destruction to Building................................ 16 16. Condemnation..................................................... 17 17. Assignment and Subletting........................................ 18 18. Estoppel Certificate............................................. 19 20. Landlord's Lien.................................................. 23 21. Uniform Commercial Code.......................................... 23 22. Removal of Tenant's Property..................................... 23
-i- 23. Holdover......................................................... 23 24. Common Areas..................................................... 23 25. Surrender and Notice............................................. 24 26. Sales; Conveyance and Assignment................................. 24 27. Subordination; Non-Disturbance and Attornment.................... 24 28. Payments After Termination....................................... 24 29. Authorities for Action and Notice................................ 25 30. Liability of Landlord............................................ 25 31. Brokerage........................................................ 25 32. Tenant's Taxes................................................... 26 33. Substitution of Premises......................................... 26 34. Rights Reserved to Landlord...................................... 26 35. Force Majeure Clause............................................. 27 36. Signage.......................................................... 27 37. Attorneys' Fees.................................................. 27 38. Miscellaneous.................................................... 27 39. Hazardous Materials.............................................. 30 40. Parking.......................................................... 31 41. Right to Renew................................................... 31 42. Letter of Credit................................................. 32
EXHIBIT A DESCRIPTION OF PREMISES EXHIBIT B LEGAL DESCRIPTION EXHIBIT C COMMENCEMENT DATE AGREEMENT EXHIBIT D WORK LETTER EXHIBIT E RULES AND REGULATIONS -ii- SUMMARY OF BASIC LEASE PROVISIONS LANDLORD: Centennial Venture I, LLC ADDRESS OF 120 17th Street, 8th Floor LANDLORD: Denver, Colorado 80202 (303) 436-9191 TENANT: Webb Interactive Services, Inc. ADDRESS OF 1899 Wynkoop Street, Suite 600 TENANT: Premises Address Denver, Colorado 80202 Business Home Office Address 1800 Glenarm, Suite 600 Denver, Colorado 80202 Business Home Office Telephone No. 303-296-9200 PREMISES: Suite 600, containing approximately 21,398 rentable square feet of space, as shown crosshatched on Exhibit A. TENANT'S PRO-RATA 12.972% SHARE: LEASE TERM: Five (5) Years Two (2) Months BASE RENT: Monthly Annual Period Base Rent Base Rent ------ --------- --------- Months 1-2 $46,362.33 See Paragraph 3 Months 3-36 $46,362.33 $556,348.00 Months 37-62 $49,928.67 $599,144.00 EXPENSE STOP: $6.50 SECURITY DEPOSIT: See infra Paragraph 4 PREPAID RENT: $46,362.33 -iii- 1899 WYNKOOP OFFICE BUILDING LEASE THIS LEASE is made this 8th day of December 1999, by and between Centennial ---------- Venture I, LLC., a Colorado Limited Liability Company ("Landlord") and Webb - ---------------- Interactive Services, Inc., a Colorado corporation ("Tenant"). 1. Premises: Landlord hereby leases to Tenant those certain premises -------- described in Exhibit A, attached hereto and incorporated herein by this reference, and the drawings referred to therein, consisting of a total of approximately 21,398 rentable square feet of space on the 6th floor, suite 600 (the "Premises"), in the Building (hereinafter defined) to be erected on the real property more particularly described on Exhibit B attached hereto and incorporated herein by this reference, together with a non-exclusive right, subject to the provisions hereof, to use all appurtenances thereunto, including, but not limited to, any areas designated by Landlord for use by tenants of the Building (the Building, the parking garage, the real property on which the same is situated, other areas and appurtenances are hereinafter collectively sometimes called the "Building Complex"). The Building is commonly known as 1899 Wynkoop and is located at 1899 Wynkoop Street, Denver, Colorado 80202 (The "Building"). This Lease is subject to the terms, covenants and conditions set forth herein and Tenant and Landlord each covenant as a material part of the consideration for this Lease to keep and perform each and all of said terms, covenants and conditions to be kept and performed by them. 2. Term and Possession: ------------------- (a) The Term of this Lease shall be approximately five (5) years and two (2) months to commence on the Commencement Date and to end, unless sooner terminated, at midnight on the last day of the sixty-second (62nd) full calendar month thereafter. Promptly after the Commencement Date, Landlord and Tenant will execute an agreement in recordable form (hereinafter referred to as the Commencement Date Agreement, a form of which is attached hereto as Exhibit C) stating, among other things, the rentable square foot area of the Premises, the commencement and expiration dates of this Lease and the Base Rent. (b) "Commencement Date" shall mean the earlier of the following dates: (1) The date upon which the Tenant takes possession or commences the operation of its business in the Premises; or (2) The date upon which the Premises are Ready for Occupancy (hereinafter defined); provided, that under either subparagraph 2(b)(1) or (2) the actual Commencement Date shall not be prior to the Scheduled Commencement Date. (c) The Scheduled Commencement Date shall be May 1, 2000. Tenant's actual Commencement Date shall be established by the Commencement Date Agreement. Prior to the Commencement Date, Landlord shall cause the Premises to be prepared for occupancy, as provided in the Work Letter attached to this Lease as Exhibit D. The cost of completion of the tenant improvement work to the Premises shall be borne by the parties as provided in the Work Letter. Other than as set forth in the Work Letter Landlord shall have no obligation for the completion of the Premises, and Tenant shall accept the Premises in its "as is" condition on the Commencement Date. "Ready for Occupancy" as that term is used herein shall mean the date when all major construction aspects of the Building and the Premises to be performed by Landlord and Tenant to the extent agreed to in the Work Letter are substantially completed although punch list items are not completed. The certificate of the architect in charge of supervising the completion of the Premises shall control the date upon which the Premises are Ready for Occupancy. Landlord shall not have any obligation for the repair or replacement of any portions of the interior of the Premises, including but not limited to carpeting, draperies, window coverings, wall coverings or painting, which are damaged or wear out during the term hereof, regardless of the cause therefor, except as may otherwise be specifically set forth in this Lease. Except as expressly provided in the Work Letter, any tenant improvements to the Premises for which Landlord shall be responsible shall be subject to the following: (1) Tenant may substitute different new material (except exterior window coverings) or make changes to the final working drawings and specifications only with Landlord's prior express approval, which may be withheld in Landlord's sole discretion. Any substitutions or changes must be shown on the working drawings and in the specifications and shall be of equal or better quality than the items originally designated and must be deemed by Landlord to be in conformance with the quality and design criteria established within the Building. In the event Landlord approves the requested substitution or change, Tenant shall bear the cost of making any changes to the working drawings and specifications as well as any additional costs occasioned by the change or substitution, including costs of disruption and delay. Tenant shall pay such additional costs to Landlord within ten (10) days of receipt of Landlord's invoice for the same. (2) If Landlord shall be delayed in sufficiently completing said work as a result of Tenant's request for substitution of materials, finishes, fixtures, equipment or installations or any other change to the working drawings and specifications requested by Tenant and approved by Landlord, or the failure of Tenant to provide timely approvals of working drawings or other specifications necessary for completion of the work, then the Commencement Date of the Term of this Lease and the payment of Base Rent shall not be extended, but shall be accelerated as provided in the Work Letter. (3) If Tenant occupies or begins to conduct business in all or any portion of the Premises before the Premises are Ready for Occupancy, such occupancy and conducting of its business by Tenant shall be subject to all provisions of this Lease which reasonably and logically apply thereto; provided, however, that Tenant shall not be required to pay any Base Rent for the Premises for any period it occupies and conducts business in the Premises prior to the Scheduled Commencement Date. Such prior occupancy shall not operate to commence the Term of the Lease for all or any part of the Premises. (4) If Landlord is delayed in delivering possession of all or any portion of the Premises to Tenant on or before the Scheduled Commencement Date for reasons not attributable to Tenant's conduct or requests, including, but not limited to, delays caused by governmental authorities, then Tenant shall take possession of the Premises on the date (not later than four (4) months after the Scheduled Commencement Date) when Landlord delivers possession of all of the Premises and Tenant obligation to pay Base Rent and the Termination Date shall be extended for an equivalent period of time. Except as provided in subparagraph 2(c)(6), this Lease shall not be void or voidable nor shall Landlord be liable to Tenant for any loss or damage resulting from any delay in delivering possession of the Premises to Tenant, its servants, agents or independent contractors, no Base Rent shall be payable by Tenant for the period prior to the date on which Landlord can so deliver possession of all of the Premises. (5) Taking possession of all or any portion of the Premises by Tenant shall constitute Tenant's acceptance of the Premises or such portion thereof as being in satisfactory condition, subject only to punch list items listed in writing in a notice delivered by Tenant to Landlord as provided for in the Work Letter. (6) If the Premises are not Ready for Occupancy by the dates indicated below for reasons other than delays caused by Tenant (including those set forth in Exhibit D), delays caused by governmental authorities or Force Majure events the Landlord shall pay Tenant the amounts set forth below for each day of delay: (A) If the Premises are not Ready for Occupancy on or before April 15, 2000, Landlord shall pay Tenant its actual Holdover Rent (hereinafter defined) not to -2- exceed $500.00 per each day of delay thereafter, until the Premises are Ready for Occupancy, through April 30, 2000. As used herein, Holdover Rent shall mean the difference between Tenant's current base rent for its premises located at 1800 Glenarm, Suite 600, Denver, Colorado 80202, Denver, Colorado ($19.00 per square foot per year), and the rate it is charged by its landlord for said premises from and after April 15, 2000. Tenant agrees that it shall use its best efforts to negotiate the most favorable holdover rate with its current landlord; and (B) If the Premises are not Ready for Occupancy on or before April 30, 2000, Landlord shall pay Tenant its actual Holdover Rent not to exceed $750.00 per each day of delay thereafter, until the Premises are Ready for Occupancy through June 30, 2000; provided that, if Landlord does not permit Tenant to occupy one or more entire floors of said premises, Landlord shall pay Tenant $750 per day from and after April 30, 2000. (C) Notwithstanding the foregoing, if, on or after April 1, 2000, Tenant is required to vacate one or more full floors included at its premises at 1800 Glenarm, then from and after the date Tenant is required to vacate, the amount Landlord is required to pay Tenant shall be $500.00 per day pursuant to subparagraph (6)(A) and $750.00 per day pursuant to subparagraph (6)(B). The amount set forth in this subparagraph (6)(C) shall be in place of the amounts set forth in subparagraphs (6)(A) and (B) and not in addition thereto. (7) If the Landlord has not commenced construction of the Leasehold Improvements by February 15, 2000, for reasons other than delays caused by Tenant, delays caused by governmental entities or Force Majure events, Tenant may terminate this Lease without liability by giving Landlord written notice of the termination on or before February 18, 2000. If construction of the Leasehold Improvements is commenced by February 15, 2000, or if Tenant fails to exercise the termination right in accordance with this subparagraph this termination right shall lapse and be null and void. (8) If the Premises are not Ready for Occupancy by July 1, 2000, for reasons other than delays caused by Tenant, delays caused by governmental entities or Force Majure events, Tenant may terminate this Lease without liability by giving Landlord written notice of the termination on or before July 5, 2000. If the Premises are Ready for Occupancy by July 1, 2000, or if Tenant fails to exercise the termination right in accordance with this subparagraph this termination right shall lapse and be null and void (9) If the Premises are not Ready for Occupancy by July 31, 2000, for reasons other than delays caused by Tenant, Tenant may terminate this Lease without liability by giving Landlord written notice of the termination on or before August 3, 2000. If the Premises are Ready for Occupancy by July 31, 2000, or if Tenant fails to exercise the termination right in accordance with this subparagraph this termination right shall lapse and be null and void. 3. Rent: Tenant shall pay to Landlord, rent for the Premises ("Base ---- Rent") in accordance with the following schedule: MONTHLY ANNUAL PERIOD BASE RENT BASE RENT Months 1-2 $46,362.33 See Paragraph 3 Months 3-36 $46,362.33 $556,348.00 Months 37-62 $49,928.67 $599,144.00 -3- All installments of Base Rent shall be payable in advance, on the first (1st) day of each calendar month during the term hereof. Base Rent for any partial month during the term hereof shall be prorated based upon the number of days during each of said months that the Lease term was in effect. The full first month's Base Rent shall be due and payable on the date of execution of this Lease by Tenant. All Base Rent shall be paid without notice, demand, deduction or offset, at the office of Landlord or to such other person or at such other place as Landlord may designate in writing. Notwithstanding anything to the contrary set forth herein, Tenant may occupy the Premises and payment of Base Rent and Tenant's Pro Rata Share of Operating Expenses shall be abated for a period commencing on the Commencement Date and terminating on the last day of the second month of the Lease Term (the "Abatement Rent Period"). If at any time during the Primary Term, an Event of Default occurs, Tenant owes Landlord, in addition to all other amounts, Base Rent and Tenant's Pro Rata Share of Operating Expenses abated pursuant to this paragraph during the Abatement Rent Period. Tenant, however, has no obligation to pay the abated amounts if no Event of Default occurs prior to the expiration of the Primary Term. Tenant shall pay to Landlord as "Additional Rent" all other sums due under this Lease. Late payments shall be subject to interest and penalties as set forth in Paragraph 19 hereof. In the event that the Premises are determined by Landlord's architect, using its standard methodology for measuring the Building, to contain less than 21,539 rentable square feet, the Base Rent will be reduced pro rata. 4. Security Deposit: It is agreed that in the event Tenant is no longer required to post the letter of credit provided for in Paragraph 42 of this Lease or if the Lease is renewed at the end of the Term, that it shall, prior to the termination of the letter of credit requirement, deposit with Landlord, and thereafter keep on deposit at all times during the remainder of the term of the Lease the sum of Forty-Nine Thousand Nine Hundred Twenty-Eight Dollars and 67/100 ($49,928.67), as security for the payment by Tenant of the Base Rent, Additional Rent and all other sums herein agreed to be paid and for the Tenant's performance of this Lease. If, at any time during the term hereof, Tenant shall be in default in the performance of any provisions of this Lease, which default has not been cured by Tenant, Landlord shall have the right, but shall not be obligated, to use said deposit, or so much thereof as necessary, to compensate Landlord for any loss damage, cost or expense (including reasonable attorney's fees and costs) which Landlord may incur by reason of tenants uncured event of default. If any part of the security deposit is so used or applied, Tenant shall within five (5) days of written demand of Landlord, remit to Landlord a sufficient amount in cash to restore said deposit to its original amount. In the event said deposit has not been utilized said deposit, or as much thereof as has not been utilized for such purposes, shall be refunded to Tenant, without interest, after the termination of this Lease upon full performance of this Lease by Tenant and vacation of the Premises by Tenant. Landlord shall have the right to commingle said deposit with other funds of Landlord. Landlord may deliver the funds deposited herein by Tenant to any purchaser of Landlord's interest in the Premises in the event such interest is sold, and thereupon Landlord shall be discharged from further liability with respect to such deposit. If the claims of Landlord exceed the amount of said deposit, Tenant shall remain liable for the balance of such claims. 5. Rent Adjustment: --------------- (a) The following terms shall have the following meanings with respect to the provisions of this Paragraph 5: (1) "Expense Stop" shall mean an amount equal to $6.50 per rentable square foot of the Building. (2) "Operating Expense Differential" shall mean the difference between the Expense Stop and the actual Operating Expenses of the Building Complex on a per rentable square foot basis. (3) "Tenant's Operating Expense Differential" shall mean the Operating Expense Differential times the number of rentable square feet contained in the Premises. (4) "Building Rentable Area" shall mean all rentable space available for lease in the Building as set forth below. If there is a significant change in the aggregate Building Rentable -4- Area, of a permanent nature, as a result of an addition to the Building, partial destruction thereof or similar circumstance, Landlord's architect and/or accountant shall determine and make an appropriate adjustment to the provisions herein. (5) "Premises Rentable Area" shall mean the total number of square feet of rentable area in the Premises as determined by Landlord's architect. (6) "Tenant's Pro Rata Share" shall mean a fraction, the numerator of which is the Premises Rentable Area (i.e., 21,398 square feet) and the denominator of which is the Building Rentable Area (i.e., 164,958 square feet), and is equal to 12.972%. At such time, if ever, any space is added to or subtracted from the Premises pursuant to the terms of this Lease, Tenants Pro Rata Share shall be increased or decreased accordingly. (7) "Operating Expenses" shall mean: (A) All operating expenses of any kind or nature which are necessary, ordinarily or customarily incurred with respect to the operation, maintenance, repair and management of the Building Complex and generally charged as an operating expense to tenants by landlords of comparable office buildings in Denver, Colorado, and shall include, but not be limited to: (ii) Costs of supplies, including but not limited to the cost of "relamping" all tenant lighting as the same may be required from time to time; (iii) Costs incurred in connection with obtaining and providing energy for the Building Complex, including but not limited to costs of propane, butane, natural gas, steam, electricity, solar energy and fuel oils, coal or any other energy sources; (iv) Costs of water and sanitary and storm drainage services; (v) Costs of janitorial and security services, if any; (vi) Costs of general maintenance and repairs, including costs under heating, ventilation, and air conditioning ("HVAC") and other mechanical maintenance contracts; and repairs and replacements of equipment used in connection with such maintenance and repair work; (vii) Costs of maintenance and replacement of landscaping; and costs of maintenance, repair of common areas, plazas and other areas used by tenants of the Building Complex, including trash and snow removal; (viii) Insurance premiums, including fire and all- risk property coverage, together with loss of rent endorsement; commercial general liability insurance; rental interruption insurance; and any other insurance carried by Landlord on the Building Complex or any component parts thereof; (ix) Labor costs, including wages and other payments, costs to Landlord of workmen's compensation and disability insurance, payroll taxes, welfare fringe benefits and all legal fees and other costs or expenses incurred in resolving any union labor disputes; (x) Building management fees (not to exceed the amount paid to other third party managers of comparable office buildings in the downtown Denver market area) and all costs related to the provision of building management services including the cost of office and storage space; -5- (xi) Reasonable legal, accounting, inspection and other consultation fees incurred for the normal prudent operation of the Building Complex; (xii) The costs of capital improvements and structural repairs and replacements made in or to the Building Complex or the cost of any machinery or equipment installed in the Building Complex in order to conform to changes, subsequent to the Lease Commencement Date, in any applicable laws, ordinances, rules, regulations or orders of any governmental or quasi- governmental authority having jurisdiction over Building Complex (herein, "Required Capital Improvement"); and the costs of any capital improvements and structural repairs and replacements designed primarily to reduce Operating Expenses (herein, "Cost Savings Improvements"). The expenditures for Required Capital Improvements and Cost Savings Improvements shall be amortized over the useful life of such capital improvement or structural repair or replacement (as determined by Landlord's accountants); and (xiii) "Real Estate Taxes" including all real property taxes, assessments and fees levied against the Building Complex by any governmental or quasi- governmental authority or district (including any historic or improvement district) and which are due and payable during the Term, including any taxes, assessments, surcharges, or service or other fees of a nature not presently in effect which shall hereafter be levied on the Building Complex as a result of the use, ownership or operation of the Building Complex or for any other reason, whether in lieu of or in addition to any current real estate taxes, assessments, and fees; provided, however, that any taxes which shall be levied on the rentals of the Building Complex shall be determined as if the Building Complex were Landlord's only property and provided further, that in no event shall the term "taxes, assessments, and fees", as used herein, include any federal, state or local income taxes levied or assessed on Landlord, unless such taxes are a specific substitute for real property taxes. "Assessments" shall include any and all so-called special assessments, license tax, business license fee, business license tax, commercial rental tax, levy, charge or tax imposed by any authority or district having the direct power to tax, including any city, county, state or federal government, or any school, agricultural, lighting, water, drainage or other improvement or special district thereof, against the Premises, the Building or the Building Complex, or against any legal or equitable interest of Landlord therein. For the purposes of this Lease, any special assessment or fee shall be deemed payable in maximum number of installments as is permitted by law, whether or not actually so paid. (B) Expressly excluded from Operating Expenses are the following: (ii) Landlord's income taxes; (iii) Leasing commissions, advertising and promotional expenses incurred in the leasing of the Building; (iv) Interest on debt or amortization payments on any mortgages or deeds of trust; (v) Costs of repairs or other work occasioned by fire, windstorm or other casualty to the extent of insurance proceeds received; (vi) Depreciation; -6- (vii) Any capital improvement other than those specified as "Cost Saving Improvements" or "Required Capital Improvements" in Paragraph 5(a)(4)(xi); and (viii) Attorney's fees associated with customary lease review and negotiation, and/or lease enforcement. (b) It is hereby agreed that Tenant shall pay to Landlord as Additional Rent during each calendar year during the term hereof an estimate of Tenant's Operating Expense Differential as reasonably estimated by Landlord, payable monthly, at the rate of one twelfth (1/12) thereof, on the same date and at the same place Base Rent is payable, with an adjustment to be made between the parties at a later date as hereinafter provided; provided, however, that for the calendar year 2000 Tenant shall not be billed nor will it be required to pay any Operating Expense Differential. Furthermore, to the extent Tenant's Pro Rata Share of Operating Expense, during any year of the Term (annualized for a full twelve months) would have been less than $6.50 per rentable square foot, Tenant shall receive a credit for such amount against Tenant's Operating Expense Differential, if, and when it would otherwise be due and payable by Tenant or refunded to Tenant if no additional amounts are due from Tenant. Notwithstanding the foregoing sentence, Tenant shall not be entitled to any credit for any period during which the Base Rent is abated. Except for increases in real estate taxes, insurance and utilities, Landlord agrees that increases in the total Operating Expenses for which Tenant shall be obligated during the Term of this Lease will not increase more than five percent (5%) in any calendar year during the Term of this Lease over the immediately preceding calendar year; provided, however, that such percentage shall be increased by the unused portion of the five percent (5%) cap for the preceding years of the Term of the Lease. It is further agreed and understood that this shall only constitute a cap on the Tenant's share of Operating Expenses, other than real estate taxes, insurance and utilities which shall not be subject to the cap. Landlord shall deliver to Tenant, as soon as practicable following the end of each calendar year, an estimate of the Operating Expenses for the new calendar year (the "Budget Sheet"). Until receipt of the Budget Sheet, Tenant shall continue to pay its monthly Tenant's Operating Expense Differential based upon the estimate for the preceding calendar year. To the extent that the Budget Sheet reflects an estimate of Tenant's Operating Expense Differential for the new calendar year greater than the amount actually paid to the date of receipt of the Budget Sheet for the new calendar year, Tenant shall pay such amount to Landlord within thirty (30) days of receipt of the Budget Sheet. Upon receipt of the Budget Sheet, Tenant shall thereafter pay the amount of its monthly Tenant's Operating Expense Differential as set forth in the Budget Sheet. As soon as practicable following the end of any calendar year, but not later than May 1st, Landlord shall submit to Tenant a statement in reasonable detail describing the computations of the Operating Expenses, setting forth the exact amount of Tenant's Operating Expense Differential for the calendar year just completed (the "Statement"), and the difference, if any, between the actual Tenant's Operating Expense Differential for the calendar year just completed and the estimated amount of Tenant's Operating Expense Differential paid by Tenant to Landlord. Landlord's failure to deliver the Statement to Tenant on or before May 1st, shall in no way serve as a waiver of Landlord's rights under this Paragraph. To the extent that the actual Tenant's Operating Expense Differential for the period covered by the Statement is higher than the estimated Tenant's Operating Expense Differential which Tenant previously paid during the calendar year just completed, Tenant shall also pay to Landlord such balance within thirty (30) days following receipt of the Statement from Landlord. To the extent that the actual Tenant's Operating Expense Differential for the period covered by the Statement is less than the estimated Tenant's Operating Expense Differential which Tenant previously paid during the calendar year just completed, Landlord shall credit the excess against any sums then owing or next becoming due from Tenant under the Lease, or, if no additional sums are due, such amount shall be refunded to Tenant. In calculating the Operating Expenses and Tenant's Operating Expense Differential, Landlord shall on an annual basis determine the proportionate division of shared Operating Expenses between the Building and the retail spaces. Shared Operating Expenses shall include, but not be limited to real estate taxes, insurance, common areas, utilities, and HVAC, security, grounds and landscaping, parking and exterior maintenance and life safety expenses. -7- (c) If the Lease term hereunder covers a period of less than a full calendar year during the first or last calendar years of the term hereof, the Expense Stop and Tenant's Operating Expense Differential for such partial year shall be calculated by proportionately reducing each to reflect the number of months in such year during which Tenant leased the Premises. (d) Tenant shall have the right at its own expense and at a reasonable time (after written notice to Landlord) within sixty (60) days after receipt of the Statement to review Landlord's books relevant to the Additional Rent due under this Paragraph 5; provided, however, that Tenant may not employ any firm or individual to review Landlord's books which is compensated on any form of contingent fee basis. In the event Tenant does not review Landlord's books and deliver the results thereof to Landlord within said 60- day period, the terms and amounts set forth in the Statement shall be deemed conclusive and final and Tenant shall have no further right to adjustment. In the event Tenant's examination reveals that an error has been made in Landlord's determination of Tenant's Operating Expense Differential and Landlord agrees with such determination, then the amount of such adjustment shall be payable by Landlord or Tenant, to the other party as the case may be. In the event Tenant's examination reveals an error has been made in Landlord's determination of Tenant's Operating Expense Differential, and Landlord disagrees with the results thereof, Landlord shall have thirty (30) days to obtain a review from an accountant of its choice to determine Tenant's Operating Expense Differential. In the event Landlord's accountant and Tenant's accountant are unable to reconcile their reviews, both accountants shall mutually agree upon a third accountant, whose determination of Tenant's Operating Expense Differential shall be conclusive. (e) Landlord's failure during the Lease term to prepare and deliver any statements or bills, or Landlord's failure to make a demand under this Paragraph or under any other provision of this Lease shall not in any way be deemed to be a waiver of, or cause Landlord to forfeit or surrender its rights to collect any items of Additional Rent which may have become due pursuant to this Paragraph during the term of this Lease. Tenant's liability for all Additional Rent due under this Paragraph 5 shall survive the expiration or earlier termination of this Lease. (f) If at any time during the term of this Lease, the occupancy area of the Building leased to tenants is less than 95% of the capacity, then for purposes of calculating Operating Expenses, those Operating Expenses that vary with occupancy shall be grossed up to reflect Building occupancy of 95%. For purposes of calculating Operating Expenses, Real Estate Taxes shall be included in an amount equal to the actual amount paid by the Landlord for the year in question. 