-----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, UsZFNTyfYZuDYgQJVz9tyxFzVjsHYEAnD7L8uy99A5pc8P3VE12PJKjWBlhRuJJL NdlkSUAaWfWYrpChrOpmww== 0001144204-05-009638.txt : 20050331 0001144204-05-009638.hdr.sgml : 20050331 20050331145615 ACCESSION NUMBER: 0001144204-05-009638 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050331 DATE AS OF CHANGE: 20050331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOAMERICA INC CENTRAL INDEX KEY: 0001101268 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 223693371 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-29359 FILM NUMBER: 05719442 BUSINESS ADDRESS: STREET 1: C/O GOAMERICA, INC. STREET 2: 433 HACKENSACK AVENUE CITY: HACKENSACK STATE: NJ ZIP: 07601 BUSINESS PHONE: 2019961717 MAIL ADDRESS: STREET 1: C/O GOAMERICA STREET 2: 401 HACKENSACK AVENUE CITY: HACKENSACK STATE: NJ ZIP: 07601 10-K 1 v014977_10k.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 0-29359 GOAMERICA, INC. ------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Delaware 22-3693371 - ------------------------------------ -------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 433 Hackensack Avenue, Hackensack, New Jersey 07601 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (201) 996-1717 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- None - ----------------------------- ----------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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: |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. |X| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes: |X| No: |_| The aggregate market value of the voting common equity of the registrant held by non-affiliates (for this purpose, persons and entities other than executive officers, directors, and 5% or more shareholders) of the registrant, as of the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2004), was $11,778,583. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 24, 2005: Class Number of Shares ----- ---------------- Common Stock, $0.01 par value 2,093,451 The following documents are incorporated by reference into the Annual Report on Form 10-K: Portions of the registrant's definitive Proxy Statement for its 2005 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report. TABLE OF CONTENTS
Item Page ---- ---- PART I 1. Business of the Company................................................ 2 2. Properties............................................................. 12 3. Legal Proceedings...................................................... 12 4. Submission of Matters to a Vote of Security Holders.................... 14 4A. Executive Officers of the Registrant................................... 14 PART II 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities................. 16 6. Selected Consolidated Financial Data................................... 18 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 20 7A. Quantitative and Qualitative Disclosures About Market Risk............. 33 8. Financial Statements and Supplementary Data............................ 33 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................. 33 9A. Controls and Procedures................................................ 34 9B. Other.................................................................. 34 PART III 10. Directors of the Registrant............................................ 35 11. Executive Compensation................................................. 35 12. Security Ownership of Certain Beneficial Owners and Management......... 35 13. Certain Relationships and Related Transactions......................... 35 14. Principal Accountant Fees and Services................................. 35 PART IV 15. Exhibits and Financial Statements...................................... 36 SIGNATURES................................................................................. 38 EXHIBIT INDEX.............................................................................. 39 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE................ F-1
Each reference in this Annual Report to "GoAmerica", the "Company" or "We", or any variation thereof, is a reference to GoAmerica, Inc. and its subsidiaries, unless the context requires otherwise. Many of GoAmerica's product/service names referred to herein are trademarks, service marks or tradenames of GoAmerica. This Annual Report also includes references to trademarks and tradenames of other companies. The GoAmerica and Wynd Communications names and logos and the names of proprietary products and services offered by GoAmerica and Wynd Communications are trademarks, registered trademarks, service marks or registered service marks of GoAmerica. FORWARD-LOOKING STATEMENTS The statements contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended) that involve risks and uncertainties. Such forward-looking statements may be identified by the use of forward-looking terminology such as "may", "will", "expect", "estimate", "anticipate", "continue", or similar terms, variations of such terms or the negative of those terms. Such forward-looking statements involve risks and uncertainties, including, but not limited to: (i) our limited operating history; (ii) our ability to successfully manage our relationship with EarthLink; (iii) our dependence on EarthLink to provide billing, customer and technical support to certain of our subscribers; (iv) our ability to respond to the rapid technological change of the wireless data industry and offer new services; (v) our dependence on wireless carrier networks; (vi) our ability to respond to increased competition in the wireless data industry; (vii) our ability to integrate acquired businesses and technologies; (viii) our ability to generate revenue growth; (ix) our ability to increase or maintain gross margins, profitability, liquidity and capital resources; (x) our ability to manage our remaining operations; and (xi) difficulties inherent in predicting the outcome of regulatory processes. Such risks and others are more fully described in the Risk Factors set forth in Exhibit 99.1 to this Annual Report. Our actual results could differ materially from the results expressed in, or implied by, such forward-looking statements. PART I ITEM 1. BUSINESS OF THE COMPANY. GENERAL GoAmerica(R) is a wireless data communications service provider, offering solutions primarily for consumers who are deaf, hard of hearing and/or speech-impaired, including wireless subscription and value added services, Internet relay services and wireless devices and accessories. Wynd Communications Corporation, a wholly owned subsidiary of GoAmerica, offers enhanced services known as WyndTell(R) and WyndPower(TM), which assist our deaf or hard of hearing customers in communicating from most major metropolitan areas in the continental United States and parts of Canada. WyndTell and WyndPower allow customers to send and receive TTY/TDD (text telephone or teletypewriter) messages, faxes, and text-to-speech messages, send and receive email messages to and from any email service, provide for delivery and acknowledgements of sent messages that are read, and access the Internet using such wireless computing devices as Research in Motion, or RIM, wireless handheld devices, certain 2 Motorola paging devices and the T-Mobile Sidekick, Fido hiptop, and SunCom hiptop devices running on Danger Inc.'s hiptop platform. GoAmerica continues to offer wireless data products and services to the consumer and enterprise markets as well as support customers who use our proprietary software technology called Go.Web(TM). Go.Web is designed for use mainly by enterprise customers to enable secure wireless access to corporate data and the Internet on numerous wireless computing devices (including RIM's BlackBerry and interactive handheld devices; Microsoft Pocket PC-based personal digital assistants; Palm operating system-based handheld computing devices; and laptop computers). The Wynd Communications and Go.Web services transmit over most major wireless data networks in North America. Our revenues are derived principally from subscription to our value-added wireless data services, for which customers typically pay monthly recurring fees. We derive additional revenue from the sale of wireless communications devices and commissions from the acquisition of subscribers on behalf of various wireless network providers. We continue to engineer our technology to operate with new versions of wireless devices as they emerge. In September 2004, we launched our GA Prepaid(TM) division and expanded our product portfolio by commencing to offer prepaid products and services, such as domestic and international calling cards, prepaid cellular/wireless telephones and related services. On December 1, 2004, we acquired certain assets from Global Interactive(TM), an established provider of wireless products, services and accessories. Subject to our capital constraints, we intend to evaluate additional alliances and acquisitions that we believe will allow us to quickly increase the scale and scope of our business. Our principal office is located at 433 Hackensack Avenue, Hackensack, New Jersey 07601, our voice telephone number is (201) 996-1717, and our TTY number is (201) 527-1520. Our web site is located at www.goamerica.com. We have not incorporated by reference into this Form 10-K any of the information on our web site, and you should not consider it to be a part of this document. Our web site address is included in this document as an inactive textual reference only. CORPORATE HISTORY GoAmerica Communications Corp. was incorporated in Delaware in 1996. In December 1999, GoAmerica, Inc. was incorporated in Delaware and each of the security holders of GoAmerica Communications Corp. exchanged all of their outstanding securities for newly issued securities of GoAmerica, Inc., with GoAmerica Communications Corp. becoming a wholly owned subsidiary of GoAmerica, Inc. GoAmerica, Inc. consummated the initial public offering of its common stock in April 2000 and acquired Wynd Communications on June 28, 2000. On November 7, 2000, we acquired substantially all the assets of Flash Creative Management, Inc., a provider of consulting services to business customers in the areas of business improvement, strategy and redesign and in software development and integration, lines of business that we are currently not pursuing. On September 25, 2002, we revised our Go.Web business model by entering into a series of agreements with EarthLink, Inc. ("Earthlink"), pursuant to which, among other things, EarthLink purchased all of our Cellular Digital Packet Data (also known as "CDPD") subscribers and certain other Go.Web subscribers, EarthLink provides billing, collections and customer service to our Go.Web customers, and EarthLink and GoAmerica collaborated on marketing each other's services and developing new applications for and extensions of existing technologies and services. The initial term of this relationship with EarthLink was two years and it has continued to operate on substantially similar terms; however, we cannot predict at this time whether this arrangement will be extended, terminated or restructured. 3 OUR BUSINESS GoAmerica's strategy is to focus its resources on providing a variety of accessible communications services to people who are deaf, hard of hearing and/or speech impaired. According to the American Speech and Hearing Association, more than 28 million Americans currently experience some level of significant hearing loss. At December 31, 2004, GoAmerica had approximately 7,400 Wynd Communications subscribers and approximately 48,700 Go.Web subscribers, from which we receive, directly or indirectly, monthly subscription fees and, to a lesser degree, usage fees. Throughout 2004, the number of Wynd Communications subscribers decreased, in part due to migration to newer networks and devices offered by wireless carriers and in part due to our strengthening of our credit profile requirements. Accordingly, we have been shifting our business emphasis from the resale of network airtime to a more concentrated effort on value added services, which we believe will result in a lower overall cost structure and higher gross margin contribution from our wireless revenue streams. This shift has also permitted us to restructure our previous agreement with Communications Services for the Deaf ("CSD") to serve as our outsourced provider for customer support during nights and weekends. Our relationship with CSD enables our customers to contact us via voice, TTY, or email on a 7 x 24 basis. The subscription and value added services currently offered by Wynd Communications are WyndTell and WyndPower, which enable deaf, hard of hearing and/or speech-impaired users to communicate with co-workers, friends, family members, and AAA Emergency Roadside service, by means of wireless devices, using communications options such as email, fax, paging, text-to-speech, Text Telephone ("TTY", sometimes referred to as "TDD") messaging, and operator assisted services as well as access to the Internet. In addition to wireless subscription and value added services, we currently offer two forms of Internet Relay service: a wireless service marketed in conjunction with Sprint Corporation, which launched in August 2004, and, as of March 24, 2005, our i711.com(TM) branded Internet service, which uses Nordia, Inc.'s technology platform and relay operators (also referred to as Communication Assistants or "CA's") to facilitate calls. Our wireless relay service called Sprint Relay Wireless(TM), which launched in May 2004, permits deaf consumers to contact a Telecommunications Relay Service, or "TRS", operator to place a "live" call using certain wireless handheld devices. TRS generally, enables standard voice telephone users to talk to people who have difficulty hearing or speaking on the telephone by having a Communications Assistant interpret for both parties. Substantially all TRS, including our Internet Relay services, are free to the consumers who use them. Like the other relay service providers, we receive payment indirectly from the federal government based on relay minutes used that are initiated on our particular service. The Federal Communications Commission requires all telephone common carriers to pay certain amounts to a central reimbursement fund, establishes a per-minute reimbursement rate and authorizes the National Exchange Carriers Association to administer the payments to service providers like us from the reimbursement fund. To date, our Internet Relay services have not been a significant source of revenue, we do not know if our services will initiate a critical mass of communication minutes, and we do not know if the current and future per-minute reimbursement rates will increase, decrease or remain substantially the same as current levels. (see "Business - Government Regulation") 4 For a person that is deaf or severely hard of hearing, the TTY or TDD, a text-based communications instrument that operates in North America using an outdated Baudot 45.5 protocol, had historically been the centerpiece of telecommunications accessibility, usually requiring a wireline connection. The size and weight of most TTY devices and the slow transmission speed of the Baudot protocol makes communicating "on-the-go" a difficult task for a deaf individual. Over the years, advances in regulatory policy and technology have vastly improved the level of communications accessibility available to deaf consumers nationwide. (see "Business - Government Regulation"). Although some people who are deaf or hard of hearing are still able to use voice-based communications services, TRS are a basic necessity for those within this segment of the population who are profoundly deaf or speech impaired. The Internet Relay and Video Relay sectors of TRS are growing steadily due to broadband technology developments and the prevalence of the Internet. Internet Relay is available to anyone who has access to the Internet via a computer, wireless handheld device, Web-capable telephone or any other Internet Protocol-based device. Unlike traditional TRS, where a TTY user contacts a TRS center via telephone lines and the CA at the TRS center calls the receiving party via voice telephone, the first leg of an Internet Relay call goes from the caller's computer or other Web-capable device, to the TRS relay center via the Internet. With the development of multiple Internet Relay services, deaf consumers now can choose their own relay provider rather than being required to use the provider for the State in which they live. We developed our i711.com web portal and service with distinctive calling features and a community orientation in order to be perceived as user friendly, familiar and a preferred Internet Relay service. Video Relay services enable individuals who use American Sign Language to use video equipment to make calls by communicating with a CA, who interprets the initial message into either speech or text and signs back the hearing party's response. We do not presently offer a Video Relay service; however, we intend to explore opportunities to be able to offer Video Relay services in the future. We believe that the potential market for wireless and relay communications services among deaf and hard of hearing consumers is largely underserved, providing us with opportunities for additional growth. We seek to deepen penetration within our installed subscriber base and expand the breadth of our overall customer base by distinguishing our current and future offerings with value added solutions and, subject to capital constraints, through increased marketing activities. In September 2004, we launched our GA Prepaid division and expanded our product portfolio by commencing to offer prepaid products and services, such as domestic and international calling cards, prepaid cellular/wireless telephones and related services. We are in the process of obtaining certification of our prepaid telephones for use with hearing aids. On December 1, 2004, we acquired certain assets from Global Interactive, an established provider of wireless products, services and accessories, including the proprietary BerryPac(TM), which includes a custom designed carrying case for RIM's Blackberry wireless devices. 5 Our GA Prepaid telephone calling cards are marketed to U.S. consumers, for whom prepaid calling cards are a primary means of domestic and international telecommunications, under a variety of brand names, including Cafe' Con Leche, Caribbean Express(TM) and Caribbean Queen(TM), Canela(TM), Charitto(TM), El Gordo(TM), GA Worldwide(TM), Mi Sueno(TM), and Ta Mejor(TM). Cards are sold in various denominations through non-exclusive distributors, the majority of which are currently located in the northeastern U.S. Revenues derived from sales of our prepaid calling cards are deferred upon sale of the cards and recognized upon the earlier of the card being fully utilized or its expiration, which is 90 days from the date of first usage. We have established our own telecommunications switching platform, using a combination of dedicated lines and Voice-over-Internet Protocol (VOIP) technology as the underlying network architecture. Our switching platform connects to multiple tier-1 and tier-2 carriers that terminate traffic for us in over 250 countries and territories. In addition to prepaid calling cards, in March 2005, we began selling prepaid wireless services, consisting of a new Clear Mobile(TM) wireless handset with approximately 100 prepaid minutes of use on Cingular's network. Consumers can purchase Clear Mobile refill cards by various means, including from authorized retail outlets or distributors, from us directly and via certain websites. Additionally, some competitor refill cards can be utilized with our phones for which we would not receive revenue. Our prepaid wireless services can be used nationally, however our current distribution is primarily in the northeast U.S. due to our recent service rollout and our corporate location in that geographic market. Our Global Interactive product lines provides, among other things, the opportunity to sell wireless communications devices and earns commissions through the acquisition of subscribers on behalf of various network providers with which we do not otherwise have reseller agreements. We continue to support wireless data technology, applications and software that address the productivity and communications needs of enterprise customers and consumers. In the enterprise market, our solutions are primarily based on our proprietary software technology called Go.Web. By utilizing Go.Web, corporations can improve the productivity of employees by enabling secure wireless access to corporate data on many wireless computing devices and over many wireless data networks. Our Go.Web technology can be hosted and supported in a secure network operations center maintained by GoAmerica or its third party outsourcing provider. 6 SALES AND MARKETING Sales We currently sell our services and solutions through two primary channels of distribution: direct and indirect. As of March 1, 2005, we had 4 employees working in our sales department. Direct Distribution. Direct distribution methods consist of those channels in which our personnel actively assist the customers with placing orders, currently comprised of our sales professionals and our DeafWireless Superstore(TM), an online shopping portal designed for people who are deaf or hard of hearing. Our telesales representatives respond to queries generated as a result of Web site visits and our marketing efforts, which usually contain our toll-free sales telephone and TTY numbers. Indirect Distribution. Indirect distribution methods consist of those channels where our distribution alliance partners take the order directly from the customers or refer customers to one of our direct sales representatives. With indirect distribution, we capture new business through dealers and value added resellers. Dealers offer our products and services to their customers and are paid a commission for each sale. A dealer's commission may consist of a one-time bounty only or may include a small percentage of revenues generated by their customers. Dealers are not responsible for billing or supporting the customer. Value added resellers buy our services at a discounted wholesale price and then sell these services to their customers at a retail price. Resellers are not paid a commission. Resellers are responsible for selling the GoAmerica service and mobile devices, and billing and supporting the customer. We are responsible for billing the reseller. Marketing We typically deploy a marketing mix consisting of direct mail, Internet direct response, print ads in periodicals aimed at deaf and hard of hearing audiences, and tradeshow sponsorship and support. As of March 1, 2005, we had 3 employees working in our marketing department. TECHNOLOGY AND OPERATIONS Service Infrastructure Data Center. We consolidated our Go.Web and WyndTell production systems into a single data center operated by a third party during April 2004. This new outsourced facility provides mission critical services to a variety of large corporate clients. Our outsourcing strategy provides our customers with the highest levels of reliability while enabling our Company to operate with a lower overall cost structure. We believe this data center is capable of meeting the capacity demands and security standards for services we have developed or are developing for our customers. Technical personnel will monitor network traffic, service quality, and security continually. 7 Wireless Networks. Through our relationships with leading wireless services providers, we are able to offer our customers the ability to use our wireless solutions in most major metropolitan areas in the continental U.S. and parts of Canada. We are a dealer for a variety of wireless network providers, and, in other cases, we provide wireless services directly to our customers through reseller agreements with wireless network operators such as Velocita (formerly Cingular Interactive), Motient and Metrocall (formerly WebLink Wireless). This type of wireless resale offering is primarily limited to our WyndTell services. Software Technology For our Wynd Communications business, we deploy a combination of licensed technology and custom built software. This technology gives our customers access to wireless messaging and information services specifically geared toward the needs of the deaf and hard of hearing users. We have developed and run gateway technology to connect wireless devices to a variety of traditional TTY devices as well as our proprietary TTY-based applications. Currently, our Wynd software supports the RIM-based family of 95X and 85X devices, certain Motorola paging devices, and the T-Mobile Sidekick, Fido hiptop and SunCom hiptop devices running on Danger Inc.'s hiptop platform. For our continuing Go.Web business, we have developed a proprietary wireless services platform that enables our customers to securely access most types of Web-based data from many leading wireless devices. The Go.Web platform also allows qualified developers to introduce standard Web-based applications for many wireless devices and networks. As a result of our Go.Web development efforts, our engineering staff has acquired substantial wireless and Web formatting expertise, which enables us to develop solutions as new wireless devices are introduced. In addition, the Go.Web compression technology and enhanced wireless transport protocol included in our software provide bandwidth efficiency and maximize data transmission speeds. We also have employed industry standard SSL, or secure sockets layer, and use Certicom's cryptography within the Go.Web infrastructure. 8 Licensed Software Technology The Velocita (formerly Cingular) Interactive Paging Service, or IPS, is based on server software that we have licensed. We are one of a limited number of companies that have deployed an IPS gateway. This service provides two-way messaging on devices such as the RIM interactive devices. Customer Service, Billing and Fulfillment We provide corporate or individual customer billing for all Wynd Communications customers' subscription fees, devices and modems, and other related fees. Resellers such as EarthLink provide the majority of customer support and billing for our Go.Web services. The outsourcing structure enables us to provide our customers with best-in-class support while minimizing our own costs of operations. For product fulfillment, we maintain an inventory of mobile devices for our Wynd Communications, Global Interactive and Prepaid customers, which we buy from third-party manufacturers and resellers. EarthLink handles that function for our Go.Web customers. COMPETITION The market for our wireless services is becoming increasingly competitive. The widespread adoption of industry standards in the wireless data communications market may make it easier for new market entrants and existing competitors to introduce services that compete against ours. Our competitors may use the same products and services in competition with us. With time and capital, it would be possible for competitors to replicate our services. We expect that we will compete primarily on the basis of the functionality, breadth, quality and price of our services. Many of our existing and potential competitors have substantially greater financial, technical, marketing and distribution resources than we do, although none (to our knowledge) are exclusively devoted to consumers who are deaf or hard of hearing as is our Wynd Communications subsidiary. Despite the lack of focus, many of these companies may have greater name recognition and may be able to adopt more aggressive pricing policies and offer customers more attractive terms than we can. Competitive pressures may have a material adverse effect on our business and reduce our market share or force us to lower prices to unprofitable levels. RESEARCH AND DEVELOPMENT Most of our product and service offerings are developed internally. We also purchase and license technology. We continue to enhance the features and performance of our existing products and services. In addition, we are continuing to develop new products to meet our customers' expectations of ongoing innovation and enhancement within our suite of products. Our ability to meet our customers' expectations depends on a number of factors, including our ability to identify and respond to emerging technological trends in our target markets, develop and maintain competitive products, enhance our existing products by adding features and functionality that differentiate them from those of our competitors and bring products to market on a timely basis and at competitive prices. Consequently, we have made, and we intend to continue to make, investments in research and development, subject to our capital constraints. 9 INTELLECTUAL PROPERTY RIGHTS We have not yet obtained patents on our technology that would preclude or inhibit competitors from using our technology. In February 2001, we filed a patent application on certain aspects of our Go.Web technology. The application is presently pending in the United States Patent and Trademark Office and has been filed internationally. Certain aspects of our various technologies rely on perpetual, royalty-free, worldwide licenses under third party patents relating to wireless products and services. We rely on a combination of patent, copyright, trademark, service mark, trade secret laws, unfair competition law and contractual restrictions to establish and protect certain proprietary rights in our technology and intellectual property. We have received or applied for registration of certain of our GoAmerica and Wynd names and marks in the United States Patent and Trademark Office. The steps taken by us to protect our intellectual property may not prove sufficient to prevent misappropriation of our technology or to deter independent third party development of similar technologies. In addition, the laws of certain foreign countries may not protect our technologies or intellectual property rights to the same extent as do the laws of the United States. We also rely on certain technologies that we license from third parties. These third party technology licenses may not continue to be available to us on commercially attractive terms. The loss of the ability to use such technology could require us to obtain the rights to use substitute technology, which could be more expensive or offer lower quality or performance, and therefore have a material adverse effect on our business, financial condition or results of operations. Third parties could claim infringement by us with respect to current or future technology. We expect that we and other participants in our markets will be increasingly subject to infringement claims as the number of services and competitors in our industry segment grows. Any such claim, whether meritorious or not, could be time consuming, result in costly litigation, cause service or installation interruptions or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to us or at all. As a result, any such claim could have a material adverse effect upon our business, financial condition or results of operations. GOVERNMENT REGULATION The enactment of the Americans with Disabilities Act of 1990 mandated that every State implement a system for Telecommunications Relay Services whereby a deaf consumer, using a TTY connected to the telephone network, could communicate with a hearing person through the use of a relay operator. The Federal Communications Commission ("FCC") has oversight responsibility for Telecommunications Relay Services in the U.S. and maintains guidelines that all States must follow. These services, beginning statewide in California in 1987 and nationally available since 1992, empowered deaf consumers to expand their use of the TTY in telephone conversations with hearing parties as well. At the national level, interstate relay services are funded by FCC-mandated common carrier contributions to a reimbursement fund that is administered by the National Exchange Carrier's Association. At the State level, funds for intrastate relay reimbursement can come from rate payer surcharges, tariff charges to the local exchange carrier or taxes as administered by the State. 