6. Character of Occupancy: ---------------------- (a) The Premises are to be used for general offices not inconsistent with the character and type of tenancy found in comparable first-class office buildings in the Denver metropolitan area and for no other purpose without the prior written consent of Landlord, which consent shall not be unreasonably withheld. (b) Tenant shall not suffer nor permit the Premises nor any part thereof to be used in any manner, nor anything to be done therein, nor suffer or permit anything to be brought into or kept therein, which would in any way (i) make void or voidable any fire or liability insurance policy then in force with respect to the Building Complex, (ii) make unobtainable from insurance companies authorized to do business in Colorado any fire insurance with extended coverage, or liability, elevator, boiler or other insurance required to be furnished by Landlord under the terms of any lease or mortgage to which this Lease is subordinate at standard rates, (iii) cause or in Landlord's reasonable opinion be likely to cause physical damage to the Building Complex or any part thereof, (iv) constitute a public or private nuisance, (v) impair, in the opinion of Landlord, the appearance, character or reputation of the Building Complex, (vi) discharge objectionable fumes, vapors or odors into the Building air conditioning system or into the Building flues or vents not designed to receive them or otherwise in such manner as may unreasonably offend other occupants of the Building, (vii) impair or interfere with any of the Building services or impair or interfere with or tend to impair or interfere with the use of any of the other areas of the Building by, or occasion discomfort, or annoyance to Landlord or any of the other tenants or occupants of the Building -8- Complex, any such impairment or interference to be based upon the judgment of Landlord, (viii) increase on an ongoing periodic basis the pedestrian traffic in and out of the Premises or the Building above an ordinary level, (ix) create waste in, on or around the Premises, Building, or Building Complex, or (x) make any noise or set up any vibration which will disturb other tenants, except in the course of permitted repairs or alterations at times permitted by Landlord. (c) Tenant shall not use the Premises nor permit anything to be done in or about the Premises or Building Complex which will in any way conflict with any law, statute, ordinance, protective covenants affecting the Building Complex or governmental or quasi-governmental rules or regulations now in force or which may hereafter be enacted or promulgated. Tenant shall give written notice within two (2) days from receipt thereof to Landlord of any notice it receives of the violation of any law or requirement of any public authority with respect to the Premises or the use or occupation thereof. Landlord shall give prompt notice to Tenant of any notice it receives relative to the violation by Tenant of any law or requirement of any public authority with respect to the Premises or the use or occupation thereof. 7. Services and Utilities: ---------------------- (a) Landlord agrees, without charge except as provided herein, to furnish water to the Building for use in lavatories and drinking fountains (and to the Premises if the plans for the Premises so provide); during Ordinary Business Hours (hereinafter defined) to furnish such heated or cooled air to the Premises as may, in the judgment of Landlord, be reasonably required for the comfortable use and occupancy of the Premises provided that Tenant complies with the recommendations of Landlord's engineer or other duly authorized representative, regarding occupancy and use of the Premises; to provide janitorial services for the Premises (including such interior and exterior window washing as may be required), such janitorial services to be provided five (5) days a week, except for "Holidays" as (hereinafter defined); during Ordinary Business Hours to cause electric current to be supplied for lighting the Premises and public halls; and to furnish such snow removal services to the Building Complex as may, in the judgment of Landlord, be reasonably required for safe access to the Building Complex. (b) Landlord shall furnish to the Premises electricity during Ordinary Business Hours for Building standard connected load in an average amount of eight (8.0) watts per square foot of rentable area within the Premises which includes the following: (i) two (2) watts per square foot of rentable area within the Premises for ceiling lighting; and (ii) approximately six (6) watts per square foot of rentable area within the Premises for general purpose power (which includes two (2.0) watts for PC rated power). Landlord shall provide Tenant with an average of 4.2 watts on a demand load basis per square foot of rentable area in the Premises; provided, that Tenant may, at its sole cost and expense, augment the existing equipment in order to provide additional watts on a demand load basis. Under such circumstances Tenant shall install at its sole cost and expense a demand meter to measure Tenant's actual electricity consumption and Tenant shall pay for all electricity consumption which is in excess of the Building standard. The cost of any electrical service at (i) other than Ordinary Business Hours and (ii) during Ordinary Business Hours but exceeding the above specified wattage, whether determined by separate metering or survey as set forth hereinafter, (the Excess Electricity) shall be paid pursuant to Paragraph 7(c) as Additional Rent. Nothing herein shall be deemed to create any obligation of Landlord to provide electrical equipment in excess of that expressly set forth in this Paragraph 7(b). Ordinary Business Hours shall mean from 7:00 a.m. to 6:00 p.m. weekdays and from 8:00 a.m. to 1:00 p.m. Saturdays (Sundays and Holidays excepted). (c) At any time and from time to time, Landlord may conduct electrical surveys within the Premises to determine Tenant's consumption of Excess Electricity, if any. If such survey(s) shall reveal usage by Tenant of Excess Electricity, Tenant shall pay Landlord for such Excess Electricity, at Landlord's average cost for the same per kilowatt hour (KWH) (determined by dividing Landlord's total monthly cost for electricity by the total number of KWHs consumed in the Building during the corresponding month) upon monthly invoice for the same from Landlord. Said invoices shall be deemed and paid as Additional Rent. -9- (d) Landlord shall have the right, if it determines based on its own judgment that Tenant is using electric current for purposes other than those described above or Excess Electricity, to require Tenant to install a check meter to determine the amount which Tenant is utilizing. The cost of such Excess Electricity, and check meter, including but not limited to monitoring, installation and repair thereof, shall be paid by Tenant. (e) Tenant agrees that Landlord shall not be liable for failure to supply any heating, air conditioning, elevator, electrical, janitorial, lighting or other services during any period when Landlord uses reasonable diligence to supply such services, or during any period Landlord is required to reduce or curtail such services pursuant to any applicable laws, rules or regulations, now or hereafter in force or effect, it being understood and agreed to by Tenant that Landlord may discontinue, reduce or curtail such services, or any of them at such times as it may be necessary by reason of accident, repairs, alterations, improvements, strikes, lockouts, riots, acts of God, application of applicable laws, statutes, rules and regulations, or due to any other happening beyond the reasonable control of Landlord. In the event of any such interruption, reduction or discontinuance of Landlord's services due to events beyond its reasonable control, Landlord shall not be liable for damages to persons or property as a result thereof, nor shall the occurrence of any such event in any way be construed as an eviction of Tenant or cause or permit an abatement, reduction or setoff of rent, or operate to release Tenant from any of Tenant's obligations hereunder. Notwithstanding anything to the contrary contained in this Paragraph 7(e) if: (i) Landlord ceases to furnish any service in the Building for a period in excess of five (5) consecutive business days after Tenant notifies Landlord of such cessation; (ii) such cessation does not arise as a result of an act or omission of Tenant; (iii) such cessation is not caused by a fire or other casualty (in which case Article 15 shall control); (iv) the restoration of such service is reasonably within the control of Landlord; and (v) as a result of such cessation, the Premises, or a material portion thereof, is rendered untenantable (meaning that Tenant is unable to use the Premises or such portion in the normal course of its business) and Tenant in fact ceases to use the Premises, or material portion thereof, then Tenant, as its sole remedy, shall be entitled to receive an abatement of Base Rent and any Operating Expense Differential payable hereunder during the period beginning on the sixth (6th) consecutive business day of such cessation and ending on the day when the service in question has been restored. In the event the entire Premises has not been rendered untenantable by the cessation in service, the amount of abatement that Tenant is entitled to receive shall be prorated based upon the percentage of the Premises so rendered untenantable and not used by Tenant. (f) Whenever heat generating machines or equipment are used by Tenant in the Premises which affect the temperature otherwise maintained by the air conditioning system, Landlord reserves the right to install supplementary air conditioning units in the Premises in the event Landlord's independent consulting engineer determines same are necessary as a result of Tenant's use of lights or equipment which generate heat loads in excess of those for which the HVAC system is designed and the cost therefor, including the cost of installation, operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord. (g) In the event that Tenant has any special or additional electrical or mechanical requirements related to its use of the Premises, any such electrical or mechanical equipment must be located within the Premises. Such electrical or mechanical requirements, for the purposes hereof, shall include by way of example, but not limitation, any internal telephone system. The foregoing shall in no way be construed as granting to Tenant additional rights to use any such special or additional electrical or mechanical equipment in its Premises without the prior written consent of Landlord. Any additional cost or expense related to or resulting from such electrical or mechanical requirements shall be the sole obligation of Tenant. (h) If Tenant requires HVAC service beyond Ordinary Business Hours (hereafter "After Hours Usage"), such service shall be metered and Tenant shall reimburse Landlord on a monthly basis, as Additional Rent, for all costs and expenses for Tenant's After Hours Usage including Landlord's actual cost for electric service without markup. -10- 8. Quiet Enjoyment. Subject to the provisions of this Lease, Landlord --------------- covenants that Tenant on paying the rent and performing the covenants of this Lease on its part to be performed shall and may peacefully and quietly have, hold and enjoy the Premises for the Term of this Lease. Landlord shall not be responsible for the acts or omissions of any other tenant or third party which may interfere with Tenant's use and enjoyment of the Premises. 9. Maintenance and Repairs; Building Management: -------------------------------------------- (a) Notwithstanding any other provisions of this Lease, Landlord shall repair and maintain the structural portions of the Building, including the elevators, plumbing, air conditioning, heating and electrical systems installed or furnished by Landlord, except to the extent such maintenance and repairs are caused by the act, neglect, fault or omission of Tenant, its agents, servants, employees, licensees or invitees, in which case Tenant shall pay to Landlord, on demand, the cost of such maintenance and repairs less the amount of any insurance proceeds received by Landlord on account thereof, if applicable. Landlord shall also maintain and keep in good order and repair the Building roof; the curtain wall, including all glass connections at the perimeter of the Building; all exterior doors, including any exterior plate glass within the Building; the Building ventilating systems; elevators; escalators; Building telephone and electrical closets; public portions of the Building or Building Complex, including but not limited to the balconies, landscaping, walkways, upper floor lobbies and corridors, the parking garage and interior portions of the Building above and below grade which are not covered by leases. Landlord or its property manager shall manage the Building in a first class manner and shall use its reasonable efforts to do so in a cost effective and competitive manner while still maintaining the quality of the Building. (b) Tenant, at Tenant's sole cost and expense, except for services furnished by Landlord pursuant to Paragraph 7 hereof, shall maintain, in good order, condition and repair, the Premises, including the interior surfaces of the ceiling (if damaged or discolored due in whole or in part to the act, neglect, omission or fault of Tenant), walls and floors, all doors, interior glass partitions of glass surfaces (not exterior windows) and pipes, electrical wiring, switches, fixtures and other special items, subject to the provisions of Paragraph 15 hereof In the event Tenant fails to so maintain the Premises in good order, condition and repair, Landlord shall give Tenant notice to do such acts as are reasonably required to maintain the Premises. In the event Tenant fails to promptly commence such work and diligently pursue it to completion, then Landlord shall have the right, but shall not be required, to do such acts and expend such funds at the expense of the Tenant as are reasonably required to perform such work. Landlord shall have no liability to Tenant for any damage, inconvenience or interference with the use of the Premises by Tenant as a result of performing any such work. (c) Tenant and Landlord shall do all acts required to comply with all applicable laws, ordinances, regulations and rules of any public authority relating to their respective maintenance obligations as set forth herein. Landlord and Tenant acknowledge that the requirements of the Americans with Disabilities Act (ADA) are and will be subject to various and possibly contradictory interpretations. Tenant acknowledges, therefore, that the Landlord and its architects and contractors making Tenant Improvements to the Building will use their best professional efforts to interpret applicable statutes, ordinances, and regulations as they apply to the Building. The Landlord, however, cannot and does not warrant or guarantee that the Building complies with all interpretations to the ADA requirements, but will use its reasonable efforts to effect such compliance. (d) Whenever a special HVAC System is installed in all or part of the Premises, Tenant shall enter into a regularly scheduled preventative maintenance and service contract, at Tenant's sole cost and expense, with an experienced maintenance and service contractor for servicing all such heating, air conditioning and ventilation systems and equipment, and shall provide Landlord with a copy of the same. The contractor and contract are both subject to Landlord's prior approval, which approval will not be unreasonably withheld or delayed. Such contract shall include, at a minimum, all services recommended by the equipment manufacturer and must be effective within thirty (30) days of the Commencement Date -11- hereof. Landlord shall retain all manufacturers' warranty information, if any, and will cooperate with the Tenant to the extent warranty repairs are required. 10. Alterations and Additions: ------------------------- (a) Tenant shall make no alterations, additions or improvements to the Premises or any part thereof without obtaining the prior written consent of Landlord, which consent may be withheld in Landlord's sole discretion, provided, however, that Landlord will not unreasonably withhold or delay its consent to alterations or improvements which do not effect the structural, mechanical or operating components of the Building. Tenant shall submit any such request to Landlord at least thirty (30) days prior to the proposed commencement date of such work. Landlord may impose, as a condition to such consent, such requirements as Landlord may deem necessary in its reasonable judgment, including without limitation, the manner in which the work is done, a right of approval of the contractor by whom the work is to be performed and the times during which the work is to be accomplished, approval of all plans and specifications and the procurement of all licenses and permits. Landlord shall be entitled to post notices on and about Premises with respect to Landlord's non-liability for mechanics' liens and Tenant shall not permit such notices to be defaced or removed. Tenant further agrees not to connect any apparatus, machinery or device to the Building systems, including electric wires, water pipes, fire safety, heating and mechanical systems, without the prior written consent of Landlord. Upon completion Tenant shall furnish Landlord "as built" plans, contractor's affidavits and full and final lien waivers and receipted bills covering all labor and materials. Tenant shall reimburse Landlord upon demand as Additional Rent for all sums, if any, incurred by Landlord for examination of Tenant's architectural, mechanical, electrical and plumbing plans and construction supervision for any such alterations, additions or improvements. (b) All alterations, improvements and additions to the Premises, including, by way of illustration but not by limitation, all counters, screens, grilles, special cabinetry work, partitions, paneling, carpeting, drapes or other window coverings and light fixtures, shall be deemed a part of the real estate and the property of Landlord and shall remain upon and be surrendered with the Premises as a part thereof without molestation, disturbance or injury at the end of the Lease term, whether by lapse of time or otherwise; provided that Landlord, may, at its option, at the time consent is given to the alteration, improvement or alteration, require Tenant to remove all or any of such alterations, improvements (including data and telephone cabling) or additions (excluding non-movable office walls), and in such event, Tenant shall promptly remove, at its sole cost and expense, such alterations, improvements and additions and restore the Premises to the condition in which the Premises were prior to the making of the same, reasonable wear and tear excepted. Any such removal, whether required or permitted by Landlord, shall be at Tenant's sole cost and expense, and Tenant shall restore the Premises to the condition in which the Premises were prior to the making of the same, reasonable wear and tear excepted. All movable partitions, machines and equipment which are installed in the Premises by or for Tenant, without expense to Landlord, and can be removed without structural damage to or defacement of the Building or the Premises, and all furniture, furnishings and other articles of personal property owned by Tenant and located in the Premises (all of which are herein called "Tenant's Property") shall be and remain the property of Tenant and may be removed by it at any time during the term of this Lease. However, if any of Tenant's Property is removed, Tenant shall repair or pay the cost of repairing any damage to the Building or the Premises resulting from such removal, including any holes or damages to the drywall. All additions or improvements which are to be surrendered with the Premises shall be surrendered with the Premises, as a part thereof, at the end of the term or the earlier termination of this Lease. (c) If Landlord permits persons requested by Tenant to perform any alterations, repairs, modifications or additions to the Premises, then prior to the commencement of any such work, Tenant shall deliver to Landlord certificates issued by insurance companies qualified to do business in the State of Colorado evidencing that worker's compensation, commercial general public liability insurance and property damage insurance, all in amounts, with companies and on forms satisfactory to Landlord, are in force and maintained by all such contractors and subcontractors engaged by Tenant to perform such work. -12- All such policies shall name Landlord as an additional insured and shall provide that the same may not be canceled or modified without thirty (30) days prior written notice to Landlord. (d) Tenant, at its sole cost and expense, shall cause any permitted alterations, decorations, installations, additions or improvements in or about the Premises to be performed in compliance with all applicable codes, ordinances, laws (including the Americans with Disabilities Act), regulations and requirements of governmental bodies having jurisdiction and insurance companies insuring the Building, and in such manner as not to interfere with, delay, or impose any additional expense upon Landlord in the construction, maintenance or operation of the Building, and so as to maintain harmonious labor relations in the Building. 11. Entry by Landlord: ----------------- (a) Landlord and its agents shall have the right to enter the Premises at all reasonable times upon reasonable notice (except in the case of an emergency) for the purpose of examining or inspecting the same, to supply any services to be provided by Landlord hereunder, to show the same to prospective purchasers of the Building, to make such alterations, repairs, improvements or additions to the Premises or to the Building as Landlord may deem necessary or desirable, and during the last nine (9) months of the Term to show the same to prospective tenants of the Premises. Landlord and its agent may enter the Premises at all times and without advance notice for the purpose of responding to an actual or apparent emergency. Landlord may for the purpose of supplying scheduled janitorial services and evaluating janitorial services at any time and from time to time enter the Premises by means of a master key without liability to Tenant and without affecting this Lease. If, during the last 60 days of the term hereof, Tenant shall have removed substantially all of its property from the Premises, Landlord may immediately enter and alter, renovate and redecorate the Premises without elimination or abatement of rent or incurring liability to Tenant for any compensation. (b) Tenant shall be entitled to one Building access card for each employee and two (2) sets of standard lockset keys to the Premises. In the event Tenant needs any additional access cards or keys, such keys must be requested from Landlord. Tenant shall pay to Landlord the actual cost of making such additional access cards and keys. 12. Mechanic's Liens: Tenant shall pay or cause to be paid all costs for ---------------- work done by or on behalf of Tenant or caused to be done by or on behalf of Tenant on the Premises of a character which will or may result in liens against Landlord's interest in the Premises, Building or Building Complex and Tenant will keep the Premises, Building and Building Complex free and clear of all mechanic's liens and other liens on account of work done for or on behalf of Tenant or persons claiming under Tenant. Tenant hereby agrees to indemnify, defend and save Landlord harmless of and from all liability, loss, damages, costs or expenses, including attorneys' fees, incurred in connection with any claims of any nature whatsoever for work performed for, or materials or supplies furnished to Tenant, including lien claims of laborers, materialmen or others. Should any such liens be filed or recorded against the Premises, Building or Building Complex with respect to work done for or materials supplied to or on behalf of Tenant or should any action affecting the title thereto be commenced, Tenant shall cause such liens to be released of record within twenty (20) days after notice thereof. If Tenant desires to contest any such claim of lien, Tenant shall nonetheless cause such lien to be released of record by the posting of adequate security within said five (5) day period with a court of competent jurisdiction as may be provided by Colorado's mechanic lien statutes. If Tenant shall be in default in paying any charge for which such a mechanic's lien or suit to foreclose such a lien has been recorded or filed and shall not have caused the lien to be released as aforesaid, Landlord may (but without being required to do so) pay such lien or claim and any costs associated therewith, and the amount so paid, together with reasonable attorneys' fees incurred in connection therewith, shall be immediately due from Tenant to Landlord as Additional Rent. -13- 13. Damage to Property; Injury to Persons: ------------------------------------- (a) Tenant, as a material part of the consideration to be rendered to Landlord under this Lease, hereby waives all claims of liability that Tenant or Tenant's legal representatives, successors or assigns may have against Landlord, and Tenant hereby indemnifies and agrees to hold Landlord harmless from any and all claims of liability for any injury or damage to any person or property whatsoever: (I) occurring in, on or about the Premises or any part thereof, except to the extent the same arises out of the negligence of the Landlord, its agents, contractors or employees; and (2) occurring in, on or about the Building Complex, to the extent such injury or damage is caused in part or in whole by the act, neglect, fault or omission of Tenant, its agents, contractors, employees, licensees or invitees. Tenant further agrees to indemnify and to hold Landlord harmless from and against any and all claims arising from any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease, or arising from any act or negligence of Tenant, or any of its agents, contractors, employees, licensees or invitees. Such indemnities shall include by way of example, but not limitation, all costs, reasonable attorneys' fees, expenses and liabilities incurred in or about any such claim, action or proceeding. (b) Landlord shall not be liable to Tenant for any damage by or from any act or negligence of any co-tenant or other occupant of the Building Complex, or by any owner or occupant of adjoining or contiguous property. Landlord shall not be liable for any injury or damage to persons or property resulting in whole or in part from the criminal activities of others. To the extent not covered by normal and customary fire and extended coverage insurance maintained by Landlord or by prudent building owners in the Denver, Colorado area, and not otherwise caused by the negligence of Landlord, its agents, contractors or employees, Tenant agrees to pay for all damage to the Building Complex, as well as all damage to persons or property of other tenants or occupants thereof, caused by the misuse, neglect, act, omission or negligence of Tenant or any of its agents, contractors, employees, licensees or invitees. (c) Neither Landlord nor its agents or employees shall be liable for any damage to property entrusted to Landlord, its agents or employees, or employees of the building manager, if any, nor for the loss or damage to any property occurring by theft or otherwise, nor for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water of rain which may leak from any part of the Building Complex or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or from any other place or resulting from dampness, or any other cause whatsoever; provided, however, nothing contained herein shall be construed to relieve Landlord from liability for any personal injury resulting from its negligence or willful misconduct or its breach of its obligations under this Lease. Neither Landlord nor its agents or employees shall be liable for interference with the lights, view or other incorporeal hereditament. Tenant shall give prompt notice to Landlord in case of fire or accidents in or about the Premises or the Building or of defects therein or in the fixtures or equipment located therein. (d) In case any claim, demand, action or proceeding is made or brought against Landlord, its agents or employees, by reason of any obligation on Tenant's part to be performed under the terms of this Lease, or arising from any act or negligence of Tenant, its agents or employees, or which gives rise to Tenant's obligation to indemnify Landlord, Tenant shall be responsible for all costs and expenses, including but not limited to reasonable attorneys' fees incurred in defending or prosecution of the same, as applicable. 14. Insurance: --------- (a) Landlord agrees to secure and maintain the following insurance during the term of this Lease and any extension hereof: commercial general public liability insurance against claims for bodily injury, personal injury and property damage in or about the Premises, the Building and the Building Complex (excluding Tenant's Property), such insurance to be in amounts sufficient to provide reasonable protection for the Building Complex. Landlord shall also secure and maintain "all risk" property insurance on the Building and Building Complex. Such insurance may expressly exclude property paid for by tenants or -14- paid for by Landlord for which tenants have Landlord located in or in, or constituting a part of the Building or the Building Complex. All such insurance shall be procured from a responsible insurance company or companies authorized to do business in Colorado and may be obtained by Landlord by endorsement on its blanket insurance policies. (b) Tenant (with respect to the Premises, the Building and the Building Complex) shall secure and maintain, at its own expense, a policy or policies of commercial general liability insurance with the premiums thereon fully paid in advance, protecting Tenant and naming Landlord, its property manager and their respective agents as additional insured against claims for bodily injury, personal injury, advertising injury and property damaged based upon, involving or arising out of the Tenant's use, occupancy or maintenance of the Premises, the Building and the Building Complex. Such insurance shall afford a combined single limit of not less than One Million Dollars ($1,000,000) per occurrence and aggregate of Two Million Dollars ($2,000,000). Any general aggregate shall apply on a per location basis. The coverage required to be carried shall include blanket contractual liability, personal injury liability (libel, slander, false arrest and wrongful eviction), and broad form property damage liability and the policy shall contain an exception to any pollution exclusion which insures damage or injury arising out of heat, smoke or fumes from a hostile fire. Such insurance shall be written on an occurrence basis and contain a standard separation of insureds provision. Tenant shall secure and maintain at its expense business auto liability insurance which insures against bodily injury and property damage claims arising out of the ownership, maintenance and use of any auto with a minimum combined single limit per accident of One Million Dollars ($1,000,000). In addition, Tenant shall secure and maintain workers' compensation and employer's liability insurance with limits of Five Hundred Thousand Dollars ($500,000) per accident, Five Hundred Thousand Dollars ($500,000) per employee for bodily injury by disease with a Five Hundred Thousand Dollar ($500,000) policy limit for bodily injury by disease, and all such other insurance as may be required by applicable law. Tenant shall provide Landlord with a certificate evidencing such insurance coverage. The certificate shall indicate that the insurance provided specifically recognizes the liability assumed by Tenant under this Lease and that Tenant's insurance is primary to and not contributory with any other insurance available to Landlord, whose insurance shall be considered excess insurance only. Not more frequently than every three years, if, in the opinion of any mortgagee of Landlord or of the insurance broker retained by Landlord, the amount of liability insurance coverage at that time is not adequate, then Tenant shall increase its liability insurance coverage as required by either any mortgagee of Landlord or Landlord's insurance broker. (c) Tenant shall secure and maintain, at Tenant's expense, special form fire and extended coverage insurance on all of Tenant's fixtures and personal property in the Premises and on any improvements or alterations, additions or improvements made by Tenant, upon the Premises, in an amount determined by Tenant (or such other form of property insurance then available in the insurance market that is most comparable or equivalent to "all risk"). Tenant shall provide Landlord with certificates of all such insurance. The property insurance certificate shall confirm that the waiver of subrogation required to be obtained pursuant to Paragraph 14(g) is permitted by the insurer. Tenant shall, at least thirty (30) days prior to the expiration of any policy of insurance required to be maintained by Tenant under this Lease, furnish Landlord with an "insurance binder" or other satisfactory evidence of renewal thereof. (d) All policies required to be carried by Tenant hereunder shall be issued by and binding upon an insurance company licensed to do business in the State of Colorado with a rating of at least A- :VIII, or such other rating as may be required by a lender having a lien on the Building as set forth in the then most current issue of "Best's Insurance Reports." Tenant shall not do or permit anything to be done that would invalidate the insurance policies referred to in this Paragraph 14. Evidence of insurance provided to Landlord shall include an endorsement showing that Landlord and its representatives are included as additional insureds on general liability insurance, and an endorsement whereby the insurer agrees not to cancel, non-renew or reduce coverage of the policy without at least thirty (30) days prior written notice to Landlord and its representatives. -15- (e) In the event that Tenant falls to provide evidence of insurance required to be provided by Tenant hereunder, prior to commencement of the Term, and thereafter during the Term, within ten (10) days following Landlord's request therefor, and thirty (30) days prior to the expiration date of any such coverage, Landlord shall be authorized (but not required) to procure such coverage in the amounts stated with all costs thereof (plus a fifteen percent [15%] administrative fee) to be chargeable to Tenant and payable upon written invoice therefor. (f) The limits of insurance required by this Lease, or as carried by Tenant, shall not limit the liability of Tenant nor relieve Tenant of any obligation hereunder. (g) Anything in this Lease to the contrary notwithstanding, Landlord and Tenant each waives all rights of recovery, claim, action or cause of action against the other, its agents (including partners, both general and limited), trustees, officers, directors, and employees, for any loss or damage that may occur to the Premises, or any improvements thereto, or the Building or any personal property of such party therein, by reason of any cause required to be insured against under this Lease, regardless of cause or origin, including negligence of the other party hereto and each party agrees to look solely to its insurance coverage in the event of such loss; and each party covenants that, to the fullest extent permitted by law, no insurer shall hold any right to subrogation against such other party. Tenant shall advise its insurers of the foregoing and such waiver shall be a part of each Tenant policy maintained by which applies to the Premises, any part of the Building or Tenant's use and occupancy of any part thereof. (h) Any Building employee to whom property shall be entrusted by or on behalf of Tenant shall be deemed to be acting as Tenant's agent with respect to such property and neither Landlord, the Building manager, if any, nor their respective agents shall be liable for any damage to the property of Tenant or others entrusted to employees of the Building, nor for the loss of or damage to any such property by theft or otherwise and Tenant shall indemnify Landlord of and from any loss or damages, costs or actions Landlord may suffer or incur as a result of such loss or damage to Property. 15. Damage or Destruction to Building: --------------------------------- (a) In the event that the Premises or the Building are damaged by fire or other insured casualty and the insurance proceeds have been made available therefor by the holder or holders of any mortgages or deeds of trust covering the Building, the damage shall be repaired by and at the expense of Landlord to the extent of such insurance proceeds available therefor cover at least 95% of the cost of repair, provided such repairs and restoration can, in Landlord's reasonable opinion, be made within one hundred eighty (180) days after the occurrence of such damage without the payment of overtime or other premiums, and until such repairs and restoration are completed, the Base Rent and Tenant's Operating Expense Differential shall be abated in proportion to the part of the Premises which is unusable by Tenant in the conduct of its business, as may be reasonably determined by Landlord and Tenant, (but there shall be no abatement of Base Rent by reason of any portion of the Premises being unusable for a period equal to one day or less). Landlord agrees to notify Tenant within sixty (60) days after such casualty if it estimates that it will be unable to repair and restore the Premises within said one hundred eighty (180) day period. Such notice shall set forth the approximate length of time Landlord estimates will be required to complete such repairs and restoration. Notwithstanding anything to the contrary contained herein, if Landlord cannot or estimates it cannot make such repairs and restoration within said one hundred eighty (180) day period, then Tenant may, by written notice to Landlord cancel this Lease, provided such notice is given to Landlord within fifteen (15) days after Landlord notifies Tenant of the estimated time for completion of such repairs and restoration. In any event, if Landlord is unable to complete the repairs and restoration within two hundred ten (210) days after the casualty, Tenant may terminate this Lease by giving Landlord written notice of cancellation within fifteen (15) days after the expiration of the two hundred ten (210) day period. Except as provided in this Paragraph 15, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business or property arising from the making of any such repairs, alterations or improvements in or to the Building, Premises or fixtures, appurtenances and equipment. Tenant understands that Landlord will not carry insurance of any kind on Tenant's property, -16- including furniture and furnishings, or on any fixtures or equipment removable by Tenant under the provisions of this Lease, or any improvement installed in the Premises by or on behalf of Tenant, and that Landlord shall not be obligated to repair any damage thereto or replace the same. (b) In case the Building throughout shall be so injured or damaged, whether by fire or otherwise (though the Premises may not be affected, or if affected, can be repaired within said 180 days) that Landlord, within sixty (60) days after the happening of such injury, shall decide not to reconstruct or rebuild the Building, then notwithstanding anything contained herein to the contrary, upon notice in writing to that effect given by Landlord to Tenant within said sixty (60) days, this Lease shall terminate from the date of delivery of said written notice, and both parties hereto shall be released and discharged from all further obligations hereunder (except those obligations which expressly survive termination of the Lease term) and Tenant shall have a reasonable time thereafter to remove its property from the Premises. If Landlord terminates the Lease in accordance with this Section, Tenant shall pay the rent, properly apportioned up to date of such casualty. A total destruction of the Building shall automatically terminate this Lease. 16. Condemnation: ------------ (a) If the whole of the Premises or so much thereof as to render the balance unusable by Tenant for the proper conduct of its business shall be taken under power of eminent domain or transferred under threat thereof, then this Lease, at the option of either Landlord or Tenant exercised by either party giving notice to the other of such election within thirty (30) days after such conveyance or taking possession, whichever is earlier, shall forthwith cease and terminate and the rent shall be duly apportioned as of the date of such taking or conveyance. No award for any partial or entire taking shall be apportioned and Tenant hereby assigns to Landlord any award which may be made in such taking or condemnation, together with any and all rights of Tenant now or hereafter arising in or to the same or any part thereof. Notwithstanding the foregoing, Tenant shall be entitled to seek, directly from the condemning authority, an award for its removable trade fixtures, equipment and personal property and relocation expenses, if any, to the extent Landlord's award is not diminished. In the event of a partial taking which does not result in a termination of this Lease, Base Rent and Tenant's Pro Rata Share of the Operating Expense Differential shall be reduced in proportion to the reduction in the size of the Premises so taken and this Lease shall be modified accordingly. Promptly after obtaining knowledge thereof, Landlord or Tenant, as the case my be, shall notify the other of any pending or threatened condemnation or taking affecting the Premises or Building. (b) If during the Term part of the Building is so taken or purchased as set out in Section 16(a), then: (1) If in the reasonable opinion of Landlord, substantial alteration or reconstruction of the Building is necessary or desirable as a result thereof, whether or not the Premises are or may be affected, Landlord shall have the right to terminate this Lease by giving the Tenant at least thirty (30) days' written notice of such termination; and (2) If more than one-third (1/3) of the number of square feet in the Premises is included in such taking or purchase and such reduction in square footage of the Premises renders the Premises unusable, in the reasonable estimation of Landlord and Tenant, for the permitted use hereunder as conducted by Tenant, Landlord and Tenant shall each have the right to terminate this Lease by giving the other at least thirty (30) days' written notice thereof. (3) If either party exercises its right to termination hereunder, this Lease shall terminate on the date stated in the notice; provided, however, that no termination pursuant to notice hereunder may occur later than sixty (60) days after the date of such taking. -17- 17. Assignment and Subletting: ------------------------- (a) Tenant shall not voluntarily, by operation of law, or otherwise, assign, transfer, sublease or encumber this Lease or any interest herein or part with possession of all or any part of the Premises (any and all of which shall hereinafter be referred to as "Transfer") without Landlord's prior written consent, which consent shall not be unreasonably withheld. Landlord's consent to any Transfer and resulting subletting or assignment shall not relieve Tenant of its primary obligations hereunder, including the obligation for payment of all rents due hereunder. Any Transfer without the prior written consent of Landlord shall constitute a default hereunder and shall be void and shall confer no rights upon any third party, notwithstanding Landlord's acceptance of rent payments from any purported transferee. Landlord's consent shall not be considered unreasonably withheld if; among other things: (1) the proposed transferee's financial responsibility does not meet the same criteria Landlord uses to select other Building tenants; (2) the proposed transferee's business is not suitable for the Building considering the business of the other tenants and the Building's prestige or would result in a violation of an exclusive right granted to another tenant in the Building; (3) the proposed use is different than the permitted use; (4) the base rent and additional rent to be paid by the proposed transferee for the Premises is less than 85% of the current market rate for comparable premises in the Building; (5) if the Building is less than 90% leased at the time of the proposed Transfer and Landlord has comparably sized space available for lease in the Building; (6) the proposed transferee would impose additional obligations on Landlord or result in an excessive amount of foot traffic to and from the Premises or an excessive amount of people per square foot within the Premises; (7) Tenant is in default; or (8) any portion of the Building or Premises would become subject to additional or different governmental laws or regulations as a consequence of the proposed Transfer and/or the proposed transferee's use and occupancy of the Premises. Tenant acknowledges that the foregoing is not intended as an exhaustive list of the reasons for which Landlord may reasonably withhold its consent to a proposed Transfer. (b) In the event of any Transfer of this Lease (or proposed Transfer, as the case may be) or all or any part of the Premises by Tenant, Landlord in addition to any rights contained herein, shall have the following options at its discretion; (1) to collect and receive 50% of the excess of rent and other cash consolidation due to Tenant from such sublessee or assignee over the Base Rent due hereunder; (2) to give Tenant written notice of Landlord's intention to terminate this Lease as to that part of the Premises which is the subject of the proposed Transfer, on the date such notice is given or on any later date specified therein, whereupon, on the date specified in such notice, Tenant's right to possession of the part of the Premises which is the subject of the proposed Transfer shall cease and this Lease shall thereupon be terminated, except as to any uncompleted obligations of Tenant; (3) to re-enter and take possession of the Premises or the part thereof subject to such Transfer, and to enforce all rights of Tenant, and receive and collect all rents and other payments due to Tenant, in accordance with such sublet or assignment of the Premises, or any part thereof, as if Landlord was the sublessor or assignor, and to do whatever Tenant is permitted to do pursuant to the terms of such sublease or assignment; or (4) Landlord, at its option and from time to time, may collect the rent from the subtenant or assignee, and apply the net amount collected to the rent herein reserved. Notwithstanding the foregoing, Tenant may, at any time within five (5) business days after the Landlord exercises any of its rights pursuant to this subparagraph 17(b), retract its request to Transfer by giving written notice to Landlord to that effect, in which case the Transfer and the Landlord's exercise of its rights pursuant to subparagraph 17(b) shall be of no further force or effect. (c) The sale of all or a majority of the stock of Tenant to one investor or a related group of investors, if Tenant is a corporation, or the sale of all or a majority of the ownership interest in Tenant, if Tenant is a partnership, or a limited liability entity, or the sale of all or substantially all of the assets of Tenant shall constitute a Transfer for purpose of this Lease. Notwithstanding the foregoing sentence Tenant may assign its entire interest under this Lease or sublet the Premises to a wholly-owned corporation, partnership, or other legal entity or controlled subsidiary or parent of Tenant or to any successor to Tenant by purchase including, without limitation, the purchase of the stock of Tenant, merger, consolidation or reorganization (hereinafter collectively referred to as "Permitted Transfer") without the consent of Landlord, provided: (i) Tenant is not in default under this Lease; (ii) if such proposed transferee -18- is a successor to Tenant by purchase, merger, consolidation or reorganization, the continuing or surviving entity shall own substantially all of the asset of Tenant and the net worth of the surviving entity exclusive of good will shall equal or exceed the net worth of the Tenant exclusive of goodwill at the date of the execution of this Lease, and (iii) in no event shall any Transfer release or relieve Tenant from any of its obligations under this Lease. (d) At the time of making a request for Landlord's consent to a Transfer and not less than fifteen (15) days prior to the proposed effective date thereof, Tenant shall provide to Landlord such information as Landlord, its accountants and attorneys, shall reasonably require with respect to such proposed Transfer, including but not limited to name and address of the proposed transferee, description of business operations, financial information, rental rate and material terms of the proposed Transfer and certificate of corporate authority and good standing or partnership certificate, or similar certificate for a limited liability entity, as applicable. Tenant shall reimburse Landlord for its reasonable attorneys' and accountants' fees incurred in the review of any proposed Transfer. (e) Consent of Landlord to a Transfer shall not relieve Tenant from seeking consent to any subsequent Transfers. (f) Subletting or assignments by subtenants or assignees shall not be permitted under any circumstances, nor shall Tenant be permitted to further assign this Lease or sublet all or any part of the Premises during any period of time that all or any portion of the Base Rent is abated or in default. Except for a Transfer referred to in subparagraph 17(c), no option to renew or extend the term of this Lease or to lease additional space, if any, shall be exercisable by any subtenant or assignee. (g) All subleases or assignments shall be in writing and a copy thereof provided to Landlord within ten (10) days of its effective date. All subleases shall further contain an express provision that in the event of any default by Tenant under this Lease and upon notice thereof to the subtenant from Landlord, all rentals payable by the subtenant shall be paid directly to Landlord, for the Tenant's account, until subsequent notice from Landlord that such default has been cured. Notwithstanding the foregoing, receipt by Landlord of rent directly from the subtenant shall not be considered a waiver of the default on the part of Tenant, nor an acceptance of such subtenant. (h) No sublease or assignment shall be effective until approved in writing by Landlord. (i) Tenant shall pay to Landlord a non-refundable processing fee in the amount of five hundred and no/l00 dollars ($500.00) plus reasonable attorney's fees for preparation and review of the documentation in connection with each proposed Transfer. 