10 We are not currently subject to direct federal, state or local government regulation, other than regulations that apply to businesses generally. The wireless network carriers we contract with to provide airtime are subject to regulation by the FCC. Changes in FCC regulations could affect the availability of wireless coverage these carriers are willing or able to sell to us. We could also be adversely affected by developments in regulations that govern or may in the future govern the Internet, the allocation of radio frequencies or the placement of cellular towers. Also, changes in these regulations could create uncertainty in the marketplace that could reduce demand for our services or increase the cost of doing business as a result of costs of litigation or increased service delivery cost or could in some other manner have a material adverse effect on our business, financial condition or results of operations. We currently do not collect sales or other taxes with respect to the sale of services or products in states and countries where we believe we are not required to do so. We do collect sales and other taxes in the State in which we have an office and are required by law to do so. One or more jurisdictions have sought to impose sales or other tax obligations on companies that engage in online commerce within their jurisdictions. A successful assertion by one or more jurisdictions that we should collect sales or other taxes on our products and services, or remit payment of sales or other taxes for prior periods, could have a material adverse effect on our business, financial condition or results of operations. Any new legislation or regulation that may be adopted by the United States Congress to regulate the Internet, or the application of laws or regulations from jurisdictions whose laws do not currently apply to our business, could have a material adverse effect on our business. EMPLOYEES As of March 1, 2005, we had a total of 40 full-time employees. None of our employees are covered by a collective bargaining agreement. We believe that our relations with our employees are good. 11 ITEM 2. PROPERTIES. REFERENCE NEW LEASE We own no real property. Our principal offices are located at 433 Hackensack Avenue in Hackensack, New Jersey, consisting of approximately 10,000 square feet that we lease until July 2007. On November 14, 2003, GoAmerica and our GoAmerica Communications Corporation subsidiary entered into two agreements with Stellar Continental LLC ("Stellar"), the then lessor of our corporate headquarters at 433 Hackensack Avenue and our former office at 401 Hackensack Avenue, both located in Hackensack, New Jersey. The agreements consisted of a Surrender Agreement and a new Lease Agreement as well as a Common Stock purchase warrant. These agreements enabled us and our subsidiary to cure all prior defaults under the previous lease, which we refer to below as the "Original Lease", and terminated all parties' rights and obligations under the Original Lease, in exchange for (i) Stellar's, or its successors' right to retain $555,755 previously drawn on a letter of credit of ours that secured the Original Lease, (ii) our issuing a warrant to Stellar that allows it to acquire up to 12,500 shares of our Common Stock at an exercise price of $36.80 per share at any time prior to the close of business on November 13, 2008, and (iii) the execution of a new lease, between our GoAmerica Communications Corporation subsidiary and Stellar for office space at 433 Hackensack Avenue, Hackensack, New Jersey. This new lease was entered into as of August 1, 2004. These agreements relieved us of approximately $8.1 million of future minimum payments on operating lease obligations. These agreements also require us to rent from Stellar's successor any new office space in New Jersey that we require during the term of the new lease, on terms no less favorable than the new lease. The offices of Wynd Communications formerly located in San Luis Obispo, California, consisting of approximately 7,400 square feet, were consolidated with our Hackensack, New Jersey office during the first half of 2004. In April 2004, we consolidated all of our network operations to a co-location third party facility in Leonia, New Jersey. The agreement under which we operated our approximately 7,000 square foot New York City network operating center expired on February 29, 2004. We believe that our current facilities are adequate to support our existing operations subject to any credit or liquidity matters discussed in "Risk Factors". ITEM 3. LEGAL PROCEEDINGS. On February 15, 2002, Eagle Truck Lines Inc. (also known as Air Eagle, Inc.) filed suit against GoAmerica, Inc. in the Superior Court of the State of California for the County of Los Angeles seeking payment of $590,000, plus other damages, expenses, interest and costs of suit. This action was removed to the United States District Court for the Central District of California and subsequently, pursuant to a motion brought by GoAmerica, transferred to the District of New Jersey where GoAmerica moved to have it consolidated with the action described in the next paragraph. Air Eagle alleged that GoAmerica, as successor in interest to Flash Creative Management, Inc. ("Flash"), failed to perform its obligations under a consulting contract dated July 2, 1999 (the "Contract"), by and between Flash and Air Eagle. Air Eagle alleged that GoAmerica assumed the rights and liabilities under this Contract as a result of the Company's purchase of substantially all of the assets of Flash in November 2000. On September 19, 2003, Air Eagle filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Central District of California. In December 2004, the parties agreed and received court approval to settle this litigation in consideration of GoAmerica's paying Air Eagle $140,000 and Air Eagle principals agreeing to assist GoAmerica in the Company's litigation against the Flash Defendants below. 12 In a separate but related matter, on July 31, 2002, GoAmerica filed suit against Flash and certain former officers and shareholders of Flash (the "Flash Defendants") in the United States District Court for the District of New Jersey for violations of federal and state securities law and common law fraud in connection with the sale of the assets of Flash to GoAmerica. In October 2002, each of the Flash Defendants filed answers to GoAmerica's complaint denying all of the Company's charges, with one of the Flash Defendants adding counterclaims against the Company and certain named officers alleging, among other things, fraudulent misrepresentation, violations of state securities law and unjust enrichment in excess of $1 million. The other Flash Defendants have been granted leave to amend their answer to include substantially similar counterclaims against the Company and Company officer defendants. The Company filed a motion to dismiss the Flash Defendants' counterclaims, and the Flash Defendants filed cross-motions for judgment on the pleadings and for summary judgment seeking dismissal of the Company's claims against them. On March 2, 2005, all of the Flash Defendants' counterclaims against the Company and the Company officer defendants were dismissed, and the Flash Defendants' cross-motions to dismiss the Company's claims against them were denied in all respects other than the common law fraud claim. The Company is exploring its options as a result of these favorable dismissals. In September 2003, Michael Marts, an individual residing in California, sued Boundless Depot, Scott Johnson and Robert Rademacher (collectively, the "Boundless Depot Defendants"), among others, with respect to claims for breach of contract by some or all of the Boundless Depot Defendants. Wynd Communications was named as a co-defendant in this action (the "Marts Action") as the successor-in-interest to the Deafwireless assets that Wynd and the Company acquired as of March 1, 2003 from the Boundless Depot Defendants pursuant to an asset purchase agreement dated as of February 8, 2003 (the "Deafwireless Agreement"). All of the claims, aggregating approximately $433,000, arose prior to execution of the Deafwireless Agreement, with more than half of the damages claimed arising prior to 2003. Wynd and the Company are no longer parties to the Marts Action pursuant to their motion to dismiss being granted on March 17, 2005. In a separate but related matter, on September 22, 2004, two of the Boundless Depot Defendants sued GoAmerica and Wynd Communications in the Superior Court of the State of California for the County of Los Angeles, claiming damages of one million dollars for GoAmerica's refusal to pay unattained contingent consideration, comprising cash and/or GoAmerica Common Stock, to Boundless Depot in connection with the Deafwireless Agreement. We believe that the contractual contingencies of the Deafwireless Agreement were not met and that the Boundless Depot Defendants remain in breach of their indemnity obligations under the Deafwireless Agreement with respect to the Marts Action; therefore the Company does not believe that any of the contingent consideration is owed. Moreover, even if all contingencies under the Deafwireless Agreement had been attained, the Company believes that the damages claimed in this case are excessive since the aggregate value of such contingent consideration would not be material. The Company intends to defend this action vigorously and may elect to pursue counterclaims. 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Annual Meeting of Stockholders was held on December 17, 2004. There were present at the Annual Meeting, in person or by proxy, stockholders holding an aggregate of 1,451,978 shares of Common Stock out of a total number of 2,039,565 shares of Common Stock issued and outstanding and entitled to vote at the Annual Meeting. The results of the vote taken at such Annual Meeting with respect to the election of the nominees to be our Class A directors as elected by the holders of the Common Stock to hold office until the 2007 Annual Meeting were as follows: Nominees For Withheld --------- --- -------- Joseph Korb 1,449,497 2,481 Mark Kristoff 1,450,669 1,309 Daniel Luis and David Lyons, who was appointed to our Board on October 21, 2004, continued their terms as Class B directors, which term expires at the 2005 Annual Meeting of Stockholders. Aaron Dobrinsky, Alan Docter and King Lee continued their terms as Class C directors, such terms expiring at the 2006 Annual Meeting of Stockholders. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following table identifies the current executive officers of the Company: CAPACITIES IN IN CURRENT NAME AGE WHICH SERVING POSITION SINCE - ---- --- ------------- -------------- Daniel R. Luis 38 Chief Executive Officer and Director 2003 Donald Barnhart 47 Chief Financial Officer 2004 Jesse Odom 39 Chief Technology Officer 2000 Wayne D. Smith 46 Executive Vice President, General Counsel 2005 and Secretary 14 - ------------ Daniel Luis joined our Board of Directors in January 2003 at the time he was elected our Chief Executive Officer. He previously served as our President and Chief Operating Officer from May 2002 until January 2003. Mr. Luis is also President and Chief Executive Officer of Wynd Communications Corporation, which became a wholly owned subsidiary of GoAmerica in June 2000. Mr. Luis joined Wynd in 1994 and has held his current positions with Wynd since 1998. Donald Barnhart joined GoAmerica in 1999 and became its Vice President and Controller in 2000. He was appointed Chief Financial Officer in March 2004. Prior to joining GoAmerica, Mr. Barnhart was employed by Bogen Communications (a telecommunications manufacturer) as its Accounting Manager and operated his own accounting and consulting firm. Mr. Barnhart is a CPA in New Jersey. Jesse Odom joined GoAmerica in 1996 as Vice President of Network Operations. He was appointed Chief Technology Officer in November 2000. Prior to joining GoAmerica. Wayne Smith joined GoAmerica in May 2002 as Vice President, General Counsel and was appointed corporate Secretary in November 2003. He was appointed Executive Vice President, General Counsel and Secretary in March 2005. Prior to joining GoAmerica, Mr. Smith held a variety of legal and staff positions with Viacom Inc. (a diversified entertainment company) from 1985 to 2001, most recently serving as Vice President, Corporate Counsel. None of our executive officers is related to any other executive officer or to any director of the Company. Our executive officers are elected annually by the Board of Directors and serve at the pleasure of the Board of Directors. 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. MARKET FOR OUR COMMON STOCK Our common stock traded on the Nasdaq National Market from our initial public offering in April 2000 until August 28, 2002, at which time our listing moved to the Nasdaq Small Cap Market, where it continues to trade under the symbol "GOAM". The following table sets forth the high and low sales prices for our common stock for the quarters indicated as reported on the Nasdaq National Market and Nasdaq SmallCap Market. QUARTER ENDED HIGH LOW --------------------------------------------------------------------- March 31, 2003............. $36.80 $16.80 June 30, 2003.............. $59.20 $12.00 September 30, 2003......... $44.80 $19.20 December 31, 2003.......... $82.40 $23.20 March 31, 2004............. $56.80 $14.40 June 30, 2004.............. $20.00 $6.32 September 30, 2004......... $6.88 $2.56 December 31, 2004.......... $14.50 $2.48 As of March 24, 2005, the approximate number of holders of record of our common stock was 100 and the approximate number of beneficial holders of our common stock was 12,135. The market price of our common stock has fluctuated since the date of our initial public offering and is likely to fluctuate in the future. Changes in the market price of our common stock and other securities may result from, among other things: o Quarter-to quarter variations in operating results o Operating results being less than analysts' estimates o Changes in analysts' earnings estimates o Announcements of new technologie, products and services or pricing policies by us or our competitors o Announcements of acquisitions or strategic partnerships by us or our competitors o Developments in existing customer or strategic relationships o Actual or perceived changes in our business strategy o Developments in pending litigation and claims o Regulatory developments o Sales of large amounts of our common stock o Changes in market conditions in wireless technology and wireless telecommunication o Changes in general economic conditions o Fluctuations in securities markets in general. 16 On August 27, 2003, the Company received a letter from the Nasdaq Stock Market ("Nasdaq") Staff stating that the Company's Common Stock was scheduled to be delisted from the Nasdaq Smallcap Market due to the Common Stock's non-compliance with the $1 minimum bid price per share requirement as set forth in Nasdaq Marketplace Rule 4310 (C) (4). The Company appealed the Nasdaq Staff Determination and subsequently the Nasdaq Listings Qualifications Panel granted the Company a series of temporary exceptions, until May 31, 2004, to regain compliance with the minimum price requirement since the Company continued to meet all of the other listing requirements. On May 14, 2004, the Company filed an amendment to its Amended and Restated Certificate of Incorporation to effect a reverse stock split at a ratio of one-for-ten that had been previously authorized by the Company's stockholders at a Special Meeting of Stockholders on March 10, 2004. The closing bid price per share of the Company's Common Stock did not close at or above $1 during the entire compliance period and on June 3, 2004, the Nasdaq Staff sent a letter to the Company stating that the Company's Common Stock was scheduled to be delisted from the Nasdaq Smallcap Market due to the Common Stock's non-compliance with the $1 minimum bid price per share requirement as set forth in Nasdaq Marketplace Rule 4310 (C) (4). The Company appealed the Nasdaq Staff Determination and, on August 18, 2004, the Nasdaq Listing Qualifications Panel granted the Company a temporary exception through October 4, 2004, with interim deadlines for certain actions the Company needed to complete as part of the process of remedying its bid price deficiency. On October 1, 2004, the Company filed an amendment to its Amended and Restated Certificate of Incorporation to effect a reverse stock split at a ratio of one-for-eight that had been authorized by the Company's stockholders at a Special Meeting of Stockholders on September 30, 2004. On October 20, 2004, the Nasdaq Listing Qualifications Panel notified the Company that its bid price deficiency had been remedied and that the Company's Common Stock would continue to be listed on The Nasdaq SmallCap Market. The following table gives information about the Company's Common Stock that my be issued upon the exercise of options, warrants and rights under the Company's GoAmerica, Inc. 1999 Stock Plan and GoAmerica Communications Corp. 1999 Stock Option Plan as of December 31, 2004. These plans were the Company's only equity compensation plans in existence as of December 14, 2004.
NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE (A) (B) ISSUANCE UNDER EQUITY NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE COMPENSATION PLANS ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING (EXCLUDING SECURITIES OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND REFLECTED IN WARRANTS AND RIGHTS RIGHTS COLUMN (A)) ------------------- ------------------------ ----------------------- Equity Compensation Plans Approved by Shareholders............. 212,746 $ 100.42 57,028 Equity Compensation Plans Not Approved by Shareholders ............ -- -- -- Total.................... 212,746 $ 100.42 57,028 ========= ========= =======
17 RELATED STOCKHOLDER MATTERS We have never declared or paid any cash dividends on our common stock. We intend to retain earnings, if any, to fund future growth and the operation of our business. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. The selected consolidated financial data set forth below with respect to our statement of operations data for the years ended December 31, 2004, 2003 and 2002, and with respect to the consolidated balance sheet data at December 31, 2004 and 2003 are derived from and are qualified by reference to our audited consolidated financial statements and related notes thereto presented elsewhere herein. Our selected consolidated statement of operations data for the years ended December 31, 2001 and 2000 and consolidated balance sheet data as of December 31, 2002, 2001 and 2000 are derived from audited consolidated financial statements not included in this Annual Report on Form 10-K. The selected consolidated financial data set forth below should be read in conjunction with, and is qualified in its entirety by, our audited consolidated financial statements and related notes thereto and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations", which are included elsewhere in this Annual Report on Form 10-K. 18
YEARS ENDED DECEMBER 31, ------------------------------------------------------------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) 2004 2003 2002 2001 2000 --------- --------- --------- --------- --------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Subscriber ....................... $ 5,588 $ 10,108 $ 29,017 $ 28,308 $ 8,535 Equipment ........................ 181 1,042 6,560 10,088 5,097 Other ............................ 453 728 335 618 242 --------- --------- --------- --------- --------- Total revenue ...................... 6,222 11,878 35,912 39,014 13,874 --------- --------- --------- --------- --------- Costs and expenses: Cost of subscriber revenue ....... 2,539 2,669 20,434 22,578 7,194 Cost of equipment revenue ........ 260 1,152 8,537 20,665 6,090 Cost of network operations ....... 733 1,828 3,074 3,264 623 Cost of other revenue ............ 201 -- -- -- -- Sales and marketing .............. 597 1,072 8,038 24,700 35,807 General and administrative ....... 5,625 9,617 29,082 40,685 26,853 Research and development ......... 507 1,209 3,456 4,174 762 Depreciation and amortization of fixed assets .................. 804 1,912 4,342 2,987 994 Amortization of goodwill and other intangibles ................... 682 1,081 1,483 18,398 7,247 Impairment of goodwill ........... -- 193 8,400 12,991 -- Impairment of other intangible assets ........................ -- -- -- 12,423 -- Impairment of other long-lived assets ........................ -- 1,202 5,582 97 -- --------- --------- --------- --------- --------- Total costs and expenses ........... 11,948 21,935 92,428 162,962 85,570 --------- --------- --------- --------- --------- Loss from operations ............... (5,726) (10,057) (56,516) (123,948) (71,696) Other income: Gain on sale of subscribers ...... -- 1,756 -- -- -- Settlement gains, net ............ 1,494 85 -- -- -- Interest (expense) income, net ... (944) (275) 191 3,099 6,944 --------- --------- --------- --------- --------- Total other income ................. 550 1,566 191 3,099 6,944 --------- --------- --------- --------- --------- Net loss before benefit from income taxes ............................ (5,176) (8,491) (56,325) (120,849) (64,752) Income tax benefit ................. 732 284 436 578 -- --------- --------- --------- --------- --------- Net loss ........................... (4,444) (8,207) (55,889) (120,271) (64,752) Beneficial conversion feature and accretion of redemption value of mandatorily redeemable convertible preferred stock .................. -- -- -- -- (30,547) --------- --------- --------- --------- --------- Net loss applicable to common stockholders ..................... $ (4,444) $ (8,207) $ (55,889) $(120,271) $ (95,299) ========= ========= ========= ========= ========= Basic net loss per share applicable to common stockholders ........... $ (2.49) $ (12.10) $ (83.04) $ (181.45) $ (175.56) ========= ========= ========= ========= ========= Diluted net loss per share applicable to common stockholders $ (2.49) $ (12.10) $ (83.00) $ (180.34) $ (174.55) ========= ========= ========= ========= ========= Weighted average shares used in computation of basic net loss per share applicable to common stockholders ..................... 1,785 678 673 663 543 Weighted average shares used in computation of diluted net loss per share applicable to common stockholders ..................... 1,785 678 673 667 546
19
AS OF DECEMBER 31, -------------------------------------------------------- (IN THOUSANDS) 2004 2003 2002 2001 2000 -------------------------------------------------------- BALANCE SHEET DATA: Cash and cash equivalents ........ $ 7,098 $ 568 $ 4,982 $ 34,977 $114,411 Working capital (deficit) ........ 8,530 (2,656) (1,037) 33,292 113,530 Total assets ..................... 17,986 12,965 26,765 87,785 207,746 Total stockholders' equity ....... 16,814 7,142 13,017 66,413 181,530
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. The results shown in this Annual Report of Form 10-K are not necessarily indicative of the results we will achieve in any future periods. OVERVIEW GoAmerica(R) is a wireless data communications service provider, offering solutions primarily for consumers who are deaf, hard of hearing and/or speech-impaired, including wireless subscription and value added services, Internet relay services and wireless devices and accessories. Wynd Communications Corporation, a wholly owned subsidiary of GoAmerica, offers enhanced services known as WyndTell(R) and WyndPower(TM), which assist our deaf or hard of hearing customers in communicating from most major metropolitan areas in the continental United States and parts of Canada. GoAmerica continues to offer wireless data products and services to the consumer and enterprise markets as well as support customers who use our proprietary software technologu called Go.Web(TM). GoWeb is designed for use mainly by enterprise customers to enable secure wireless access to corporate date and the Internet on numerous wireless computing devices. In September 2004, we launched our GA Prepaid(TM) division and expanded our product portfolio by commencing to offer prepaid products and services, such as domestic and international calling cards, prepaid cellular/wireless telephones and related services. On December 1, 2004, we acquired certain assets from Global Interactive(TM), an established provider of wireless products, services and accessories. Historically, we have derived our revenue primarily from the sale of basic and value-added wireless data services and the sale of related mobile devices to our subscribers. During March 1997, we commenced offering our services to individuals and businesses. Since our inception, we have invested significant capital to build our wireless network operations and e-commerce system as well as our billing system. We have invested additional capital in the development of our software applications Go.Web and Mobile Office(R) as well as other software applications. We have provided mobile devices made by third parties to our customers at prices below our costs for such devices. We have incurred operating losses since our inception and expect to continue to incur operating losses for a portion of the fiscal year ending December 31, 2005. We will need to significantly improve our overall gross margins, and further reduce our selling, general and administrative expenses to become profitable and sustain profitability on a quarterly or annual basis. We will seek to grow Wynd's business through additional strategic alliances or new service offerings. As a result of our strategic alliance with EarthLink, Inc., or EarthLink, we experienced an overall decline in revenue while gross margins increased and selling, marketing and administrative declined. We have generated and may continue to generate revenues from EarthLink from three primary sources: (i) recurring service revenue; (ii) software revenue; and (iii) activation bounties. We have substantially reduced our costs of subscriber airtime and operating costs as a result of our relationship with EarthLink. 20 Our subscriber revenue primarily consists of monthly service fees, which we recognize as revenue when the services are provided to the subscriber. Subscriber revenue accounted for approximately 89.8%, 85.1% and 80.8% of our total revenue during 2004, 2003 and 2002, respectively. Historically, we offered a variety of mobile data service plans. Our consumer plans, which are marketed through Wynd, provide data usage on multiple mobile devices through variable and fixed monthly fees ranging from $9.95 to $39.95. In the enterprise market, we provide unlimited data usage on any mobile device for a fixed monthly fee, which currently ranges from $1.25 to $17.95. We will continue to derive recurring subscriber revenue from our consumer channels and through the sale of our Go.Web software. We also typically sell third-party mobile devices in conjunction with a service agreement to a new subscriber. Equipment revenue accounted for approximately 2.9%, 8.8% and 18.3% of our total revenue during 2004, 2003 and 2002, respectively. We recognize equipment revenue at the time of the shipment of the mobile device to a subscriber. In addition to our subscriber and equipment revenue, we historically have generated other revenue which consists of consulting services relating to the development and implementation of wireless data systems for certain corporate customers. We anticipate that our professional service revenues will decrease as a percentage of our total revenues during 2005 from prior year levels. Additionally, we anticipate during 2005 that the amount of our non-recurring bounty revenues we receive from EarthLink and other wireless providers for selling their wireless services and other product offerings to increase as compared with 2004 levels. Our sales and marketing expenses consist primarily of compensation and related costs for marketing personnel, advertising and promotions, travel and entertainment and other related costs. We expect sales and marketing expenses to increase as a percentage of sales during 2005 as compared to 2004 as we introduce new products and services to the consumer marketplace. Our general and administrative expenses consist primarily of compensation and related costs for general corporate and business development, along with rent and other related costs. We expect general and administrative expenses to decrease as a percentage of our annual revenues. Our research and development expenses consist primarily of compensation and related costs and professional service fees. Depreciation and amortization expenses consist primarily of depreciation expenses arising from equipment purchased for our network operations center and other property and equipment purchases. 21 During 1999 and the first quarter of 2000, we granted options to certain of our employees at exercise prices below the deemed fair market value per share of our common stock. Such grants resulted in non-cash employee compensation expenses based on the difference, on the date of grant, between the fair market value and the exercise price of stock options granted to employees. The resulting deferred employee compensation is being amortized over the vesting periods of the grants. During 2003, we incurred an aggregate of $314,000 in non-cash employee compensation, representing the remaining balance of deferred compensation, as a result of stock option and warrant grants during 1999 and the first quarter of 2000 which were granted at prices below the fair market value of our common stock. Net interest expense consists primarily of amortization of deferred debt expense and is partially offset by interest earned on cash and cash equivalents. We expect interest expense to decrease during 2005 as compared with 2004 as a result of the deferred debt described above being fully amortized as of December 31, 2004. During 2001, we acquired OutBack Resource Group, Inc., a software development company. The total purchase price of approximately $148,000 included the issuance of 1,687 shares of common stock valued at $76.80 per share and warrants issued at the date of acquisition with an estimated fair market value of approximately $19,000 to purchase an aggregate of 843 shares of our common stock at an exercise price of $240.00 per share. As a result of this acquisition, we recorded intangibles of approximately $193,000. During 2003, we identified indicators of possible impairment of our long-lived assets, principally goodwill recorded with regard to the acquisition of Outback. Such indicators included the continued deterioration in the business climate for wireless Internet service providers, significant declines in the market values of our competitors in the wireless Internet services industry, recent changes in our 2004 operating and cash flow forecasts, and changes in our strategic plans for certain of our acquired businesses. We determined that the carrying value of these long-lived assets exceeded their respective fair values, thus requiring a write-down totaling $193,000 of goodwill associated with Outback. On December 19, 2003, we announced plans for a strategic re-focusing premised on a financing that we completed in 2004. Our strategy is centered on the pursuit of three priorities, centered on the market currently serviced by our Wynd Communications subsidiary: o growth of Wynd Communications' core wireless services business; o development and marketing of new communications services, including branded Internet protocol and video relay services; and o streamlined operations to enable superior customer support. 22 CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, inventory valuation and recoverability of our intangible assets. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Historically, we have derived our revenue primarily from the sale of basic and value-added wireless data services and the sale of related mobile devices. Subscriber revenue consists primarily of monthly charges for access and usage and is recognized as the services are provided. We also generally charge a non-refundable activation fee upon initial subscription. Equipment revenue is recognized upon shipment to the end user. We estimate the collectibility of our trade receivables. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, including analysis of historical collection rates and the current credit-worthiness of significant customers. Significant changes in required reserves have been recorded in recent periods and may occur in the future due to the current market conditions. We write down inventory for estimated excess or obsolete inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. In assessing the recoverability of our goodwill, other intangibles and other long-lived assets, we must make assumptions regarding estimated future cash flows. If such assumptions change in the future, we may be required to record impairment charges for these assets not previously recorded. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain financial data as a percentage of revenue:
PERCENTAGE OF REVENUE --------------------------------------- YEARS ENDED DECEMBER 31, --------------------------------------- 2004 2003 2002 -------- -------- -------- Revenue: Subscriber...................................... 89.8% 85.1% 80.8% Equipment....................................... 2.9 8.8 18.3 Other........................................... 7.3 6.1 0.9 -------- -------- -------- Total revenue............................... 100.0 100.0 100.0 Costs and expenses: Cost of subscriber revenue...................... 40.8 22.5 56.9 Cost of equipment revenue....................... 4.2 9.7 23.8 Cost of network operations...................... 11.8 15.4 8.6 Cost of other revenue........................... 3.2 -- -- Sales and marketing............................. 9.6 9.0 22.4 General and administrative...................... 90.4 81.0 81.0 Research and development........................ 8.1 10.2 9.6 Depreciation and amortization of fixed assets... 12.9 16.1 12.1 Amortization of other intangibles............... 11.0 9.1 4.1 Impairment of goodwill.......................... -- 1.6 23.4 Impairment of other long-lived assets........... -- 10.1 15.5 --------- -------- -------- Total costs and expenses.................... 192.0 184.7 257.4 -------- -------- -------- Loss from operations........................ 92.0 84.7 157.4 Other income (expense)............................... 8.8 13.2 0.5 Income tax benefit................................... 11.8 2.4 1.2 -------- -------- -------- Net loss.................................... 71.4% 69.1% 155.7% ======== ======== ========
23 YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003 Subscriber revenue. Subscriber revenue decreased to $5.6 million for the year ended December 31, 2004 from $10.1 million for the year ended December 31, 2003. This decrease was primarily due to declines in our full service offering subscriber base. Our subscriber base decreased to 56,026 subscribers at December 31, 2004 from 75,130 subscribers at December 31, 2003. We expect the number of our subscribers to remain relatively constant to levels at December 31, 2004. Our average monthly revenue per user, or ARPU, decreased to $7.10 for the year ended December 31, 2004 from $10.10 for the year ended December 31, 2003. Equipment revenue. Equipment revenue decreased to $181,000 for the year ended December 31, 2004 from $1.0 million for the year ended December 31, 2003. This decrease was primarily due to lower sales of mobile devices. We anticipate that equipment revenue may increase slightly as we continue to provide devices to new subscribers of our Wynd services and due to our recent acquisition of Global Interactive. Other revenue. Other revenue decreased to $453,000 for the year ended December 31, 2004 from $728,000 for the year ended December 31, 2003. This decrease was primarily due to reduced consulting services. We anticipate that consulting services will decrease as a result of our decision not to pursue certain consulting projects and consulting services to third parties during 2005. Cost of subscriber revenue. Cost of subscriber revenue decreased to $2.5 million for the year ended December 31, 2004 from $2.7 million for the year ended December 31, 2003. The decrease was primarily due to having a smaller average subscriber base in the year ended December 31, 2004 than in the year ended December 31, 2003. Additionally, during the third and fourth quarters of 2003, we recorded one-time reductions of accruals for certain subscriber-related costs recorded in prior periods of $763,000 and $750,000, respectively. We expect the number of our subscribers to remain relatively constant to levels at December 31, 2004. 24 Cost of equipment revenue. Cost of equipment revenue decreased to $260,000 for the year ended December 31, 2004 from $1.2 million for the year ended December 31, 2003. This decrease was primarily due to lower sales of mobile devices and was partially offset by an inventory related charge for a lower of cost to market adjustment primarily related to wireless handheld devices which remained unsold. We anticipate that equipment revenue may increase slightly as we continue to provide devices to new subscribers of our Wynd services and due to our recent acquisition of Global Interactive. Cost of network operations. Cost of network operations decreased to $733,000 for the year ended December 31, 2004 from $1.8 million for the year ended December 31, 2003 as a result of the consolidation of our GoWeb and WyndTell production systems into a single data center operated by a third party provider. We expect our cost of network operations to decline as a percentage of sales during 2005. Sales and marketing. Sales and marketing expenses decreased to $597,000 for the year ended December 31, 2004 from $1.1 million for the year ended December 31, 2003. This decrease primarily was due to our consolidation of operations completed during April of 2004, as well as decreased advertising and marketing activities. Additionally, during the year ended December 31, 2003, we recorded a $372,000 one-time reduction of accruals for certain sales and marketing expenses recorded in prior periods. We expect sales and marketing expenses to increase as a percentage of sales during 2005 as compared to 2004 as we introduce new products and services to the consumer marketplace. General and administrative. General and administrative expenses decreased to $5.6 million for the year ended December 31, 2004 from $9.6 million for the year ended December 31, 2003. This decrease primarily was due to our consolidation of operations completed during April of 2004, as well as decreased general corporate activities of approximately $500,000, decreased salaries and benefits for personnel performing general corporate activities of approximately $1.0 million, amounts paid to third parties for professional services of approximately $100,000, a decrease in our bad debt expense of approximately $295,000, and decreased facility costs of approximately $2.0 million. We expect general and administrative expenses to decline as a percentage of sales during 2005. Additionally, during the fourth quarter of 2003, we recorded one-time reductions of deferred rent for certain long term lease related costs recorded in prior periods of $347,000. Research and development. Research and development expense decreased to $507,000 for the year ended December 31, 2004 from $1.2 million for the year ended December 31, 2003. This decrease primarily was due to decreased salaries and benefits for personnel performing research and development activities. We expect research and development expenses to remain constant as we utilize internal resources to develop and maintain our WyndTell, Go.Web and Relay technologies rather than using outside consultants. Amortization of other intangibles. Amortization of other intangibles decreased for the year ended December 31, 2004 to $682,000 from $1.1 million for the year ended December 31, 2003. This decrease primarily was due to certain of our other intangibles being fully amortized as of December 31, 2003. We expect amortization of other intangible assets to decline further as a result of additional classes of intangible assets becoming fully amortized during 2005. 25 Settlement Gains, net. The Company entered into agreements with certain of its creditors to relieve the Company of certain debts. As a result, the Company has recorded settlement gains totaling $1.5 million in 2004. Interest (expense) income, net. The Company incurred interest expense of $944,000 for the year ended December 31, 2004 compared to interest expense of $275,000 for the year ended December 31, 2003. This change was primarily due to the amortization of deferred debt expense and discount recorded on bridge notes payable. The majority of this amortization occurred in 2004. YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 Subscriber revenue. Subscriber revenue decreased to $10.1 million for the year ended December 31, 2003 from $29.0 million for the year ended December 31, 2002. The decrease was primarily due to having a smaller average subscriber base in the year ended December 31, 2003 than in the year ended December 31, 2002 as a result of the sale of our CDPD subscribers, as well as a portion of our Cingular and Motient network subscribers, to EarthLink during the fourth quarter 2002. Our subscriber base decreased to 75,130 subscribers at December 31, 2003 from 91,384 subscribers at December 31, 2002. Our average monthly revenue per user, or ARPU, decreased to $10.10 for the year ended December 31, 2003 from $23.53 for the year ended December 31, 2002. The decline in ARPU was due to an increase in the number of new subscribers from the sale of our Go.Web value added services, which generally have a lower monthly ARPU than our full-service offerings. Equipment revenue. Equipment revenue decreased to $1.0 million for the year ended December 31, 2003 from $6.6 million for the year ended December 31, 2002. This decrease was primarily due to our outsourcing of device provisioning to EarthLink. Other revenue. Other revenue increased to $728,000 for the year ended December 31, 2003 from $335,000 for the year ended December 31, 2002. This increase was primarily due to consulting services provided to Earthlink. Cost of subscriber revenue. Cost of subscriber revenue decreased to $2.7 million for the year ended December 31, 2003 from $20.4 million for the year ended December 31, 2002. The decrease was primarily due to having a smaller average subscriber base in the year ended December 31, 2003 than in the year ended December 31, 2002 as a result of the sale of our CDPD subscribers as well as a portion of our Cingular and Motient network subscribers, to EarthLink during the fourth quarter of 2002. Additionally, during the third and fourth quarters of 2003, we recorded one-time reductions of accruals for certain subscriber-related costs recorded in prior periods of $763,000 and $750,000, respectively. Cost of equipment revenue. Cost of equipment revenue decreased to $1.2 million for the year ended December 31, 2003 from $8.5 million for the year ended December 31, 2002. This decrease was primarily due to our outsourcing of device provisioning to EarthLink, as well as decreased inventory related charges of approximately $47,000 for the year ended December 31, 2003 compared to $1.6 million for the year ended December 31, 2002 The inventory related charges primarily relate to wireless modems supporting laptop and older PALM OS based models for which sales were lower than expected and a charge for a lower of cost to market adjustment related to other equipment which remained unsold. 26 Cost of network operations. Cost of network operations decreased to $1.8 million for the year ended December 31, 2003 from $3.1 million for the year ended December 31, 2002. Sales and marketing. Sales and marketing expenses decreased to $1.1 million for the year ended December 31, 2003 from $8.0 million for the year ended December 31, 2002. This decrease primarily was due to decreased advertising and marketing activities of $2.0 million including advertising costs paid to third parties of approximately $1.3 million and a decrease in salaries and benefits for personnel performing sales and marketing activities of approximately $3.5 million. Additionally, during the year ended December 31, 2003, we recorded a $372,000 one-time reduction of accruals for certain sales and marketing expenses recorded in prior periods. General and administrative. General and administrative expenses decreased to $9.6 million for the year ended December 31, 2003 from $29.1 million for the year ended December 31, 2002. This decrease primarily was due to decreased professional fees for infrastructure buildout and general corporate activities of approximately $9.6 million, decreased salaries and benefits for personnel performing business development and general corporate activities of approximately $2.7 million, amounts paid to third parties for professional services of approximately $2.3 million, a decrease in our bad debt expense of approximately $2.7 million, and decreased facility costs of approximately $1.6 million. Additionally, during the fourth quarter of 2003, we recorded one-time reductions of deferred rent for certain long term lease related costs recorded in prior periods of $347,000. Research and development. Research and development expense decreased to $1.2 million for the year ended December 31, 2003 from $3.5 million for the year ended December 31, 2002. This decrease primarily was due to decreased salaries and benefits for personnel performing research and development activities. Amortization of other intangibles. Amortization of other intangibles decreased for the year ended December 31, 2003 to $1.1 million from $1.5 million for the year ended December 31, 2002. This decrease primarily was due to certain of our other intangibles being fully amortized as of December 31, 2002. Impairment of goodwill and other long-lived assets. During the second quarter of 2003 and third quarter of 2002, we identified indicators of possible impairment of our long-lived assets, principally goodwill and other acquired intangible assets recorded upon the acquisitions of Wynd, Hotpaper and Outback. Such indicators included the continued deterioration in the business climate for wireless Internet service providers, significant declines in the market values of our competitors in the wireless Internet services industry, recent changes in our 2004 operating and cash flow forecasts, and changes in our strategic plans for certain of our acquired businesses. With the assistance of independent valuation experts, we performed asset impairment tests and determined the fair value of the impaired long-lived assets for the respective acquired entities. Fair value was determined primarily using the discounted cash flow method. A write-down of goodwill and intangible assets totaling $193,000 and $8.4 million were recorded during the second quarter of 2003 and third quarter of 2002, respectively, reflecting the amount by which the carrying amount of the assets exceed their respective fair values. The write-down consisted of $193,000 and $8.4 million for goodwill during the second quarter of 2003 and third quarter of 2002, respectively. In addition, impairment charges related to property and equipment totaling $1.2 million and $5.6 million were recorded during 2003 and 2002, respectively, in accordance with the Statement of Financial Accounting Standard No. 144, "Accounting for Impairment of Long Lived Assets" and Statement of Financial Accounting Standard No. 121, "Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of". 27 Gain on sale of subscribers. Gain on sale of subscribers resulted from our comprehensive strategic alliance whereby EarthLink purchased all of the Company's cellular digital packet data (CDPD) subscribers as well as certain of the Company's Cingular and Motient network subscribers. As a result of this agreement, we recorded a gain on the sale of subscribers of $1,756,000 during 2003. Settlement Gains, net. The Company entered into agreements with certain of its creditors to relieve the Company of certain debts. As a result, the Company has recorded settlement gains totaling $85,000. Interest (expense) income, net. The Company incurred interest expense of $275,000 for the year ended December 31, 2003 compared to interest income of $191,000 for the year ended December 31, 2002. This change was primarily due to the amortization of deferred debt expense and discount recorded on bridge notes payable. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we financed our operations through private placements of our equity securities. We have incurred significant operating losses since our inception and as of December 31, 2004 have an accumulated deficit of $268.9 million. During 2004, we incurred a net loss of $4.4 million and used $5.5 million of cash to fund operating activities. As of December 31, 2004 we had $7,098,000 in cash and cash equivalents. In execution of our 2004 operating plan, we took steps to reduce our annual payroll and took further actions to reduce sales and marketing expenses. We anticipate continuing to generate revenues from three primary sources, (i) recurring service revenue; (ii) software revenue; and (iii) activation bounties. This will be partially offset by increases in sales and marketing expenditures from levels incurred during 2004 as we introduce new products and services to the consumer marketplace. We currently anticipate that our available cash resources will be sufficient to fund our operating needs for at least the next 12 months. At this time, we do not have any bank credit facility or other working capital credit line under which we may borrow funds for working capital or other general corporate purposes. On December 19, 2003, we entered into definitive agreements with multiple investors providing for the investors to purchase approximately 1.3 million shares of our Common Stock, par value $.01 (the "Common Stock"), for an aggregate purchase price of $14,500 in a private placement offering (the "Financing"). As part of this Financing, on December 19, 2003, we received net proceeds of approximately $800 from the issuance of 10% Senior Secured Convertible Promissory Notes (the "Notes") and certain warrants. The Notes were purchased by the investors at their par value in proportional amounts to their aggregate investment commitments in the Financing. Upon stockholder approval and closing of the Financing, the Notes and all accrued interest automatically converted into Common Stock at a price of $12.00 per share, subject to certain adjustments. We closed on the balance of the financing in March 2004. We issued a total of 1.3 million shares which included 86,509 of shares relative to the Bridge Note Conversion. We received net proceeds after expenses of approximately $12 million. 28 Net cash used in operating activities was $5.5 million, $7.9 million and $29.0 million for the years ended December 31, 2004, 2003 and 2002, respectively. The principal use of cash in each of these periods was to fund our losses from operations. Net cash (used in)/provided by investing activities was ($621,000), $2.6 million and ($448,000) for the years ended December 31, 2004, 2003 and 2002, respectively. For the year ended December 31, 2004, we used cash in investment activities principally to support a letter of credit in favor of Cingular, as well as purchases of property, equipment and leasehold improvements. For the year ended December 31, 2003, we provided cash by release of funds previously restricted and through the sale of subscribers to Earthlink. These amounts were partially offset from the purchases of property, equipment and leasehold improvements as well as an acquisition of subscribers for our Wynd subsidiary. For the year ended December 31, 2002, we used cash in investment activities principally for purchases of property, equipment and leasehold improvements. During 2005, we expect to use cash in investing activities principally through capital expenditures. Net cash provided by financing activities was $12.7 million and $914,000 for the years ended December 31, 2004 and 2003, respectively. This primarily resulted from the above-mentioned financing and the issuance of common stock from the exercise of stock options. Net cash used in financing activities was $533,000 for the year ended December 31, 2002. This resulted primarily from payments made on lease obligations and was partially offset by the issuance of common stock upon the exercise of stock options. As of December 31, 2004, our principal commitments consisted of obligations outstanding under operating leases. As of December 31, 2004, future minimum payments for non-cancelable operating leases having terms in excess of one year amounted to $716,000, of which $291,000 is payable in 2005. 29 The following table summarizes our contractual obligations at December 31, 2004, and the effect such obligations are expected to have on our liquidity and cash flow in future periods.
Less than 1-3 4-5 After 5 December 31, (In thousands) Total 1 Year Years Years Years - --------------------------- ---------- ---------- ---------- ---------- ---------- Contractual Obligations: Capital Lease Obligations ........ $ 1 $ 1 $ -- $ -- $ -- Operating Lease Obligations ........ 716 291 425 -- -- ---------- ---------- ---------- ---------- ---------- Total Contractual Cash Obligations ........ $ 717 $ 292 $ 425 $ -- $ -- ========== ========== ========== ========== ==========
We have employment agreements with certain of our key executives, which provide for fixed compensation. Our maximum aggregate cash liability under the agreements, if we terminated these employees, is approximately $175,000 at December 31, 2004. 30 As of December 31, 2004, we had net operating loss carryforwards of approximately $181.2 million for Federal income tax purposes that will expire through 2022. The state tax benefit during 2004 of $732,000 is attributable to our sale of certain state net operating loss carryforwards. For financial reporting purposes, a valuation allowance has been recognized to offset the deferred tax assets related to these carryforwards. Due to limitations imposed by the Tax Reform Act of 1986, and as a result of a significant change in our ownership in 1999, the utilization of net operating loss carryforwards that arose prior to such ownership change is subject to an annual limitation of $1.4 million. In addition, we acquired additional operating losses through our acquisitions of Wynd and Hotpaper. We believe that an ownership change has occurred with respect to these entities. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before such change. We have not performed a detailed analysis to determine the amount of the potential limitations. In addition, we have not performed a detailed analysis to determine the amount of the potential limitations as a result of the Financing. RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities". The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities") and how to determine when and which business enterprise (the "primary beneficiary") should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose entities ("SPEs") created prior to February 1, 2003. We must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003. We are required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. (iii) All entities, regardless of whether an APE, that were created subsequent to January 31, 2003. The provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. We do not have any arrangements with variable interest entities that will require consolidation of their financial information in our financial statements. In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4 to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). The provisions of SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS 151 is not expected to have a material effect on the Company's financial condition or results of operations. 31 In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 amends APB Opinion 29 to eliminate the similar productive asset exception and establishes that exchanges of productive assets should be accounted for at fair value, rather than at carryover basis unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits, (2) the transaction is an exchange transaction to facilitate sales to customers, or (3) the transaction lacks commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS 153 are effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 is not expected to have a material effect on our financial condition or results of operations. In December 2004, the FASB issued SFAS 123R, "Share-Based Payment". SFAS 123R establishes that employee services received in exchange for share-based payment result in a cost that should be recognized in the income statement as an expense when the services are consumed by the enterprise. It further establishes that those expenses be measured at fair value determined as of the grant date. The provisions of SFAS 123R become effective as of the beginning of the first interim reporting period that begins after June 15, 2005. We are currently evaluating the effect the adoption of SFAS 123R will have on our financial condition and results of operations. 32 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We believe that we have limited exposure to financial market risks, including changes in interest rates. At December 31, 2004, all of our available excess funds were cash or cash equivalents. The value of our cash and cash equivalents is not materially affected by changes in interest rates. A hypothetical change in interest rates of 1.0% would result in an annual change in net loss of approximately $70,000 based on cash and cash equivalent balances at December 31, 2004. We currently hold no derivative instruments and do not earn foreign-source income. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and the notes thereto which contain supplementary data required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K. A list of the financial statements filed herewith is found at "Item 15. Exhibits, Financial Statement Schedules". ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. As previously announced, on December 20, 2002, our Board of Directors, acting upon the recommendation of our Audit Committee, decided to no longer engage Ernst & Young LLP ("Ernst & Young") as our independent auditor and engaged WithumSmith + Brown P.C. ("WSB") to serve as our independent auditor for the year 2002. Ernst & Young's reports on our consolidated financial statements for each of the years ended December 31, 2001, 2000 and 1999 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the years ended December 31, 2001, 2000 and 1999 and through the date of our announcement of a change in accountants, (the "Announcement Date"), there were no disagreements with Ernst & Young on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Ernst & Young's satisfaction, would have caused them to make reference to the subject matter in connection with their report on our consolidated financial statements for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. During the years ended December 31, 2001, 2000 and 1999 and through the Announcement Date, we did not consult with WSB with respect to the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K. 33 ITEM 9A. CONTROLS AND PROCEDURES. Disclosure controls and procedures. As of the end of the Company's most recently completed fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) covered by this report, the Company carried out an evaluation, with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Changes in internal controls over financial reporting. There have been no changes in the Company's internal controls over financial reporting that occurred during the Company's last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 9B. OTHER None 34 PART III ITEM 10. DIRECTORS. We maintain a code of ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, and to persons performing similar functions. A copy of this code of ethics is posted on our website accessible at http://www.goamerica.com/Company_info/ethics_execs.php. We will provide information that is responsive to this Item 10 in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the caption "Directors and Executive Officers," and possibly elsewhere therein. That information is incorporated in this Item 10 by reference. ITEM 11. EXECUTIVE COMPENSATION. We will provide information that is responsive to this Item 11 regarding compensation paid to our executive officers in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the caption "Executive Compensation," and possibly elsewhere therein. That information is incorporated in this Item 11 by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. We will provide information that is responsive to this Item 12 regarding ownership of our securities by some beneficial owners and our directors and executive officers in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the caption "Security Ownership of Certain Beneficial Owners and Management," and possibly elsewhere therein. That information is incorporated in this Item 12 by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. We will provide information that is responsive to this Item 13 regarding transactions with related parties in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the caption "Certain Relationships and Related Transactions," and possibly elsewhere therein. That information is incorporated in this Item 13 by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. We will provide information that is responsive to this Item 14 regarding accounting fees and services in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the caption "Principal Accountant Fees and Services" or "Accounting Matters", and possibly elsewhere therein. That information is incorporated in this Item 14 by reference. 35 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS. The following documents are filed as part of this report: (a) (1) Consolidated Financial Statements and (2) Consolidated Financial Statement Schedule Reference is made to the Index to Consolidated Financial Statements and Financial Statement Schedule on Page F-1. All other schedules have been omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or Notes thereto. (b) Exhibits. Reference is made to the Exhibit Index on Page E-1. 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 31st day of March, 2005. GOAMERICA, INC. By: /s/ Daniel R. Luis --------------------------- Daniel R. Luis, Chief Executive Officer 37 Pursuant to the requirements of 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. SIGNATURE TITLE DATE - ---------------------- ---------------------------------- -------------- /s/ Aaron Dobrinsky Chairman of the Board March 31, 2005 - ---------------------- Aaron Dobrinsky /s/ Daniel R. Luis Chief Executive Officer (Principal March 31, 2005 - ---------------------- Executive Officer) Daniel R. Luis /s/ Donald G. Barnhart Chief Financial Officer (Principal March 31, 2005 - ---------------------- Accounting Officer) Donald G. Barnhart /s/ Joseph Korb Director March 31, 2005 - ---------------------- Joseph Korb /s/ Alan Docter Director March 31, 2005 - ---------------------- Alan Docter /s/ Mark Kristoff Director March 31, 2005 - ---------------------- Mark Kristoff /s/ King Lee Director March 31, 2005 - ---------------------- King Lee /s/ David Lyons Director March 31, 2005 - ---------------------- David Lyons 38 EXHIBIT INDEX++ ITEM 15(c) EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 3.1 Amended and Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on May 8, 2000 (Incorporated by reference to GoAmerica's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 7, 2000) (File No. 000-29359) 3.2 Certificate of Amendment to Amended and Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on May 14, 2004 (filed herewith) (File No. 000-29359) 3.3 Certificate of Amendment to Amended and Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on October 1, 2004 (filed herewith) (File No. 000-29359) 3.4 By-laws (Incorporated by reference to GoAmerica's Registration Statement on Form S-1 [which became effective on April 6, 2000]). (File No. 333-94801) 4.1 Warrant Certificate, dated as of November 14, 2003, issued to Stellar Continental LLC (Incorporated by reference to GoAmerica's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 24, 2003) (File No. 00-29359) 4.2 Warrant to Purchase Common Stock of GoAmerica, Inc., issued to Derek Caldwell as nominee for Sunrise Securities Corp. (Incorporated by reference to GoAmerica's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 24, 2003) (File No. 00-29359) 4.3 Warrant to Purchase Common Stock of GoAmerica, Inc., issued to Amnon Mandelbaum as nominee for Sunrise Securities Corp. (Incorporated by reference to GoAmerica's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 24, 2003) (File No. 00-29359) 10.1 Form of Invention Assignment and Non-Disclosure Agreement by and between GoAmerica and its employees (Incorporated by reference to GoAmerica's Registration Statement on Form S-1 [which became effective on April 6, 2000]) (File No. 333-94801) 10.2 Form of Indemnification Agreement by and between GoAmerica and each of its directors and executive officers (Incorporated by reference to GoAmerica's Registration Statement on Form S-1 [which became effective on April 6, 2000]) (File No. 333-94801) 10.3= Value Added Reseller Agreement by and between GoAmerica, Wynd and Cingular Interactive, L.P., dated as of December 30, 2003 (Incorporated by reference to GoAmerica's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2004) (File No. 00-29359) 39 EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 10.4= Reseller Agreement for Messaging Services by and between GoAmerica and ARDIS Company (now Motient Communications Inc.), dated August 25, 1999 (Incorporated by reference to GoAmerica's Registration Statement on Form S-1 [which became effective on April 6, 2000]) (File No. 333-94801) 10.5* Amended and Restated Employment Agreement by and between GoAmerica, Inc. and Daniel R. Luis, dated as of May 6, 2002 (Incorporated by reference to GoAmerica's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 2, 2002) (File No. 000-29359) 10.6* Employment Agreement by and between GoAmerica and Aaron Dobrinsky, dated as of May 6, 2002 (Incorporated by reference to GoAmerica's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 2, 2002) (File No. 000-29359), as amended by Amendment No. 1, dated as of March 10, 2004 (Incorporated by reference to GoAmerica's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2004) (File No. 00-29359) 10.7* Employment Agreement by and between GoAmerica and Joseph Korb, dated as of May 6, 2002 (Incorporated by reference to GoAmerica's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 2, 2002) (File No. 000-29359), as terminated by an Agreement, dated as of March 10, 2004 (Incorporated by reference to GoAmerica's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2004) (File No. 00-29359) 10.8* Employment Agreement by and between GoAmerica and Jesse Odom, dated as of May 6, 2002 (Incorporated by reference to GoAmerica's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 2, 2002) (File No. 000-29359) 10.9* Employment Agreement by and between GoAmerica and Donald G. Barnhart, dated as of March 10, 2004 (Incorporated by reference to Amendment No. 2 to GoAmerica's Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 29, 2004) (File No. 000-29359) 10.10* Services Agreement by and between GoAmerica and David Lyons, dated as of March 1, 2005 (filed herewith) 10.11* GoAmerica Communications Corp. 1999 Stock Option Plan (Incorporated by reference to GoAmerica's Registration Statement on Form S-1 [which became effective on April 6, 2000]) (File No. 333-94801) 10.12* GoAmerica, Inc. 1999 Stock Plan (Incorporated by reference to GoAmerica's Registration Statement on Form S-1 [which became effective on April 6, 2000]) (File No. 333-94801) 10.13 GoAmerica, Inc. Employee Stock Purchase Plan (Incorporated by reference to GoAmerica's Registration Statement on Form S-1 [which became effective on April 6, 2000]) (File No. 333-94801) 40 EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 10.14 Lease Agreement dated as of April 1, 2004, by and between GoAmerica Communications Corp. and Stellar Continental LLC (filed herewith), as amended by Amendment No. 1 dated as of August 1, 2004, (filed herewith) 10.15 Purchase Agreement, dated as of December 19, 2003, by and between GoAmerica, Inc. and the Investors set forth therein (Incorporated by reference to GoAmerica's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 24, 2003) (File No. 000-29359) 10.16 Registration Rights Agreement, dated as of December 19, 2003, by and between GoAmerica, Inc. and the Investors set forth therein (Incorporated by reference to GoAmerica's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 24, 2003) (File No. 000-29359) 10.17 Acquisition Agreement, dated as of September 25, 2002, between EarthLink, Inc., GoAmerica, Inc. and GoAmerica Communications Corp. (Incorporated by reference to GoAmerica's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2002) (File No. 000-29359) 10.18 Sales Agent Agreement, dated as of September 25, 2002, between EarthLink, Inc., GoAmerica, Inc. and GoAmerica Communications Corp. (Incorporated by reference to GoAmerica's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2002) (File No. 000-29359) 10.19 Technology Development Agreement, dated as of September 25, 2002, between EarthLink, Inc., GoAmerica, Inc. and GoAmerica Communications Corp. (Incorporated by reference to GoAmerica's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2002) (File No. 000-29359) 10.20 License Agreement, dated as of September 25, 2002, between EarthLink, Inc., GoAmerica, Inc. and GoAmerica Communications Corp. (Incorporated by reference to GoAmerica's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2002) (File No. 000-29359) 21.1 List of subsidiaries of GoAmerica, Inc. (filed herewith) 23.1 Consent of WithumSmith+Brown, P.C. (filed herewith) 31.1 Certification pursuant to Rule 13a-14(a) or 15d-14(a) (filed herewith) 31.2 Certification pursuant to Rule 13a-14(a) or 15d-14(a) (filed herewith) 32.1 Certification pursuant to 18 U.S.C. Section 1350 (filed herewith) 32.2 Certification pursuant to 18 U.S.C. Section 1350 (filed herewith) 99.1 Risk Factors (filed herewith) 41 = Confidential treatment has been requested and granted (subject to applicable renewals) for a portion of this Exhibit. Confidential materials have been omitted and filed separately with the Securities and Exchange Commission. * Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 15(c). ++ Certain schedules and exhibits to the documents listed in this index are not being filed herewith or have not been previously filed because we believe that the information contained therein is not material. Upon request therefore, we agree to furnish supplementally a copy of any schedule or exhibit to the Securities and Exchange Commission. 