18. Estoppel Certificate: Tenant further agrees at any time and from time to time on or before fifteen (15) days after written request by Landlord, to execute, acknowledge and deliver to Landlord an estoppel certificate certifying (to the extent it believes the same to be true) that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified, and stating the modifications), that there have been no defaults thereunder by Landlord or Tenant (or if there have been defaults, setting forth the nature thereof), the date to which the rent and other charges have been paid, if any, Tenant claims no present charge, lien, claim or offset against rent (or specifying the nature of any such claims), and such other matters as may be reasonably required by Landlord, Landlord's mortgagee, or any potential purchaser of the Building, it being intended that any such statement delivered pursuant to this Paragraph may be relied upon by any prospective purchaser of all or any portion of Landlord's interest herein, or a holder of any mortgage or deed of trust encumbering any portion of the Building Complex. Tenant's failure to deliver such statement within such time shall be a default under this Lease. Notwithstanding the foregoing, in the event that Tenant does not execute the statement required by this paragraph, Tenant hereby grants to Landlord a power of attorney coupled with an interest to act as Tenant's attorney in fact for the purpose of executing such statement or statements required by this Paragraph. -19- (a) The following events (herein referred to as an "event of default") shall constitute a default by Tenant hereunder; (1) Tenant shall fail to pay when due any installment of Base Rent, Additional Rent or any other amounts payable hereunder; provided that Tenant shall be entitled to one (1) five (5) day grace period during every calendar year during which period if the Tenant pays the amounts due it shall not be in default and no late charges shall be assessed. (2) Tenant shall fail to perform any of the other non- monetary agreements, terms, covenants or conditions hereof on Tenant's part to be performed, and such nonperformance shall continue for a period of fifteen (15) days after notice thereof by Landlord to Tenant; provided, however, that if Tenant cannot reasonably cure such nonperformance within fifteen (15) days, Tenant shall not be in default if it commences cure within said fifteen (15) days and diligently and continuously pursues the same to completion, with completion occurring in all instances within seventy-five (75) days; (3) This Lease or the estate of Tenant hereunder shall be transferred to or shall pass to or devolve upon any other person or party in violation of the provisions of this Lease; (4) This Lease or the Premises or any part thereof shall be taken upon execution or by other process of law directed against Tenant, or shall be taken upon or subject to any attachment at the instance of any creditor or claimant against Tenant, and said attachment shall not be discharged or disposed of within fifteen (15) days after the levy thereof; (5) Tenant shall file a petition in bankruptcy or insolvency or for reorganization or arrangement under the bankruptcy laws of he United States or under any insolvency act of any state, or shall voluntarily take advantage of any such law or act by answer or otherwise, or shall be dissolved or shall make an assignment for the benefit of creditors; (6) Involuntary proceeding under any such bankruptcy law or insolvency act or for the dissolution of Tenant shall be instituted against Tenant, or a receiver or trustee shall be appointed of all or substantially all of the property of Tenant, and such proceedings shall not be dismissed or such receivership or trusteeship vacated within sixty (60) days after such institution or appointment; (7) Tenant shall fail to take possession of the Premises within thirty (30) days of the Commencement Date; (8) Tenant shall abandon or permanently vacate the Premises for ten (10) consecutive days; (9) Tenant shall fail to obtain a release of any mechanic's lien or post a bond, as required herein within twenty (20) days after notice of the filing of the notice of intent to lien; (10) A guarantor of this Lease, if any, or a general partner of Tenant (if Tenant is a general or limited partnership), becomes a debtor under any state or federal bankruptcy proceedings, or becomes subject to receivership or trusteeship proceedings, whether voluntary or involuntary; except in the case of a guarantor, Tenant shall not be in default if a substitute guarantor, with acceptable creditworthiness and financial abilities in light of the responsibilities of Tenant hereunder, and otherwise acceptable to Landlord, is provided to Landlord within fifteen (15) days; and -20- (11) All or any part of the personal property of Tenant is seized, subject to levy or attachment, or similarly repossessed or removed from the Premises, or a receiver is appointed for all or substantially all of Tenant's assets. (b) Upon the occurrence of an event of default, Landlord shall have the right, at its election, then or at any time thereafter and while any such event of default shall continue, to pursue any one or more of the following remedies without notice or demand whatsoever: (1) Except as otherwise provided in C.R.S. ss. 13-40- 104(l)(e) and (e.5), as amended, give Tenant written notice of Landlord's intent to terminate this Lease on the date of such notice or on any later date as may be specified herein, whereupon Tenant's right to possession of the Premises shall cease and this Lease, except as to Tenant's liability, shall be terminated. In the event this Lease is terminated in accordance with the provisions of this Paragraph, Tenant shall remain liable to Landlord for damages in an amount equal to the Base Rent, Additional Rent and other sums which would have been owing by Tenant hereunder for the balance of the Term had this Lease not been terminated, less the net proceeds, if any, of any reletting of the Premises by Landlord subsequent to such termination, deducting from such proceeds all Landlord's expenses including, without limitations, all repossession costs, brokerage commissions, legal expenses, attorneys' fees, expenses of employees, alteration and repair costs and expenses of preparation for such reletting. Landlord shall be entitled to collect such damages from Tenant monthly on the days on which the Base Rent and other charges would have been payable hereunder if this Lease had not been terminated. Alternatively, at the option of the Landlord, in the event this Lease is so terminated, Landlord shall be entitled to recover forthwith against Tenant as damages for loss of the bargain and not as a penalty an aggregate sum, which at the time of such termination of this Lease, represents the excess, if any, of the aggregate of the Base Rent, Additional Rent and all other charges payable by Tenant hereunder that would have accrued for the balance of the Term over the aggregate fair market rental value of the Premises (such rental value to be computed on the basis of Tenant paying not only a Base Rent and Additional Rent to Landlord for the use and occupation of the Premises, but also such other charges as are required to be paid by Tenant under the terms of this Lease) for the balance of such Term, both discounted to present worth at the rate of four percent (4%) per annum. (2) Reenter and take possession of the Premises or any part thereof, and repossess the same as of Landlord's former estate and expel Tenant and those claiming through and under Tenant, and remove the effects of both or either, using such force for such purposes as may be necessary, without being liable for prosecution thereof, without being deemed guilty of any manner of trespass, and without prejudice to any remedies for arrears of Base Rent, Additional Rent and other charges payable or preceding breach of covenants or conditions. Should Landlord elect to reenter as provided in this subparagraph, or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provided for by law, Landlord from time to time, without terminating this Lease, relet the Premises or any part thereof in Landlord's or Tenant's name, but for the account of Tenant, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term of this Lease) and on such conditions and upon other terms (which may include concessions of free Base Rent and alteration and repair of the Premises) as Landlord, in its sole discretion, may determine, and Landlord may collect and receive the Base Rents therefor. Landlord shall in no way be responsible or liable for any failure to relet the Premises, or any part thereof, or for any failure to collect any Base Rent due upon such reletting. No such reentry or taking possession of the Premises by Landlord shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such intention is given to Tenant. No notice from Landlord hereunder or under a forcible entry and detainer statute or similar law shall constitute an election by Landlord to terminate this Lease unless such notice specifically so states. Landlord reserves the right following any such reentry -21- and/or reletting to exercise its right to terminate this Lease by giving Tenant such written notice, in which event the Lease will terminate as specified in said notice. In the event that Landlord does not elect to terminate this Lease but takes possession as provided for in this subparagraph, Tenant shall pay to Landlord (i) the Base Rent, Additional Rent and other charges as herein provided which would be payable hereunder if such repossession had not occurred, less (ii) the net proceeds, if any, of any reletting of the Premises after deducting all Landlord's reasonable expenses including, without limitation, all repossession costs, brokerage commissions, legal expenses, attorneys' fees, expenses of employees, alteration and repair costs and expense of preparation for such reletting. Tenant shall pay such Base Rent, Additional Rent and other sums to Landlord monthly on the days on which the Base Rent would have been payable hereunder if possession had not been retaken. (c) No failure by Landlord to insist upon the strict performance of any agreement, term, covenant or condition hereof or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach of such agreement, term, covenant or condition. No agreement, term, covenant or condition hereof to be performed or complied with by either Landlord or Tenant, and no breach thereof, shall be waived, altered or modified except by written instrument executed by the other party. No waiver of any breach shall affect or alter this Lease, but each and every agreement, term, covenant and condition hereof shall continue in full force and effect with respect to any other then existing or subsequent breach thereof. Notwithstanding any unilateral termination of this Lease, this Lease shall continue in force and effect as to any provisions hereof which require observance or performance of Landlord or Tenant subsequent to termination. (d) Any rents or other amounts owing to Landlord hereunder which are not paid within ten (10) days of the date they are due, shall thereafter bear interest from the due date at the rate of four percent (4%) over the prime rate of interest charged by Wells Fargo Bank of Denver (or its successor) ("Interest Rate") until paid. Similarly, any amounts paid by Landlord to cure any default of Tenant or to perform any obligation of Tenant, shall, if not repaid by the Tenant within five (5) days of demand by Landlord, thereafter bear interest from the date paid by Landlord at the Interest Rate until paid. In addition to the foregoing, Tenant shall pay to Landlord whenever any Base Rent, Additional Rent or any other sums due hereunder remain unpaid more than ten (10) days after the due date thereof, a late charge equal to ten percent (10%) of the amount due. Further, in the event of default by Tenant, in addition to all other rights and remedies, Landlord shall be entitled to receive from Tenant all sums, the payment of which may previously have been waived or abated by Landlord, or which may have been paid by Landlord pursuant to any agreement to grant Tenant a rental abatement or other monetary inducement or concession, including but not limited to any tenant finish allowance, moving allowance, and leasing commissions, together with interest thereon from the date or dates such amounts were paid by Landlord or would have been due from Tenant but for the abatement, at the Interest Rate, until paid; provided, that Landlord may only recover for such amounts to the extent they have not otherwise been amortized over the Term of the Lease prior to the default or as part of any future Base Rent awarded to Landlord. It is understood and agreed that such concession or abatement was made on the condition and basis that Tenant fully perform all obligations and covenants under the Lease for the entire term. (e) Each right and remedy provided for in this Lease shall be cumulative and shall be in addition to every other right or remedy provided for in this Lease now or hereafter existing at law or in equity or by statute or otherwise, including, but not limited to, suits for injunctive or declaratory relief and specific performance. The exercise or commencement of the exercise by Landlord of any one or more of the rights or remedies provided for in this Lease now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or subsequent exercise by Landlord of any or all other rights or remedies provided for in this Lease, or now or hereafter existing at law or in equity or by statue or otherwise. All costs incurred by Landlord in connection with collecting any amounts and damages owing by Tenant pursuant to the provisions of this Lease or to enforce any provision of this Lease, including by -22- way of example, but not limitation, reasonable attorneys' fees from the date any such matter is turned over to an attorney, shall also be recoverable by Landlord from Tenant. Landlord and Tenant agree that any action or proceeding arising out of this Lease shall be heard by a court sitting without a jury and thus hereby waive all rights to a trial by jury. (f) The Tenant and Landlord each hereby expressly, irrevocably, fully and forever release, waive and relinquish any and all right to trial by jury and all right to receive punitive, exemplary and consequential damages from the other (or any past, present or future director, officer, member, partner, employee, agent, representative, or advisor of the other) in any claim, demand, action, suit, proceeding or cause of action in which the Tenant and Landlord are parties, which in any way (directly or indirectly) arises out of, results from, or relates to, any of the following, in each case whether now existing or hereafter arising and whether based on contract or tort or any other legal basis: this Lease; any past, present or future act, omission, conduct or activity with respect to this Lease; any transactions, event or occurrence contemplated by this Lease; the performance of any obligation or the exercise of any right under this Lease; or the enforcement of this Lease. The Tenant and Landlord each agree that this Agreement constitutes written consent that trial by jury shall be waived in any such claim, demand, action, suit, proceeding or other cause of action and agree that the Tenant and Landlord each shall have the right at any time to file this Lease with the clerk or judge of any court in which any such claim, demand, action, suit, proceeding or other cause of action may be pending as written consent to waiver of trial by jury. /s/ /s/ ---------------- --------------- Landlord Tenant 20. Landlord's Lien: Intentionally Deleted --------------- 21. Uniform Commercial Code: Intentionally Deleted ----------------------- 22. Removal of Tenant's Property: All movable furniture and personal ---------------------------- effects of Tenant not removed from the Premises upon the vacation or abandonment thereof or upon the termination of this Lease for any cause whatsoever shall conclusively be deemed to have been abandoned and may be appropriated, sold, stored, destroyed or otherwise disposed of by Landlord without notice to Tenant and without obligation to account therefor, and Tenant shall reimburse Landlord for all expenses incurred in connection with the disposition of such property. 23. Holdover: Should Tenant, without Landlord's consent, holdover -------- after the termination of this Lease and continue to pay rent, Tenant shall become a tenant from month to month only upon each and all of the terms herein provided as may be applicable to such month to month tenancy and any such holdover shall not constitute an extension of this Lease. During such holdover, without Landlord's consent, Tenant shall pay monthly Base Rent equal to two hundred percent (200%) of the Base Rent and Additional Rent due for the last month of the Term of the Lease, plus the other monetary charges as provided herein. In the event of Tenant holdover after the termination of this Lease with Landlord's consent all other terms of this Paragraph 23 shall apply, however, Tenant shall pay Landlord monthly Base Rent in the amount agreed upon by Landlord and Tenant or, in the absence of an agreement an amount equal to one hundred fifty percent (150%) of the Base Rent and Additional Rent due for the last month of the Term of the Lease. Such tenancy (whether with or without Landlord's consent) shall continue until terminated by Landlord, as provided by law, or until Tenant shall have given to Landlord at least thirty (30) days written notice prior to the last day of the calendar month intended as the date of termination of such month to month tenancy. 24. Common Areas: Except as otherwise specifically provided herein, ------------ all access roads, courtyards, and other areas, facilities or improvements furnished by Landlord are for the general and nonexclusive use in common of all tenants of the Building, and those persons invited upon the land upon which the Building is situated and shall be subject to the exclusive control and management of Landlord, and Landlord shall have the right, without obligation to establish, modify and enforce such rules and regulations, which the Landlord may deem reasonable and/or necessary. -23- 25. Surrender and Notice: Upon the expiration or earlier termination -------------------- of this Lease, Tenant shall promptly quit and surrender to Landlord the Premises broom clean, in good order and condition, ordinary wear and tear and loss by fire or other casualty excepted, and Tenant shall remove all of its movable furniture and other effects and such alterations, additions and improvements as Landlord shall require Tenant to remove pursuant to Paragraph 10 hereof. In the event Tenant fails to so vacate the Premises on a timely basis as required, Tenant shall be responsible to Landlord for all costs and damages, including but not limited to any amounts required to be paid to third parties who were to have occupied the Premises, incurred by Landlord as a result of such failure, plus interest thereon at the Interest Rate on all amounts not paid by Tenant within five (5) days of demand, until paid in full. 26. Sales; Conveyance and Assignment: Nothing in this Lease shall -------------------------------- restrict the right of Landlord to sell, convey, assign or otherwise deal with its interest in the Building subject only to the rights of Tenant under this Lease. In the event Landlord conveys its interest in the Building to an affiliate of Landlord, Tenant shall, if requested by Landlord, execute an Estoppel Certificate for the benefit of the new owner. 27. Subordination; Non-Disturbance and Attornment: --------------------------------------------- (a) This Lease is and shall be subject and subordinate in all respects to any and all mortgages and deeds of trust now or hereafter placed on the Building, the Building Complex or the land on which it is situated, and to all renewals, modifications, consolidations, replacements and extensions thereof. (b) Subject to subparagraph (c) and receipt from the Landlord's mortgagee of the non- disturbance agreement provided for in subparagraph 27(f), if the interest of Landlord is transferred to any person (herein called ("Purchaser") by reason of foreclosure or other proceedings for enforcement of any mortgage or deed of trust, or by delivery of a deed in lieu of such foreclosure or other proceedings, Tenant shall immediately and automatically attorn to Purchaser. (c) No attornment by Tenant to the holder of any mortgage or deed of trust which would be subordinate to this Lease but for the provisions of subparagraph (a) shall be effective unless Purchaser delivers to Tenant written undertaking that this Lease and Tenant's rights hereunder shall continue undisturbed while Tenant is not in default, despite such enforcement proceedings and transfer. (d) Upon attornment under subparagraph (b), this Lease shall continue in full force and effect as a direct Lease between Purchaser and Tenant, upon all of the same terms, conditions and covenants as are set forth in this Lease except that, after such attornment, Purchaser shall not be liable for any act of omission of any previous Landlord. (e) The subordination and attornment provisions of this Paragraph 27 shall be self-operating and except as set out in subparagraph (c), no further instrument shall be required. Nevertheless Tenant, on request by and without cost to Landlord or any successor in interest, shall execute and deliver any and all reasonable instruments further evidencing such subordination and (where applicable hereunder) attornment. Tenant hereby irrevocably appoints Landlord as attorney-in-fact of Tenant to execute, delivery and record any such documents and instruments in the name and on behalf of Tenant if Tenant fails to do so. (f) Landlord agrees that substantially concurrent with the execution of this Lease by both Landlord and Tenant, that it will deliver to Tenant a non-disturbance agreement from Landlord's mortgagee, which non- disturbance agreement shall be on the mortgagee's standard form. 28. Payments After Termination: No payments of money by Tenant to -------------------------- Landlord after the termination of this Lease, in any manner, or after giving of any notice (other than a demand for payment of money) by Landlord to Tenant, shall reinstate, continue or extend the term of this Lease or affect any notice given to Tenant prior to the payment of such money, it being agreed that after the service of notice of the commencement of a suit or other final judgement granting Landlord possession of the Premises, Landlord may receive and collect any sums of rent due, or any other sums of money due under the terms of this Lease or otherwise exercise its rights and remedies hereunder. -24- The payment of such sums of money, whether as rent or otherwise, shall not waive said notice or in any manner affect any pending suit or judgement theretofore obtained. 29. Authorities for Action and Notice: --------------------------------- (a) Except as otherwise provided herein, Landlord may, for any matter pertaining to this Lease, act by and through its building manager or any other person designated in writing from time to time. (b) All notices or demands required or permitted to be given hereunder shall be in writing, and shall be deemed duly served when received, if hand delivered or delivered by facsimile transmission or overnight courier, or three (3) days after deposited in the United States mail, with proper postage prepaid, certified or registered, return receipt requested, addressed to: Landlord: Centennial Venture I, LLC Attn: Randy Nichols 1200 17th Street, Suite 890 Denver, Colorado 80202 cc: Jones Lang, LaSalle, Inc. Attn: Linda Kaboth 950 Seventeenth Street, Suite 2000 Denver, Colorado Tenant: Prior to the Commencement Dat Webb Interactive Services, Inc. 1800 Glenarm, Suite 600 Denver, Colorado 80202 After the Commencement Date Webb Interactive Services, Inc. 1899 Wynkoop, Suite 600 Denver, Colorado 80202 Either party shall have the right to designate in writing, served as above provided, a different address to which notice is to be provided. The foregoing shall in no event prohibit notice from being given as provided in Rule 4 of the Colorado Rules of Civil Procedure, as the same may be amended from time to time. 30. Liability of Landlord: Landlord's liability under this Lease shall be limited to Landlord's estate and interest in the Building (or to the proceeds thereof) and no other property or other assets of Landlord shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder or Tenant's use and occupancy of the Premises. Nothing contained in this Paragraph shall be construed to permit Tenant to offset against rents due a successor landlord, a judgement (or other judicial process) requiring the payment of money by reason of any default of a prior landlord, except as otherwise specifically set forth herein. 31. Brokerage: Landlord and Tenant each represents and warrants that --------- it has dealt only with Fuller and Company as agent for Tenant ("Tenant's Broker") and Cushman Realty Corporation as agent for Landlord (the "Landlord's Broker") in the negotiation of this Lease. Landlord shall make payment of the brokerage fee due to Landlord's Broker pursuant and in accordance with Landlord's separate agreement with Landlord's Broker. Landlord's Broker shall pay Tenant's Broker pursuant to and in accordance with a separate coop agreement with Tenant's Broker. Landlord and Tenant hereby agree to indemnify, defend and hold the other harmless of and from any and all loss, costs, damages or expenses (including, without limitation, all attorneys' fees and disbursements) by -25- reason of any claim of or liability to any other broker or person claiming through Landlord and Tenant, respectively, and arising out of or in connection with the negotiation, execution and delivery of this Lease. Additionally, Tenant acknowledges and agrees that Landlord shall have no obligation for payment of any brokerage fee or similar compensation to any person with whom Tenant has dealt or may in the future deal with respect to leasing of any additional or expansion space in the Building or renewals or extensions of this Lease. Tenant further acknowledges that Landlord's Broker is the exclusive broker for the Landlord and that it has no fiduciary duties to Tenant. 32. Tenant's Taxes: -------------- (a) Tenant shall be liable for and shall pay at least ten (10) days before delinquency and Tenant hereby agrees to indemnify and hold Landlord harmless from and against any liability in connection with, all taxes levied against any personal property, fixtures, machinery, equipment, apparatus, systems and appurtenances placed by or on behalf of Tenant in or about or utilized by Tenant in, upon or in connection with the Premises ("Equipment Taxes"). If any Equipment Taxes are levied against Landlord or Landlord's property or if the assessed value of Landlord's property is increased by the inclusion therein of a value placed upon such personal property, fixtures, machinery, equipment, apparatus, systems or appurtenances of Tenant, and if Landlord, after written notice to Tenant, pays the Equipment Taxes or taxes based upon such an increased assessment (which Landlord shall have the right to do regardless of the validity of such levy, but under proper protest if requested by Tenant prior to such payment and if payment under protest is permissible), Tenant shall pay to Landlord upon demand, as Additional Rent hereunder, the taxes so levied against Landlord or the proportion of such taxes resulting from such increase in the assessment; provided, however, that in any such event, Tenant shall have the right, on behalf of Landlord and with Landlord's full cooperation, but at no cost to Landlord, to bring suit in any court of competent jurisdiction to recover the amount of any such tax so paid under protest, and any amount so recovered shall belong to Tenant (provided Tenant has previously paid such amount to Landlord). Notwithstanding the foregoing to the contrary, Tenant shall cooperate with Landlord to the extent reasonable necessary to cause the fixtures, furnishings, equipment and other personal property to be assessed and billed separately from the real property of which the Premises form a part, and Landlord shall use reasonable efforts to treat all other Tenants on the same basis. (b) Tenant shall pay to Landlord, as Additional Rent, any excise, sales, privilege, gross receipts or other tax, assessment or other charge (other than income or franchise taxes) imposed, assessed or levied by any governmental or quasi-governmental authority or agency upon Landlord on account of this Lease, the rent or other payments made by Tenant hereunder, any other benefit received by Landlord hereunder, Landlord's business as a lessor hereunder, or other in respect of or as a result of the agreement or relationship of Landlord and Tenant hereunder. 33. Substitution of Premises: Prior to the commencement of ------------------------ construction of the Leasehold Improvements on the sixth (//6//th) floor, Landlord shall have the right to relocate the Premises to either Floor 5 or 7 in accordance with the following: (a) the new Premises shall be substantially the same in size, dimensions, configuration, decor, and nature as are the Premises described in this Lease, and shall be placed in substantially that condition by Landlord at its cost; (b) the physical relocation of the Premises shall be accomplished by Landlord at its cost; (c) Landlord shall give Tenant written notice of landlord's intention to relocate the Premises; (d) all reasonable costs incurred by Tenant as a result of the relocation, including, without limitation, costs incurred in changing addresses on stationery, business cards, directories, advertising, and other reasonable items, shall be paid by Landlord; (e) if the relocated Premises are smaller than the Premises as they existed before the relocation, Annual Base Rent shall be reduced pro-rata; and, (f) the parties hereto shall immediately execute an amendment to this Lease stating the relocation of the Premises and the reduction of rent, if any. Once the Leasehold Improvements on Floor 6 have been commenced, this Paragraph 33 shall be null and void. 34. Rights Reserved to Landlord: --------------------------- (a) All portions of the Building are reserved to Landlord except the Premises and the inside surfaces of all walls, windows and doors bounding in the Premises, but including exterior building walls, -26- core corridor walls and doors and any core corridor entrance. Landlord also reserves any space in or adjacent to the Premises used for shafts, stacks, pipes, conduits, fan rooms, ducts, electric or other utilities, sinks or other building facilities, and the use thereof, as well as the right to access thereto through the Premises for the purposes of operation, maintenance and repair, upon reasonable notice, except in the event of emergencies or apparent emergencies, when no prior notice shall be required. (b) Landlord shall have the following rights without liability to Tenant for damage or injury to property, person or business (all claims for damage being hereby waived and released), and without effecting an eviction or disturbance of Tenant's use or possession of the Premises or giving rise to any claim for setoffs or abatement of rent: (1) To enter the Premises as more fully provided in this Lease. (2) To install and maintain signs on the exterior and interior of the Building, except within the Premises, provided the signs do not block either completely or partially the exterior windows of the Premises. (3) To have pass keys to the Premises. (4) To decorate, remodel, repair, alter or otherwise prepare the Premises for reoccupancy during the last sixty (60) days of the term hereof if, during or prior to such time, Tenant has vacated the Premises, or at any time after Tenant abandons the Premises. 