42 GOAMERICA, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE PAGE ---- Report of Independent Registered Public Accounting Firm.................... F-2 Consolidated Balance Sheets as of December 31, 2004 and 2003............... F-3 Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002......................................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2004, 2003 and 2002......................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002...................................................... F-6 Notes to Consolidated Financial Statements................................. F-7 Financial Statement Schedule: Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2004, 2003 and 2002...................................... F-32 All other schedules have been omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or Notes thereto. F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors, GoAmerica, Inc. We have audited the accompanying consolidated balance sheets of GoAmerica, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 2004, 2003 and 2002. Our audits also included the consolidated financial statement schedule for the years ended December 31, 2004, 2003 and 2002 as listed in the index at Item 15(a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of GoAmerica, Inc. as of December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for the years ended December 31, 2004, 2003 and 2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ WithumSmith + Brown, P.C. New Brunswick, New Jersey February 28, 2005 F-2 GOAMERICA, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ---------------------- 2004 2003 --------- --------- ASSETS Current assets: Cash and cash equivalents ......................................... $ 7,098 $ 568 Accounts receivable, less allowance for doubtful accounts of $603 in 2004 and $1,213 in 2003 ................................ 1,530 1,737 Other receivables ................................................. 732 534 Merchandise inventories, net ...................................... 123 213 Prepaid expenses and other current assets ......................... 219 115 --------- --------- Total current assets ................................................. 9,702 3,167 Restricted cash ...................................................... 604 -- Property, equipment and leasehold improvements, net .................. 940 1,606 Trade names, net of accumulated amortization of $4,388 in 2004 and $4,019 in 2003 ............................................... 184 553 Other intangible assets, net of accumulated amortization of $6,755 in 2004 and $6,442 in 2003, respectively ......................... 455 251 Goodwill, net ........................................................ 6,000 6,000 Deferred debt and other financing expense, net ....................... -- 1,091 Other assets ......................................................... 101 297 --------- --------- Total assets ......................................................... $ 17,986 $ 12,965 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................................. $ 348 $ 1,472 Accrued expenses .................................................. 538 3,040 Bridge note payable, net of discount of $390 in 2003 .............. -- 625 Deferred revenue .................................................. 285 673 Other current liabilities ......................................... 1 13 --------- --------- Total current liabilities ............................................ 1,172 5,823 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value; authorized: 4,351,943 in 2004 .... and 2003; issued and outstanding: none in 2004 and 2003 ........ -- -- Common stock, $.01 par value; authorized: 200,000,000 in 2004 ..... and 2003; issued : 2,117,339 in 2004 and 684,739 in 2003, ...... respectively ................................................... 21 7 Additional paid-in capital ........................................ 285,854 271,566 Accumulated deficit ............................................... (268,875) (264,431) Treasury stock, at cost, 24,063 shares in 2004 and none in 2003 ... (186) -- --------- --------- Total stockholders' equity ........................................... 16,814 7,142 --------- --------- Total liabilities and stockholders' equity ........................... $ 17,986 $ 12,965 ========= =========
SEE ACCOMPANYING NOTES. F-3 GOAMERICA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED DECEMBER 31, ----------------------------------------- 2004 2003 2002 ----------- ----------- ----------- REVENUES: Subscriber .......................................... $ 5,588 $ 10,108 $ 29,017 Equipment ........................................... 181 1,042 6,560 Other ............................................... 453 728 335 ----------- ----------- ----------- 6,222 11,878 35,912 COSTS AND EXPENSES: Cost of subscriber revenue .......................... 2,539 2,669 20,434 Cost of equipment revenue ........................... 260 1,152 8,537 Cost of network operations .......................... 733 1,828 3,074 Cost of other revenue ............................... 201 -- -- Sales and marketing ................................. 597 1,072 8,038 General and administrative .......................... 5,625 9,617 29,082 Research and development ............................ 507 1,209 3,456 Depreciation and amortization of fixed assets ....... 804 1,912 4,342 Amortization of other intangibles ................... 682 1,081 1,483 Impairment of goodwill .............................. -- 193 8,400 Impairment of other long-lived assets ............... -- 1,202 5,582 ----------- ----------- ----------- 11,948 21,935 92,428 ----------- ----------- ----------- Loss from operations ..................................... (5,726) (10,057) (56,516) OTHER INCOME (EXPENSE): Gain on sale of subscribers ......................... -- 1,756 -- Settlement gains, net ............................... 1,494 85 -- Interest (expense) income, net ...................... (944) (275) 191 ----------- ----------- ----------- 550 1,566 191 ----------- ----------- ----------- Net loss before benefit from income taxes ................ (5,176) (8,491) (56,325) Income tax benefit .................................. 732 284 436 ----------- ----------- ----------- Net loss ................................................. $ (4,444) $ (8,207) $ (55,889) =========== =========== =========== Basic net loss per share ................................. $ (2.49) $ (12.10) $ (83.04) =========== =========== =========== Diluted net loss per share ............................... $ (2.49) $ (12.10) $ (83.00) =========== =========== =========== Weighted average shares used in computation of basic net loss per share ...................................... 1,785,403 678,240 673,072 Weighted average shares used in computation of diluted net loss per share ...................................... 1,785,403 678,240 673,365
SEE ACCOMPANYING NOTES. F-4 GOAMERICA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ----------------- ADDITIONAL DEFERRED NUMBER PAID-IN EMPLOYEE ACCUMULATED OF SHARES AMOUNT CAPITAL COMPENSATION DEFICIT --------- ------ ---------- ------------ ----------- BALANCE AT JANUARY 1, 2002 ................. 671,254 $ 7 $ 269,583 $ (2,842) $ (200,335) Issuance of common stock pursuant to: exercise of employee stock options .............................. 2,888 -- 114 -- -- employee stock purchase plan ........... 1,065 -- 64 -- -- Adjustment to deferred employee compensation for terminations .......... -- -- (213) 213 -- Amortization of deferred employee compensation ........................... -- -- -- 2,315 -- Net loss ................................. -- -- -- -- (55,889) --------- ------ ---------- ------------ ----------- BALANCE AT DECEMBER 31, 2002 ............... 675,207 7 269,548 (314) (256,224) Issuance of common stock pursuant to: exercise of employee stock options .............................. 8,931 -- 258 -- -- employee stock purchase plan ........... 601 -- 13 -- -- Issuance of warrant to settle lease commitment ............................. -- -- 440 -- -- Issuance of warrant to placement agent to secure bridge note financing ........ -- -- 292 -- -- Fair value of warrants issued to investors as part of bridge note financing .............................. -- -- 487 -- -- Value of beneficial conversion feature of convertible bridge note financing ......................... -- -- 528 -- -- Amortization of deferred employee compensation ........................... -- -- -- 314 Net loss ................................. -- -- -- -- (8,207) --------- ------ ---------- ------------ ----------- BALANCE AT DECEMBER 31, 2003 ............... 684,739 7 271,566 -- (264,431) Issuance of common stock pursuant to: exercise of employee stock options .............................. 6,776 -- 173 -- -- exercise of warrants ................... 50,652 -- 13 -- -- equity financing, net of expenses ......1,224,304 12 12,197 -- -- conversion of bridge note payable ...... 86,509 1 1,014 -- -- acquisition of intangible assets ....... 54,671 1 441 -- -- Issuance of common stock pursuant to settlement agreements ............... 9,688 -- 450 -- -- Purchase of treasury stock ............... -- -- -- -- -- Net loss ................................. -- -- -- -- (4,444) --------- ------ ---------- ------------ ----------- BALANCE AT DECEMBER 31, 2004 ...............2,117,339 $ 21 $ 285,854 $ -- $ (268,875) ========= ====== ========== ============ =========== TOTAL STOCK- HOLDERS' TREASURY STOCK EQUITY ----------------- ------------ NUMBER OF SHARES AMOUNT --------- ------ BALANCE AT JANUARY 1, 2002 ................. -- $ -- $ 66,413 Issuance of common stock pursuant to: exercise of employee stock options .............................. -- -- 114 employee stock purchase plan ........... -- -- 64 Adjustment to deferred employee compensation for terminations .......... -- -- -- Amortization of deferred employee compensation ........................... -- -- 2,315 Net loss ................................. -- -- (55,889) ------ ------ ------------ BALANCE AT DECEMBER 31, 2002 ............... -- -- 13,017 Issuance of common stock pursuant to: exercise of employee stock options .............................. -- -- 258 employee stock purchase plan ........... -- -- 13 Issuance of warrant to settle lease commitment ............................. -- -- 440 Issuance of warrant to placement agent to secure bridge note financing ........ -- -- 292 Fair value of warrants issued to investors as part of bridge note financing .............................. -- -- 487 Value of beneficial conversion feature of convertible bridge note financing ......................... -- -- 528 Amortization of deferred employee compensation ........................... -- -- 314 Net loss ................................. -- -- (8,207) ------ ------ ------------ BALANCE AT DECEMBER 31, 2003 ............... -- -- 7,142 Issuance of common stock pursuant to: exercise of employee stock options .............................. -- -- 173 exercise of warrants ................... -- -- 13 equity financing, net of expenses ...... -- -- 12,209 conversion of bridge note payable ...... -- -- 1,015 acquisition of intangible assets ....... -- -- 442 Issuance of common stock pursuant to settlement agreements ............... -- -- 450 Purchase of treasury stock ............... 24,063 (186) (186) Net loss ................................. -- -- (4,444) ------ ------ ------------ BALANCE AT DECEMBER 31, 2004 ............... 24,063 $ (186) $ 16,814 ====== ====== ============
SEE ACCOMPANYING NOTES. F-5 GOAMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 2004 2003 2002 -------- -------- -------- OPERATING ACTIVITIES Net loss ........................................................ $ (4,444) $ (8,207) $(55,889) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ............................... 1,486 2,993 5,825 Amortization of debt discount and deferred financing costs .. 1,014 248 -- Impairment of goodwill ...................................... -- 193 8,400 Impairment of other long-lived assets ....................... -- 1,202 5,582 Provision for losses on accounts receivable ................. 239 534 3,221 Common stock issued for interest expense .................... 19 -- -- Settlement gains, net ....................................... (1,494) -- -- Accrued loss on sublease .................................... -- 509 -- Gain on sale of subscribers ................................. -- (1,756) -- Non-cash employee compensation .............................. -- 314 2,315 Non-cash warrant expense .................................... -- 440 -- Other non-cash charges ...................................... -- 7 -- Changes in operating assets and liabilities: (Increase) decrease in accounts receivable ............... (32) 3,509 (329) Increase in other receivables ............................ (198) (534) -- Decrease in inventory .................................... 90 833 6,921 (Increase) decrease in prepaid expenses and other current assets ................................................ (104) 405 1,853 Decrease in accounts payable ............................. (1,124) (3,374) (4,982) Decrease in accrued expenses and other current liabilities (564) (3,496) (1,532) Decrease in deferred revenue ............................. (388) (1,733) (399) -------- -------- -------- Net cash used in operating activities ........................... (5,500) (7,913) (29,014) INVESTING ACTIVITIES Purchase of property, equipment and leasehold improvements ...... (138) (35) (451) Proceeds from the sale of subscribers ........................... -- 1,756 -- Acquisition of subscribers ...................................... -- (368) -- Acquisition of intangible assets ................................ (75) -- -- Change in other assets and restricted cash ...................... (408) 1,232 3 -------- -------- -------- Net cash provided by (used in) investing activities ............. (621) 2,585 (448) FINANCING ACTIVITIES Issuance of common stock, net of related expenses ............... 12,981 271 178 Issuance of note payable and warrant, net of financing costs of $215 ........................................................ -- 800 -- Payments made for deferred financing costs ...................... (139) (112) -- Purchase of treasury stock ...................................... (186) -- -- Payments made on capital lease obligations ...................... (5) (45) (711) -------- -------- -------- Net cash provided by (used in) financing activities ............. 12,651 914 (533) -------- -------- -------- Increase (decrease) in cash and cash equivalents ................ 6,530 (4,414) (29,995) Cash and cash equivalents at beginning of year .................. 568 4,982 34,977 -------- -------- -------- Cash and cash equivalents at end of year ........................ $ 7,098 $ 568 $ 4,982 ======== ======== ========
SEE ACCOMPANYING NOTES. F-6 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION GoAmerica, Inc. (the "Company") is a wireless data communications service provider, offering solutions primarily for consumers who are deaf, hard of hearing and/or speech-impaired. The Company currently develops, markets and supports most of these services through Wynd Communications Corporation ("Wynd"), a wholly owned subsidiary of the Company. Wynd Communications offers enhanced services known as WyndTell(R) and WyndPower(TM), which assist deaf or hard of hearing customers in communicating from most major metropolitan areas in the continental United States and parts of Canada. Additionally, GoAmerica continues to support customers who use its proprietary software technology called Go.Web(TM). GoWeb is designed for use mainly by enterprise customers to enable secure wireless access to corporate data and the Internet on numerous wireless computing devices. The Company's revenues are derived principally from subscriptions to its value-added wireless data services, for which customers typically pay monthly recurring fees. The Company derives additional revenue from the sale of wireless communications devices and commissions from the acquisition of subscribers on behalf of various wireless network providers. The Company is highly dependent on EarthLink, Inc. ("Earthlink") for billing and collections, customer support and technical support for certain of the Company's subscribers. Additionally, the Company is highly dependent on EarthLink and other third parties for wireless communication devices and wireless network connectivity. The Company operates in a highly competitive environment subject to rapid technological change and emergence of new technology. Although management believes its services are transferable to emerging technologies, rapid changes in technology could have an adverse financial impact on the Company. The Company has incurred significant operating losses since its inception and, as of December 31, 2004, has an accumulated deficit of $268,875. During 2004, the Company incurred a net loss of $4,444 and used $5,500 of cash to fund operating activities. As of December 31, 2004 the Company had $7,098 in cash and cash equivalents. F-7 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation The consolidated financial statements include the accounts of GoAmerica, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Cash Equivalents Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of certain revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates that affect the financial statements include, but are not limited to: collectibility of accounts receivable, amortization periods and recoverability of long-lived assets. Receivables and Credit Policies Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Accounts receivable are stated at the amount billed to the customer. Interest is not billed or accrued. Accounts receivable in excess of 90 days old are considered delinquent. Payments of accounts receivable are allocated to the specific invoices identified on the customer's remittance advice or, if unspecified, are applied to the oldest unpaid invoices. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects the Company's best estimate of the amounts that may not be collected. This estimate is based on reviews of all balances in excess of 90 days from the invoice date and based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. The Company reviews its valuation allowance on a quarterly basis. Merchandise Inventories Merchandise inventories, principally wireless devices, are stated at the lower of cost (first-in, first-out) basis or market. Inventories are recorded net of a reserve for excess and obsolete merchandise. F-8 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Property, Equipment and Leasehold Improvements Property, equipment and leasehold improvements are stated at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the related assets ranging from two to seven years. Expenditures for maintenance and repairs are charged to expense as incurred. Computer Software Developed or Obtained For Internal Use All direct internal and external costs incurred in connection with the application development stage of software for internal use are capitalized. All other costs associated with internal use software are expensed when incurred. Amounts capitalized are included in property, equipment and leasehold improvements and are amortized on a straight-line basis over three years beginning when such assets are placed in service. Goodwill and Intangible Assets Goodwill and intangible assets result primarily from acquisitions accounted for under the purchase method. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill and intangible assets with indefinite lives are not amortized but are subject to impairment by applying a fair value based test. Intangible assets with finite useful lives related to developed technology, customer lists, trade names and other intangibles are being amortized on a straight-line basis over the estimated useful life of the related asset, generally one to five years. Recoverability of Intangible and Other Long Lived Assets In accordance with SFAS No.142, the Company reviews the carrying value of goodwill and intangible assets with indefinite lives annually or in certain circumstances as required. The Company measures impairment losses by comparing carrying value to fair value. Fair value is determined using discounted cash flow methodology. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," long-lived assets used in operations are reviewed for impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value. F-9 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Revenue and Deferred Revenue The Company derives subscriber revenue from the provision of wireless communication services. Subscriber revenue consists of monthly charges for access and usage and is recognized as the service is provided. Also included in subscriber revenue are one-time non-refundable activation fees. Equipment revenue is recognized upon shipment and transfer of title to the end user. Consulting revenue, included in other revenue, is recognized as the related services are provided. Software and prepaid revenues through December 31, 2004 were insignificant. Cost of Revenues Cost of subscriber revenue consists principally of airtime costs charged by carriers. Cost of equipment revenue consists of the cost of equipment sold. Income Taxes Deferred income taxes are determined using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when the expected recognition of a deferred tax asset is considered to be unlikely. Advertising Costs Advertising costs are expensed as incurred. During 2004, 2003 and 2002, advertising expense was approximately $17, $23 and $1,019, respectively. Research and Development Costs Research and development costs are expensed as incurred. F-10 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Stock-Based Employee Compensation The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", using an intrinsic value approach to measure compensation expense, if any. Under this method, compensation expense is recorded on the date of the grant only if the current market price of the underlying stock exceeds the exercise price. Options issued to non-employees are accounted for in accordance with SFAS 123, "Accounting for Stock-Based Compensation", and Emerging Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and Services", using a fair value approach. SFAS No. 123 established accounting and disclosure requirements using a fair value-basis method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. Had the Company elected to recognize compensation cost based on fair value of the stock options at the date of grant under SFAS 123, such costs would have been recognized ratably over the vesting period of the underlying instruments and the Company's net loss and net loss per common share would have increased to the pro forma amounts indicated in the table below.
Year ended December 31, -------------------------------------- 2004 2003 2002 ---------- ---------- ---------- Net loss ................................... $ (4,444) $ (8,207) $ (55,889) Deduct: Stock-based employee compensation expense included in reported net loss .... -- 314 2,315 Add: Total stock-based employee compensation expense determined under fair value based method for all awards ........ (3,048) (3,968) (6,966) ---------- ---------- ---------- Pro forma net loss ......................... $ (7,492) $ (11,861) $ (60,540) ========== ========== ========== Loss per share - basic, as reported ........ $ (2.49) $ (12.10) $ (83.04) ========== ========== ========== Loss per share - diluted, as reported ...... $ (2.49) $ (12.10) $ (83.00) ========== ========== ========== Pro forma loss per share - basic ........... $ (4.20) $ (17.49) $ (89.95) ========== ========== ========== Pro forma loss per share - diluted ......... $ (4.20) $ (17.49) $ (89.91) ========== ========== ==========
The pro forma results above are not intended to be indicative of or a projection of future results. Refer to Note 14 for assumptions used in computing the fair value amounts above. F-11 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Earnings (Loss) Per share The Company computes net loss per share under the provisions of SFAS No. 128, "Earnings per Share" (SFAS 128), and SEC Staff Accounting Bulletin No. 98 (SAB 98). Under the provisions of SFAS 128 and SAB 98, basic loss per share is computed by dividing the Company's net loss for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share excludes potential common shares if the effect is antidilutive. The weighted average number of shares utilized in arriving at basic loss per share reflects an adjustment for 293 common shares for the year ended December 31, 2002 for shares held in escrow as a result of the 2001 and 2000 acquisitions. Diluted loss per share is determined in the same manner as basic loss per share except that the number of shares is increased assuming exercise of dilutive stock options and warrants using the treasury stock method. As the Company had a net loss, the impact of the assumed exercise of the stock options and warrants is anti-dilutive and as such, these amounts (except for warrants issued for nominal consideration) have been excluded from the calculation of diluted loss per share. For the years ended December 31, 2004, 2003 and 2002, 290,780, 181,900 and 170,876 of common stock equivalent shares were excluded from the computation of diluted net loss per share. Concentration of Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and accounts receivable. The Company maintains a significant portion of its cash and cash equivalents with two financial institutions. At times these balances exceed the FDIC insured limit. As of December 31, 2004 and 2003, the Company had 16% and 17%, respectively, of its accounts receivable with Earthlink. For the years ended December 31, 2004 and 2003, the Company generated 14% and 13% of its total revenue from Earthlink. The Company performs periodic credit evaluations of its customers but generally does not require collateral. Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and notes payable approximate their fair values due to the short maturity of these items. Segment Information In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for the way that a public enterprise reports information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company operates in a single segment. The chief operating decision maker allocates resources and assesses the performance associated with wireless services, and related equipment sales on a single segment basis. Consulting and prepaid calling services are not a material component of the Company's business. F-12 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Reclassifications The Company has reclassified certain prior year information to conform with current year presentation. Recent Accounting Pronouncements In January 2003, the FASB issued interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities". The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities") and how to determine when and which business enterprise (the "primary beneficiary") should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose entities ("SPEs") created prior to February 1, 2003. The Company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ended after December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003. The Company was required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. (iii) All entities, regardless of whether an SPE, that were created subsequent to January 31, 2003; the interpretation applies immediately. The Company does not have any arrangements with variable interest entities that will require consolidation of their financial information in the Company's financial statements. In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4 to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). The provisions of SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS 151 is not expected to have a material effect on the Company's financial condition or results of operations. F-13 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 amends APB Opinion 29 to eliminate the similar productive asset exception and establishes that exchanges of productive assets should be accounted for at fair value, rather than at carryover basis unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits, (2) the transaction is an exchange transaction to facilitate sales to customers, or (3) the transaction lacks commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS 153 are effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 is not expected to have a material effect on the Company's financial condition or results of operations. In December 2004, the FASB issued SFAS 123R, "Share-Based Payment". SFAS 123R establishes that employee services received in exchange for share-based payment result in a cost that should be recognized in the income statement as an expense when the services are consumed by the enterprise. It further establishes that those expenses be measured at fair value determined as of the grant date. The provisions of SFAS 123R become effective as of the beginning of the first interim reporting period that begins after June 15, 2005. The Company is currently evaluating the effect the adoption of SFAS 123R will have on the Company's financial condition and results of operations. F-14 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 3. LEASE SETTLEMENT On January 10, 2003, the Company entered into a sublease agreement to partially offset the cost of unused office space at 401 Hackensack Avenue. The sublease agreement was set to expire in April 2007. As a result of this agreement, the Company recorded a loss on sublease of $610 in 2003. The Company entered into two agreements, each dated as of November 14, 2003, with Stellar Continental LLC ("Stellar"), the lessor of the Company's corporate headquarters at 433 Hackensack Avenue and its office at 401 Hackensack Avenue, both located in Hackensack, New Jersey (collectively, the "Hackensack Offices"). The agreements consist of a Surrender Agreement and a new Lease Agreement as well as a Warrant Certificate (collectively, the "Long Term Lease Settlement"). The Long Term Lease Settlement enabled the Company to cure all prior defaults under the previous lease (the "Original Lease", as described below) and terminated all parties' rights and obligations under the Original Lease, in exchange for (i) Stellar's right to retain $556 previously drawn on the Company's letter of credit that secured the Original Lease, (ii) the Company's issuance of a warrant to Stellar that allows Stellar to acquire up to 12,500 shares of the Company's Common Stock at an exercise price of $36.80 per share at any time prior to November 14, 2008 and (iii) the execution of a new lease between the Company and Stellar for office space at 433 Hackensack Avenue (see note 11). The Long Term Lease Settlement also requires the Company to rent from Stellar any new office space in the Hackensack, New Jersey area that it may require over the term of the new short term lease, on terms no less favorable than the New Lease. The sublease agreement described above was effectively cancelled by these settlements. Therefore, the Company reversed the remaining $509 of unamortized loss on sublease as of December 31, 2003. The warrant to purchase 12,500 shares of the Company's common stock at a price of $36.80 per share was immediately exercisable at the date of grant and expires in five years therefrom. The warrant had an estimated fair market value at the date of grant of approximately $440, as determined by using the Black-Scholes method and was recognized by the Company during the fourth quarter of 2003 as an offset to the reversal of the loss on sublease described above. Both items are included in settlement gains, net in the accompanying 2003 statement of operations. Such warrant remains outstanding as of December 31, 2004. 4. SETTLEMENT GAINS AND CHANGES IN ESTIMATES SETTLEMENT GAINS, NET In December 2003, the Company entered into agreement with a creditor to settle an obligation for less than the recorded amount by making a final cash payment to this vendor prior to December 31, 2003. The Company recorded a gain on settlement of approximately $64 relating to this transaction and has included this item in settlement gains, net in the accompanying statement of operations. F-15 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) In December 2003, the Company executed a series of settlement agreements with various vendors that provided, upon their consummation, for the reduction of amounts owed by the Company to these vendors. Generally, the terms of the settlement agreements called for the Company to make fixed cash payments or the issuance of shares of the Company's common stock. The consummation of the settlement agreements was contingent upon the Company's complying with all of the terms of the individual agreements, certain of which are as follows: o Cash payments of approximately $300 to vendors with which the Company had established settlement agreements. o Establishment of a standby letter of credit in favor of Cingular, which resulted in restricted cash in the amount of $600. All such terms and conditions were satisfied in 2004 and, as a result, the Company recorded approximately $1,621 in additional settlement gains during the year ended December 31, 2004. In addition, approximately $450 of vendor liabilities were satisfied through the issuance of 9,688 shares of the Company's common stock. On December 23, 2003, the Company executed a settlement agreement with Eastern Computer Exchange, Inc. ("Eastern Computer") with respect to certain payment obligations pursuant to two equipment leases (the "Leases") by agreeing to pay Eastern Computer $350 upon closing the financing discussed in Note 5 in exchange for a full release of the Company and its affiliates of the claim filed by Eastern Computer. Previously, Eastern Computer had taken back the equipment covered under the Leases. This settlement enabled the Company to cure all prior defaults under the Leases. The Company recorded a loss on this settlement of $7, which is included in settlement gains, net in the accompanying 2003 statement of operations. CHANGES IN ESTIMATES During the year ended December 31, 2003, the Company, as part of its strategic realignment, reviewed certain liability provisions and accrued expenses based on recent discussions with vendors and recorded the following adjustments: o A $347 reduction of general and administrative expenses relating to the elimination of an accrued liability for deferred rent on the Company's lease obligations at 401 and 433 Hackensack Avenue (see note 3). o A $1,513 reduction of accruals for certain subscriber related costs based upon a finalization of amounts owed to vendors. F-16 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) o A $372 reduction of accruals for certain sales and marketing costs recorded in prior periods. The above amounts were recorded as changes in estimates and reductions of the related expenses in the accompanying 2003 statement of operations. 5. BRIDGE NOTE PAYABLE AND EQUITY FINANCING On December 19, 2003, the Company entered into definitive agreements with multiple investors providing for the investors to purchase approximately 1.3 million shares of the Company's Common Stock, par value $.01 (the "Common Stock"), for an aggregate purchase price of $14,500 in a private placement offering (the "Financing"). As part of this Financing, on December 19, 2003, the Company received net proceeds of approximately $800 from the issuance of 10% Senior Secured Convertible Promissory Notes (the "Notes") and certain warrants. The Notes were purchased by the investors at their par value in proportional amounts to their aggregate investment commitments in the Financing. Upon stockholder approval and closing of the Financing, the Notes and all accrued interest automatically converted into Common Stock at a price of $12.00 per share, subject to certain adjustments. The notes contain a beneficial conversion feature, which has been calculated in the amount of approximately $528 and is reflected as a deferred debt expense in the accompanying 2003 balance sheet. This amount was being amortized as interest expense through March 2004 when it was converted to equity. In addition to the Notes, the Company granted to the investors warrants to purchase 16,916 shares of the Company's common stock at a price of $12.00 per share. These warrants were immediately exercisable at the date of grant and expire in five years. The warrants had an estimated fair market value at the date of grant of approximately $487, as determined using the Black-Scholes method, which discount was amortized as interest expense over the life of the debt. The Note Payable is shown on the Balance Sheet at December 31, 2003 net of unamortized discount in the amount of $390. Such warrants remain outstanding as of December 31, 2004. On March 10, 2004, the Company's stockholders at a special meeting of the stockholders approved the following: o Approved the issuance of 1,224,304 shares of the Company's common stock in exchange for cash consideration of $12,209, net of expenses. o Authorized the Board of Directors to amend the Company's restated certificate of incorporation to effect a reverse stock split at one of five different ratios. o Authorize the Board of Directors to amend the Company's restated certificate of incorporation to increase the number of shares of common stock the Company is authorized to issue from 200,000,000 to 350,000,000 shares, resulting in an increase in the total number of authorized shares of capital stock from 204,351,943 to 354,351,943. The Board of Directors did not act on this approval to increase the Company's authorized shares prior to the Company's 2004 annual meeting of stockholders, so this authorization has expired. F-17 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) As a result, the Company issued a total of 1,310,813 shares of its common stock, comprised of the 1,224,304 shares referred to above and 86,509 upon the mandatory conversion of the Bridge Notes Payable and related accrued interest. The Company received net proceeds of approximately $12,000 after deducting the $714 cash payment made to the offering placement agent and deferred offering expenses such as professional fees. 6. RELATIONSHIP WITH EARTHLINK, INC. On September 25, 2002, the Company formed a comprehensive relationship with EarthLink by entering into a series of agreements pursuant to which, among other things (i) EarthLink purchased all of the Company's CDPD subscribers as well as certain of the Company's Cingular and Motient network subscribers (collectively, the "transferred subscribers"); (ii) EarthLink purchased the Company's rights under a credit for $1,400 of inventory from a hardware manufacturer, receiving the Company's equipment pricing at a discount; (iii) the Company and EarthLink will market each other's wireless services in exchange for commissions and/or recurring revenue shares; (iv) EarthLink will provide billing, customer support and network services to most subscribers of the Company's technology; and (v) the Company and EarthLink will collaborate on developing new applications and extensions of existing technology, including EarthLink-branded wireless data services, as well as new technologies. As a result of this relationship and the transfer of subscribers, the Company received and recorded approximately $1,756 of gains on sales of subscribers during 2003 and had remaining $50 and $100 of deferred revenue as of December 31, 2004 and 2003, respectively. F-18 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 7. ACQUISITION OF INTANGIBLE ASSETS On December 1, 2004, the Company acquired certain assets from Global Interactive, a provider of wireless products, services, and accessories. The total purchase price of approximately $442 included the issuance of 30,000 shares of the Company's common stock valued at $12.23 per share. The total purchase price has been recorded as an intangible asset and is being amortized over 12 months. On September 1, 2004, the Company purchased certain assets relating to prepaid telephone calling cards from H. Edward Torres. The total purchase price of approximately $75 was satisfied through the issuance of 24,671 shares of the Company's common stock. The total purchase price has been recorded as an intangible asset and is being amortized over 12 months. 8. GOODWILL AND OTHER INTANGIBLE ASSETS Impairment Charge Recorded Under SFAS No. 142 During the first half of 2003, the Company identified indicators of impairment, including changes in the Company's 2003 and 2004 operating and cash flow forecasts, and changes in its strategic plans for certain of its acquired businesses, which required that the Company evaluate the appropriateness of the carrying value of its long-lived assets, principally goodwill recorded upon the acquisitions of Outback. A write-down of goodwill totaling $193 was recorded during the second quarter of 2003, reflecting the amount by which the carrying amount of the respective reporting unit exceeded its respective fair value as determined utilizing estimates of future discounted cash flows. During the first half of 2002, the Company completed the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002, and no adjustment to the carrying value of goodwill was required at that time. During the third quarter of 2002, the Company identified indicators of impairment, including then recent changes in the Company's 2002 and 2003 operating and cash flow forecasts, and then recent changes in its strategic plans for certain of its acquired businesses, which required that the Company evaluate the appropriateness of the carrying value of its long-lived assets, principally goodwill recorded upon the acquisitions of Wynd and Hotpaper.com, Inc. ("Hotpaper"). A write-down of goodwill totaling $8,400 was recorded during the third quarter of 2002, reflecting the amount by which the carrying amount of the respective reporting units exceeded their respective fair values as determined utilizing estimates of future discounted cash flows. The Company's annual impairment test indicated that no further impairment had occurred in the fourth quarter of 2002 or during 2003 and 2004 relative to Wynd. F-19 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following table summarizes the activity in Goodwill for the periods indicated: Years Ended December 31, 2004 2003 2002 ----------------------------------------------- Beginning balance, net $ 6,000 $ 6,193 $ 14,593 Impairment charge -- (193) (8,400) ----------------------------------------------- Ending balance, net $ 6,000 $ 6,000 $ 6,193 =============================================== F-20 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following table summarizes other intangible assets subject to amortization at the dates indicated:
December 31, 2004 December 31, 2003 Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Net Amount Amortization Net ------------------------------------------- ------------------------------------------- Trade Names $ 4,572 $ (4,388) $ 184 $ 4,572 $ (4,019) $ 553 Technology 3,017 (3,017) -- 3,017 (2,925) 92 Customer Lists 2,258 (2,258) -- 2,258 (2,168) 90 Other 935 (480) 455 418 (349) 69 ------------------------------------------- ------------------------------------------- $ 10,782 $ (10,143) $ 639 $ 10,265 $ (9,461) $ 804 =========================================== ===========================================
Aggregate future amortization expense for the above intangible assets is estimated to be: Years Ending December 31, 2005: $ 639 9. IMPAIRMENT OF OTHER LONG-LIVED ASSETS During the years ended December 31, 2003 and 2002, the Company identified indicators of possible impairment of its other long-lived assets. Such indicators included the continued deterioration in the business climate for wireless Internet service providers, significant declines in the market values of the Company's competitors in the wireless Internet services industry, recent changes in the Company's operating and cash flow forecasts, and changes in our strategic plans. Based on these factors, the Company initiated significant reductions in its workforce resulting in impairment to its property and equipment, principally software and furniture and fixtures. The impairment charge was calculated assuming no salvage value to be obtained from the assets. As a result, the Company recorded impairment charges of $1,202 and $5,582 during the years ended December 31, 2003 and 2002, respectively, for assets no longer in use. Included in the charge for 2003 is $445, relating to equipment given back to Eastern Computer upon the Company's default on related lease obligations (see note 4). 10. SUPPLEMENTAL BALANCE SHEET INFORMATION Merchandise inventories: During 2004, the Company recorded a write-down of approximately $84 in order to reflect inventory at the lower of cost or market. The write-down primarily relates to a lower of cost to market adjustment for wireless PDA models which remained unsold. F-21 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Additionally, during 2003 and 2002, the Company recorded reserves for excess inventory quantities of approximately $47 and $5,889, respectively. As of December 31, 2004, the Company had applied all reserves for excess inventory quantities to the related merchandise inventory. Property, equipment and leasehold improvements: Property, equipment and leasehold improvements consists of the following: December 31, ----------------- 2004 2003 ------- ------- Furniture, fixtures and equipment ............. $ 754 $ 754 Computer equipment and software ............... 6,903 6,765 Leasehold improvements ........................ 265 265 ------- ------- 7,922 7,784 Less: accumulated depreciation and amortization 6,982) (6,178) ------- ------- $ 940 $ 1,606 ======= ======= Accrued expenses: Accrued expenses consisted of the following: December 31, ----------------- 2004 2003 ------- ------- Settlement arrangements with vendors .......... $ -- $ 2,072 Professional fees ............................. 169 427 Carrier services .............................. 109 360 Employee compensation ......................... 128 130 Consideration for acquired intangibles ........ 45 -- Acquired subscriber withheld consideration .... 44 -- Inventory purchases ........................... 22 -- Dealer commissions ............................ 7 6 Marketing expenses ............................ 3 15 Other ......................................... 11 30 ------- ------- $ 538 $ 3,040 ======= ======= F-22 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 11. COMMITMENTS AND CONTINGENCIES On February 15, 2002, Eagle Truck Lines Inc. (a/k/a Air Eagle, Inc.) filed suit against GoAmerica, Inc. in the Superior Court of the State of California for the County of Los Angeles seeking payment of $590, plus other damages, expenses, interest and costs of suit. This action was removed to the United States District Court for the Central District of California and subsequently, pursuant to a motion brought by GoAmerica, transferred to the District of New Jersey where GoAmerica was moved to have it consolidated with the action described in the next paragraph. Air Eagle alleged that GoAmerica, as successor in interest to Flash, failed to perform its obligations under a consulting contract dated July 2, 1999 (the "Contract"), by and between Flash and Air Eagle. Air Eagle alleged that GoAmerica assumed the rights and liabilities under this Contract as a result of its purchase of substantially all of the assets of Flash in November 2000. On September 19, 2003, Air Eagle filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Central District of California. In December 2004, the parties agreed and received court approval to settle this litigation in consideration of GoAmerica's paying Air Eagle $140 and Air Eagle principals' agreeing to assist GoAmerica in the Company's litigation against the Flash Defendants below. In a separate but related matter, on July 31, 2002, GoAmerica filed suit against Flash and certain former officers and shareholders of Flash (the "Flash Defendants") in the United States District Court for the District of New Jersey for violations of federal and state securities law and common law fraud in connection with the sale of the assets of Flash to GoAmerica. In October 2002, each of the Flash Defendants filed answers to GoAmerica's complaint denying all of the Company's charges, with one of the Flash Defendants adding counterclaims against the Company and certain named officers alleging, among other things, fraudulent misrepresentation, violations of state securities law and unjust enrichment in excess of $1,000. The other Flash Defendants have been granted leave to amend their answer to include substantially similar counterclaims against the Company and Company officer defendants. The Company filed a motion to dismiss the Flash Defendants' counterclaims, and the Flash Defendants filed cross-motions for judgment on the pleadings and for summary judgment seeking dismissal of the Company's claims against them. On March 2, 2005, all of the Flash Defendants' counterclaims against the Company and the Company officer defendants were dismissed, and the Flash Defendants' cross-motions to dismiss the Company's claims against them were denied in all respects other than the common law fraud claim. The Company is exploring its options as a result of these favorable dismissals. In September 2003, Michael Marts, an individual residing in California, sued Boundless Depot, Scott Johnson and Robert Rademacher (collectively, the "Boundless Depot Defendants"), among others, with respect to claims for breach of contract by some or all of the Boundless Depot Defendants. Wynd Communications was named as a co-defendant in this action (the "Marts Action") as the successor-in-interest to the Deafwireless assets that Wynd and the Company acquired as of March 1, 2003 from the Boundless Depot Defendants pursuant to an asset purchase agreement dated as of February 8, 2003 (the "Deafwireless Agreement"). All of the claims, aggregating approximately $433, arose prior to execution of the Deafwireless Agreement, with more than half of the damages claimed arising prior to 2003. Wynd and the Company are no longer parties to the Marts Action pursuant to their motion to dismiss being granted on March 17, 2005. In a separate but related matter, on September 22, 2004, two of the Boundless Depot Defendants sued GoAmerica and Wynd Communications in the Superior Court of the State of California for the County of Los Angeles, claiming damages of $1,000 dollars for GoAmerica's refusal to pay unattained contingent consideration, comprising cash and/or GoAmerica Common Stock, to Boundless Depot in connection with the Deafwireless Agreement. We believe that the contractual contingencies of the Deafwireless Agreement were not met and that the Boundless Depot Defendants remain in breach of their indemnity obligations under the Deafwireless Agreement with respect to the Marts Action; therefore the Company does not believe that any of the contingent consideration is owed. Moreover, even if all contingencies under the Deafwireless Agreement had been attained, the Company believes that the damages claimed in this case are excessive since the aggregate value of such contingent consideration would not be material. The Company intends to defend this action vigorously and may elect to pursue counterclaims. F-23 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Future minimum capital lease payments and future minimum lease payments relating to office space under noncancelable operating leases as of December 31, 2004 are as follows:
Capital Year ending December 31, Leases Operating Leases - ------------------------------------------------------- ---------------- ---------------- 2005 .................................................. $ 1 $ 291 2006 .................................................. -- 285 2007 .................................................. -- 140 2008 .................................................. -- -- 2009 .................................................. -- -- Thereafter ............................................ -- -- ---------------- ---------------- Total minimum lease payments .......................... 1 $ 716 ================ Less amount representing interest ..................... (--) ---------------- Present value of net minimum capital .................. lease payments ...................................... 1 Less current portion of capital lease obligations ..... (1) ---------------- Obligations under capital lease, net of current portion $ -- ================
During 2004, 2003 and 2002 total rent expense was approximately $277, $2,139 and $3,282, respectively. At December 31, 2004, a standby letter of credit totaling approximately $600 was outstanding as security deposit in favor of Cingular. As of December 31, 2004, $604 of cash held in the Company's bank accounts was restricted to secure this letter of credit. As of December 31, 2003, the Company had no standby letters of credit outstanding. During 2002, the Company entered into employment agreements with certain of its key executives which provide for fixed compensation. These agreements generally continue until terminated by the employee or the Company and, under certain circumstances, provide for salary continuance for a specified period. The Company's maximum aggregate liability under the agreements if these employees were terminated is approximately $175 at December 31, 2004. 12. BENEFIT PLAN The Company has established a defined contribution plan under Section 401(k) of the Internal Revenue Code, which provides for voluntary employee contributions of up to 15 percent of compensation for employees meeting certain eligibility requirements. The Company contributes to the plan up to a maximum of 3 percent. 13. STOCKHOLDERS' EQUITY On December 19, 2003, the Company granted Sunrise Securities Corp. a warrant to purchase 10,150 shares of the Company's common stock at a price of $12.00 per share as part of their compensation for securing bridge financing for the Company as described in note 5. This warrant was immediately exercisable at the date of grant. The warrant had an estimated fair market value at the date of grant of approximately $292 and was recorded as additional deferred debt expense. Such warrant was exercised during 2004. F-24 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) A one for ten reverse stock split was effected during May 2004. Additionally, a one for eight reverse stock split was effected during October 2004. The Company retained the current par value of $.01 per share for all shares of common stock. All references in the financial statements to the number of shares outstanding, per share amounts, and stock option data of the Company's common stock have been restated to reflect the effect of both of the reverse stock splits for all periods presented. Stockholders' equity reflects both of the reverse stock splits by reclassifying from "Common stock" to "Additional paid in capital " an amount equal to the par value of the reduced shares arising from the reverse splits. On May 20, 2004, the Company's Board of Directors authorized the repurchase of up to 62,500 shares of its Common Stock pursuant to a new stock buyback program. As of December 31, 2004, the Company had repurchased an aggregate of 24,063 shares of its Common Stock at an average price of $7.778 per share. All purchases under the program have been made in the open market at the Company's discretion. The Company also issued warrants in 2003 relating to the settlement of their lease obligations (see note 3) and as part of the bridge note financing (see note 5). As of December 31, 2004, the Company had reserved shares of common stock for issuance as follows: Exercise of common stock options...................................... 127,408 Exercise of common stock purchase warrants............................ 85,338 Employee stock purchase plan.......................................... 48,335 14. STOCK OPTION PLANS AND OTHER STOCK-BASED COMPENSATION On August 3, 1999, the Company adopted the GoAmerica Communications Corp. 1999 Stock Option Plan. This plan provided for the granting of awards to purchase shares of common stock. No further options will be made under the GoAmerica Communications Corp. 1999 Stock Option Plan. In December 1999, the Company's Board of Directors adopted the GoAmerica, Inc. 1999 Stock Plan (the "Plan") as a successor plan to the GoAmerica Communications Corp. 1999 Stock Option Plan, pursuant to which 60,000 additional shares of the Company's common stock have been reserved for issuance to selected employees, non-employee directors and consultants. In May 2001, the Company's shareholders approved an increase in the maximum number of shares issuable under the Plan from 60,000 to 132,809 shares. F-25 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Under the terms of the Plan, a committee of the Company's Board of Directors may grant options to purchase shares of the Company's common stock to employees and consultants of the Company at such prices that may be determined by the committee. The Plan provides for award grants in the form of incentive stock options and non-qualified stock options. Options granted under the Plan generally vest annually over 4 years and expire after 10 years. The following table summarizes activity on a combined basis for the plans during 2004, 2003 and 2002: Number of Weighted-Average Options Exercise Price --------------- --------------- Outstanding at January 1, 2002 ......... 76,189 $ 376.00 Granted ................................ 72,453 $ 66.40 Exercised .............................. (2,888) $ 40.00 Cancelled .............................. (30,451) $ 403.20 --------------- Outstanding at December 31, 2002 ....... 115,303 $ 177.60 Granted ................................ 12,188 $ 24.80 Exercised .............................. (8,931) $ 40.00 Cancelled .............................. (41,605) $ 292.00 --------------- Outstanding at December 31, 2003 ....... 76,955 $ 105.60 Granted ................................ 10,000 $ 2.35 Exercised .............................. (6,776) $ 29.23 Cancelled .............................. (9,799) $ 118.14 --------------- Outstanding at December 31, 2004 ....... 70,380 $ 116.66 =============== Exercisable at December 31, 2004 ....... 48,459 $ 127.20 =============== Exercisable at December 31, 2003 ....... 40,076 $ 157.60 =============== Exercisable at December 31, 2002 ....... 53,303 $ 219.20 =============== Available for grant at December 31, 2004 57,028 -- =============== The following table summarizes information about fixed price stock options outstanding at December 31, 2004:
Outstanding Exercisable ------------------------------------------------------ ----------------------------------- Weighted-Average Number Weighted-Average Remaining Number Weighted-Average Range of Exercise Prices Outstanding Exercise Price Contractual Life Exercisable Exercise Price - ------------------------- ---------------- ---------------- ---------------- ---------------- ---------------- $2.35 10,000 $ 2.35 9.8 years 3,333 $ 2.35 $20.00-$26.40 28,672 $ 23.86 5.5 years 16,515 $ 23.95 $36.00-$44.80 5,875 $ 44.12 7.0 years 7,094 $ 44.64 $56.80-$84.80 4,471 $ 84.64 5.6 years 4,532 $ 84.64 $104.80-$156.80 11,565 $ 146.93 7.9 years 7,195 $ 144.34 $162.40-$195.20 3,096 $ 166.54 5.8 years 3,089 $ 166.55 $401.60-$600.00 5,963 $ 432.58 6.1 years 5,963 $ 432.58 $637.60-$661.60 13 $ 637.60 6.8 years 13 $ 637.60 $1200.00-$1280.00 725 $1268.97 6.6 years 725 $1268.97 ---------------- ---------------- 70,380 48,459 ================ ================
F-26 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) For certain options granted during 2000 and 1999, the Company has recorded pursuant to APB No. 25 approximately $8,457 and $7,799, respectively, of deferred compensation expense representing the difference between the exercise price and the market value of the common stock on the date of grant. These amounts were being amortized over the vesting period of each option and amounted to approximately $314 and $2,315 during the years ended December 31, 2003 and 2002, respectively. The following table discloses, for the year ended December 31, 2004, 2003 and 2002, the number of options granted and certain weighted-average information:
Year ended December 31, --------------------------------------------------------------------------------------------------------- 2004 2003 2002 --------------------------------- --------------------------------- --------------------------------- Number of Fair Exercise Number of Fair Exercise Number of Fair Exercise Options Value Price Options Value Price Options Value Price --------- --------- --------- --------- --------- --------- --------- --------- --------- Exercise price greater than market price ... -- $ -- $ -- -- $ -- $ -- -- $ -- $ -- Exercise price equals market price .......... 10,000 2.35 2.35 12,188 24.80 24.80 72,453 66.40 66.40 Exercise price less than market price .......... -- -- -- -- -- -- -- -- --
Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123 (see note 1). For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions for 2004, 2003 and 2002: weighted-average risk-free interest rate of 4.20%, 4.20% and 4.03% respectively; expected volatility of 0.80; no dividends; and a weighted-average expected life of the options of 2.0 years, 2.0 years and 3.0 years, respectively. In December 1999, the Company's Board of Directors adopted the Employee Stock Purchase Plan effective upon the Company's initial public offering of its common stock, which was completed on April 12, 2000. The Company initially reserved 50,000 shares of common stock for issuance under the plan. During 2003 and 2002, there were 600 and 1,065 shares, respectively, sold pursuant to the plan. F-27 15. INCOME TAXES Significant components of the Company's deferred tax assets and liabilities are as follows: December 31, -------------------- 2004 2003 -------- -------- Deferred tax assets: Net operating loss carryforwards ................. $ 70,587 $ 71,710 Deferred compensation ............................ 8,635 8,635 Reserves and accruals ............................ 626 461 Amortization of Goodwill ......................... 4,024 3,964 Other ............................................ 2,388 2,701 Less valuation allowance ............................. (86,261) (87,302) -------- -------- Deferred tax assets .................................. 1 169 Deferred tax liabilities: Intangible assets ................................ (1) (169) -------- -------- Net deferred tax assets .............................. $ -- $ -- ======== ======== A reconciliation setting forth the differences between the effective tax rate of the Company and the U.S. statutory rate is as follows:
Year ended December 31, -------------------------------- 2004 2003 2002 -------- -------- -------- Statutory federal income tax (benefit) at 34% ............... $ (1,511) $ (2,764) $(19,002) State income tax (benefit), net of federal benefit .......... (372) (122) (1,911) Non-deductible expenses, primarily impairment of goodwill ... 2,193 1,350 4,130 Increase in valuation allowance ............................. (1,042) 1,252 16,347 -------- -------- -------- Total ....................................................... $ (732) $ (284) $ (436) ======== ======== ========
The state tax benefits recorded in 2004, 2003 and 2002 of $732, $284 and $436, respectively, are attributable to the Company's sa le of certain state net operating loss carryforwards. At December 31, 2004, the Company had a federal and state net operating loss ("NOL") carryforward of approximately $181,200 and $149,500, respectively. The federal NOL carryforwards expire beginning in 2011 and state NOL's beginning in 2005. The Tax Reform Act of 1986 enacted a complex set of rules limiting the potential utilization of net operating loss and tax credit carryforwards in periods following a corporate "ownership change." In general, for federal income tax purposes, an ownership change is deemed to occur if the percentage of stock F-28 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) of a loss corporation owned (actually, constructively and, in some cases, deemed) by one or more "5% shareholders" has increased by more than 50 percentage points over the lowest percentage of such stock owned during a three-year testing period. During 1999, such a change in ownership occurred. As a result of the change, the Company's ability to utilize certain of its net operating loss carryforwards will be limited to approximately $1,400 of taxable income, per year. In addition, the Company acquired additional net operating losses through its acquisitions of Wynd and Hotpaper. The Company believes that an ownership change has occurred with respect to these entities. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the change. The Company has not performed a detailed analysis to determine the amount of the potential limitations. In addition, the Company has not performed a detailed analysis to determine the amount of the potential limitations as a result of the March financing. F-29 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 16. QUARTERLY FINANCIAL DATA (UNAUDITED) The table below summarizes the Company's unaudited quarterly operating results for years ended December 31, 2004 and 2003.
Quarter Ended 2004 March 31 June 30 September 30 December 31 ------------ ------------ ------------ ------------ Net revenue and other income ......... $ 1,948 $ 1,597 $ 1,370 $ 1,307 Cost of revenue ...................... (1,195) (974) (733) (831) Operating expenses ................... (1,865) (1,651) (1,511) (1,702) Depreciation and amortization expenses (532) (399) (267) (288) Settlement gains, net ................ 1,621 -- (140) 13 Interest (expense) income, net ....... (1,065) 36 38 47 Benefit from income taxes ............ -- -- -- 732 Net (loss) ........................... $ (1,088) $ (1,391) $ (1,243) $ (722) Net (loss) per common share: - Basic .......................... $ (1.09) $ (0.68) $ (0.61) $ (0.35) - Diluted ........................ $ (1.09) $ (0.68) $ (0.61) $ (0.35) 2003 March 31 June 30 September 30 December 31 ------------ ------------ ------------ ------------ Net revenue and other income ......... $ 3,103 $ 3,331 $ 3,123 $ 2,321 Cost of revenue ...................... (1,846) (1,533) (1,610) (660) Operating expenses ................... (4,578) (3,056) (1,942) (2,322) Depreciation and amortization expenses (814) (944) (581) (654) Impairment of long-lived assets ...... -- (1,245) -- (150) Gain on sale of subscribers .......... 1,180 565 11 -- Settlement gains, net ................ -- -- -- 85 Interest income, net ................. (12) 3 (4) (262) Benefit from income taxes ............ -- -- -- 284 Net (loss) ........................... $ (2,967) $ (2,879) $ (1,003) $ (1,358) Net (loss) per common share: - Basic .......................... $ (4.39) $ (4.26) $ (1.48) $ (1.98) - Diluted ........................ $ (4.39) $ (4.26) $ (1.48) $ (1.98)
F-30 GOAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 17. SUPPLEMENTAL CASH FLOW INFORMATION The table below presents the Company's supplemental disclosure of cash flow information for the years ended December 31, 2004, 2003 and 2002.