35. Force Majeure Clause: Except as provided in subparagraphs 2(c)(6) --------------------- and 7(e), wherever there is provided in this Lease a time limitation for performance by Landlord of any obligation, including but not limited to obligations related to construction, repair, maintenance or service, the time provided for shall be extended for as long as and to the extent that delay in compliance with such limitation is due to an act of God, governmental control or other factors beyond the reasonable control of Landlord. 36. Signage: ------- (a) No sign, advertisement or notice shall be inscribed, painted or affixed on any part of the inside or outside of the Building unless of such color, size and style and in such place upon or in the Building as shall be first designated by Landlord, but there shall be no obligation or duty on Landlord to allow any sign, advertisement or notice to be inscribed, painted or affixed on any part of the inside or outside of the Building. A directory in a conspicuous place, with the names of Tenant, not to exceed one (1) name per every 2000 rentable square feet of the Premises, shall be provided by Landlord on a one time basis. Any necessary revision to such directory shall be made by Landlord, at Tenant's expense, within a reasonable time after written notice from Tenant of the change making the revision necessary. Landlord shall have the right to remove all nonpermitted signs without notice to Tenant and at the expense of Tenant. (b) Tenant shall only be permitted to install building standard signs and logos, subject to Landlord's prior written consent and criteria as to size, design, materials and location. 37. Attorneys' Fees: In the event of any dispute hereunder, or any --------------- default in the performance of any term or condition of this Lease, the prevailing party shall be entitled to recover all costs and expenses associated therewith, including reasonable attorneys' fees. 38. Miscellaneous: ------------- (a) The rules and regulations attached hereto as Exhibit E, as well as such rules and regulations as may hereafter be adopted by Landlord for the safety, care and cleanliness of the Premises and the Building and the preservation of good order thereon, are hereby expressly made a part hereof, and Tenant agrees to obey all such rules and regulations. The violation of any of such rules and regulations by Tenant -27- shall be deemed a breach of this Lease by Tenant affording Landlord all the remedies set forth herein. Landlord shall not be responsible to Tenant for the nonperformance by any other tenant or occupant of the Building of any of said rules and regulations. Landlord reserves the right from time to time to amend and modify the rules and regulations. Such amendments or modifications shall be effective upon delivery to Tenant. (b) The term "Landlord" as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners of the Building at the time in question, and in the event of any transfer or transfers of the title thereto. Except for the Landlord's obligation to construct and deliver the Base Building and the Leasehold Improvements and the warranty associated with the Leasehold Improvements, Landlord herein named (and in the case of any subsequent transfers or conveyances, the then grantor) shall be automatically released from and after the date of such transfer or conveyance of all liability in respect to the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed and relating to events occurring thereafter; provided that any funds in the hands of Landlord or the then grantor at the time of such transfer in which Tenant has an interest shall be turned over to the grantee, and any amount then due and payable to Tenant by Landlord or the then grantor under any provisions of this Lease shall be paid to Tenant. (c) This Lease shall be construed as though the covenants herein between Landlord and Tenant are independent and not dependent and Tenant shall not be entitled to any setoff of the rent or other amounts owing hereunder against Landlord, if Landlord fails to perform its obligations set forth herein, except as herein specifically set forth; provided, however, the foregoing shall in no way impair the right of Tenant to commence a separate action against Landlord for any violation by Landlord of the provisions hereof so long as notice is first given to Landlord and any holder of a mortgage or deed of trust covering the Building Complex or any portion thereof whose address Tenant has been notified in writing and so long as an opportunity has been granted to Landlord and such holder to correct such violation as provided in subparagraph (g) hereof. (d) If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws effective during the term of this Lease, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby, and it is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid or unenforceable, there shall be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable, provided such addition does not increase or decrease the obligations of or derogate from the rights or powers of either Landlord or Tenant. (e) The captions of each paragraph are added as a matter of convenience only and shall be considered of no effect in the construction of any provision or provisions of this Lease. (f) Except as herein specifically set forth, all terms, conditions and covenants to be observed and performed by the parties hereto shall be applicable to and binding upon their respective heirs, administrators, executors, successors and assigns. The terms, conditions and covenants hereof shall also be considered to be covenants running with the land. (g) Except as otherwise specifically provided herein, in the event Landlord shall fail to perform any of the agreements, terms, covenants or conditions hereof on Landlord's part to be performed, and such nonperformance shall continue for a period of thirty (30) days after written notice thereof, from Tenant to Landlord, or if such performance cannot be reasonably had within such thirty (30) day period, and Landlord shall not in good faith have commenced such performance within such thirty (30) day period and proceed therewith to completion, it shall be considered a default of Landlord under this Lease. Tenant shall give written notice to Landlord in the matter herein set forth and shall afford Landlord a reasonable opportunity to cure any such default. In addition, Tenant shall send notice of such default by certified or -28- registered mail, with proper postage prepaid, to the holder of any mortgages or deeds of trust covering the Building Complex or any portion thereof of whose address Tenant has been notified in writing and shall afford such holder a reasonable opportunity to cure any alleged default on Landlord's behalf. (h) If there is more than one entity or person which or who are the Tenants under this Lease, the obligations imposed upon Tenant under this Lease shall be joint and several. (i) No act or thing done by Landlord or Landlord's agent during the term hereof, including but not limited to any agreement to accept surrender of the Premises or to amend or modify this Lease, shall be deemed to be binding upon Landlord unless such act or things shall be by an officer of Landlord or a party designated in writing by Landlord as so authorized to act. The delivery of keys to Landlord, or Landlord's agent, employees or officers shall not operate as a termination of this Lease or a surrender of the Premises. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or such rent or pursue any other remedy available to Landlord. (j) Landlord shall have the right to construct other buildings or improvements in any plaza or any other area designated by Landlord for use by tenants or to change the location, character or make alterations of or additions to any of said plazas or other areas. Landlord, during the entire term of this Lease, shall have the right to change the number and name of the Building at any time without liability to Tenant. (k) Tenant acknowledges and agrees that it has not relied upon any statements, representations, agreements or warranties, except such as are expressed in this Lease. (l) Time is of the essence hereof. (m) (n) The word "Holidays" as used herein shall mean those days celebrated each calendar year as New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas and such other recognized national holidays to the extent office buildings are generally closed in the Denver metropolitan area. (n) Tenant and Landlord and the party executing this Lease on behalf of each of them represent to each other that such party is authorized to do so by requisite action of the board of directors, members or partners, as the case may be, and agree upon request to deliver to each other a resolution or similar document to that effect. (o) This Lease shall be governed by and construed in accordance with the laws of the State of Colorado. (p) This Lease, together with Exhibits A. B. C. D and E, ------------------------- attached hereto, contains the entire agreement of the parties and may not be amended or modified in any manner except by an instrument in writing signed by both parties. Tenant shall not record this Lease or a memorandum hereof. (q) In the event Landlord makes available any area in the Building Complex for use as a health facility, Tenant agrees that Landlord shall not be liable for any injury or damage to persons or property arising out of the use of such health facility by Tenant, its employees or invitees, and further agrees to indemnify, defend and hold Landlord harmless against any claims, demands or damages associated therewith, including claims for personal injury and death. Tenant further agrees to execute and deliver to Landlord upon request, and indemnification agreement, in form acceptable to Landlord, as a condition precedent to use of any such health facility by Tenant and its employees and invitees. -29- (r) Tenant shall not use the name of the Building, the Building Complex or the development in which the Building is situated as part of its legal or trade name, nor for any purpose other than as an address for the business to be conducted by Tenant in the Premises. (s) The submission or delivery of this document for examination and review does not constitute an option, an offer to lease space in the Building or an agreement to lease. This document shall have no binding effect on the parties unless and until executed by both Landlord and Tenant. 39. Hazardous Materials: ------------------- (a) Tenant shall at all times and in all respects comply with all federal, state and local laws, ordinances, rules and regulations ("Hazardous Materials Laws") relating to industrial hygiene, environmental protection or the use, analysis, generation, manufacture, storage, presence, disposal or transportation of any Hazardous Materials (as hereinafter defined). (b) Except for normal and customary types and quantities of products which are used in the operation of a business office and which may be considered to be Hazardous Materials, Tenant shall not cause or permit any Hazardous Materials to be brought upon, kept, stored, generated, treated, manufactured, produced, disposed of, discharged, released, spilled or used in, on or about the Premises by Tenant or Tenant's affiliates, agents, employees, contractors, invitees, sublessees or assignees (collectively, the "Tenant Parties"). If Tenant or any Tenant Party breaches the obligation stated in the preceding sentence or if the presence of Hazardous Materials on the Premises caused or permitted by Tenant results in contamination of the Premises, the Building or any adjacent property, then Tenant shall indemnify, defend and hold harmless Landlord from and against any and all claims, judgments, actions, damages, penalties, fines, forfeitures, costs, expenses, liabilities or losses (including, without limitation, diminution in value of the Premises, the Building and/or adjacent property, damages for the loss or restriction on use of rentable or usable space of any amenity of the Premises, the building and/or adjacent property, damages arising from any adverse (c) impact on marketing of the Premises, the Building and/or adjacent property, and sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees and court costs) which arise during or after the Lease Term or any extension hereof, as a result of such breach. This indemnification of Landlord by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision because of any Hazardous Material present in the soil or ground water on or under the Premises, the Building and/or adjacent property. Without limiting the foregoing, if the presence of any Hazardous Material on the Premises caused or permitted by Tenant or any of the Tenant Parties results in any contamination of the Premises, the Building and/or adjacent property, Tenant shall promptly take all actions at its sole cost and expense as are necessary to return the Premises, the Building and/or adjacent property to the condition existing prior to the introduction of any such Hazardous Material to the Premises, the Building and/or adjacent property; provided that Tenant shall not take any remedial action in or about the Premises or the Building, nor enter into any settlement agreement, consent decree or other compromise with respect to any claims relating to Hazardous Materials in any way connected with the Premises or the Building, without first notifying Landlord of Tenant's intention to do so and affording Landlord the opportunity to appear, intervene or otherwise appropriately assert and protect Landlord's interest with respect thereto. (d) As used in this Lease, the term "Hazardous Material" means any flammable item, explosive, radioactive material, hazardous or toxic substance, material or waste or related materials, including any substance defined as or included in the definition of "hazardous substances", "hazardous wastes", "infectious wastes", "hazardous materials" or "toxic substances" now or subsequently regulated under any federal, state or local laws, regulations or ordinances including, without limitation, oil, petroleum-based products, paints, solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonia compounds and other chemical products, chemicals known to cause cancer or reproductive toxicity, asbestos, -30- polychlorinated biphenyls (PCBs) and similar compounds, and including any other products and materials which are subsequently found to have adverse effects on the environment or the health and safety of persons. (e) Tenant immediately shall notify Landlord in writing of: (i) any spill, release, discharge or disposal of any Hazardous Material in, on, under, around or about the Premises, the Building or any portion thereof of which Tenant has knowledge; (ii) any enforcement, cleanup, removal or other governmental or regulatory action instituted, contemplated, or threatened pursuant to any Hazardous Materials Laws and relating to the Premises or the Building of which Tenant has knowledge; (iii) any claim made or threatened by any person against Tenant, any of the Tenant Parties, the Premises, or the Building relating to damage, contribution, cost recovery, compensation, loss or injury resulting from or claimed to result from any Hazardous Materials of which Tenant has knowledge; and (iv) any reports made to any governmental agency or entity arising out of or in connection with any Hazardous Materials in, on, under, around or about or removed from the Premises or the Building of which Tenant has knowledge, including any complaints, notices, warnings, reports or asserted violations in connection therewith. Tenant also shall supply to Landlord as promptly as possible, and in any event within five (5) business days after Tenant first receives or sends the same, copies of all claims, reports, complaints, notices, warnings or asserted violations relating in any way to the Premises, the Building or the use or occupancy thereof by Tenant or any of the Tenant Parties. Upon any termination of this Lease, whether by lapse of time, cancellation pursuant to an election provided for herein, forfeiture or otherwise, Tenant shall immediately surrender possession of the Premises (and all improvements to the Premises which Tenant is not required to remove from the Premises pursuant to this Lease) to Landlord in full compliance with all Hazardous Materials Laws free of any Hazardous Material. (f) Any material failure of Tenant to comply with the provisions of this Section 39 shall be a material default under this Lease. (g) Landlord shall defend, indemnify and hold Tenant harmless from and against any and all losses, costs, (including reasonable attorney fees) liabilities and claims arising from any violations of Hazardous Materials Laws by Landlord and/or the existence of Hazardous Materials that are now or hereinafter become located in or on or under the Building Complex as a result of Landlord acts or negligence and shall assume responsibility and cost to remedy such violations and/or the existence of such Hazardous Materials provided that such violations or the existence of Hazardous Materials is not caused solely by Tenant. (h) The provisions of this Paragraph 39 shall survive the expiration or earlier termination of the Lease Term. 40. Parking: Subject to Tenant's execution of a separate parking ------- agreement with the operator of the Building Parking Garage, Landlord agrees to provide Tenant with the opportunity during the Term of this Lease to lease up to forty-two (42) parking spaces in the Building Parking Garage. The allocation of spaces between reserved and unreserved shall be subject to availability and shall be arranged by Tenant with the garage operator prior to the Commencement Date. The cost of such spaces shall be the prevailing market rates for comparable parking spaces in the vicinity of the Building. During the Term of the Lease, Tenant may reduce or increase the number of parking spaces up to the maximum of forty-two (42), but in order to increase the number of spaces it must give the garage operator at least sixty (60) days prior written notice of its decision to lease additional parking spaces and any additional increase will be subject to availability. Tenant acknowledges and agrees that during the baseball season on days which baseball games commence after 5:30 p.m. that all of Tenant's parking spaces shall be vacated prior to 5:30 p.m.; provided, however, Tenant may purchase from the garage operator special game day parking privileges for up to twelve (12) parking spaces, the cost of which shall be determined by the garage operator, but shall not be more than that charged to other Building tenants. 41. Right to Renew: Landlord hereby grants to Tenant one (1) option -------------- to renew this Lease for between a three (3) or five (5) year term (at the option of Tenant) at the then prevailing market rate for comparable office -31- space in the downtown Denver, Colorado market area. The option to renew shall be exercisable by Tenant only if Tenant is not in default of any material provision under this Lease or in default of any monetary provision of this Lease, unless the default is cured within the allowed time period. Tenant must give written notice to Landlord of its intent to exercise the option and the length of the term selected at least nine (9) months prior to the expiration of the then current Term. If Tenant fails to provide such notice in accordance with this paragraph, the option shall lapse and thereafter be null and void. As used herein the prevailing term market rate shall mean the rate which Landlord or other landlords have leased within the prior twelve (12) months for comparable terms of comparable space in the Building and other comparable Class A buildings in the central business district of Denver, Colorado. Upon exercising the option, all terms and conditions during such extension period shall remain the same as those set forth in the Lease, except that Annual Base Rent and Operating Expenses. Within thirty (30) days after Landlord's receipt of Tenant's exercise notice, Landlord shall provide Tenant with Landlord's reasonable opinion of prevailing market rate. Upon Landlord's written notice of prevailing market rate to Tenant, Tenant shall have fifteen (15) days to accept or reject such current market rate in writing. If Tenant rejects Landlords opinion of the prevailing market rate, the Landlord and Tenant shall have forty-five (45) days thereafter to reach an agreement. If within said period Landlord and Tenant are unable to agree this option to renew shall lapse and thereafter be null and void. In the event Landlord and Tenant agree on the prevailing market rate, they shall execute an amendment to the Lease providing for the renewal and the new Annual Base Rent. 42. Letter of Credit: Tenant at its expense shall deposit with Landlord ---------------- within two (2) weeks of Lease execution, as additional security to guaranty the performance of Tenant under the terms of this Lease, an irrevocable letter of credit in favor of Landlord in the amount of Seventy-Five Thousand and 00/100 Dollars ($75,000) in a form and from a bank recognized and acceptable to Landlord. Provided that the base building improvements are sufficiently complete to allow for the commencement of construction of the tenant improvements for the Premises on or before January 10, 2000, Tenant shall as of December 15, 1999, increase the letter of credit to a total of $525,000 (an additional $450,000). In the event the base building improvements have not been sufficiently completed by December 15, 1999, to allow for commencement of the tenant improvement by January 3, 2000, the date to deliver the increased letter of credit shall be extended by one day for each day of delay after December 15, 1999. Except as provided below, the letter of credit shall remain on deposit with the Landlord for the Term of the Lease. On each anniversary date of the Commencement Date, if Tenant is not in material default under the terms of the Lease, the letter of credit shall be reduced by the amounts and have the remaining balances indicated below: Anniversary Date Reduction BALANCE 1st $ 50,000 $475,000 2nd $ 50,000 $425,000 3rd $200,000 $225,000 4th $112,500 $112,500 5th $112,500 $ 0.00 Notwithstanding the foregoing, if at anytime after the thirty-sixth (36th) month of the Lease, Tenant is able to demonstrate to Landlord, in Tenant's audited financial statements, that it has maintained working capital of $5,000,000 or more, as determined under generally accepted accounting principals, for a period of twelve (12) consecutive months, the letter of credit shall be returned to Tenant in exchange for the Security Deposit provided for in Paragraph 4 hereof. If the letter of credit is to be renewed at any time during the Term of the Lease, it shall be renewed not less than thirty (30) days prior to its expiration. If for any reason the letter of credit is not renewed, other than the expiration of the Lease, Landlord shall be entitled to draw on the entire letter of credit. At the expiration of the Lease, if Tenant is not in default under the terms of the Lease, Landlord shall return the letter of credit to Tenant. Notwithstanding notice provisions contained elsewhere in this Lease, if an event of default has occurred and the Landlord does not have sufficient time to give notice to Tenant prior to the expiration of the letter of credit, the Landlord shall be entitled to draw the letter of credit to the extent the amount of the default claimed. The letter of credit shall be retained by Landlord as security for payment by Tenant of the rents, all other payments herein agreed to be paid by Tenant, the reimbursement of Landlord for the cost of tenant improvements and leasing commissions, and for the faithful performance by Tenant of the terms, provisions and conditions of this Lease. It is -32- agreed that Landlord may, at Landlord's option, at any time after a default by Tenant under any of the terms, provisions, covenants or conditions of this Lease, make one or more draws on the letter of credit to the extent of the amount of the default and apply said sum or any part thereof towards the payment of the rents and all other sums accrued and payable by Tenant under this Lease (including, but not limited to, the cost of tenant improvement and leasing commissions), which shall thereby be discharged only pro tanto; that Tenant shall remain liable for any amounts that such letter of credit shall be insufficient to pay; and that Landlord may exhaust any or all rights and remedies against Tenant before resorting to said letter of credit, but nothing herein contained shall require or be deemed to require Landlord to so do. The letter of credit contemplates that in the event of multiple defaults, Landlord shall be entitled to make multiple draws on the letter of credit. Nothing contained in this paragraph shall be deemed or construed to constitute a liquidated damages provision. -33- IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease the day and year first above written. LANDLORD: CENTENNIAL VENTURE I, LLC By: /s/ ----------------------------------------- Title: General Manager -------------------------------------- TENANT: WEBB INTERACTIVE SERVICES, INC. By: /s/ Lindley S. Branson ----------------------------------------- Title: Ex. V.P. and General Counsel -------------------------------------- -34- EXHIBIT A TO LEASE ------------------ DESCRIPTION OF PREMISES This Exhibit supplements that certain Lease dated and executed concurrently herewith by and between CENTENNIAL VENTURE I, LLC ("Landlord") and WEBB INTERACTIVE SERVICES, INC. ("Tenant"), regarding Suite 600 consisting of approximately 21,398 rentable square feet on the 6th floor of the Building as depicted on the floor plan of the Building attached hereto as Exhibit A-1: A-1 EXHIBIT A-l TO LEASE 21,398 RSF [DIAGRAM OF FLOOR PLAN OF OFFICE SPACE] A-2 EXHIBIT B TO LEASE ------------------ LEGAL DESCRIPTION Vacant Land Parcel: - ------------------ A portion of Block "D," East Denver and Block "D" Hoyt & Robinson Addition to Denver being a part of Section 28 and Section 33, Township 3 South, Range 68 West of the 6th Principal Meridian, being a part of the City and County of Denver, State of Colorado, more particularly described as follows: Lots 23 to 30, Inclusive, Block "D," partly in East Denver and partly in Hoyt & Robinson's Addition to Denver, lying southeasterly of a line parallel with and 62.5 feet distant southeasterly, measured along the northeasterly line of said Block "D" of Hoyt & Robinson's Addition from the most northerly corner thereof, together with that certain 16.0 feet wide alley vacated by Ordinance No. 475-1985 of the City and County of Denver adjoining said lots containing in all an area of 25,437 square feet. and Parking Condominium Parcel: - -------------------------- Parking Condominium Unit C-1 to The Ice House Condominiums, according to Condominium Map thereof, recorded April 1, 1997 under Reception No. 9700040664, and Amended and Restated Condominium Map recorded December 12, 1997 under Reception No. 9700168487, and Second Amendment to Amended and Restated Condominium Map recorded November 18, 1998, in the records of the Clerk and Recorder of the City and County of Denver, State of Colorado. B-1 EXHIBIT C TO LEASE ------------------ COMMENCEMENT DATE AGREEMENT THIS COMMENCEMENT DATE AGREEMENT ("Agreement") is given by WEBB INTERACTIVE SERVICES, INC. ("Tenant") to CENTENNIAL VENTURE I, LLC ("Landlord"), with respect to that certain Lease Agreement dated _____, 1999 ("Lease"), under which Tenant has leased from Landlord certain premises known as Suite _____ ("Premises") in 1899 Wynkoop Building at 1899 Wynkoop Street, Denver, Colorado ("Building"). In consideration of the mutual covenants and agreements stated in the Lease, and intending that this Agreement may be relied upon by Landlord and any prospective purchaser or present or prospective mortgagee, deed of trust beneficiary or ground lessor of all or a portion of the Building certifies as follows: 1. The Commencement Date of this lease is __________, 2000. 2. The Expiration Date of the Lease is _______________, 20____. 3 The Premises contain 21,398 rentable square feet of space. 4. The Expense Stop is $6.50. 