YEARS ENDED DECEMBER 31, ---------------------------- 2004 2003 2002 ------- ------- ------- Supplemental disclosure of cash flow information: Interest paid ............................................. $ 32 $ 21 $ 91 Non-cash investing and financing activities: Beneficial conversion feature of convertible bridge note payable ................................................ -- 528 -- Conversion of bridge note payable into common stock ....... 1,015 -- -- Application of deferred financing costs against proceeds from the sale of stock ................................. 606 -- -- Issuance of shares for vendor settlements ................. 450 -- -- Issuance of shares to acquire intangible assets ........... 442 -- -- Issuance of warrant to placement agent to secure financing -- 292 -- Restricted cash utilized to pay accrued expenses .......... -- 556 -- Conversion of capital lease obligation into an account payable ................................................. -- 152 -- Accrued expenses related to acquisition of subscribers .... -- 50 -- Accrued expenses related to the incurrence of deferred financing expense ...................................... -- 70 --
F-31 SCHEDULE II GOAMERICA, INC. FINANCIAL STATEMENT SCHEDULE VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
BALANCE AT ADDITIONS: BALANCE AT BEGINNING OF CHARGED TO COSTS END OF PERIOD AND EXPENSES DEDUCTIONS PERIOD --------------- --------------- --------------- --------------- YEAR ENDED DECEMBER 31, 2004 Allowance for doubtful accounts $ 1,213 $ 239 $ 849(1) $ 603 Inventory Reserve -- 84 84(3) -- YEAR ENDED DECEMBER 31, 2003 Allowance for doubtful accounts $ 3,418 $ 534 $ 2,739(1) $ 1,213 Inventory Reserve -- 47 47(3) -- Sales allowances, discounts & returns 513 134 647(2) -- YEAR ENDED DECEMBER 31, 2002 Allowance for doubtful accounts $ 2,675 $ 3,221 $ 2,478(1) $ 3,418 Inventory Reserve 4,740 5,889 10,629(3) -- Sales allowances, discounts & returns 1,378 2,686 3,551(2) 513
(1) Uncollectible accounts written-off, net of recoveries. (2) Returns and discounts charged to reserve. (3) Inventory discounts charged to reserve. F-32 EX-10.10 2 v014977_ex10-10.txt Exhibit 10.10 Dated as of March 1, 2005 David Lyons [address deleted] Dear Mr. Lyons: GoAmerica, Inc. ("GoAmerica") desires that you perform certain services for GoAmerica as provided for in this Agreement upon the following terms and conditions: 1. Term. The term of this Agreement commenced as of January 1, 2005 and shall continue for up to six (6) months thereafter, unless sooner terminated by GoAmerica or you pursuant to Section 5 hereof. 2. Duties and Responsibilities. You shall provide advice to GoAmerica with respect to, identify and evaluate potential acquisitions, dispositions and/or business combinations in order to strengthen GoAmerica's business prospects and to increase GoAmerica's shareholder value, and provide advice with respect to such other matters as GoAmerica's Board of Directors may request from time to time (the "Services"), all on a non-exclusive basis. You shall devote the appropriate portion of your time to perform diligently the Services; however, nothing herein shall prevent you from fulfilling any of your obligations as a director of GoAmerica or engaging in other businesses and activities that are not in violation of your obligations hereunder. You shall inform GoAmerica promptly of any conditions or limitations which will or might affect your performance of the Services contemplated hereunder, including legal, ethical and personal conflicts; however, your failure to comply with these provisions shall not relieve you of any of your duties, liabilities or obligations hereunder. 3. Independent Contractor. In performing the Services, you shall be an independent contractor and not an employee of GoAmerica. You shall comply with instructions from GoAmerica concerning the nature and objective of the Services, but you have the discretion to determine the manner and precise timing of your performance of the Services. Except as specifically authorized by GoAmerica, during your performance of the Services you do not have the authority to contractually bind GoAmerica and you are not GoAmerica's agent. 4. Compensation. For all Services rendered by you in any capacity hereunder other than traditional service as a director of GoAmerica, GoAmerica agrees to pay you the sum of ten thousand dollars ($10,000) monthly in the manner set forth herein, in addition to reimbursement by GoAmerica for reasonable travel and other expenses incurred directly and wholly in the performance of the Services. GoAmerica shall issue you a check in the amount of ten thousand dollars ($10,000) following each month during which you perform the Services (other than those fees for months in which Services were rendered prior to formal execution of this Agreement which have already been paid). Additionally, a check will be issued to you for reimbursement of expenses reasonably incurred in and to the extent of your performance of the Services upon submission of an invoice adequately describing the expenses paid by you. Each such invoice shall be accompanied and supported by satisfactory evidence of the reimbursable expenses listed thereon. Payment to you of each monthly amount shall constitute full and sufficient compensation for the Services. Payment of any invoice for expenses shall not prejudice GoAmerica's right to dispute the accuracy thereof. You shall retain all related accounting and other documentation for a period of 2 years after performance of the Services and expenses on each such invoice. 5. Termination. Each of GoAmerica and you shall have the right to terminate this Agreement immediately upon written notice as provided in Section 7; provided, however, neither party shall be required to notify the other with respect to the expiration of the Term of this Agreement. The Term may not be extended or renewed without the express authorization of the majority of GoAmerica's Board of Directors (with you abstaining from voting on such extension or renewal) and you expressly agree that you will not condition diligent performance of the Services or request, demand, expect, or accept any compensation therefor other than as provided in Section 4 above. At no time are you to take any action that jeopardizes, compromises or prejudices your status as an "independent" director of GoAmerica (as determined by The Nasdaq Stock Market, Inc.) unless you are notified otherwise by GoAmerica in writing. GoAmerica shall have the right to terminate this Agreement immediately without notice in the event you cease to serve as an independent director of GoAmerica. 6. Assignment. You shall not assign your rights or delegate your duties hereunder without the prior written consent of GoAmerica. 7. Notices. All notices, invoices, changes of address, or other communication required or permitted to be given hereunder shall be deemed to have been duly given when personally delivered or faxed and immediately deposited in the U.S. mail, postage prepaid, as follows: If to GoAmerica: GoAmerica, Inc. ATTN: Chairman of the Board 433 Hackensack Avenue, 3rd Floor Hackensack, NJ 07601 Fax: 201-996-1772 If to you, to Fax [deleted] and at your address as set forth above. Notwithstanding the foregoing, if exigent circumstances exist, telephonic communication shall suffice if immediately followed by confirmation of such communication in the manner described above. Either party may change its or his address and/or fax number for the purpose of this paragraph by written notice similarly given. 8. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey (without regard to conflicts of laws principles) and the courts located in the State of New Jersey shall have exclusive jurisdiction over any matter arising under this Agreement. 9. Void Provisions. If any provision of this Agreement, as applied to either party or to any circumstances, shall be adjudged by a court to be void or unenforceable, the same shall be deemed stricken from this Agreement and shall in no way affect any other provision of this Agreement or the validity or enforceability of this Agreement. 10. Survival. The provisions of Sections 4 and 8 shall survive any termination or expiration of this Agreement. 11. Entire Agreement. The terms and provisions of this Agreement constitute the entire agreement between GoAmerica and you with respect to the Services and supersede all communications, representations or agreements, either verbal or written. This Agreement may not be modified, amended or supplemented except by written instrument duly executed by both GoAmerica and you. If the foregoing correctly sets forth our understanding, please sign one copy of this letter and return it to the undersigned, whereupon this letter shall constitute a binding agreement between us. Very truly yours, GOAMERICA, INC. By: -------------------------- Daniel R. Luis Chief Executive Officer ACCEPTED AND AGREED: - --------------------------- David Lyons EX-10.14 3 v014977_ex10-14.txt Exhibit 10.14 LEASE AGREEMENT BY AND BETWEEN STELLAR CONTINENTAL LLC, LESSOR - AND - GOAMERICA COMMUNICATIONS CORP., LESSEE DATED: AUGUST 1, 2004 1249-0751042501.DOC ii i TABLE OF CONTENTS BASIC LEASE PROVISIONS AND DEFINITIONS.........................................1 1. DESCRIPTION 2 2. TERM.....................................................................3 3. BASIC RENT .............................................................3 4. USE AND OCCUPANCY........................................................3 5. CARE AND REPAIR OF PREMISES/ENVIRONMENTAL................................3 6. ALTERATIONS, ADDITIONS OR IMPROVEMENTS...................................6 7. ACTIVITIES INCREASING FIRE INSURANCE RATES...............................6 8. ASSIGNMENT AND SUBLEASE..................................................7 9. COMPLIANCE WITH RULES AND REGULATIONS...................................10 10. DAMAGES TO BUILDING.....................................................10 11. WAIVER OF SUBROGATION...................................................11 12. EMINENT DOMAIN..........................................................11 13. INSOLVENCY OF LESSEE....................................................12 14. LESSOR'S REMEDIES ON DEFAULT............................................12 15. DEFICIENCY ............................................................12 16. SUBORDINATION OF LEASE..................................................13 17. SECURITY DEPOSIT........................................................14 18. RIGHT TO CURE LESSEE'S BREACH...........................................16 19. LIENS ..................................................................16 20. RIGHT TO INSPECT AND REPAIR.............................................16 21. SERVICES TO BE PROVIDED BY LESSOR.......................................16 22. AFTER-HOURS USE.........................................................17 23. INTERRUPTION OF SERVICES OR USE.........................................17 24. ELECTRICITY 18 25. ADDITIONAL RENT.........................................................20 (A) Operating Cost Escalation.........................................20 (B) Fuel, Utilities and Electric Cost Escalation......................21 (C) Tax Escalation....................................................21 i (D) Lease Year........................................................22 (E) Payment...........................................................22 (F) Books and Records.................................................23 (G) Right of Review...................................................23 (H) Occupancy Adjustment..............................................23 26. LESSEE'S ESTOPPEL.......................................................24 27. HOLDOVER TENANCY........................................................24 28. RIGHT TO SHOW PREMISES..................................................25 29. "AS IS" CONDITION.......................................................25 30. WAIVER OF TRIAL BY JURY.................................................25 31. LATE CHARGE 25 32. INSURANCE...............................................................25 (A) Lessee's Insurance................................................25 (B) Lessor's Insurance................................................27 (C) Waiver of Subrogation.............................................28 33. NO OTHER REPRESENTATIONS................................................28 34. QUIET ENJOYMENT.........................................................28 35. INDEMNITY...............................................................28 36. RULES OF CONSTRUCTION/APPLICABLE LAW....................................28 37. APPLICABILITY TO HEIRS AND ASSIGNS......................................29 38. PARKING.................................................................29 39. LESSOR'S EXCULPATION....................................................30 40. INTENTIONALLY OMITTED...................................................30 41. RECORDATION.............................................................30 42. NO OPTION...............................................................30 43. DEFINITIONS.............................................................30 (A) Affiliate.........................................................30 (B) Business Days and Building Hours..................................30 (C) Common Facilities.................................................31 (D) Force Majeure.....................................................31 (E) Lessee's Percentage...............................................31 44. LEASE COMMENCEMENT......................................................32 ii 45. NOTICES.................................................................32 46. ACCORD AND SATISFACTION.................................................32 47 EFFECT OF WAIVERS.......................................................32 48. LESSOR'S RESERVED RIGHT.................................................32 49. RELOCATION BY LESSEE....................................................33 50. CORPORATE AUTHORITY.....................................................33 51. NUMBER AND GENDER.......................................................33 52. LESSEE RESTRICTION......................................................33 53. GOVERNMENT REQUIREMENTS.................................................33 54. LIMITATION OF LESSOR'S LIABILITY........................................34 55. 24-HOUR ACCESS..........................................................34 56. RENT CONCESSION.........................................................34 The following Exhibits attached to this Lease are incorporated herein and made a part hereof: Exhibit A Premises Exhibit B Rules and Regulations Exhibit C Cleaning Specifications iii LEASE, dated August 1, 2004 between STELLAR CONTINENTAL LLC, a Delaware limited liability company with an office at 156 William Street, New York, New York 10038 (hereinafter called "LESSOR"), and GOAMERICA COMMUNICATIONS CORP., a Delaware corporation, whose address is 433 Hackensack Avenue, Hackensack, New Jersey (hereinafter called "LESSEE"). REFERENCE PAGE CONTINENTAL PLAZA BASIC LEASE PROVISIONS AND DEFINITIONS In addition to other terms elsewhere defined in this Lease, the following terms whenever used in this Lease shall have only the meanings set forth in this Section, unless such meanings are expressly modified, limited or expanded elsewhere herein. (1) DEMISED PREMISES OR PREMISES: Approximately 10,825 gross rentable square feet on the third (3rd) floor of the Building as shown on Exhibit A hereto, which includes an allocable share of the Common Facilities as defined in Subsection 43(C). (2) BUILDING: 433 Hackensack Avenue, Hackensack, New Jersey. (3) TERM FIXED BASIC RENT: $26.00 per square foot per year, payable in monthly installments of $23,454.17. All exclusive of ERIF and subject to further adjustment as provided in Section 24. (4) MONTHLY FIXED BASIC RENT: $23,454.17. All exclusive of ERIF and subject to further adjustment as provided in Section 24. (5) ELECTRIC RENT INCLUSION FACTOR ("ERIF"): One and 50/100 ($1.50) Dollars per gross rentable square foot; One Thousand Three Hundred Fifty Three and 13/100 ($1,353.13) per month. (6) ESCALATORS: Additional Rent adjustments and Base Year adjustments for the Operating Cost Escalation, Tax Escalation, and Fuel, Utilities and Electric Cost Escalations. (7) COMMENCEMENT DATE: The latter of (i) August 1, 2004, or (ii) the date Lessor gives notice to Lessee that Lessor has completed the demise of the Premises, subject to Sections 29 and 44. (8) TERM: Three (3) years. (9) TERMINATION DATE: July 31, 2007. 1 (10) SECURITY DEPOSIT: Forty Six Thousand Nine Hundred Eight and 34/100 ($46,908.34). (11) BASE PERIOD COSTS: As to the following: (A) Base Operating Costs: Those costs incurred for the Building, Complex and Parcel during Calendar Year 2004. (B) Base Real Estate Taxes: Those Real Estate Taxes assessed against the Building, Complex and Parcel applicable to Calendar Year 2004. (C) Base Utility and Energy Costs: Those costs determined by multiplying the Base Utility Rate (as hereinafter defined) by the usage incurred for the Building, Complex and Parcel during Calendar Year 2004. (12) BASE UTILITY RATE: The rate in effect (including fuel surcharges and/or adjustments) on January 1, 2004. (13) LESSEE'S PERCENTAGE: One and Eight Hundredths (1.8%) percent subject to adjustment as in Subsection 43(E) provided. (14) PARKING SPACES: A total of thirty (30) spaces, of which ten (10) shall be in the covered parking area described in Section 38, below. (15) BROKER: None. (16) PARCEL: Lot 5.A, Block 512.A, Lot 1, Block 514 on the tax map of the City of Hackensack; Lot 3, Block 98 on the tax map of the Borough of River Edge. (17) PERMITTED USE: General office for executive and administrative purposes and network operations. (18) ADDITIONAL RENT: All sums in addition to Term Fixed Basic Rent payable by Lessee to Lessor pursuant to the provisions of this Lease for the collection of which Lessor shall have all the remedies as are permitted for the collection of Fixed Basic Rent. W I T N E S S E T H: For and in consideration of the covenants herein contained, and upon the terms and conditions herein set forth, Lessor and Lessee agree as follows: 1. DESCRIPTION. Lessor hereby leases to Lessee, and Lessee hereby hires from Lessor, the Demised Premises as defined on the Reference Page (hereinafter called "DEMISED PREMISES" or "PREMISES"), as shown on the plan or plans, initialed by the parties hereto, marked EXHIBIT A attached hereto and made part 2 of this Lease in the Building as defined on the Reference Page (hereinafter called the "BUILDING") which is situated as part of that Complex of Buildings known as 401, 407, 411 and 433 Hackensack Avenue, Hackensack, New Jersey, also known as Continental Plaza (hereinafter called the "Complex"), all located on that certain Parcel as defined in Section (15) on the Reference Page (hereinafter called the "PARCEL"). 2. TERM. The Premises are leased for the Term to commence on the Commencement Date, and to end at 12:00 midnight on the Termination Date, all as defined on the Reference Page. 3. BASIC RENT. The Lessee shall pay to the Lessor during the Term commencing on the Commencement Date, the Term Fixed Basic Rent as defined on the Reference Page (hereinafter called the "TERM FIXED BASIC RENT"), payable in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. The Term Fixed Basic Rent shall accrue at the Term Fixed Basic Rent as defined on the Reference Page and shall be payable in advance on the first day of each calendar month during the Term in installments of Monthly Fixed Basic Rent as defined on the Reference Page, except that a proportionately lesser sum may be paid for the first and last months of the Term of this Lease if the Term commences on a day other than the first day of the month, in accordance with the provisions of this Lease herein set forth. Lessor acknowledges receipt from Lessee of the first installment of Monthly Fixed Basic Rent for the Term, by check, subject to collection. Lessee shall pay Fixed Basic Rent and any Additional Rent as hereinafter provided, to Lessor at Lessor's above stated address, or at such other place as Lessor may designate in writing, without demand and without counterclaim, deduction or setoff. The aforesaid Fixed Basic Rent shall be subject to adjustment as in Section 24 provided. As used in this Lease, Fixed Basic Rent shall mean either Term Fixed Basic Rent, Annual Fixed Basic Rent or Monthly Fixed Basic Rent, as appropriate. 4. USE AND OCCUPANCY. Lessee shall use and occupy the Premises for the Permitted Use as defined on the Reference Page and for no other purpose. Notwithstanding anything to the contrary contained in this Lease, Lessee, in the use and occupancy of the Premises and in the prosecution and conduct of any business thereon, shall comply with all requirements of all laws, orders, ordinances, rules and regulations of the Federal, State, county and municipal authorities and with any direction or certificate of occupancy issued pursuant to any law of or by any public officer or officers. Lessee covenants that it will not use or permit to be used any part of the Premises for any unlawful purpose or for any dangerous, noxious or offensive trade or business and will not cause or maintain any nuisance in, at or on the Premises. 5. CARE AND REPAIR OF PREMISES/ENVIRONMENTAL. (A) Lessee covenants to commit no act of waste and to take good care of the Premises and the fixtures and appurtenances thereon, and shall, in the use and occupancy of the Premises, comply with all present and future laws, orders and regulations of the Federal, State and municipal governments or any of their departments affecting the Premises and with any and all environmental requirements resulting from the Lessee's use of the Premises; this covenant shall survive the expiration or sooner termination of the Lease. Lessee shall make all necessary non-structural repairs to the Premises, and Lessee shall pay to Lessor, as Additional Rent, immediately upon demand, the cost for any such 3 necessary repairs. Lessor shall make all necessary repairs to the Common Facilities, the parking areas, if any, the Building systems and the Building structure, the same to be included as an Operating Cost pursuant to Section 25 herein, except where the repair has been made necessary by misuse, overuse or neglect by Lessee or Lessee's agents, servants, visitors or licensees, in which event Lessor shall nevertheless make the repair but Lessee shall pay to Lessor, as Additional Rent, immediately upon demand, the costs therefor (net of any insurance proceeds which Lessor may receive on account of such repair). Lessor shall comply with all present and future laws, orders and regulations of the federal, state and municipal governments or any of their departments affecting the Common Facilities, the same to be included as an Operating Cost, except where the need for such compliance has been made necessary by the specific manner of Lessee's use, in which case Lessor shall effect the compliance but Lessee shall pay to Lessor, as Additional Rent, immediately upon demand, the costs thereof. All improvements made by Lessee to the Premises, which are so attached to the Premises that they cannot be removed without material injury to the Premises, shall become the property of Lessor upon installation. Not later than the last day of the Term, Lessee shall, at Lessee's expense, remove all Lessee's personal property and those improvements made by Lessee which have not become the property of Lessor, including trade fixtures (other than built-in cabinetwork), movable paneling partitions; repair all injury done by or in connection with the installation or removal of said property and improvements; cap or terminate all electrical and telephone connections at service entry panels as required by law; and surrender the Premises in as good condition as they were at the beginning of the Term, reasonable wear and damage by fire, the elements, casualty, or other cause not due to the misuse or neglect by Lessee, Lessee's agents, servants, visitors or licensees excepted. All other property of Lessee remaining on the Premises after the last day of the Term of this Lease shall be conclusively deemed abandoned and may be removed by Lessor, and Lessee shall reimburse Lessor for the cost of such removal. Lessor may have any such property stored at Lessee's risk and expense. Notwithstanding the provisions in this Section, Lessee shall be responsible for installing and maintaining any additional HVAC systems that may be required due to Lessee's use of the Premises, as further provided for in Section 24(C). (B) Lessee agrees that it will not suffer, allow or permit any vibration, radiation, noise or odor to emanate from Premises, or any machine or other installation therein, or otherwise suffer, allow or permit the same to constitute a nuisance or otherwise unreasonably interfere with (i) the safety, comfort or convenience of Lessor or any of the other occupants of the Building of which the Premises forms a part; (ii) their customers, agents or invitees or others lawfully in or upon said premises. Upon notice by Lessor to Lessee that any of the aforesaid is occurring, Lessee shall forthwith (but in all events within five (5) days) install sound proofing and take such other steps, including, without limitation, the installation of filters, vents, vibration eliminators, false ceilings and noise barriers, as are required to prevent vibration, noise and odors from annoying the other tenants of the Building. Lessee shall submit to Lessor a plan of the steps to be taken to prevent such conditions for Lessor' approval, and shall complete all work in accordance with such plan, if approved, prior to commencement of business. If the steps taken to eliminate such conditions, whether or not previously approved by Lessor, shall be deemed unsatisfactory to Lessor, Lessor may give notice specifying changes, alterations or repairs to be made at Lessee's sole cost and expense. If such changes, alterations or repairs are not completed within thirty (30) days of such notice as specified by Lessor, Lessor may, at its sole discretion, either (i) cure such condition and thereafter add the cost and expenses incurred by Lessor therefore as Additional Rent to the next monthly installment of Fixed Rent to become due; or (ii) treat such failure to eliminate such conditions as a material default hereunder. 4 (C) Lessee hereby agrees to execute such documents as Lessor reasonably deems necessary and to make such applications as Lessor reasonably requires to assure compliance with ISRA with respect to Lessee's operations at the Premises, as that term is hereinafter defined. Lessee shall bear all costs and expenses incurred by Lessor associated with any required ISRA compliance resulting from Lessee's use of the Demised Premises including but not limited to State agency fees, engineering fees, clean-up costs, filing fees and suretyship expenses. As used in this Lease, ISRA compliance shall include applications for determinations of non-applicability by the appropriate governmental authority. The foregoing undertaking shall survive the termination or sooner expiration of the Lease and surrender of the Demised Premises and shall also survive sale, or lease or assignment of the Demised Premises by Lessor. Lessee agrees to indemnify and hold Lessor harmless from any violation of ISRA occasioned by Lessee's use of the Demised Premises. The Lessee shall immediately provide the Lessor with copies of all correspondence, reports, notices, orders, findings, declarations and other materials pertinent to the Lessee's compliance and the requirements of the New Jersey Department of Environmental Protection ("NJDEP") under ISRA as they are issued or received by the Lessee. (D) Lessee agrees not to generate, store, manufacture, refine, transport, treat, dispose of, or otherwise permit to be present on or about the Demised Premises, any Hazardous Substances. As used herein, Hazardous Substances shall be defined as any "HAZARDOUS CHEMICAL," "HAZARDOUS substance" or similar term as defined in the Comprehensive Environmental Responsibility Compensation and Liability Act, as amended (42 U.S.C. 9.0l et seq.), the New Jersey Environmental Cleanup Responsibility Act, as amended, N.J.S.A. 13:IK-6 et seq. and/or the Industrial Site Recovery Act ("ISRA"), the New Jersey Spill Compensation and Control Act, as amended, N.J.S.A. 58:l0-23.llb, et seq., any rules or regulations promulgated thereunder, or in any other applicable Federal, State or local law, rule or regulation dealing with environmental protection. It is understood and agreed that the provisions contained in this Section shall be applicable notwithstanding the fact that any substance shall not be deemed to be a Hazardous Substance at the time of its use by the Lessee but shall thereafter be deemed to be a Hazardous Substance. (E) In the event Lessee fails to comply with ISRA as stated in this Section or any other governmental law as of the termination or sooner expiration of the Lease and as a consequence thereof Lessor is unable to rent the Demised Premises, then the Lessor shall treat the Lessee as one who has not removed at the end of its Term, and thereupon be entitled to all remedies against the Lessee provided by law in that situation including a monthly rental of one hundred fifty (150%) percent of the installment of Monthly Fixed Basic Rent for the last month of the Term of this Lease or any renewal term, payable in advance on the first day of each month, until such time as Lessee provides Lessor with a negative declaration or confirmation that any required clean-up plan has been successfully completed. 5 (F) Lessee agrees that Lessee, its agents and contractors, licensees, or invitees shall not handle, use, manufacture, store or dispose of any Hazardous Substances on, under, or about the Premises, without Lessor's prior written consent (which consent may be given or withheld in Lessor's sole discretion), provided that Lessee may handle, store, use or dispose of products containing small quantities of Hazardous Substances, which products are of a type customarily found in offices and households (such as aerosol cans containing insecticides, toner for copies, paints, paint remover, and the like) , and provided further that Lessee shall handle, store, use and dispose of any such Hazardous Substances in a safe and lawful manner and shall not allow such Hazardous Substances to contaminate the Premises or the environment. (G) Without limiting the above, Lessee agrees to reimburse, defend, indemnify and hold harmless the Lessor and each mortgagee of the Demised Premises from and against any and all liabilities, damages, claims, losses, judgments, causes of action, costs and expenses, including without limitation, loss of rental income, loss due to business interruption, and the reasonable fees and expenses of counsel which may be incurred by the Lessor or any such mortgagee or threatened against the Lessor or such mortgagee, arising out of or in any way connected with the use, manufacture, storage or disposal of Hazardous Substances by Lessee, its agents or contractors on, under or about the Premises including, without limitation, the costs of any required or necessary investigation, repair, cleanup or detoxification, and the preparation of any closure or other required plans in connection herewith, whether voluntary or compelled by governmental authority, or any breach by Lessee of the undertakings set forth in this Section. The indemnity obligations of Lessee under this clause shall survive any termination or expiration of the Lease. (H) Notwithstanding anything set forth in this Lease, Lessee shall only be responsible for contamination of Hazardous Substances or any cleanup resulting directly therefrom, resulting directly from matters occurring or Hazardous Substances deposited (other than by contractors, agents or representatives controlled by Lessor) during the Lease Term, and any other period of time during which Lessee is in actual or constructive occupancy of the Premises. Lessee shall take reasonable precautions to prevent the contamination of the Premises with Hazardous Substances by third parties. (I) It shall not be unreasonable for Lessor to withhold its consent to any proposed assignment or sublease if (i) the proposed assignee's or sublessee's anticipated use of the Premises involves the generation, storage, use, treatment or disposal of Hazardous Substances; (ii) the proposed assignee or sublessee has been required by any prior landlord, lender or governmental authority to take remedial action in connection with Hazardous Substances contaminating a property if the contamination resulted from such assignee's or sublessee's actions or use of the property in question; or (iii) the proposed assignee or sublessee is subject to an enforcement order issued by any governmental authority in connection with the use, disposal, or storage of a Hazardous Substance. 6. ALTERATIONS, ADDITIONS OR IMPROVEMENTS. Lessee shall not, without first obtaining the written consent of Lessor, which consent shall not unreasonably be withheld, conditioned or delayed, make any alterations, additions or improvements in, to or about the Premises. Lessee shall promptly reimburse Lessor for all costs and expenses incurred by Lessor for any work performed by Lessor or Lessor's servants, agents or employees in or to the Premises at the request of Lessee. Notwithstanding the forgoing, Lessee may ask Lessor to remove three (3) interior walls located in three (3) perimeter offices in order to expand Lessee's mail room at any time after the Commencement Date, such work to be done at Lessor's sole cost and expense and at Lessor's sole discretion. 6 7. ACTIVITIES INCREASING FIRE INSURANCE RATES. Lessee shall not do or suffer anything to be done on the Premises, which will increase the rate of fire insurance on the Building. 8. ASSIGNMENT AND SUBLEASE. Lessee may not mortgage, pledge, hypothecate, assign, transfer, sublet or otherwise deal with this Lease or the Premises in any manner except as specifically provided for in this Section 8: (A) In the event that the Lessee desires to assign this Lease or sublease all or any portion of the Premises to any other party, the terms and conditions of such sublease or assignment and the identity of the sublessee or assignee, provided all by means of an executed agreement conditioned on Lessor's approval, shall be communicated to the Lessor in writing not less than thirty (30) days prior to the effective date of any such sublease or assignment, and, prior to such effective date, the Lessor shall have the option, exercisable in writing to the Lessee within fifteen (15) Business Days following Lessor's receipt of the above-referenced agreement, to terminate the within Lease and recapture Premises (or the part thereof relating to the assignment or sublease) so that such prospective sublessee or assignee shall then become the direct lessee of Lessor hereunder, or alternatively to recapture said Premises and cancel this Lease whereupon Lessee shall be fully released from any and all obligations hereunder. (B) In the event that the Lessor elects not to recapture the Premises or cancel this Lease or part thereof as the case may be in accordance with (A) above, the Lessee may nevertheless assign this Lease or sublet the whole or any portion of the Premises so offered to Lessor, subject to the Lessor's prior written consent, and subject to the consent of any mortgagee, trust deed holder or ground lessor, on the basis of the terms and conditions enumerated herein in this Subsection 8 (B). Lessor shall not consent, and shall not be deemed unreasonable for failure to consent, to any proposed sublease or an assignment of the Lease to a tenant, subtenant or other occupant of the Building or Complex (or to a subsidiary or affiliate thereof), or if, in the judgment of Lessor, the business of such proposed subtenant or assignee is not compatible with the type of occupancy of the Building, violates any exclusive granted to any other tenant in the Building, or such business will create increased use of the Common Facilities of the Parcel and/or Building or if the proposed sublease or assignment is to any State, Federal or municipal agency or bureau or if such mortgagee, trust deed holder or ground lessor does not consent thereto. The provisions of Section 5(I) also shall apply hereto. In connection with any request for Lessor to consent to an assignment or subletting: (1) The Lessee shall provide to the Lessor the name and address of the assignee or sublessee, and copies of financial reports certified by an officer of the transferee and other relevant financial information of the assignee or sublessee reasonably required by Lessor. 7 (2) The assignee or sublessee shall assume, by written instrument, all of the obligations of Lessee under this Lease, and a copy of such assumption agreement shall be furnished to the Lessor within ten (10) days of its execution. Any sublease shall expressly acknowledge that said sublessee's rights against the Lessor shall be no greater than those of the Lessee and any sublease shall expressly acknowledge that Lessor and sublessee are not in privity of contract. (3) The Lessee and each assignee or subtenant shall be and remain liable for the observance of all the covenants and provisions of this Lease, including, but not limited to, the payment of Term Fixed Basic Rent and Additional Rent reserved herein as and when required to be paid, through the entire Term of this Lease, as the same may be renewed, extended or otherwise modified. (4) The Lessee and any assignee or subtenant shall promptly pay to Lessor any consideration received for any assignment or all of the rent (Fixed Basic Rent and Additional Rent), and any other consideration payable by the subtenant to Lessee under or in connection with the sublease, as and when received, in excess of the Term Fixed Basic Rent and Additional Rent required to be paid by Lessee for the period affected by said assignment or sublease for the area sublet, computed on the basis of an average square foot rent for the gross square footage Lessee has leased. (5) In any event, the acceptance by the Lessor of any rent (Fixed Basic Rent and Additional Rent) from the assignee or from any of the subtenants or the failure of the Lessor to insist upon a strict performance of any of the terms, conditions and covenants herein shall not release the Lessee herein, nor any assignee assuming this Lease, from any and all of the obligations herein during and for the entire Term of this Lease nor, without express written consent to any assignment or sublease, operate as Lessor's consent to an assignment or sublease. (6) Lessor shall require a Five Hundred and 00/100 ($500.00) Dollar payment to cover its handling charges for each request for consent to any sublet or assignment prior to its consideration of the same. (7) Lessee shall have no claim, and hereby waives the right to any claim, against Lessor for money damages by reason of any refusal, withholding or delaying by Lessor of any consent, and in such event, Lessee's only remedies therefor (if any) shall be an action for specific performance, injunction or declaratory judgment to enforce any such requirement. (C) In the event that any or all of Lessee's interest in the Premises and/or this Lease is transferred by operation of law to any trustee, receiver, or other representative or agent of Lessee, or to Lessee as a debtor in possession, and subsequently any or all of Lessee's interest in the Premises and/or this Lease is offered or to be offered by Lessee or any trustee, receiver, or other representative or agent of Lessee as to its estate or property (such person, firm or entity being hereinafter referred to as the "GRANTOR") , for assignment, conveyance, lease, or other disposition to a person, firm or entity other than Lessor (each such transaction being hereinafter referred to as a "DISPOSITION"), it is agreed that Lessor has and shall have a right of first refusal to purchase, take, or otherwise acquire, the same upon the same terms and conditions as the Grantor thereof shall accept upon such Disposition to such other person, firm, or entity; and as to each such 8 Disposition the Grantor shall give written notice to Lessor in reasonable detail of all of the terms and conditions of such Disposition within twenty (20) days next following its determination to accept the same but prior to accepting the same, and Grantor shall not make the Disposition until and unless Lessor has failed or refused to accept such right of first refusal as to the Disposition, as set forth herein. Lessor shall have sixty (60) days next following its receipt of the written notice as to such Disposition in which to exercise the option to acquire Lessee's interest by such Disposition, and the exercise of the option by Lessor shall be effected by notice to that effect sent to the Grantor; but nothing herein shall require Lessor to accept a particular Disposition or any Disposition, nor does the rejection of any one such offer of first refusal constitute a waiver or release of the obligation of the Grantor to submit other offers hereunder to Lessor. In the event Lessor accepts such offer of first refusal, the transaction shall be consummated pursuant to the terms and conditions of the Disposition described in the notice to Lessor. In the event Lessor rejects such offer of first refusal, Grantor may consummate the Disposition with such other person, firm, or entity; but any decrease in price of more than two (2%) percent of the price sought from Lessor or any change in the terms of payment for such Disposition shall constitute a new transaction requiring a further option of first refusal to be given to Lessor hereunder. (D) Without limiting any of the provisions of Sections 13 and 14, if pursuant to the Federal Bankruptcy Code (or any similar law hereafter enacted having the same general purpose), or if pursuant to any State insolvency or bankruptcy law, Lessee is permitted to assign this Lease, notwithstanding the restrictions contained in this Lease, adequate assurance of future performance by an assignee expressly permitted under such code or law shall be deemed to mean the deposit of cash security in an amount equal to the sum of one (1) year's Term Fixed Basic Rent and Additional Rent for the next succeeding twelve (12) months (which Additional Rent shall be reasonably estimated by Lessor) , which deposit shall be held by Lessor for the balance of the Term, without interest, as Additional Security Deposit, as hereinafter defined, for the full performance of all of Lessee's obligations under this Lease, to be held and applied in the manner specified for the Security Deposit in Section 17 hereof. (E) The sale, issuance or transfer of equity interests or change in control of Lessee or any Affiliate shall be deemed an assignment of this Lease unless: (a) it involves the sale or issuance of securities registered under the Securities Act of 1933, as amended, (b) it is made amongst the existing principals of Lessee or any Affiliate, or (c) it results from the death of a principal of Lessee or any Affiliate. (F) Except as specifically set forth above, no portion of, or any right to use or occupy all or any of, the Demised Premises or of Lessee's interest in this Lease may be acquired by any other person or entity, directly or indirectly, whether by assignment, mortgage, sublease, transfer, operation of law or act of the Lessee, nor shall Lessee pledge its interest in this Lease or in any Security Deposit required hereunder. 9 (G) If Lessee is a corporation other than a corporation whose stock is listed and traded on a nationally recognized stock exchange, the provisions of this Section 8 shall apply to a transfer (however accomplished, whether in a single transaction or in a series of related or unrelated transactions) of stock or any other mechanism such as, by way of example, the issuance of additional stock, a stock voting agreement or change in class(es) of stock which results in a change of control of Lessee as if such transfer of stock (or other mechanism) which results in a change of control of Lessee were an assignment of this Lease, and if Lessee is a trust, partnership, limited liability company, limited liability partnership or joint venture (an "ENTITY"), said provisions shall apply with respect to a transfer (by one or more transfers) of an interest in the distributions of profits and losses of such Entity (or other mechanism, such as, by way of example, the creation of additional general partnership or limited partnership or membership interests) which results in a change of control of such Entity as if such transfer of an interest in the distributions of profits and losses of such Entity which results in a change of control of such Entity were an assignment of this Lease; but said provisions shall not apply to transactions with a corporation into or with which Lessee is merged or consolidated or to which all or substantially all of Lessee's assets are transferred or to any corporation which controls or is controlled by Lessee or is under common control with Lessee, provided that in the event of such merger, consolidation or transfer of all or substantially all of Lessee's assets, (i) the successor to Lessee has a net worth computed in accordance with generally accepted accounting principles at least equal to the greater of (a) the net worth of Lessee immediately prior to such merger, consolidation or transfer or (b) the net worth of Lessee herein named on the date of this Lease, and (ii) proof satisfactory to Lessor of such net worth shall have been delivered to Lessor at least ten (10) days prior to the effective date of any such transaction. 9. COMPLIANCE WITH RULES AND REGULATIONS. Lessee shall observe and comply with the Rules and Regulations hereinafter set forth in EXHIBIT B attached hereto and made a part hereof and with such further reasonable Rules and Regulations as Lessor may prescribe, on notice to the Lessee, for the safety, care and cleanliness of the Building and the comfort, quiet and convenience of other occupants of the Building. 10. DAMAGES TO BUILDING. If the Building is damaged by fire or any other cause to such extent that the cost of restoration, as reasonably estimated by Lessor, will equal or exceed twenty-five (25%) percent of the replacement value of the Building (exclusive of foundations) just prior to the occurrence of the damage, then Lessor may, no later than the sixtieth (60th) day following the damage, give Lessee a notice of election to terminate this Lease, or if the cost of restoration will equal or exceed fifty (50%) percent of such replacement value or if the estimated repair time (as determined by Lessor) is more than one hundred fifty (150) days, and if the Premises shall not be reasonably usable for the purpose for which they are leased hereunder, then Lessee may, no later than the sixtieth (60th) day following the damage, give Lessor a notice of election to terminate this Lease. In either said event of election, this Lease shall be deemed to terminate on the thirtieth (30th) day after the giving of said notice, and Lessee shall surrender possession of the Premises within a reasonable time thereafter; and the Term Fixed Basic Rent and any Additional Rent shall be apportioned as of the date of said surrender, and any Term Fixed Basic Rent or Additional Rent paid for any period beyond the latter of the thirtieth (30th) day after said notice, or the date Lessee surrenders possession, shall be repaid to Lessee. If the cost of restoration shall not entitle Lessor to terminate this Lease or if, despite the cost, Lessor does not elect to terminate this Lease, Lessor shall restore the Building and the Premises with reasonable promptness, subject to Force Majeure, as hereinafter defined, and except as stated above, Lessee shall have no right to terminate this Lease. Lessor need not restore fixtures and improvements owned by Lessee. 10 Except as provided in Section 5 hereof, notwithstanding the provisions of this Section or any other provision of this Lease, Lessor shall not have any obligation whatsoever to repair, reconstruct, or restore the Premises when the damages resulting from any casualty covered by the provisions of this Section occur during the last twelve (12) months of the Term or any extension thereof. In any case in which use of the Premises is affected by any damage to the Building, there shall be either an abatement or an equitable reduction in Term Fixed Basic Rent and an equitable reduction in the Base Period Costs as established in Section 25 depending on the period for which and the extent to which the Premises are not reasonably usable for the purpose for which they are leased hereunder. The words "RESTORATION" and "RESTORE" as used in this Section 10 shall include repairs. If the damage results from the fault of the Lessee, or Lessee's agents, servants, visitors or licensees, Lessee shall not be entitled to any abatement or reduction in Term Fixed Basic Rent or Additional Rent, except to the extent of any rent insurance received by Lessor. 11. WAIVER OF SUBROGATION. Except as provided in Section 5 hereof, notwithstanding the provisions of this Section or any other provision of this Lease, in the event of any loss or damage to the Building, the Premises and/or any contents (herein "PROPERTY DAMAGE"), each party waives all claims against the other for any such loss or damage and each party shall look only to any insurance which it has obtained to protect against such loss (or in the case of Lessee, waives all claims against any tenant of the Building that has similarly waived claims against such Lessee), and each party shall obtain, for each policy of such insurance, provisions waiving any claim against the other party and against any other tenant(s) in the Building that has waived subrogation against the Lessee for loss or damage within the scope of such insurance. 12. EMINENT DOMAIN. If Lessee's use of the Premises is materially affected due to the taking by eminent domain of (a) the Premises or any part thereof or any estate therein; or (b) any other part of the Building; then, in either event, this Lease shall terminate on the date when title vests pursuant to such taking. The Term Fixed Basic Rent and any Additional Rent shall be apportioned as of said termination date and any Term Fixed Basic Rent or Additional Rent paid for any period beyond said date shall be repaid to Lessee. Lessee shall not be entitled to any part of the award for such taking or any payment in lieu thereof, but Lessee may file a separate claim for any taking of fixtures and improvements owned by Lessee which have not become the Lessor's property, and for moving expenses, provided the same shall in no way affect or diminish Lessor's award. In the event of a partial taking which does not effect a termination of this Lease but does deprive Lessee of the use of a portion of the Demised Premises, there shall either be an abatement or an equitable reduction of the Term Fixed Basic Rent, and an equitable adjustment reducing the Base Period Costs depending on the period for which and the extent to which the Premises so taken are not reasonably usable for the purpose for which they are leased hereunder. 11 13. INSOLVENCY OF LESSEE. Either (a) the appointment of a receiver to take possession of all or substantially all of the assets of Lessee, or (b) a general assignment by Lessee for the benefit of creditors, or (c) any action taken or suffered by Lessee under any insolvency or bankruptcy act, shall constitute a default of this Lease by Lessee, and Lessor may terminate this Lease forthwith and upon notice of such termination Lessee's right to possession of the Demised Premises shall cease, and Lessee shall then quit and surrender the Premises to Lessor but Lessee shall remain liable as hereinafter provided in Section 14 hereof. 14. LESSOR'S REMEDIES ON DEFAULT. If Lessee defaults in the payment of Term Fixed Basic Rent or any Additional Rent, or defaults in the performance of any of the other covenants and conditions hereof or permits the Premises to become deserted, abandoned or vacated, or defaults in the performance of any other Lease held by Lessee or its Affiliates from Lessor or from any landlord in which Lessor's principals have at least a twenty-five (25%) percent interest, Lessor may give Lessee notice of such default, and if Lessee does not cure any Term Fixed Basic Rent or Additional Rent default within five (5) days of the giving of such notice or other default within fifteen (15) days after giving of such notice or if such other default is of such nature that it cannot be completely cured within such period, if Lessee does not commence such curing within such fifteen (15) days and thereafter proceed with reasonable diligence and in good faith to cure such default, then Lessor may terminate this Lease on not less than ten (10) days' notice to Lessee, and on the date specified in said notice, Lessee's right to possession of the Demised Premises shall cease, and Lessee shall then quit and surrender the Premises to Lessor, but Lessee shall remain liable as hereinafter provided. If this Lease shall have been so terminated by Lessor pursuant to Sections 13 or 14 hereof, Lessor may at any time thereafter resume possession of the Premises by any lawful means and remove Lessee or other occupants and their effects. 15. DEFICIENCY. In any case where Lessor has recovered possession of the Premises by reason of Lessee's default, Lessor may, at Lessor's option, occupy the Premises or cause the Premises to be redecorated, altered, divided, consolidated with other adjoining premises, or otherwise changed or prepared for reletting, and may relet the Premises or any part thereof as agent of Lessee or otherwise, for a term or terms to expire prior to, at the same time as, or subsequent to, the original expiration date of this Lease, at Lessor's option, and receive Term Fixed Basic Rent and Additional Rent therefor. Term Fixed Basic Rent or Additional Rent so received shall be applied first to the payment of such expenses as Lessor may have incurred in connection with the recovery of possession, redecorating, altering, dividing, consolidating with other adjoining premises, or otherwise changing or preparing for reletting, and the reletting, including brokerage and reasonable attorney's fees, and then to the payment of damages in amounts equal to the Term Fixed Basic Rent and Additional Rent hereunder and to the costs and expenses of performance of the other covenants of Lessee as herein provided. Lessee agrees, in any such case, whether or not Lessor has relet, to pay to Lessor damages equal to the Term Fixed Basic Rent and Additional Rent and other sums herein agreed to be paid by Lessee, as and when due, less the net proceeds of the reletting, if any, as ascertained from time to time, as of the due date, and the same shall be payable by Lessee on the several rent days above specified. Lessee shall not be entitled to any surplus accruing as a result of any such reletting, nor shall any surplus be applied to offset the damages referred to in the preceding sentence. In reletting the Premises as aforesaid, Lessor may grant rent concessions, and Lessee shall not be credited therewith. No such reletting shall constitute a surrender and acceptance or be deemed evidence thereof. If Lessor elects, pursuant hereto, actually to occupy and use the Premises or any part thereof during any part of 12 the balance of the Term as originally fixed or since extended, there shall be allowed against Lessee's obligation for Term Fixed Basic Rent and Additional Rent or damages as herein defined, during the period of Lessor's occupancy, the reasonable value of such occupancy not to exceed in any event the Term Fixed Basic Rent and Additional Rent herein reserved and such occupancy shall not be construed as a release of Lessee's liability hereunder. Alternatively, in any case where Lessor has recovered possession of the Premises by reason of Lessee's default, Lessor may at Lessor's option, and at any time thereafter, and without notice or other action by Lessor, and without prejudice to any other rights or remedies it might have hereunder or at law or equity, become entitled to recover from Lessee, as damages for such breach, in addition to such other sums herein agreed to be paid by Lessee, to the date of re-entry, expiration and/or dispossess, an amount equal to the difference between the Term Fixed Basic Rent and the Additional Rent reserved in this Lease from the date of such default to the date of expiration of the original Term demised and the then fair and reasonable rental value (inclusive of Additional Rent and Term Fixed Basic Rent) of the Premises for the same period. Said damages shall become due and payable to Lessor immediately upon such breach of this Lease and without regard to whether this Lease be terminated or not, and if this Lease is terminated, without regard to the manner in which it is terminated. In the computation of such damages, the difference between any installments of rent (Fixed Basic and Additional) thereafter becoming due, and fair and reasonable rental value of the Premises (inclusive of the same rent components) for the period for which such installment was payable shall be discounted to the date of such default at the rate of not more than four (4%) percent per annum. Lessee hereby waives all right of redemption to which Lessee or any person under Lessee might be entitled by any law now or hereafter in force. In addition, in the event of a default which results in the Lessor recovering possession of the Premises, Lessor shall be under no duty to mitigate Lessor's damages as provided for in this Section 15. Lessor's remedies hereunder are in addition to any remedy allowed by law. Lessee agrees to pay, as Additional Rent, all attorney's fees and other expenses incurred by the Lessor in enforcing any of the obligations under this Lease, this covenant to survive the expiration or sooner termination of this Lease. 16. SUBORDINATION OF LEASE. This Lease and any option contained herein shall be subject and subordinate to any such underlying leases and to any such first mortgage and/or first trust deed which may now or hereafter affect the real property of which the Premises form a part, and also to all renewals, modifications, consolidations and replacements of said underlying leases and said first mortgage and first trust deed. Although no instrument or act on the part of Lessee shall be necessary to effectuate such subordination, Lessee will, nevertheless, execute and deliver such further instruments confirming such subordination of this Lease as may be desired by the holders of said first mortgage and first trust deed or by any of the lessors under such underlying leases. Lessee hereby appoints Lessor attorney-in-fact, irrevocably, to execute and deliver any such instrument for Lessee. If any underlying lease to which this Lease is subject terminates, Lessee shall, on timely request, attorn to the owner of the reversion. 13 17. SECURITY DEPOSIT. Lessee shall deposit with Lessor on the signing of this Lease the Security Deposit as defined on the Reference Page for the full and faithful performance of Lessee's obligations under this lease, including without limitation, the surrender of possession of the Premises to Lessor as herein provided. If Lessor applies any part of said deposit to cure any default of Lessee, Lessee shall on demand deposit with Lessor the amount so applied so that Lessor shall have the full deposit on hand at all times during the Term of this Lease. In the event of a bona fide sale, subject to this Lease, Lessor shall have the right to transfer the Security Deposit to the vendee and Lessor shall be considered released by Lessee from all liability for the return of such Security Deposit; and Lessee agrees to look solely to the new lessor for the return of the said Security Deposit, and it is agreed that this shall apply to every transfer or assignment made of the Security Deposit to a new lessor. Accrued interest on the Security Deposit (less any portions thereof used, applied or retained by Lessor in accordance with the provisions of this Section 17), shall be paid to Lessee on an annual basis. The Security Deposit (less any portions thereof used, applied or retained by Lessor in accordance with the provisions of this Section 17), shall be returned to Lessee promptly after the expiration or sooner termination of this Lease without the fault of the Lessee and after delivery of the entire Premises to Lessor in accordance with the provisions of this Lease. Lessee covenants that it will not assign or encumber or attempt to assign or encumber the Security Deposit and Lessor shall not be bound by any such assignment, encumbrance or attempt thereof. In the event of the insolvency of Lessee or in the event of the entry of a judgment declaring Lessee insolvent or bankrupt in any court which is not discharged within sixty (60) days after entry, or in the event a petition is filed by or against Lessee under any chapter of the bankruptcy laws of the State of New Jersey or the United States of America, then and in such event Lessor may require the Lessee to deposit additional security in the amount specified in Subsection 8(E) (hereinafter called the "ADDITIONAL SECURITY DEPOSIT") to adequately assure Lessee's performance of all of its obligations under this Lease including all payments subsequently accruing. Failure of Lessee to deposit the Additional Security Deposit pursuant thereto within ten (10) days after Lessor's written demand shall constitute a default by Lessee. In lieu of a cash deposit, upon signing this Lease, Lessor agrees that Lessee may deliver to Lessor a clean, irrevocable and unconditional Letter of Credit (the "L/C") issued by and drawn upon any commercial bank chartered by the State of New York, the State of New Jersey or the United Stated Government (the "ISSUING BANK") with offices for banking purposes in the City of Hackensack or the City of New York, and having a new worth of not less than $500 million, which L/C shall have a term of not less than one year, be in form and content reasonably satisfactory in all respects to Lessor, be for the account of Lessor and be in the amount of the Security Deposit. The L/C shall provide that: (i) The Issuing Bank shall pay to Lessor, or its duly authorized representative, an amount up to the face amount of the L/C upon presentation of the L/C and a sight draft in the amount to be drawn; (ii) The L/C shall be deemed to be automatically renewed, without amendment, for consecutive periods of one year each during the Term of this Lease, unless the Issuing Bank sends written notice (the "NON-RENEWAL NOTICE") to Lessor by certified or registered mail, return receipt requested, not less than thirty (30) days next preceding the then expiration date of the L/C, that it elects not to have such L/C renewed; 14 (iii) Lessor, within twenty (20) days of its receipt of the Non-Renewal Notice, shall have the right, exercisable by a sight draft, to receive the monies represented by the L/C (which moneys shall be held by Lessor as a cash deposit pursuant to the terms of this Article pending the placement of such L/C or Lessee's default hereunder; and (iv) Upon Lessor's sale of Lessor's interest in the Building, the L/C shall be transferable by Lessor as provided for herein. In the event of a sale of Lessor's interest in or net lease of the Building, Lessor shall have the right to transfer the cash security or L/C, as the case may be, deposited hereunder to the vendee, lessee or transferee, without cost to Lessor, and Lessor shall thereupon be released by Lessee from all liability for the return of such cash security or L/C. In such event, Lessee agrees to obtain a new L/C naming the purchaser or net lessee (as the case may be) as the beneficiary and to look solely to the new landlord for the return of said cash security or L/C. It is agreed that the provisions hereof shall apply to every transfer or assignment made of said case security of L/C. In the event that any time during the Term of this Lease Lessor, in Lessor's opinion, believes (a) that the net worth of the Issuing Bank shall be less than the minimum amount specified above or (b) that circumstances have occurred indicating that the Issuing Bank may be incapable of, unable to, or prohibited from honoring the then existing L/C (hereinafter referred to as the "EXISTING L/C" in accordance with the terms thereof, then, upon the happening of either of the foregoing, Lessor may send written notice to Lessee (hereinafter referred to as the "REPLACEMENT NOTICE") requiring Lessee within ten (10) days to replace the Existing L/C with a new letter or credit (hereinafter referred to as the "REPLACEMENT L/C") from an Issuing Bank meeting the qualifications described in this Section 17. Upon receipt of the Replacement L/C meeting the qualifications of this Section 17, Lessor shall forthwith return the Existing L/C to Lessee. In the event that (i) a Replacement L/C meeting the qualifications of this Section 17 is not received by Lessor within the time specified or (ii) Lessor believes an emergency exists, then in either event, the Existing L/C may be presented for payment by Lessor and the proceeds thereof shall be held by Lessor in accordance with this Section 17 subject, however, to Lessee's right, at any time thereafter prior to a Lessee's default hereunder, to replace such cash security with a Replacement L/C meeting the qualifications of this Section 17. 18. RIGHT TO CURE LESSEE'S BREACH. If Lessee breaches any covenant or condition of this Lease, Lessor may, on reasonable notice to Lessee (except that no notice need be given in case of emergency) , cure such breach at the expense of Lessee and the reasonable amount of all expenses, including attorneys' fees, incurred by Lessor in so doing (whether paid by Lessor or not) shall be deemed Additional Rent payable on demand, with interest at two (2%) percent per annum over the prime lending rate announced as such by JPMorgan Chase Bank to its most creditworthy customers or the highest rate permitted by law, whichever is lower. 19. LIENS. Lessee shall not do any act, or make any contract, which may create or be the foundation for any lien or other encumbrance upon any interest of Lessor or any ground or underlying lessor in any portion of the Premises. If, because of any act or omission (or alleged act or omission) of Lessee, any Construction Lien Claim or other lien (collectively "LIEN") charge, 15 or order for the payment of money or other encumbrance shall be filed against Lessor and/or any ground or underlying lessor and/or any portion of the Premises (whether or not such Lien, charge, order, or encumbrance is valid or enforceable as such), Lessee shall, at its own cost and expense, cause same to be discharged of record or bonded within fifteen (15) days after the filing thereof; and Lessee shall indemnify and save harmless Lessor and all ground and underlying lessor(s) against and from all costs, liabilities, suits, penalties, claims, and demands, including reasonable counsel fees, resulting therefrom. If Lessee fails to comply with the foregoing provisions, Lessor shall have the option of discharging or bonding any such Lien, charge, order, or encumbrance, and Lessee agrees to reimburse Lessor for all costs, expenses and other sums of money in connection therewith (as additional rental) with interest at the maximum rate permitted by law promptly upon demand. All materialmen, contractors, artisans, mechanics, laborers, and any other persons now or hereafter contracting with Lessee or any contractor or subcontractor of Lessee for the furnishing of any labor services, materials, supplies, or equipment with respect to any portion of the Premises, at any time from the date hereof until the end of the Lease Term, are hereby charged with notice that they look exclusively to Lessee to obtain payment for same. 20. RIGHT TO INSPECT AND REPAIR. Lessor may enter the Premises but shall not be obligated to do so (except as required by any specific provision of this Lease) at any reasonable time on reasonable notice to Lessee (except that no notice need be given in case of emergency) for the purpose of inspection or the making of such repairs, replacement or additions, in, to, on and about the Premises or the Building, as Lessor deems necessary or desirable. During the last twelve (12) months of the Term, Lessor may immediately enter, alter, renovate or redecorate the Premises if Lessee shall have removed all or substantially all of Lessee's property from the Premises. Such actions by Lessor shall have no effect on this Lease or Lessee's obligations hereunder, and Lessee shall have no claims or cause of action against Lessor by reason thereof. 