5. The Base Rent for the Premises is: MONTHLY ANNUAL PERIOD BASE RENT BASE RENT Months 1-2 $46,362.33 See Paragraph 3 Months 3-36 $46,362.33 $556,348.00 Months 37-62 $49,928.67 $599,144.00 Executed this _________ day of _____________, 20____. TENANT: WEBB INTERACTIVE SERVICES, INC. By: ____________________________________ Printed Name:___________________________ Title:__________________________________ C-1 EXHIBIT D TO LEASE ------------------ 1899 WYNKOOP WORK LETTER 1. Conflicts; Terms. If there is any conflict or inconsistency between ---------------- the provisions of the Lease and those of this Exhibit D ("Work Letter"), the provisions of this Work Letter will control. Except for those terms expressly defined in this Work Letter, all initially capitalized terms will have the meanings stated for such terms in the Lease. (a) "Scheduled Commencement Date" means May 1, 2000. (b) "Landlord's Representative" means Randy Nichols. (c) "Tenant's Representative" means Doug WuIf. (d) "Schematic Plan Approval Date" means November 12, 1999. (e) "Budget Pricing" means the estimate of the Total Cost based upon the Tenant's Pricing Plans. (f) "Budget Pricing and Pricing Plan Approval Date" means November 30, 1999. (g) "Working Drawings and Final Pricing Approval Date" means December 30, 1999. (h) "Landlord's Allowance" means $25.50 per rentable square foot of the Premises (a total of $545,649.00) to be used solely for Leasehold Improvements to the Premises including Schematic Plans, Construction Documents, permit fees, construction supervision fee, construction of work above the ceiling grid and all slab to slab improvements to the Premises (i.e. HVAC, sprinklers, lighting, ceiling grid and acoustical tiles, etc.). Tenant acknowledges and agrees that Landlord may, in its discretion, allocate the Landlord's Allowance towards the payment of certain of the Leasehold Improvements, which allocation shall be made in the construction contract. (i) "Base Building" means those items listed on Exhibit D-1 which shall be constructed by Landlord at its sole cost and expense and shall not be charged against the Landlord's Allowance. (j) "Leasehold Improvements" means all alterations, leasehold improvements and installations to be constructed or installed by Landlord or Tenant in the Premises according to this Work Letter other than Base Building Improvements. (k) "Schematic Plans" means space plans and general specifications for the Leasehold Improvements. (l) "Construction Documents" means complete space plans, working drawings, construction plans and specifications for the Leasehold Improvements, which shall be prepared at Landlord's sole cost and expense. The preparation of mechanical, plumbing and electrical drawings shall be coordinated through Landlord's architect. All engineered drawings shall be prepared by the Landlord's engineers. (m) "Total Cost" means the total cost of obtaining all Schematic Plans, Construction Documents, necessary permits, constructing and installing the Leasehold Improvements in the Premises, and providing any Building services required during construction (such as electricity and other utilities, refuse removal and housekeeping). D-1 2. Landlord's Obligations. Landlord will proceed to complete the Base ---------------------- Building and the Premises according to this Work Letter and tender possession of the Premises to Tenant when Base Building and the Leasehold Improvements have been completed to the extent that only punch list items, which would not materially interfere with Tenant's use and enjoyment of the Premises, require completion or correction. Tenant will accept the Premises when Landlord tenders possession, provided that the Premises has been made ready for occupancy. Landlord and Tenant agree that all alterations, improvements and additions made to the Premises according to this Work Letter, whether paid for by Landlord or Tenant, will, without compensation to Tenant, become Landlord's property upon installation and will remain Landlord's property at the expiration or earlier termination of the Term. 3. Representatives. Landlord appoints Landlord's Representative to act --------------- for Landlord in all matters covered by this Work Letter. Tenant appoints Tenant's Representative to act for Tenant in all matters covered by this Work Letter. All inquiries, requests, instructions, authorizations and other communications with respect to the matters covered by this Work Letter will be made to Landlord's Representative or Tenant's Representative, as the case may be. Tenant will not make any inquiries of or requests to, and will not give any instructions or authorizations to, any other employee or agent of Landlord, including Landlord's architect, engineers and contractors or any of their agents or employees, with regard to matters covered by this Work Letter. Either party may change its Representative under this Work Letter at any time by 3 days prior written notice to the other party. 4. Construction Schedule. Attached hereto as Exhibit D-2 is the schedule --------------------- for construction of the Leasehold Improvements (the "Construction Schedule"). The Tenant has reviewed and approved the Construction Schedule and acknowledges that delays in meeting the scheduled dates, if caused by Tenant, will result in the inability of the contractor to complete the Leasehold Improvements by the Scheduled Commencement Date and that each day of delay caused by Tenant's actions or omissions shall result in a day for day extension of Landlord's obligations and responsibilities under the Lease and this Exhibit D, including Landlord's obligations under subparagraph 2(c)(6) of the Lease. 5. Schematic Plans. Tenant will cooperate with Landlord and W. E. Kieding --------------- ("Kieding") and submit all information necessary for preparation of the Schematic Plans. Subject to Tenant's cooperation in the preparation of the Schematic Plans, at least three (3) business days prior to the Schematic Plan Approval Date, Kieding shall deliver to Tenant for its approval a copy of the Schematic Plans for the Premises. Within three (3) business days after receipt of the Schematic Plans, but not later than the Schematic Plan Approval Date, Tenant will either approve the same in writing or notify Landlord in writing of how the proposed Schematic Plans are inconsistent with the design information supplied by Tenant and how the Schematic Plans must be changed in order to overcome Tenant's objections. Each day following the later of the third (3rd) business day after the Tenant's receipt of the Schematic Plans or the Schematic Plan Approval Date until Tenant approves them shall be a day of Tenant's delay. Upon receipt of Tenant's notice of objections, W. E. Kieding shall prepare revised Schematic Plans according to such notice and submit the revised Schematic Plans to Tenant. Upon submittal to Tenant of the revised Schematic Plans, and upon submittal of any further revisions, the procedures described above will be repeated. If the revised Schematic Plans, or any further revisions, are consistent with the design information and all requirements identified in Tenant's prior notice(s) of objections, then each day following Landlord's receipt of Tenant's notice of any additional objections until the day on which Landlord receives Tenant's written approval of the Schematic Plans will be a day of Tenant's delay. Landlord and Tenant acknowledge and agree that they have each approved the Schematic Plan within the time deadlines set forth in this Paragraph 5. 6. Budget Pricing. At such time as Schematic Plans have been approved in -------------- writing by Tenant, Kieding will prepare Pricing Plans for submission to the contractor in order to obtain Budget Pricing. On or before three (3) business days prior to the Budget Pricing and Plan Approval Date, Kieding shall deliver to Tenant the Budget Pricing and Pricing Plan for Tenant's approval. If the Budget Pricing is less than or equal to Landlord's Allowance, then Tenant will be deemed to have approved the Budget Pricing and Pricing Plan. If the Budget Pricing is greater than Landlord's Allowance, then Tenant, at Tenant's option, may either approve the Budget Pricing in writing or elect to eliminate or revise one or more items shown on the Pricing Plans so as to reduce the Budget Pricing and then approve in writing the reduced Budget Pricing (based on the revised Pricing Plans). If the original Budget Pricing is greater than Landlord's Allowance, then each day following the later of three (3) business days after Tenant's receipt of such Budget Pricing and Pricing Plan or the Budget Pricing and Pricing Plan Approval Date D-2 until the day Landlord receives Tenant's written approval of the Budget Pricing (as the same may have been revised) and the Pricing Plan will be a day of Tenant's delay. 7. Construction Documents; Final Pricing. At such time as the Budget ------------------------------------- Pricing and Pricing Plan have been approved (or deemed approved) by Tenant, Landlord will cause its architect and engineer to prepare the Working Drawings based strictly on the approved Pricing Plans. At such time as the Working Drawings have been prepared, Landlord will obtain bids from its general contractor (The Neenan Company) for the construction or installation of the Leasehold Improvements according to the Working Drawings. Each trade shall be bid by a minimum of three (3) subcontractors unless otherwise approved by Tenant. The Neenan Company may select its mechanical, electrical, plumbing and fire/safety contractors working on the Building Complex to complete the Leasehold Improvements; provided that such contractors bids must be for amounts which are comparable to third party bids obtained by The Neenan Company. At least three (3) business days before the Working Drawings and Final Pricing Approval Date, Landlord shall cause to be delivered to Tenant the Working Drawings and Final Pricing for Tenant's approval. If the Final Pricing is less than or equal to the Budget Pricing approved by Tenant, then Tenant will be deemed to have approved the Final Pricing and the Working Drawings. If the Final Pricing is greater than the Budget Pricing approved by Tenant, then Tenant, at Tenant's option, may either approve the Final Pricing in writing or elect to eliminate or revise one or more items shown on the Working Drawings so as to reduce the Final Pricing and then approve in writing the reduced Final Pricing (based on the revised Working Drawings). If the Final Pricing approved or deemed approved by Tenant is greater than Landlord's Allowance, then Tenant will immediately deposit with Landlord an amount ("Construction Deposit") equal to the difference between Landlord's Allowance and the approved Final Pricing. Each day following the later of the third (3rd) business day after Tenant's receipt of the Final Pricing and Working Drawings or the Working Drawings and Final Pricing Approval Date until the day on which Landlord has received Tenant's written approval of the Working Drawings, Final Pricing (if required) and Landlord has received the Construction Deposit (if required) will be a day of Tenant's delay. Notwithstanding the provisions of Paragraphs 5 and 6 of this Work Letter, if Tenant Approves the Working Drawings and Final Pricing by the Working Drawings and Final Pricing Approval Date, the days of Tenant's delay accumulated prior to such date shall be disregarded. 8. Building Permit; Construction of Leasehold Improvements. At such time ------------------------------------------------------- time as Tenant has approved (or is deemed to have approved) the Working Drawings and Final Pricing, has made any required Construction Deposit, and the Building Permit has been received, Landlord will cause the Leasehold Improvements to be constructed or installed in the Premises in a good and workmanlike manner and according to the Construction Documents and all Laws. Upon substantial completion of the construction and installation of the Leasehold Improvements and prior to Tenant's occupancy of the Premises, Tenant will pay to Landlord the amount, if any, by which the Total Cost exceeds the sum of the Landlord's Allowance and the Construction Deposit. Tenant will not be entitled to any credit if Landlord's Allowance exceeds the Total Cost. Neenan's fees shall be 7% for general conditions and 5% for overhead and profit. Landlord or its affiliates shall receive a construction supervision fee equal to three percent (3%) of the Total Cost which amount shall be paid from the Landlord's Allowance. 9. Change Orders. Tenant's Representative may authorize changes in the ------------- work during construction only by written instructions to Landlord's Representative on a form approved by Landlord. All such changes will be subject to Landlord's prior written approval according to Paragraph 12 below. Prior to commencing any change, Landlord will prepare and deliver to Tenant, for Tenant's approval, a change order ("Change Order") identifying any additional time required to complete the Leasehold Improvements, and the effect on the Scheduled Commencement Date and the total cost or cost savings resulting from such change, which will include associated architectural, engineering and construction contractor's fees, and an amount sufficient to reimburse Landlord for overhead and related expenses incurred in connection with the Change Order. If Tenant fails to approve and pay for such Change Order within three (3) business days after delivery by Landlord, Tenant will be deemed to have withdrawn the proposed change and Landlord will not proceed to perform the change. Upon Landlord's receipt of Tenant's approval and payment, Landlord will proceed to perform the change. 10. Additional Tenant Work. If Tenant desires any work in addition to ---------------------- the Leasehold Improvements to be performed in the Premises ("Additional Tenant Work"), Tenant, at Tenant's D-3 expense, will cause plans and specifications for such work to be prepared either by Landlord's architect or engineer or by consultants of Tenant's own selection. All plans and specifications for Additional Tenant Work will be subject to Landlord's approval according to Paragraph 12 below. If Landlord approves Tenant's plans and specifications for any Additional Tenant Work, Landlord will, subject to the following terms and conditions, grant to Tenant and Tenant's agents a license to enter the Premises prior to the Commencement Date in order that Tenant may perform or cause to be performed the Additional Tenant Work according to the plans and specifications previously approved by Landlord: (a) Tenant will give Landlord not less than three (3) business days prior written notice of the request to have such access to the Premises, which notice must contain or be accompanied by: (i) a description and schedule for the work to be performed by those persons and entities for whom such early access is being requested; (ii) the names and addresses of all contractors, subcontractors and material suppliers for whom such access is being requested; (iii) the approximate number of individuals, itemized by trade, who will be present in the Premises; (iv) copies of all contracts pertaining to the performance of the work for which such early access is being requested; (v) copies of all licenses and permits required in connection with the performance of the work for which such access is being requested; (vi) certificates of insurance and instruments of indemnification against all claims, costs, expenses, damages, suits, fines, penalties, actions, causes of action and liabilities which may arise in connection with such work; (vii) assurances of the availability of funds sufficient to pay for all such work, if such assurances are requested by Landlord; and (viii) if requested by Landlord full lien waivers from all contractors and material men employed by Tenant. Each of such matters will be subject to Landlord's approval, which approval will not be arbitrarily withheld. (b) Such early access is subject to scheduling by Landlord. (c) Tenant's agents, contractors, workers, mechanics, suppliers and invitees must work in harmony and not interfere with Landlord and Landlord's agents in doing work in the Premises and in other premises and Common Areas of the Building, or the general operation of the Building. If at any time such entry causes or threatens to cause disharmony or interference, including labor disharmony, Landlord may immediately withdraw Tenant's license for access. (d) If Landlord's work in the Premises and Tenant's work in the Premises (under such license granted by Landlord) progress simultaneously, Landlord will not be liable for any injury to person or damage to property of Tenant, or of Tenant's employees, licensees or invitees, from any cause whatsoever occurring upon or about the Premises, and Tenant will indemnify and save Landlord harmless from any and all liability and claims arising out of or connected with any such injury or damage. (e) Tenant agrees that it is liable to Landlord for any damage to the Premises or any portion of the work in the Premises caused by Tenant or any of Tenant's employees, agents, contractors, workers or suppliers. 11. Punch List. Unless otherwise agreed to by Landlord and Tenant or as ---------- to any latent defects of which Tenant notifies Landlord in writing within nine (9) months after the Commencement Date, Tenant's taking possession of any portion of the Premises at the time as the Premises are ready for occupancy will be conclusive evidence that the Premises is in good order and satisfactory condition when Tenant took possession; except as to any items requiring correction or completion identified on a punch list prepared and signed by Landlord's Representative and Tenant's Representative after an inspection of the Premises by both such parties prior to Tenant taking possession (the "Preliminary Punch List") and such other items as are identified on a final punch list prepared and signed by Landlord's Representative and Tenant's Representative within seven (7) business days after the Premises are delivered to Tenant for occupancy (the "Final Punch List"). Final Punch List items shall not include items which were damaged during Tenant's move into the Premises or painting which should have been specified on the Preliminary Punch List. It is intended that the Final Punch List will be for items which Tenant could not have reasonably been expected to discover prior to moving into the Premises. Landlord's general contractor will, within 10 days after execution of each punch list, begin correction or completion of any items specified on such punch list and will complete such work in a prompt and diligent manner. Landlord will not be responsible for any items of damage caused by Tenant, its agents, independent contractors or suppliers. No promises to alter, remodel D-4 or improve the Premises or Building and no representations concerning the condition of the Premises or Building have been made by Landlord to Tenant other than as may be expressly stated in the Lease (including this Work Letter). 12. Landlord's Approval. All Schematic Plans, Construction Documents and ------------------- Change Orders; and any drawings, space plans, plans and specifications for any Additional Tenant Work or any other improvements or installations in the Premises, are expressly subject to Landlord's prior written approval. Landlord may withhold its approval of any such items that require work which: (a) exceeds or adversely affects the capacity or integrity of the Building's structure or any of its heating, ventilating, air conditioning, plumbing, mechanical, electrical, communications or other systems; (b) is not approved by the holder of any encumbrance; (c) would not be approved by a prudent owner of property similar to the Building; (d) violates any agreement which affects the Building or binds Landlord; (e) Landlord reasonably believes will increase the cost of operating or maintaining any of the Building's systems; (f) Landlord reasonably believes will reduce the market value of the Premises or the Building at the end of the Term; (g) does not conform to applicable building code or is not approved by any governmental authority having jurisdiction over the Premises; (h) does not meet or exceed Building Standard; or (i) Landlord reasonably believes will infringe on the architectural or historical integrity of the Building. 13. Tenant's Delays. Except as provided in Paragraph 2 of the Lease, --------------- the Term of the Lease (and therefore Tenant's obligation for the payment of Base Rent) will not commence until the Premises are delivered to Tenant for occupancy; provided, however, that if Landlord is delayed in substantially completing such work as a result of: (a) any Tenant delays described in Paragraphs 4, 5, 6, 7, or 8 above; (b) Tenant's request for materials or installations as a part of the Leasehold Improvements that are other than Building Standard materials or installations; (c) any Change Orders or changes in any drawings, plans or specifications requested by Tenant; (d) Tenant's failure to review or approve in a timely manner any item requiring Tenant's review or approval; (e) performance of any Additional Tenant Work or any failure to complete or delay in completion of such work; or (f) any other act or omission of Tenant or Tenant's architects, engineers, contractors or subcontractors (all of which will be deemed to be delays caused by Tenant); D-5 then the Commencement Date will be adjusted as provided in Paragraph 2 of the Lease and Landlord's obligations and responsibilities shall be extended as provided in Paragraph 4 of this Exhibit D. 14. General. No approval by Landlord or Landlord's architect or engineer ------- of any drawings, plans or specifications which are prepared in connection with construction of improvements in the Premises will constitute a representation or warranty by Landlord as to the adequacy or sufficiency of such drawings, plans or specifications, or the improvements to which they relate, for any use, purpose or condition, but such approval will merely be the consent of Landlord to the construction or installation of improvements in the Premises according to such drawings, plans or specifications. Failure by Tenant to pay any amounts due under this Work Letter will have the same effect as failure to pay Base Rent under the Lease, and such failure or Tenant's failure to perform any of its other obligations under this Work Letter will constitute a Default under Paragraph 19 of the Lease, entitling Landlord to all of its remedies under the Lease as well as all remedies otherwise available to Landlord. 15. Construction Warranty. Landlord warrants to Tenant that the Leasehold --------------------- Improvements will be completed in a good and workmanlike manner in accordance with the Construction Documents and (subject to subparagraph 10(c) of the Lease) all laws, and that, upon completion of the Leasehold Improvements, the same shall be free from material defect arising out of defects in design or materials or improper workmanship for a period of one year from the Commencement Date. In addition, in the event that in connection with the portions of the Leased Premises which are the responsibility of the Tenant to maintain, repair and/or replace, any contractors, subcontractors, or suppliers that make any warranties with respect to workmanship or materials which extend beyond the period of the Landlord's warranty set forth above in this paragraph, Landlord shall make the same available to Tenant upon the expiration of the warranty period. Without limiting the generality of the foregoing, if, within one (1) year after the date of substantial completion of the Leasehold Improvements, any part of the Leasehold Improvements is found to be not in accordance with the requirements of this Lease or the Construction Documents or laws, Landlord shall correct it promptly after receipt of written notice from Tenant to do so. This obligation under this paragraph shall survive acceptance of such work. Landlord partially shall bear the cost of correcting destroyed or damaged construction, whether completed or completed, caused by Landlord's correction or removal of the work which is not in accordance with the requirements of this Lease, the Construction Documents or laws. In order to cause Landlord to honor the warranty contained in this paragraph Tenant must give written notice to Landlord specifying the defect within thirteen (13) months after the Commencement Date, after which date this warranty shall lapse. Landlord further warrants to Tenant that the Base Building will be completed in a good and workmanlike manner in accordance with the plans and specifications described on Exhibit D-1 and all laws. Landlord: Tenant: CENTENNIAL VENTURE I, LLC WEBB INTERACTIVE SERVICES, INC. By: /s/ By: /s/ Lindley S. Branson --------------------------------- ------------------------------- Title: General Manager Title: Ex. V.P. and General Counsel ------------------------------ ---------------------------- D-6 LEASEHOLD IMPROVEMENTS STANDARDS Scope of Work Definition Base Building vs. Tenant Improvement Work
- ---------------------------------------------------------------------------------------------------------------------------- ITEM BASE BUILDING TENANT IMPROVEMENTS - ---------------------------------------------------------------------------------------------------------------------------- Ceilings a. No requirement in Tenant Premises a. Furnish and install 2' x 4' acoustical ceiling grid Chicago Metallic White 15/16" intermediate weight throughout Tenant's Premises. Furnish and install 2' x 4' acoustical ceiling tile (not yet selected) equal to Armstrong's Second Look II on each floor at a height of 9'0". b. Core and shell shall provide b. No. requirement. drywall ceilings in restroom areas and decorative drywall ceilings in tenant lobby areas. c. No requirement. c. Provide upgraded ceiling systems as required by tenant's space plan. Core Service Areas a. Elevators, toilet rooms, a. No requirements. telephone, electrical rooms, stairwells, janitor closets, service entry and mechanical rooms are to be provided complete. Doors, Frames and a. Furnish and install oak, birch or a. T.I. will include any required Hardware maple veneer doors (3'-0" x 8'-10") in corridor construction, including corridor hollow metal welded frames at all public doors. building areas (painted to match standard tenant door frame colors). Service core doors will be 3' x 9' solid core set in welded hollow metal frames. Building entry and service core doors will be equipped with mortise locks. All locks should have removable cores. Ground floor service core doors to be hollow metal doors in painted hollow metal frames. b. No requirement. b. Furnish, install and finish solid core natural finish flush honey colored maple doors (3'0" x 9'0" nominal), aluminum metal frames as required by tenant's space plan. Polished chrome hardware with lever handled and cylindrical locks or passage sets. c. No requirement. c. Furnish and install solid core natural finished flush honey colored maple tenant entry door (3'0" x 9'0"), per code, in aluminum metal frames with sidelights extending the full door height and glass is 16" in width. Satin bronze finish on all
D-7
- ---------------------------------------------------------------------------------------------------------------------------- ITEM BASE BUILDING TENANT IMPROVEMENTS door hardware. Provide and install lever handle, mortise licks and closers on all tenant entry doors. All locks to have removable cores. Manufacturer of locks must be compatible with Landlord's locking system for the base building d. Furnish and install proximity d. No requirement. At Tenant's type card access, electric locks for after expense; Tenant may tie into Landlord's card hour security at each of the building access system. entrances. (per allowance in contract). Electrical a. Furnish and install a complete a. No requirement. 244/480 volt, 3 phase, 4 wire building power distribution system. 2.0 watt per SF allocated for lighting 7.0 watts per SF allocated for office equipment loads (including HVAC) b. Furnish and install on 277 volt b. Lighting circuits and switching lighting panel in the central electrical distributed from central panel to tenant room on each floor. fixtures. c. No requirement. c. Furnish and install light fixtures as required by tenant's space plan. Fluorescent fixtures are to be 2' x 4', 18 cell 3" deep parabolic and equipped with three (3) T8 lamps and electronic ballast. Fixture density at 1:80 RSF (minimum). Furnish and install connection to J-box, switching and accent lighting. d. Furnish and install lighting in d. No requirement. base building rooms and all common areas. e. Furnish and install (1) step down e. Furnish and install branch circuits transformer and one 120/208 v. panel at for 120V power to tenant spaces from Elec. each floor for tenant power circuits. Rooms. Furnish and install convenience outlets (power poles not permitted) as desired along with any additional distribution panels or step down transformers. f. Furnish and install all code f. Furnish and install code required required exit and emergency lighting for exit and emergency lighting for all tenant all public areas. areas. Same or Landlord specs. g. Furnish and install adequate g. Furnish and install3/4" conduit for telephone chases to the telephone rooms on horizontal distribution from telephone each floor and from the main telephone closet on each floor to accessible ceiling room at ground level. Provide 4' x 8' x space in each tenant space. 3/4" plywood phone board in all telephone rooms.
D-8
- ------------------------------------------------------------------------------------------------------------------------------- ITEM BASE BUILDING TENANT IMPROVEMENTS h. Furnish and install fire h. Fire management provisions, if any, management systems as required by code, in addition to code requirements. including horn and strobe devices on each floor. i. Furnish exterior building accent i. No requirements. lighting per allowance as stated in contract. Elevators a. Furnish and install four electric a. No requirement. traction passenger elevators with a speed of 350' per minute. One of the cabs will be a dual service cab also serving as a freight elevator. All passenger elevators will have a 3,500 lb. capacity. b. Furnish and install custom b. No requirement. interior cab wall ceiling and floor finishes per allowance incl. in contract in office elevators and standard cab finishes in the parking elevators. c. Two (2) hydraulic elevators with c. No requirements. 2,500 lb. capacity two service the parking garage. These cabs will have a speed of 150' per minute. Fire Protection a. Furnish and install complete fire a. Relocate or add sprinkler for Sprinkler System protection system per NFPA re-requirements proper coverage as dictated by the tenant's for office occupancy space plan. Floor Covering a. Furnish and install all stone, a. Furnish and install all stone, carpet and tile flooring per design and carpet, tile flooring, ceilings, all light allowances in contract at ground floor and fittings, and all wall finishes in upper restrooms. Upper elevator lobby walls to elevator lobbies. have drywall prepared for painting. b. Provide smooth trowelled concrete b. Furnish and install floor coverings slabs ready for finish. for all Tenant areas. Carpet shall be Mannington Belwede II, 32 oz. for cut pile and Manning ton Aspects II for level loop upgrade, or Landlord approved equal. HVAC a. The cooling ratio is approx. 425 a. Furnish and install separate air GSF/ton and is based on calculations using conditioning on air handling units for the building envelope and internal loads, nonstandard loads (i.e. computer room). as described in the mechanical systems narrative provided for the Schmatic Design. The cooling tower has spare capacity for 20 tons/floor of additional tenant cooling on Floors Two through Nine. The HVAC systems will meet ASHRAE
D-9
- ---------------------------------------------------------------------------------------------------------------------------- ITEM BASE BUILDING TENANT IMPROVEMENTS standards for ventilation, indoor air quality, heating and cooling. The core and shell design will accommodate 1,100 s.f. tenant improvement zones. After hours cooling will be available for all tenants on a floor-by-floor basis. the central plant will modulate to meet the requirements of the after-hours part load operation. b. There will be a primary trunk b. No requirement. duct from the air handlers to the vicinity of each zone. c. Furnish and install base building c. Provide modifications as required energy management system with DDC by tenant's space plan. Provide DDC temperature control system. temperature control connection to all terminal devices. d. The only exhaust systems being d. There is no general exhaust system provided in the core and shell are toilet planned in the core and shell for such exhaust, life safety exhaust and parking spaces as conference rooms, etc. since this garage exhaust, as required for the facility is a non-smoking facility, it is applicable codes. our assessment that a general exhaust system is unnecessary. If additional air flow is required in spaces such as conference rooms, then transfer fans can be installed and discharge the air into the return air plenum to be cooled by air handling unit cooling coil. Interior Columns a. To be framed with metal studs. a. Furnish and install 5/8" gypsum board to columns. Tape and sand smooth. Apply paint/wall covering and base. Interior Partitions a. No requirement. a. Construct gypsum board partitions consisting of 5/8" sheetrock on 3-5/8" metal studs set 24" O.C. on center, as required by tenant's space plan. Finish as desired. Apply paint/wall covering and base. Partitions shall run to the acoustical ceiling except in areas approved by Landlord. b. No requirement. b. Construct required building corridor walls to underside of structure with gypsum wall board both sides (rated - 1 hour). 5/8" sheetrock on 3 5/8" metal studs set at 24" on center. Perimeter Walls a. Provide a framed & insulated a. Furnish and install 5/8" gypsum surface ready to receive gypsum board. board walls at exterior, taped and sanded smooth. Apply paint/wall covering and
D-10
- ---------------------------------------------------------------------------------------------------------------------------- ITEM BASE BUILDING TENANT IMPROVEMENTS base. b. No window sills are provided in b. Provide sills. core & shell scope of work. Framing at perimeter wall included. c. Furnish and install building c. No requirement. directory (per allowance in contract d. Furnish and install glass d. No requirement. entrance doors. e. Furnish and install security desk e. No requirement. (per allowance in contract). Plumbing a. Furnish and install complete a. No requirement. plumbing in core service areas. Ladies room to have four water closets and two sinks and the men's room a combination of four water closets and urinals and two sinks. b. Furnish and install (2) electric b. No requirement. water coolers adjacent to public toilet rooms at each floor 2-9. c. Furnish (2) two tenant wet stub c. Furnish and install convenience groups, one at each side of core near sinks, water supply to coffee/vending areas, restroom block on each office floor. Each etc., as needed. stub group shall have a cold water, hot water, 4" waste and a vent line. Signage a. Furnish and install general a. Furnish and install identification identification/ directional signage at signage at tenant entrances. toilet rooms and exit stairwells. b. Furnish and install upper b. No requirement. elevator lobby c. Furnish and install exterior c. No requirement. signage for building identification (per allowance in contract) Stairs a. Furnish and install painted metal a. No requirement. pan and riser with poured concrete. Painted metal stringer and railings. b. Paint stair walls. Furnish and b. No requirement. install surface-mounted lighting at stair landings. Structure a. Structural steel frame and a. No requirement. composite steel and concrete floor structure (fire resistant to code requirements). b. Supported live load capacity of b. No requirement. 50 lbs. per SF and a partition load of 20 lbs.
D-11
- ---------------------------------------------------------------------------------------------------------------------------- ITEM BASE BUILDING TENANT IMPROVEMENTS per SF have been allowed which will provide additional areas located near the core with 250 lbs. loading capacity in these selected areas. c. Building shell shall meet ADA c. No requirement. code requirements. d. Roof: A single ply membrane d. No requirement. insulated roof with R19 Rigid Insulation. Toilet Floors a. Furnish and install ceramic tile a. No requirement. on floor and full height wet walls. Paint and/or vinyl shall be used on remaining walls. b. Furnish and install stone b. No requirement. (granite or marble) vanity top with apron and decorative mirrors. c. Furnish and install ceiling c. No requirement. mounted baked enamel toilet partitions with full height pilasters.. d. Furnish and install wall-mount, d. No requirement. flush valve water closets and wall-hung urinals to meet all code requirements. d. Fully ADA compliant restrooms. e. No requirement. Window Blinds a. No window coverings are included a. Provide building standard blinds, in the core & shell contract. 1" aluminum horizontal blinds by Levalor, Riviera Delux with dust-guard and color to be determined.
D-12 EXHIBIT D-2 TO LEASE -------------------- Webb Interactive The Neenan Company Classic Schedule Layout
Activity Orig - -------- ---- ID Activity Description Dur Early Start Early Finish - -- -------------------- --- ----------- ------------ 100 Initial Schematic Design 3 04OCT99 13OCT99 105 Review and Sign Off by Webb 0 15OCT99 110 Start Pricing Plans 5 22NOV99 29NOV99 120 Neenan Pricing 6 30NOV99 07DEC99 115 Review & Sign Off Pricing Plan with Tenant 4 07DEC99 10DEC99 125 Architectural Working Plans 8 10DEC99 21DEC99 195 Preconference Meeting with City 1 10DEC99 10DEC99 130 Backgrounds to engineers & Engineers drawings 7 13DEC99 21DEC99 140 Print and Log into Building Department 2 23DEC99 27DEC99 155 Building Department Review 35 23DEC99 27DEC99 135 Final Working Drawings Complete 1 22DEC99 22DEC99 145 Neenan Final Pricing 5 23DEC99 30DEC99 150 Fin.Review and Signoff Plans and Pricing by Webb 4 27DEC99 30DEC99 165 Layout Wall 3 28JAN99 01FEB99 170 Rough Mech and Fire 10 02FEB00 15FEB00 175 Frame Interior Walls 8 16FEB00 25FEB00 180 Finish Interiors 45 28FEB00 28APR00 185 Tenant Move In 3 01MAY00 03MAY00
D-13 EXHIBIT E TO LEASE ------------------ RULES AND REGULATIONS Landlord and Tenant agree that the following Rules and Regulations shall be and hereby are made a part of this Lease, and Tenant agrees that Tenant's employees and agents, or any others permitted by Tenant to occupy or enter the Premises, will at all times abide by said Rules and Regulations: 1. The sidewalks, entries, passages, corridors, stairways and elevators of the Building Complex shall not be obstructed by Tenant, or Tenant's agents or employees, or used for any purpose other than ingress to and egress from the Premises. 2. Furniture, equipment or supplies will be moved in or out of the Building only upon the elevator designated by Landlord and then only during such hours and in such manner as may be prescribed by Landlord and upon no less than forty-eight (48) hours prior notice to Landlord. Landlord shall have the right to approve or disapprove the movers or moving company employed by Tenant. Tenant shall cause its movers to use only the loading facilities and elevator designated by Landlord. In the event Tenant's movers damage the elevator or any part of the Building Complex, Tenant shall forthwith pay to Landlord the amount required to repair said damage. 3. No safe or articles, the weight of which may in the opinion of Landlord constitute a hazard or damage to the Building or Building's equipment, shall be moved into the Premises; provided, that Landlord acknowledges that Tenant's general office furniture, equipment, files and portable safe, if any, if approved as part of the initial Leasehold Improvements will not violate this provision. 4. No sign, advertisement or notice shall be inscribed, painted or affixed on any part of the inside or outside of the Building unless of such color, size and style and in such place upon or in the Building, as shall be first designated and approved in writing by Landlord, provided, however, there shall be no obligation or duty on Landlord to allow any sign, advertisement or notice to be inscribed, painted or affixed on any part of the inside or outside of the Building except as otherwise provided in the Lease. No furniture shall be placed in front of the Building or in any lobby or corridor, without the prior written discretionary consent of Landlord. Landlord shall have the right to remove all non-permitted signs and furniture, without notice to Tenant, and at the expense of Tenant. 5. Tenant shall not do or permit anything to be done in the Premises, or bring or keep anything therein which would in any way increase the rate of fire insurance on the Building or on property kept therein, constitute a nuisance or waste, or obstruct or interfere with the rights of other tenants, or in any way injure or annoy them, or conflict with any of the rules or ordinance of the Fire Department or of the Department of Health of the City and County where the Building is located. 6. Tenant shall not employ any person or persons other than the janitor of Landlord for the purpose of cleaning or taking care of the Premises, without the prior written consent of Landlord. Landlord shall be in no way responsible to Tenant for any loss of property from the Premises, however occurring, or for any damage done to Tenant's furniture or equipment by the janitor or any of janitor's staff, or by any other person or persons whomsoever; provided, however, that the janitorial staff is bonded. The janitor of the Building may at all times keep a pass key, and other agents of Landlord shall at all times be allowed admittance to the Premises. 7. Water closets and other water fixtures shall not be used for any purpose other than that for which the same are intended, and any damage resulting to the same from misuse on the part of Tenant, Tenant's agents or employees, shall be paid for by Tenant. No person shall waste water by tying back or wedging the faucets or in any other manner. 8. Except for animals assisting disabled persons, no animals shall be allowed in the offices, halls, corridors and elevators in the Building. No person shall disturb the occupants of this or adjoining buildings or premises by the use of any radio, sound equipment or musical instrument or by the making of loud or improper noises. 9. No vehicles, including bicycles, shall be permitted in the offices, halls, corridors, and elevators in the Building nor shall any vehicles be permitted to obstruct the sidewalks or entrances of the Building. 10. No additional lock or locks shall be placed by Tenant on any door in the Building unless written consent of Landlord shall first have been obtained. A reasonable number of keys to the toilet rooms if locked by Landlord will be furnished by Landlord, and neither Tenant, Tenant's agents or employees shall have any duplicate keys made. At the termination of this tenancy, Tenant shall promptly return to Landlord all keys to offices, toilet rooms or vaults. 11. No window shades, blinds, screens, draperies or other window coverings will be attached or detached by Tenant without Landlord's prior written consent. Tenant agrees to abide by Landlord's rules with respect to maintaining uniform curtains, draperies and/or linings at all windows and hallways. 12. No awnings shall be placed over any window by Tenant. 13. Tenant shall not install or operate any steam or gas engine or boiler, or carry on any mechanical operation in the Premises. The use of oil, gas or inflammable liquids for heating, lighting or any other purpose is expressly prohibited. Explosives or other articles deemed extra hazardous shall not be brought into the Building Complex. 14. Except as permitted by Landlord in conjunction with the initial Leasehold Improvements, and except for normal office decorating, Tenant shall not mark upon, paint signs upon, cut, drill into, drive nails or screws into, or in any way deface the walls, ceilings, partitions or floors of the Premises or of the Building, and any defacement, damage or injury caused by Tenant, Tenants's agents or employees, shall be paid for by Tenant. 15. Tenant shall not obstruct or interfere with the rights of other tenants of the Building, or of persons having business in the Building, or in any way injure or annoy such tenants or persons. 16. Tenant shall not commit any act or permit anything in or about the Building which shall or might subject Landlord to any liability or responsibility for injury to any person or property by reason of any business or operation being carried on in or about the Building or for any other reason. 17. Tenant shall not use the Building for lodging, sleeping, cooking (other than customary cooking operations related to employee meals and catered events for Tenant's business), or for any immoral or illegal purpose or for any purpose that will damage the Building, or the reputation thereof, or for any purposes other than those specified in the Lease. 18. Canvassing, soliciting, and peddling in the Building are prohibited, and Tenant shall cooperate to prevent such activities. 19. Tenant shall not use the building for manufacturing or for the storage of goods, wares or merchandise, except as such storage may be incidental to the use of the Premises for general office purposes and except in such portions of the Premises as may be specifically designated by Landlord for such storage. 20. Tenant shall not deposit any trash, refuse, cigarettes, or other substances of any kind within or out of the Building except in the refuse containers provided therefore. Tenant shall not introduce into the Building any substance which might add an undue burden to the cleaning or maintenance of the Premises of the Building. Tenant shall exercise its best efforts to keep the sidewalks, entrances, passages, courts, lobby areas, garages or parking areas, elevators, escalators, stairways, vestibules, public corridors and hall in and about the Building clean and free from rubbish. 21. Tenant shall use the Common Areas only as a means of ingress and egress, and Tenant shall permit no loitering by any persons upon Common Areas or elsewhere within the Building. The Common Areas and roof of the Building are not for the use of the general public, and Landlord shall, in all cases, retain the right to control or prevent access thereto by all persons whose presence in the judgment of the Landlord, shall be prejudicial to the safety, character, reputation or interests of the Building and its tenants. Tenant shall not enter the mechanical rooms, air conditioning rooms, electrical closets, or similar areas or go upon the roof of the Building without the express prior written consent of Landlord. 22. Tenant shall cooperate with Landlord in obtaining maximum effectiveness of the cooling system of the Building by closing drapes and other window coverings when the sun's rays fall upon the windows of the Premises. Tenant shall not obstruct, alter or in any way impair the efficient operation of Landlord's heating, ventilating, air conditioning, electrical, fire, safety, or lighting systems, nor shall Tenant tamper with or change the setting of any thermostat or temperature control valves in the Building. 23. Subject to applicable fire or other safety regulations, all doors opening into Common Area and all doors upon the perimeter of the Premises shall be kept closed and, during nonbusiness hours, locked, except when in use for ingress or egress. If Tenant uses the Premises after regular business hours or on nonbusiness days, Tenant shall lock any entrance doors to the Building or to the Premises used by Tenant immediately after using such doors. 24. Tenant shall not permit its employees or agents to smoke in any lobby, hallway or restroom within the Building Complex or in any other areas of the Building Complex posted as a non-smoking area. 25. Tenant shall not permit any employee, agent, or invitee to bring or carry guns, weapons, firearms, or the like (including concealed weapons), into the Premises or the Building Complex. EX-10.7 3 INTERNET/BUSINESS SITE DEVELOPMENT & HOST AGREE. Exhibit 10.7 INTERNET/BUSINESS SITE & HOST AGREEMENT This Agreement ("AGREEMENT") is entered into and effective this _____ day of January, 2000 by and between RE/MAX International, Inc. ("RE/MAX"), a Colorado corporation with its principal place of business at 8390 East Crescent Parkway, Suite 600, Greenwood Village, CO 80111 and Webb Interactive Services, Inc. ("Webb"), a Colorado corporation (formerly known as Online System Services, Inc.) with its principal place of business at 1800 Glenarm Place, Denver, CO 80202. WHEREAS, RE/MAX is interested in maintaining for itself and providing to its affiliates a private site on the World Wide Web ("WWW") for their use in communicating with RE/MAX and its approved suppliers and benefiting from an array of other service capabilities and is desirous of assuring that such site is always competitive, if not state of the art, and regularly enhanced to take full advantage of emerging technologies, such site being a password protected area on the WWW using HTML documents, Active Server Pages, Databases, Forums, Chat Rooms and other features and technologies, all combined to present a virtual RE/MAX community which is referred to as "RE/MAX Mainstreet". WHEREAS, in accordance with the terms and specifications set forth in the Internet/Business Site Development & Host Agreement entered into by the parties effective November 12, 1997 (the "Original Agreement"), Webb designed and developed and is currently hosting RE/MAX Mainstreet; WHEREAS, since the development of RE/MAX Mainstreet, Webb has substantially revised and improved its community software and is currently offering and marketing a suite of services under the name CommunityWare<-1-228>/XML, which software utilizes a new architecture/platform (herein "CommunityWare<-1-228>/XML") which platform is well-suited for use with RE/MAX Mainstreet; and WHEREAS, Webb and RE/MAX desire to replace the Original Agreement in order to better provide for the continued hosting, maintenance and enhancement of RE/MAX Mainstreet by basing the R/M Customized Software (as hereinafter defined) on CommunityWare<-1-228>/XML in order to substantially reduce the amount of customized software utilized in RE/MAX Mainstreet. NOW THEREFORE, in consideration of the mutual covenants set forth herein, the parties hereto agree as follows: 1. DEFINITIONS For purposes of this AGREEMENT and their relationship, the following terms shall have the meanings assigned to them. a. "Host Services": That collection of services specified to be provided by the entity acting as host of RE/MAX Mainstreet, including without limitation, services such as security, help desk, billing, Email and other specified ancillary services commonly or customarily performed by a site host. b. "Deliverables": The components of the online services and capabilities specified for subscribers to RE/MAX Mainstreet, including without limitation, Host Services, HTML documents, Active Server Pages, Databases, Forums, Message Conferences, Chat, a Moderated Library and other services and capabilities specified in this AGREEMENT. c. "Embedded Software": Commercially available, third party software such as Microsoft SQL Server, Microsoft Internet Information Server, Microsoft Commerce Server and Internet Explorer 4.0 Browser, which software is not owned by Webb, but is or may be used by Webb in its solutions to RE/MAX's business web site objectives. d. "Developed Software": Software developed and owned exclusively by Webb, including without limitation, that software developed using XML or ASP Technology for highly flexible, database-driven WWW web sites and that software developed by Webb to enhance or supplement the CommunityWare<-1-228>/XML Interact Software and/or compliment or integrate the Embedded Software in the creation of the R/M Customized Software. e. "CommunityWare<-1-228>/XML Interact Software": An integrated, creatively interfaced combination of Developed Software and Embedded Software which serves as Webb's basic suite of virtual community products and upon which RE/MAX Mainstreet is and is to be based. f. "R/M Customized Software": "CommunityWare<-1-228>/XML Interact Software as customized, enhanced and modified by Developed Software and Embedded Software to meet the objectives of RE/MAX for "RE/MAX Mainstreet". g. "RE/MAX Mainstreet": The RE/MAX highly flexible, functional, scaleable, easy-to-use, database driven business, virtual community web site which utilizes the R/M Customized Software and which satisfies all criteria and specifications identified in the Original Agreement. h. "Residual Information": Information in non-tangible form, which may be retained by persons within Webb's organization who have participated in the development and delivery of the R/M Customized Software and/or the RE/MAX Mainstreet site. 2. RE/MAX MAINSTREET Webb hereby agrees to maintain the R/M Customized Software and to migrate the R/M Customized Software to the CommunityWare<-1-228>/XML platform that are deemed to be in the best interests of both parties incrementally in the year 2000, to the R/M Customized Software in order to improve its functionality, scalability and ability to be enhanced and, utilizing such software, to provide a fully operational, subscriber accessible, virtual community business suite exclusively for RE/MAX and its affiliates, such site being known as "RE/MAX Mainstreet" and which site provides all of the Deliverables listed below, all of which have been previously developed, tested, approved and released to production, such that each Deliverable satisfies its corresponding specifications (See for specifications, Exhibits "A" through "J" to the Original Agreement): a. Message Conferences: Unlimited number of RE/MA defined collaborative subscriber-to-subscriber messaging conferences consistent with the specifications set forth in Exhibit A to the Original Agreement. b. Chat Interactive Topic Discussions: Chat Lobbies and no fewer than fifteen (15) conference rooms for each message conference to facilitate multiple simultaneous interactive group discussions by topic per chat room with capability for accommodating peak periods of demand and otherwise consistent with the specifications of Exhibit B to the Original Agreement. c. Moderated Libraries: Libraries for each messag conference to enable the moderated posting and retrieval of subscriber files (documents, forms, graphics) consistent with the specifications set forth in Exhibit C to the Original Agreement. d. EMail Capabilities: Forwarding Email accounts handled on a proxy basis per designated address and addressee information, i.e., username@REMAX.NET, assigning a unique address per subscriber, maintaining a searchable e-mail address directory online, and otherwise consistent with the specifications set forth in Exhibit D to the Original Agreement. e. Flexibility for Future Expansions/Enhancements/Mobility: Design features which assure maximum flexibility to meet future demands and take advantage of future technologies, assure functional, scaleable, and easy to use features which will enable RE/MAX to adapt to changing uses or demands, consistent with the specifications set forth in Exhibit A through F attached to the Original Agreement. f. Linking and Bridging Capabilities: System flexibility fo creating data entry, transfer, and retrieval and communication links to third party service and content providers on the WWW consistent with the specifications set forth in Exhibit E attached to the Original Agreement. g. Administrative Capabilities: A CommunityWare <-1-228>/XML Interact administrator interface which provides for administering and reporting on the subscriber accounts, structure of the conferences, chat rooms, libraries, content (graphics and text), and other components of RE/MAX Mainstreet and otherwise consistent with Exhibit F attached to the Original Agreement. In addition, RE/MAX shall have file transfer protocol access for upgrading graphics and layout content for the RE/MAX Mainstreet site. h. Telephone Help Desk: On call subscriber help desk and support capabilities which will provide subscribers the ability to speak to a technical support agent within (3) minutes of receiving the call. Support will be available 18 hours per day, seven (7) days a week. In addition, technical support will be accessible via Email with a response within 24 hours and otherwise consistent with Exhibit G attached to the Original Agreement. 3. SOFTWARE LICENSE During the term of this AGREEMENT, on and subject to the terms and conditions set forth below in this Paragraph 3, Webb hereby grants to RE/MAX a limited license to use the R/M Customized Software. 4. SOFTWARE UPGRADES/ENHANCEMENTS Webb hereby agrees that included within the software license set forth above in Paragraph 3 hereof is a commitment for the term of the license to notify RE/MAX of upgrades and enhancements as they become known to Webb and to give RE/MAX the option, at RE/MAX's sole cost and expense, as described in sections 9.a and 9.b, to have those upgrades or enhancements built into the R/M Customized Software and/or otherwise included in RE/MAX Mainstreet. In the event RE/MAX elects to include any such upgrade or enhancement, Webb shall acquire any rights in software required and make such modifications in the R/M Software as are necessary to include the selected enhancement or upgrade. In all cases, Webb modifications to software shall be accomplished with a minimum of disruption of the Host Services and RE/MAX Mainstreet's online availability. Additionally, in the event RE/MAX becomes aware of any software, feature, enhancement, or of new technology that RE/MAX believes may be advantageous for RE/MAX Mainstreet, RE/MAX will notify Webb and Webb will endeavor to develop a proposal to RE/MAX for the inclusion of the same in RE/MAX Mainstreet and such proposal shall include plans, costs and terms for maintaining such software, feature enhancements or new technology. RE/MAX shall have the right to seek directly other bids from third parties and to present the same to Webb. If Webb is unwilling or unable to include the feature of interest at a cost below or not more than ten percent (10%) above the best competing proposal, RE/MAX shall have the right to have such feature built into the R/M Customized Software and RE/MAX Mainstreet by a third party selected by RE/MAX. Webb agrees to cooperate with such third party or, in the alternative, to provide such access to its documentation and source codes as may be necessary to enable such third party to include such feature in the R/M Customized Software and RE/MAX Mainstreet. The function of maintaining the R/M Customized Software as modified shall still be the responsibility of Webb and the costs thereof shall still be deemed to be included in the monthly fee except where additional costs are approved as part of the proposal approval process, in which case RE/MAX shall bear such additional cost. 5. LINKS WITH THIRD PARTY SERVICE & CONTENT PROVIDERS Webb hereby agrees that RE/MAX shall have the right to develop or require Webb to accommodate data insertion and retrieval links and communication links on the WWW with third party providers of services and/or content. For example, RE/MAX shall have the right at any time during the term of this AGREEMENT, to develop itself, or require Webb to develop, a link between RE/MAX Mainstreet and a third party web site through which link subscribers to RE/MAX Mainstreet could view and use that web site without leaving the RE/MAX Mainstreet web site. Should there be costs to Webb involved in satisfying RE/MAX's request for any such link, it is understood that such costs shall be paid or reimbursed by RE/MAX, but only to the extent they are reasonable and represent the published rates for any engineering or project management time required and the actual out of pocket costs incurred by Webb without any mark-up or surcharge and that such costs are consistent with estimates, quotes, or proposals submitted to RE/MAX by Webb in advance. It is further understood that RE/MAX will be solely responsible for any subscriber fee or access fee associated with access to any such third party provider. Furthermore, RE/MAX shall have the right to divide any additional income generated from any such link with the third party provider, and do so with no duty to account or disclose to Webb the details of its relationship with such third party provider, and without sharing with Webb any portion of the additional income. 6. HARDWARE PREVIOUSLY ACQUIRED FOR RE/MAX MAINSTREET RE/MAX hereby transfers and assigns to Webb all of RE/MAX's right, title and interest to the computer equipment purchased pursuant to Paragraph 7 of the Original Agreement. 7. HOST SERVICES FOR RE/MAX MAINSTREET Webb hereby agrees to host RE/MAX Mainstreet and to provide all services contemplated by the role of community web site host and all services of an administrative or ancillary nature, including without limitation, security, help desk, subscriber billing, and billing administration, online credit card validation and/or charge authorizations, monthly, or, if required, more frequent, ongoing, maintenance of the foregoing functions as well as the basic functions of the RE/MAX Mainstreet web site, all consistent with the specifications set forth in Exhibit H to the Original Agreement. It is understood that on or around January 15, 2000, all aspects of the current subscriber billing system will be removed from RE/MAX Mainstreet. 8. TRANSFER OF HOST SERVICES RE/MAX reserves the right to move RE/MAX Mainstreet to a new hosting entity and to use the escrowed copy of the R/M Customized Software if necessary to continue RE/MAX Mainstreet in any of the following circumstances: a. Any failure or disruption in the business of Webb due to any bankruptcy filing on behalf of Webb or any other event which threatens the ability of Webb to continue to perform its obligations under this AGREEMENT; b. Any change in ownership or control of Webb to any entity or organization which competes directly or indirectly with RE/MAX or its affiliates; c. The disruption of access by subscribers (other than planned downtime) which causes the site to be available for less than 98% of the time during any calendar quarter. d. Reports to RE/MAX from the greater of (i) one percent (1%) of the subscribers to RE/MAX Mainstreet or (ii) fifty (50) subscribers to the effect they cannot get online or they have difficulty getting access to RE/MAX Mainstreet, that chat rooms are not available, Email is not functioning, security has been breached, access to the Help Desk at RE/MAX Mainstreet is difficult, or any other similar type of problem which continues to be reported to RE/MAX thirty (30) days after Webb has been notified in writing of such problem. The transfer of the Host Services function to a new entity shall not relieve Webb of its other obligations under this AGREEMENT or the software license set forth herein. RE/MAX understands that because of the complexity of the hosting environment, moving RE/MAX Mainstreet to a new hosting entity would require significant re-engineering of many aspects of the site. 9. CONTRACT PRICE; PAYMENT TERMS RE/MAX shall pay Webb monthly for the license and services provided pursuant to this Agreement as follows: a. Fixed Fee for Hosting, Maintenance of Site and Software License: A fee of $20,000 per month shall be paid for Webb's hosting of RE/MAX Mainstreet, for Webb's providing standard maintenance and support for the services covered by this AGREEMENT and for the limited license provided in accordance with Paragraph 3 of this AGREEMENT. Standard maintenance and support includes fixing of any software problems required to provide the services contemplated by this AGREEMENT but do not include cosmetic changes or functional enhancements. Included with the monthly fee is the availability to RE/MAX of forty (40) hours per month of engineering and project management time which Webb will make available for site enhancements, to make changes to the user interface, to add new features or to integrate new core features of CommunityWare<-1-228>/XML and to integrate with third-party software. b. Variable Fee for Cost Support and Additional Site Enhancement Services. A monthly fee equal to the greater of $3,000 or $1.20 per minute of call support provided during each month shall be paid for telephone support to be provided by Webb or by a third-party retained by Webb to provide call support to the subscribers to RE/MAX Mainstreet. In addition, Webb will provide engineering and project management services in excess of the forty (40) hours included in the fixed monthly fee as desired by RE/MAX, such services to be provided at Webb's published rates. Webb will provide the estimates of the time required to complete desired enhancements if so requested by RE/MAX. Webb may provide promotional support for RE/MAX Mainstreet and will provide estimates of the costs required for any travel, trade show materials, etc. that may be requested by RE/MAX. These costs will be paid by RE/MAX for each occurrence on a pass through basis. c. Reduction in Fixed Monthly Fee. In the event that RE/MAX shall move RE/MAX Mainstreet to a new hosting entity in accordance with the provisions of Paragraph 8 hereof, the fixed monthly fee provided for in Paragraph 9(a) above shall be reduced to $17,500 per month. d. Payment Terms. Webb shall bill RE/MAX monthly for the fixed and variable monthly fees for the preceding month, which invoices shall be paid within thirty (30) days of the receipt thereof. e. These new payments are to take effect January 1 2000, with the first invoice at January 2000 month-end. 10. OWNERSHIP OF WEBB INTELLECTUAL PROPERTY Except for the rights under the license herein granted to RE/MAX and otherwise specifically addressed in this AGREEMENT, it is hereby acknowledged and agreed to by Webb and RE/MAX that all rights of any nature whatsoever in and to the Developed Software, the CommunityWare<-1-228>/XML Interact Software and the R/M Customized Software are retained by Webb. 11. OWNERSHIP OF WEBB PROPRIETARY TECHNOLOGY Webb shall own all worldwide rights, title, and interest in and to the Developed Software, including copyright right, and also in and to any software tools, specifications, ideas, concepts, know-how, processes, and techniques used by Webb in performing the services covered by this AGREEMENT (collectively "Proprietary Technology"), including all Intellectual Property rights therein. Nothing in this AGREEMENT or otherwise shall be deemed to prohibit or limit in any way Webb's right to use the Proprietary Technology (as defined herein) or Residual Information, in whole or in part, to develop and market any software that is the same in any or all respects as the Developed Software, or to develop other software products or applications for Webb customers. Webb acknowledges and agrees that during the term of this Agreement and any renewals thereof, Webb shall not reuse any code custom developed for RE/MAX for a real estate service business or any other business or enterprise that directly or indirectly competes with RE/MAX or any of its corporate affiliates, RE/MAX Broker/Owners or RE/MAX Affiliates, including but not limited to, any business that provides real estate brokerage or property management services, sells or markets real estate franchises or provides corporate relocation services ("RE/MAX Competitor" or to any company that has an ownership interest of 10% or more in a RE/MAX Competitor or to any other person or entity.") Webb agrees to not allow its key staff dedicated to this effort to work on other real-estate projects during the term of this contract. 12. RE/MAX ACKNOWLEDGMENT RE/MAX hereby acknowledges that the Documentation and Source Codes for the R/M Customized Software may contain trade secrets and confidential information of Webb and that providing the R/M Customized Software, in whole or in part, to any unauthorized third parties would be harmful to the interests of Webb. RE/MAX agrees, therefore, to use reasonable efforts to supervise, manage and control the R/M Customized Software, and to safeguard all copies of the same licensed under this AGREEMENT using the same degree of care that RE/MAX uses to safeguard its own proprietary materials. RE/MAX agrees that, except to the extent expressly authorized in this AGREEMENT or the license contained herein, it will not sub-license, re-sell, or otherwise authorize any other party to possess or obtain the R/M Customized Software, or to reverse engineer the R/M Customized Software. 13. RE/MAX OWNERSHIP OF DATA, CONTENT & SUBSCRIBER INFORMATION RE/MAX shall own all worldwide rights, title, and interest in and to its name and logos and all other components of graphical and textural content used in, or in connection with, the promotion of RE/MAX Mainstreet and RE/MAX shall own all rights, title, and interest in the name "RE/MAX Mainstreet" and in the URL address selected for the site. All use of the RE/MAX marks in connection with the web site shall inure exclusively to the benefit of RE/MAX. RE/MAX shall also own exclusively all data entered by subscribers and/or by RE/MAX or third parties and Webb shall periodically create back-up tapes of such data for its safekeeping. RE/MAX shall also own exclusively all subscriber data, including without limitation, subscriber name, address, telephone number, FAX number, credit card numbers and expiration dates, and all other data collected or developed in reference to subscribers individually or collectively as a subscriber base. In no event shall Webb disclose, sell, market, use, distribute, or provide to any third party or governmental agency any form of name, address, phone number, user name, Email address or other listing, either physically or electronically, or provide any form of online solicitation rights or opportunities to any third party or governmental agency. Webb itself shall not solicit or communicate directly with the subscriber base for RE/MAX Mainstreet, except with the prior written consent of RE/MAX to the subject matter and content of such communication, and such prior written authority shall be required of RE/MAX for each proposed communication, the overall objective being to minimize the volume of unwanted solicitations over RE/MAX Mainstreet. Webb and RE/MAX shall maintain a guideline for responding to requests by subscribers, for global Email messages to all or large groupings of subscribers, and Webb shall follow such guideline. Webb shall periodically provide RE/MAX with a back-up tape setting forth all subscriber information on file for safekeeping by RE/MAX. 14. WEBB ACKNOWLEDGMENT Webb hereby acknowledges that the name "Mainstreet" for real estate industry-related web site is unique to RE/MAX and the database, subscriber information, and content of RE/MAX Mainstreet may contain trade secrets, confidential information, and/or highly sensitive data and that RE/MAX and/or its subscriber base will be irreparably damaged if such information were disclosed, sold, or otherwise distributed or made public. Webb acknowledges that RE/MAX is the exclusive owner of such data, content, and information and Webb agrees not to challenge the validity of any mark owned by RE/MAX, or RE/MAX claim to ownership to the site name, "RE/MAX Mainstreet," or of the URL address for the site. Webb agrees, therefore, to use its best efforts to protect and secure such data, content, and subscriber information from third parties and to incorporate into the R/M Customized Software such security measures as it deems reasonable and appropriate to protect the RE/MAX Mainstreet web site from unauthorized use, access, or invasion by third parties. 15. DESIGN CHANGES The parties hereto agree that RE/MAX shall have the exclusive right, without consultation with or notice to Webb, at any time and from time-to-time to modify at RE/MAX's sole cost and expense the structural, graphical, and textural content and appearance of RE/MAX Mainstreet in limited areas as defined by the technology and/or to change the name of the web site to something other than RE/MAX Mainstreet. Webb agrees to provide RE/MAX with access codes and information sufficient to enable RE/MAX to effectuate such changes via online modifications, invisible to Webb or subscribers. 16. LIMITATIONS ON LIABILITY Webb makes no direct or implied guarantee regarding the response or business which will be generated from the RE/MAX Mainstreet site nor will RE/MAX attempt to hold Webb responsible for any economic or legal liabilities which may result from the presence or distribution of the material contained in the RE/MAX Mainstreet web site, provided, however, that Webb will work with RE/MAX in maintaining guidelines for subscriber uses and message content, and Webb, as Host Services provider, shall exercise its best efforts to assure compliance by subscribers with such guidelines and terminate any subscriber who refuses or fails repeatedly to honor such guidelines. To this end, the parties hereto agree that the subscriber agreement shall include both the obligation to honor guidelines established, and from time-to-time amended, for RE/MAX Mainstreet. Such subscriber agreement will also expressly recite the right to terminate RE/MAX Mainstreet access privileges for failure to honor such guidelines. Neither Webb nor anyone else who has been or will be involved in the creation, production, or delivery of the RE/MAX Mainstreet web site shall be liable for any direct, indirect, consequential or incidental damages (including damages for Webb of business profits, business interruption, loss of business information and the like) arising out of the use or inability to use RE/MAX Mainstreet even if Webb has been advised of the possibility of such damages. 17. RE/MAX INDEMNIFICATION OF WEBB RE/MAX hereby acknowledges that Webb employees, agents, and officers have assumed no liability or responsibility for the content generated by RE/MAX, subscribers to RE/MAX Mainstreet or others and supplied to Webb for mounting on Webb's servers for Password Protected access via the Internet and World Wide Web (WWW). RE/MAX agrees to indemnify, save, and hold harmless Webb and its directors, officers, employees, and agents from and against any and all claims arising out of RE/MAX's publication of content on RE/MAX Mainstreet and to pay reasonable attorney fees incurred in the defense of any such claim, provided, however, that RE/MAX's obligation hereunder for liability and defense costs together shall be limited strictly by the amount for which such claim could have been settled. This indemnification shall include any and all claims of copyright infringement, slander, or libel, but excludes any claim to the effect that the Developed Software, the R/M Software or RE/MAX Mainstreet as such, infringe any copyrights or other rights of third parties. This AGREEMENT does not create or imply and shall not be construed to create or imply an agency relationship between Webb and RE/MAX. Webb agrees under these terms to provide the specific development and Host Services described in this AGREEMENT. 18. WEBB INDEMNIFICATION OF RE/MAX Webb hereby acknowledges that neither RE/MAX nor any of its directors, officers, employees, or agents have assumed any liability whatsoever for the conduct, actions, or performance of Webb under this AGREEMENT, or for Webb's performance of Host Services hereunder. Webb hereby agrees to indemnify, save, and hold harmless RE/MAX and its directors, officers, employees, and agents from and against any and all claims whatsoever, including without limitation, claims arising out of the software or software development efforts or undertakings of Webb, and claims to the effect that any software used in the R/M Customized Software infringes the copyrights of any third party or that Webb wrongfully obtained, is not entitled to use, or is not the rightful owner of the Developed Software, CommunityWare(TM)/XML Interact Software, R/M Customized Software, Residual Information, Intellectual Property, Proprietary Technology and/or trade secrets, and confidential information as those terms are defined herein, and claims relating in any way to Webb relationships with any employee or independent contractor working on the development of the RE/MAX Mainstreet web site or involved at any level in providing Host Services under this AGREEMENT. Webb further agrees to pay reasonable attorney fees incurred by RE/MAX in the defense of any such claim, provided, however, that Webb's obligation hereunder for liability and defense costs together shall be limited strictly by the amount for which such claim could have been settled. 19. WEBB WARRANTIES Webb hereby warrants that its Developed Software, its CommunityWare<-1-228>/XML Interact Software and its other claimed proprietary tools and residual information were originally developed by Webb or rightfully and lawfully acquired, and that Webb has the rights therein to enter into this AGREEMENT, to enter into and license the R/M Customized Software in accordance with the license contained herein, to provide the Deliverables contemplated, and perform the Host Services agreed to, and that in doing so, Webb will not be violating the rights of privacy, the copyrights or any other rights of any third party and that its performance of its obligations hereunder will not place it in breach of any other contract or commitment. Webb does not warrant the license or the reliability of work conducted by any third party. 20. SECURITY MEASURES & PASSWORD ACCESS Access to RE/MAX Mainstreet shall be restricted to individuals affiliated in good standing with RE/MAX International, Inc. and who have executed and returned a current form subscriber agreement. Each such individual shall have a unique user name and a confidential password. Such names and passwords will be assigned in accordance with the procedure outlined in Exhibit J attached to the Original Agreement. Access to RE/MAX Mainstreet will require the use of industry standard encrypted and secure communication protocols for those portions of the subscriber's access, file transfers, messaging, or other activities which contain content which is deemed to be sensitive by RE/MAX and, more specifically, those involving the transfers of billing, credit card or other sensitive data and information exchange. On site system security will be provided by hardware, protocol, and Windows-NT based security consistent with specifications set forth on Exhibit J attached to the Original Agreement. 21. DATA & CONTENT BACK-UP Webb shall provide to RE/MAX a monthly copy of the database, which may include such information as forums messages, subscriber identity data, subscriber payment history information with billing address, subscriber Email address and password information residing on the servers allocated to providing access to RE/MAX Mainstreet. Such back-up copy shall be maintained by RE/MAX for the benefit of itself and Webb should the software and web site become corrupted or inoperable for any reason. 22. MINIMUM PERFORMANCE STANDARDS In the performance of its obligations under this AGREEMENT, Webb shall demonstrate to RE/MAX that access to RE/MAX Mainstreet will satisfy the minimum performance standards of simultaneous use by 10, 25, 50, 75, and 100 concurrent users performing a mixture of chat, library downloads, and messaging without any significant (i.e., less than 10%) degradation of response time. 23. TERM AND TERMINATION The initial term of this AGREEMENT is two (2) years from the effective date of this AGREEMENT. RE/MAX may terminate this AGREEMENT at any time in the event Webb fails to meet or satisfy the Minimum Performance Standards established by Paragraph 22 hereof. Either party may terminate this contract in the event that the other party breaches this AGREEMENT provided that the breach has not been cured, notwithstanding that the non-breaching party has given the breaching party written notice of the alleged breach and thirty (30) days to cure. This AGREEMENT will automatically renew for successive two (2) year terms, commencing at the conclusion of the initial two (2) year term, unless written notice of intent not to renew is provided by either party one hundred eighty (180) days prior to the expiration of the then current term. 24. NOT ASSIGNABLE This AGREEMENT is uniquely between Webb and RE/MAX and is based in large measure on the trust, confidence, mutual respect, and unique attributes of the parties. This AGREEMENT shall not be assignable by either party without the express written consent of the other, and such written consent may be withheld for any reason whatsoever. Notwithstanding the foregoing, RE/MAX shall have the right to assign this AGREEMENT to any new corporation formed or any existing corporation to oversee, own and/or manage RE/MAX Mainstreet so long as the same group of individuals who own a majority of shares in RE/MAX also control such new or existing corporation. 25. CHOICE OF LAW This AGREEMENT shall be construed and interpreted in accordance with the laws of the state of Colorado and of the United States of America. 26. INCORPORATION BY REFERENCE Exhibits A through J attached to the Original Agreement are hereby incorporated herein by reference. 27. ARBITRATION In the event of any dispute between the parties hereto regarding duties or responsibilities under this AGREEMENT, or any other claim by one party against the other arising out of their relationship under this AGREEMENT, or their performance of any duty or obligation relating to this AGREEMENT, or its subject matter, or the RE/MAX Mainstreet web site, such dispute shall be submitted to binding arbitration in accordance with the Federal Arbitration Act and shall be arbitrated by the American Arbitration Association in accordance with its rules and procedures for commercial arbitration. 28. NO WAIVER Any failure by either party hereto to enforce at any time any term or condition of this AGREEMENT shall not be considered a waiver of that party's right thereafter to enforce that same term or condition or any other term or condition of this AGREEMENT. 29. ENTIRE AGREEMENT This AGREEMENT constitutes the entire agreement between RE/MAX and Webb regarding the subject matter hereof, and this AGREEMENT may not be amended, altered, or changed except by a written agreement signed by both parties hereto. Except as expressly incorporated herein by reference, the Original Agreement is hereby terminated and of no further force and effect. 30. HEADINGS The headings used in this AGREEMENT are used solely for convenience and are not an aid in the interpretation of this AGREEMENT or a limitation to the application of any term or condition hereof. IN WITNESS WHEREOF, RE/MAX International, Inc. and Webb Interactive Services, Inc. have executed this AGREEMENT. Webb Interactive Services, Inc. RE/MAX International, Inc. - --------------------------- ---------------------------- By By - --------------------------- ---------------------------- Title Title - --------------------------- ----------------------------- Date Date EX-21 4 SUBSIDIARIES OF WEBB INTERACTIVE SERVICES, INC. Exhibit 21 Subsidiaries of Webb Interactive Services, Inc. Durand Communications, Inc., a California corporation. NetIgnite2, LLC, a Colorado limited liability company. EX-23.1 5 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-KSB of our report dated February 25, 2000, included in Registration Statement File No. 333-13983 on Form S-8, Registration Statement File No. 333-83103 on Form S-8, Registration Statement File No. 333-03282-D on Form S-3, Registration Statement File No. 333-58653 on Form S-3, Registration Statement File No. 333-69477 on Form S-3, Registration Statement File No. 333- 71503 on Form S-3, Registration Statement File No. 333-86465 on Form S-3, Registration Statement File No. 333-87887 on Form S-3, Registration Statement File No. 333-67509. It should be noted that we have not audited any financial statements of the company subsequent to December 31, 1999, or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Denver, Colorado March 27, 2000 EX-27 6 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-30-1999 4,164,371 0 111,132 4,000 0 5,115,265 3,754,647 1,402,158 22,624,534 2,363,213 4,167,783 0 1,020,295 49,513,769 (43,052,848) 22,624,534 1,944,283 1,944,283 1,734,314 15,233,631 98,629 0 2,352,062 (17,277,095) 0 (1,727,095) 0 0 (4,588,917) (21,866,012) (3.31) (3.31)
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