21. SERVICES TO BE PROVIDED BY LESSOR. Subject to intervening laws, ordinances, regulations and executive orders, while Lessee is not in default under any of the provisions of this Lease, Lessor agrees to furnish, on "BUSINESS DAYS," as defined in Section 43, below: (a) Janitorial services to be performed in accordance with Building standards and practices, to include restroom supplies, as set forth in Exhibit C attached hereto and made a part hereof. (b) Heating, ventilating and air conditioning (herein "HVAC"), as appropriate for the season, together with Common Facilities lighting and electric energy all during "BUILDING HOURS," as defined in Section 43, below. Notwithstanding the provisions in this Section, Lessee shall be responsible for installing and maintaining any additional HVAC systems that may be required due to Lessee's use of the Premises, as further provided for in Section 24(C). (c) Cold and hot water for drinking and lavatory purposes. (d) Elevator service during Building Hours. 16 Notwithstanding any other provision of this Lease, Lessor shall not be liable for failure to furnish any of the aforesaid services when such failure is due to Force Majeure, as hereinafter defined. 22. AFTER-HOURS USE. Lessee shall be entitled to make use of HVAC beyond Building Hours, at Lessee's sole cost and expense, provided Lessee shall notify the Lessor twenty-four (24) hours prior to such desired overtime use, except if such use is desired for a weekend, in which event Lessee shall notify Lessor no later than 5:00 p.m. on the Thursday immediately preceding said weekend. It is understood and agreed that Lessee shall pay the sum of Eighty-five and 00/100 ($85.00) Dollars per hour, plus such additional percentage increase of the aforesaid hourly sum computed by measuring the percentage increase of the rate in effect (including fuel surcharges or adjustments) during the month for which such overtime use is requested against the Base Utility Rate, as defined on the Reference Page. In no event shall the Lessee pay less than the sum of Eighty-five and 00/100 ($85.00) Dollars per hour for such aforesaid overtime use. 23. INTERRUPTION OF SERVICES OR USE. Interruption or curtailment of any service maintained in the Building or the Complex or at the Parcel, if caused by Force Majeure, as hereinafter defined, shall not entitle Lessee to any claim against Lessor or to any abatement in Term Fixed Basic Rent or Additional Rent, and shall not constitute a constructive or partial eviction, unless Lessor fails to take measures as may be reasonable under the circumstances to restore the service. If Lessor fails to take such measures as may be reasonable under the circumstances to restore the curtailed service, Lessee's remedies shall be limited to an equitable abatement of Term Fixed Basic Rent and Additional Rent for the duration of the curtailment beyond said reasonable period, to the extent such Premises are not reasonably usable by Lessee or to a claim of constructive eviction. If the Premises are rendered untenantable in whole or in part, for a period of fifteen (15) consecutive business days, by the making of repairs, replacements or additions, other than those made with Lessee's consent or caused by misuse or neglect by Lessee, or Lessee's agents, servants, visitors or licensees, there shall be a proportionate abatement of Term Fixed Basic Rent and Additional Rent from and after said tenth (10th) consecutive business day and continuing for the period of such untenantability. In no event shall Lessee be entitled to claim a constructive eviction from the Premises unless Lessee shall first have notified Lessor in writing of the condition or conditions giving rise thereto, and, if the complaints be justified, unless Lessor shall have failed, within a reasonable time after receipt of such notice, to remedy, or commence and proceed with due diligence to remedy, such condition or conditions, all subject to Force Majeure, as hereinafter defined. The remedies provided for in this Section 23 shall be Lessee's sole remedies for any interruption of services or use as described above. 24. ELECTRICITY. (A) Lessor, subject to the provisions of this Section 24, shall furnish electrical energy to or for the use of Lessee in the Premises in accordance with this Section 24. 17 (B) Throughout the Term, Lessor shall redistribute electrical energy to the Premises during Building Hours upon the following terms and conditions: (i) Lessee shall pay for such electrical energy as provided by this Section 24; (ii) Lessor will redistribute electricity to Lessee through presently installed electrical facilities for Lessee's reasonable use of normal office equipment and such lighting, electrical appliances and equipment as Lessor may permit to be installed in the Premises, all consistent with that wiring capacity that has been installed in the Premises; (iii) Lessee agrees that an independent electrical engineering consultant selected by Lessor shall from time to time make a survey of the electric power demand of the electric lighting fixtures and the electric equipment of Lessee used in the Premises to determine the average monthly electric consumption thereof, said survey to be at Lessee's expense. Lessor reserves the right to estimate Lessee's electric consumption until such a survey is made. The estimate will be based on One and 50/100 ($1.50) Dollars per gross rentable square foot per year of the rentable area of the Premises and Lessee agrees that Lessee shall pay the estimate Electric Rent Inclusion Factor as defined on the Reference Page, in addition to the Term Fixed Basic Rent, as defined in the Reference Page, in order to compensate Lessor for supplying Lessee with electric current by an estimated Electric Rent Inclusion Factor as defined on the Reference Page. The aforesaid survey shall take into account, among other things, any special electrical requirements of Lessee and use by Lessee of electrical energy at times other than during Building Hours on Business Days. The findings of such engineering consultant as to the proper Electric Rent Inclusion Factor based on such average monthly electric consumption shall be conclusive and binding upon the parties and the amount thereof, less the Electric Rent Inclusion Factor, if in excess of the Electric Rent Inclusion Factor, shall be paid by Lessee, in addition to the Term Fixed Basic Rent which shall be payable in installments of Monthly Fixed Basic Rent, payable for each month from the Commencement Date or if the amount thereof shall be lower than the Electric Rent Inclusion Factor, the difference therein shall be subtracted from the annualized Term Fixed Basic Rent and the resulting sum shall be the revised annualized Term Fixed Basic Rent which shall be payable in installments of Monthly Fixed Basic Rent (except that if the amount of such rent increase or decrease shall not have been determined on the Commencement Date, then, upon such subsequent determination, Lessee shall pay or receive a credit, as the case may be, for the retroactive determination from the Commencement Date to the date of such determination); (iv) If the Electric Rates (as hereinafter defined) on which the initial determination of said consultant was based shall be increased or decreased, then the Term Fixed Basic Rent shall be increased or decreased in the amount equal to the change in Lessor's cost of supplying electrical current to the Premises resulting from such rate change, retroactive if necessary to the date of such increase or decrease in such Electric Rates. The Term Fixed Basic Rent, as defined on the Reference Page, shall be deemed modified accordingly by any of the aforesaid modifications. Lessee hereby acknowledges that Lessee will be responsible for any additional costs for increased electrical usage and related expenses associated with Lessee's network operations center. (C) If Lessee installs additional or substituted electrical equipment or appliances or otherwise increases its use of current, then the Electric Rent Inclusion Factor shall be redetermined by Lessor's electrical engineer or consultant, at Lessee's expense, and such determination shall be conclusive and binding upon Lessor and Lessee. Lessee shall make no alterations or additions to the electrical equipment or appliances without first obtaining written consent from Lessor in each instance. Lessee may at any time it believes any change in its electrical equipment or appliances or fixtures has reduced its electrical consumption request a resurvey of the Premises by Lessor's electrical engineer or consultant, at Lessee's expense. Any change in the Electric Rent Inclusion Factor resulting from a change in Lessee's consumption shall be effective as of the date of such change, and the Term Fixed Basic Rent enumerated herein shall be deemed modified accordingly, retroactive if necessary. Lessor hereby acknowledges that Lessee will operate certain computers and equipment in connection with Lessee's network operations center, provided, throughout the Term, Lessee, at Lessor's approval, which shall not be unreasonably withheld, conditioned or delayed, and Lessee's sole cost and expense, provides and maintains adequate HVAC equipment such as will keep the Premises at a consistent cool temperature as reasonably determined by Lessor. 18 (D) Lessor shall not be liable in any way to Lessee for any loss, damage or expense which Lessee may sustain or incur as a result of any failure, defect or change in the quantity or character of electrical energy available for redistribution to the Premises pursuant to this Section nor for any interruption in the supply, and Lessee agrees that such supply may be interrupted for inspection, repairs and replacement and in emergencies. In any event, the full measure of Lessor's liability for any interruption in the supply due to Lessor's acts or omissions shall be an abatement of Term Fixed Basic Rent and Additional Rent. In no event shall Lessor be liable for any business interruption suffered by Lessee. Lessee covenants and agrees that at all times its use of electric current shall never exceed the capacity of existing feeders to the Building or the risers or wiring installation. Any riser or risers to supply Lessee's electrical requirements, upon written request of Lessee, shall be installed by Lessor, at the sole cost and expense of Lessee, if, in Lessor's sole judgment, the same are necessary and will not cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations, repairs or expense or interfere with or disturb other tenants or occupants. In addition to the installation of such riser or risers, Lessor shall also, at the sole cost and expense of Lessee, install all other equipment proper and necessary in connection therewith subject to the aforesaid terms and conditions. (E) Lessor reserves the right to terminate the redistribution of electricity to the Premises at any time, upon thirty (30) days' written notice to Lessee, in which event Lessee may make application directly to the utility company servicing the Building for Lessee's entire separate supply of electricity. Lessor, upon the expiration of the aforesaid thirty (30) day period, may discontinue furnishing the electric current. The term "ELECTRIC RATES" shall be deemed to mean the rates for the comparable usage charged by the public utility company furnishing electrical energy to the Building, including but not limited to any charges or surcharges incurred or taxes payable by Lessor in connection therewith or increase or decrease thereof by reason of fuel adjustment or any substitutions for such Electric Rates or additions thereto. (F) If Lessor discontinues the furnishing of electricity, as provided in this Section 24, then, and in such event, Lessor shall permit Lessee to receive electrical service directly from the public utility supplying electrical service to the Building and shall permit the existing feeders, risers, wiring and other electrical facilities serving the Premises to be used by Lessee for such purpose to the extent that they are available, suitable and safe. Lessee shall, at its own expense, install any necessary electrical meter equipment, panel boards, feeders, risers, wiring and other conductor and equipment which may be required to obtain electrical energy directly from the public utility supplying the same. Lessor shall have no liability whatsoever to Lessee by reason of Lessor's discontinuance of electrical service. 19 (G) Lessor, at Lessee's expense, shall furnish and install all lamps (including incandescent and fluorescent) starters and ballasts used in the Premises. (H) Following a determination of an increase or decrease in the Electric Rent Inclusion Factor attributable to the furnishing of electrical energy to the Premises by Lessor as set forth in this Section 24, Lessor and Lessee shall, upon request of either party, execute, acknowledge and deliver to each other a supplemental agreement in form satisfactory to Lessor reflecting such change in the annualized Term Fixed Basic Rent and Monthly Installment of Term Fixed Basic Rent, but any such change shall be effective whether or not such agreement is entered into. (I) In addition to payments of the Electric Rent Inclusion Factor, if Lessee makes use of electric current on non-Business Days or after Building Hours, then Lessee shall pay to Lessor, as Additional Rent, Lessor's cost of supplying electrical current to the Premises at all such times when electrical current is so used. Such charge shall be made on a per hour (or any portion thereof) basis determined by the hourly cost of supplying electrical current to the Premises or such portions of the Building as must be supplied to provide electric current to the Premises; provided, however, that Lessee shall not be required under this Section to pay for use of electrical current which shall have previously been included in a survey of Lessee's use of electrical current pursuant to Subsection 24(B) above. (J) Notwithstanding anything contained herein to the contrary, Lessor reserves the right, at Lessor's cost and expense, to install a separate meter to measure electrical consumption to the Premises for lighting and equipment purposes, in which event Lessee shall pay 107% of the meter charges based upon the Electric Rates for said consumption in lieu of the amount determined pursuant to Subsection 24(B) hereof, in which event Lessee's Term Fixed Basic Rent shall be decreased by the charge for Electric Rent Inclusion Factor as of the date of installation of the meter. 25. ADDITIONAL RENT. It is expressly agreed that Lessee will pay in addition to the Term Fixed Basic Rent provided in Section 3 above, an Additional Rent to cover Lessee's Percentage, as defined on the Reference Page, of the increased cost to Lessor, for each of the categories enumerated herein, over the "BASE PERIOD COSTS," as defined on the Reference Page, for said categories. (A) Operating Cost Escalation. If during the Lease Term the Operating Costs incurred for the Building in which the Demised Premises are located, Complex and Parcel, for any Lease Year or proportionate part thereof if the Lease Term expires prior to the expiration of a Lease Year (herein the "COMPARISON PERIOD") shall be greater than the Base Operating Costs (adjusted proportionately if the Comparison Period is less than a Lease Year), then Lessee shall pay to Lessor, as Additional Rent, Lessee's Percentage of all such excess Operating Costs. Operating Costs shall include, by way of illustration and not of limitation: personal property taxes; management fees; labor, including all wages and salaries; social security taxes, and other taxes which may be levied against Lessor upon such wages and salaries; employee benefits and payroll taxes; accounting and legal fees; any sales, use or service taxes incurred in connection with the operation of the Complex or Parcel; supplies; repairs and maintenance; maintenance and service contracts; the cost of security and alarm 20 services; license permits and inspection fees; painting; wall and window washing; laundry and towel service; tools and equipment (which are not required to be capitalized for Federal income tax purposes); fire and other insurance; the cost of any loss which is the responsibility of Lessor because of the existence of commercially reasonable deductibles; trash removal; lawn care; snow removal and all other items properly constituting direct operating costs according to standard accounting practices (hereinafter collectively referred to as the "OPERATING COSTS"). Lessor shall be entitled to amortize and include in Operating Costs an allocable portion of the cost of capital improvement items, including life safety systems, which are reasonably calculated to reduce operating expenses or which are required under any governmental laws, regulations or ordinances which were not applicable to the Building or Complex or Parcel at the time it was constructed. All such costs shall be amortized over the reasonable life of such improvements with interest at two (2%) percent over the prime lending rate announced as such by Chase Manhattan Bank to its most creditworthy borrowers on the unamortized amount in accordance with such reasonable life and amortization schedules as shall be determined by Lessor in accordance with generally accepted accounting principles. As used in this Subsection 25(A), the Base Period Costs for Operating Costs shall be as defined on the Reference Page. Any Operating Costs which under generally accepted accounting principles are to be capitalized shall be capitalized by Lessor hereunder and amortized over their useful lives. (B) Fuel, Utilities and Electric Cost Escalation. If during the Lease Term the utility and energy costs, including any fuel surcharges or adjustments with respect thereto, incurred for water, sewer, other utilities and heating, ventilating and air conditioning for the Building, Complex and Parcel to include all leased and leasable areas (not separately billed or metered within the Building) and Common Facilities electric, lighting, water, sewer and other utilities for the Building, the Complex and Parcel (hereinafter "UTILITY AND ENERGY COSTS") for any Comparison Period shall be greater than the Base Utility and Energy Costs (adjusted proportionately if the Comparison Period is less than a Lease Year) , then Lessee shall pay to Lessor as Additional Rent, Lessee's Percentage of all such excess Utility and Energy Costs. Common Facilities electric consumption shall be charged at the bulk rate at which Lessor purchases electrical energy from the public utility supplying electrical service to the Building. As used in this Subsection 25(B), the Base Utility and Energy Costs shall be as defined on the Reference Page. (C) Tax Escalation. If during the Lease Term the Real Estate Taxes for the Building, the Complex and Parcel at which the Demised Premises are located for any Comparison Period shall be greater than the Base Real Estate Taxes (adjusted proportionately if the Comparison Period is less than a Lease Year), then Lessee shall pay to Lessor as Additional Rent, Lessee's Percentage of all such excess Real Estate Taxes. As used in this Subsection 25(C), the words and terms which follow mean and include the following: (i) The Base Period Costs for "REAL ESTATE TAXES" shall be as defined on the Reference Page. 21 (ii) "REAL ESTATE TAXES" shall mean the property taxes and assessments imposed upon the Building, the Complex and Parcel, or upon the Term Fixed Basic Rent and Additional Rent, as such, payable by the Lessor including, but not limited to, real estate, city, county, village, school and transit taxes, or taxes, assessments or charges levied, imposed or assessed against the Building and Complex by any other taxing authority, whether general or specific, ordinary or extraordinary, foreseen or unforeseen. If due to a future change in the method of taxation, any franchise, income or profit tax shall be levied against Lessor in substitution for, or in lieu of, or in addition to, any tax which would otherwise constitute a Real Estate Tax, such franchise, income or profit tax shall be deemed to be a Real Estate Tax for the purposes hereof; conversely, any additional real estate tax hereafter imposed in substitution for, or in lieu of, any franchise, income or profit tax (which is not in substitution for, or in lieu of, or in addition to, a Real Estate Tax as hereinbefore provided) shall not be deemed a Real Estate Tax for the purposes hereof. Notwithstanding anything contained herein to the contrary, Lessee shall assume and pay to Lessor in full at the time of paying the Term Fixed Basic Rent, any excise, sales, use, gross receipts or other taxes (other than a net income or excess profits tax) which may be imposed on or measured by such Term Fixed Basic Rent or Additional Rent or may be imposed on Lessor or on account of the letting or which Lessor may be required to pay or collect under any law now in effect or hereafter enacted. (D) Lease Year. As used in this Lease, Lease Year shall mean the twelve (12) month period commencing on the Commencement Date and each twelve (12) month period thereafter. Once the base costs are established, in the event any lease period is less than twelve (12) months, then the Base Period Costs for the categories listed above shall be adjusted to equal the proportion that said period bears to twelve (12) months, and Lessee shall pay to Lessor as Additional Rent: for such period, an amount equal to Lessee's Percentage of the excess for said period over the adjusted base with respect to each of the aforesaid categories. Notwithstanding, anything contained herein to the contrary, once the base costs are established, Lessor reserves the right to calendarize billing and payment in order to establish operating consistency. (E) Payment. At any time, and from time to time, after the establishment of the Base Period Costs for each of the categories referred to above, Lessor shall advise the Lessee in writing of Lessee's Percentage, as defined on the Reference Page, with respect to each of the categories as estimated for the current Lease Year and for each succeeding Lease Year or proportionate part thereof if the Lease is Term is for less than twelve (12) months, and thereafter the Lessee shall pay as Additional Rent, Lessee's Percentage of the excess of these costs over the Base Period Costs for the then current period affected by such advice (as the same may be periodically revised by Lessor as additional costs are incurred) in equal monthly installments on the first day of each month, such new rates being applied to any months for which the installments of Monthly Fixed Basic Rent shall have already been paid which are affected by the Operating Cost Escalation and/or Utility and Energy Cost Escalation and/or Tax Escalation Costs above referred to, as well as the unexpired months of the current period the adjustment for the then expired months to be made at the payment of the next succeeding installment of Monthly Fixed Basic Rent, all subject to final adjustment at the expiration of each Lease Year as defined in Subsection 25(D) hereof or proportionate part thereof, if the last period prior to the Lease's termination is less than twelve (12) months. In the event the last period prior to the Lease's termination is less than twelve (12) months, the Base Period Costs during said period shall be proportionately reduced to correspond to the duration of said final period. 22 (F) Books and Records. For the protection of Lessee, Lessor shall maintain books of account which shall be open to Lessee and its representatives at reasonable times and upon prior written notice, so that Lessee can determine that such Operating, Utility, Energy and Tax Costs have, in fact, been paid or incurred. Any disagreement with respect to any one or more of said charges if not satisfactorily settled between Lessor and Lessee shall be referred by either party to an independent certified public accountant to be mutually agreed upon, and if such an accountant cannot be agreed upon, the American Arbitration Association may be asked by either party to select an arbitrator, whose decision on the dispute will be final and binding upon both parties, who shall jointly share any cost of such arbitration. Pending resolution of said dispute, the Lessee shall pay to Lessor the sum so billed by Lessor subject to its ultimate resolution as aforesaid. (G) Right of Review. Once Lessor shall have finally determined said Operating, Utility and Energy or Tax Costs at the expiration of a Lease Year, then, as to the item so established, Lessee shall only be entitled to dispute said charge as finally established for a period of six (6) months after such charge is finally established, and Lessee specifically waives any right to dispute any such charge at the expiration of said six (6) month period. (H) Occupancy Adjustment. If, with respect to Operating Cost Escalation, as established in Subsection 25(A) hereof, and Utility and Energy Cost Escalation, as established in Subsection 25(B) hereof, the Building is not ninety-five (95%) percent occupied during the establishment of the respective Base Period Costs, then the Base Period Costs incurred with respect to said Operating Cost or Utility and Energy Cost shall be adjusted during any such period so as to reflect ninety-five (95%) percent occupancy. Similarly, if, during any Lease Year or proportionate part thereof subsequent to the establishment of the respective Base Period Costs the Building is less than ninety-five (95%) percent occupied, then the actual costs incurred for Operating Cost and Utility and Energy Cost shall be increased during any such period to reflect ninety-five (95%) percent occupancy so that at all times after the establishment of the aforesaid Base Period Costs, the Utility and Energy Cost and Operating Cost shall be actual costs, but in the event less than ninety-five (95%) percent of the Building is occupied during all or part of the Lease Year involved, the Utility and Energy Cost and Operating Cost shall not be less than that which would have been incurred had ninety-five (95%) percent of the Building been occupied. The aforesaid adjustment shall only be made with respect to those items that are in fact affected by variations in occupancy levels. To the extent any Operating Cost or Utility and Energy Cost is separately billed or metered or paid for directly by any Building tenant, to include but not be limited to Lessee, or for which Lessor receives reimbursements, said space shall be considered vacant space for purposes of the aforesaid adjustment. 26. LESSEE'S ESTOPPEL. (A) Lessee shall, from time to time, within ten (10) days of Lessor's written request, execute, acknowledge and deliver to Lessor a written statement certifying that the Lease is unmodified and in full force and effect, or that the Lease is in full force and effect as modified and 23 listing the instruments of modification; the dates to which the Monthly Fixed Basic Rent and Additional Rent and charges have been paid; and, to the best of Lessee's knowledge, whether or not Lessor is in default hereunder, and if so, specifying the nature of the default; and any other information which Lessor shall reasonably request. It is intended that any such statement delivered pursuant to this Section 26 may be relied on by a prospective purchaser of Lessor's interest or mortgagee of Lessor's interest or assignee of any mortgage of Lessor's interest. Lessee hereby irrevocably appoints Lessor or if Lessor is a trust, Lessor's beneficiary or agent, as attorney-in-fact for the Lessee with full powers and authority to execute and deliver in the name of Lessee such estoppel certificate if Lessee fails to deliver the same within such ten (10) day period and such certificate as signed by Lessor, Lessor's beneficiary or agent, as the case may be, shall be fully binding on Lessee, if Lessee fails to deliver a contrary certificate within five (5) days after receipt by Lessee of a copy of the certificate executed by Lessor, Lessor's beneficiary or agent, as the case may be, on behalf of Lessee. (B) Lessee's failure to deliver such statement within such time shall be conclusive upon Lessee that: (i) this Lease is in full force and effect and not modified except as Lessor may represent; (ii) not more than one (1) installment of Monthly Fixed Basic Rent has been paid in advance; (iii) there are no such defaults; and (iv) notices to Lessee shall be sent to Lessee's mailing address as set forth in this Lease. Notwithstanding the presumptions of this Section, Lessee shall not be relieved of its obligation to deliver said statement. 27. HOLDOVER TENANCY. If Lessee holds possession of the Premises after the Term of this Lease, Lessee, at Lessor's option, shall become a tenant from month to month under the provisions herein provided, but at a Monthly Fixed Basic Rent of one hundred and fifty (150%) percent of the prior month's Monthly Fixed Basic Rent, and without the requirement for demand or notice by Lessor to Lessee demanding delivery of possession of said Premises (but Additional Rent shall continue as provided in this Lease), which sum shall be payable in advance on the first day of each month, and such tenancy shall continue until terminated by Lessor by notice to Lessee given at least thirty (30) days prior to the intended date of termination, or until Lessee shall have given to Lessor, at least sixty (60) days prior to the intended date of termination, a written notice of intent to terminate such tenancy, which termination date must be as of the end of a calendar month. Lessee shall pay Term Fixed Basic Rent and Additional Rent until such alterations and corrections as are required to be made by Lessee are made, and until such additions and improvements as Lessee is entitled to remove have been removed. Lessee shall also pay all damages sustained by Lessor from any loss or liability resulting from such holding over and delay in surrender. The time limitations described in this Section 27 shall not be subject to extension for Force Majeure. 28. RIGHT TO SHOW PREMISES. Lessor may show the Premises to prospective purchasers and mortgagees; and, during the twelve (12) months prior to termination of this Lease, to prospective tenants, during Building Hours on reasonable notice to Lessee. 29. "AS IS" CONDITION. Lessee has inspected the Premises, Building and Complex, and is thoroughly acquainted with their respective conditions and agrees to take same "AS IS". Lessee acknowledges that the taking of the Premises by Lessee shall be conclusive evidence that the Premises, Building and Complex were in good and satisfactory condition at the time possession of the Premises was so taken. 24 30. WAIVER OF TRIAL BY JURY. To the extent such waiver is permitted by law, the parties waive trial by jury in any action or proceeding brought in connection with this Lease or the Premises. 31. LATE CHARGE. Lessee recognizes that late payment of any Term Fixed Basic Rent or Additional Rent or other sum due hereunder will result in administrative expense to Lessor, the extent of which additional expense is extremely difficult and economically impractical to ascertain. Lessee therefore agrees that if Monthly Fixed Basic Rent or Additional Rent or any other sum is due and payable pursuant to this Lease, and such amount remains due and unpaid five (5) days after said amount is due, such amount shall be increased by a late charge in an amount equal to the greater of: (a) Fifty and 00/100 ($50.00) Dollars; or (b) a sum equal to five (5%) percent of the unpaid Monthly Fixed Basic Rent or Additional Rent or other payment. The amount of the late charge to be paid by Lessee shall be reassessed and added to Lessee's obligation for each successive monthly period until paid. The provisions of this Section 31 in no way relieve Lessee of the obligation to pay Term Fixed Basic Rent or Additional Rent or other payment on or before the date on which they are due nor do the terms of this Section 31 in any way affect Lessor's remedies pursuant to Section 14 in the event said Term Fixed Basic Rent or Additional Rent or other payment is unpaid after date due. 32. INSURANCE. (A) Lessee's Insurance. (1) Lessee covenants and represents, said representation being specifically designed to induce Lessor to execute this Lease, that during the entire Term hereof, at its sole cost and expense, Lessee shall obtain, maintain and keep in full force and effect the following insurance: (a)"ALL RISK" property insurance against fire, theft, vandalism, malicious mischief, sprinkler, leakage and such additional perils as are now, or hereafter may be, included in a standard extended coverage endorsement from time to time in general use in the State of New Jersey upon property of every description and kind owned by Lessee or under Lessee's care, custody or control and located in the Building, Complex or Parcel or for which Lessee is legally liable or installed by or on behalf of Lessee, including by way of example and not by way of limitation, furniture, fixtures, fittings, installations and any other personal property in an amount equal to the full replacement cost thereof. (b) Commercial General Liability Insurance coverage to include personal injury, bodily injury, broad form property damage, operations hazard, owner's protective coverage, contractual liability, products and completed operations liability naming Lessor and Lessor's mortgagee or trust deed holder and ground lessors (if any) as additional named insureds in limits of not less than One Million and 00/100 ($1,000,000.00) Dollars. 25 (c)Business interruption insurance in such amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent tenants or assumed by Lessee pursuant to this Lease or attributable to prevention or denial of access to the Premises, Building, Complex or Parcel as a result of such perils. (d)Workers' Compensation insurance in form and amount as required by law. (e) Business auto liability covering owned, non-owned and hired vehicles with a limit of not less than One Million and 00/100 ($l,000,000.00) Dollars per accident. (f) Any other form or forms of insurance or any increase in the limits of any of the aforesaid enumerated coverages or other forms of insurance as Lessor or the mortgagees or ground lessors (if any) of Lessor may reasonably require from time to time if in the reasonable opinion of Lessor or said mortgagees or ground lessors said coverage and/or limits become inadequate or less than that commonly maintained by prudent tenants in similar buildings in the area by tenants making similar uses. (2) All insurance policies required pursuant to this Section 32 shall be taken out with insurers rated at least A7 by A.M. Best Company, Oldwick, New Jersey, who are licensed to do business in the State and shall be in form satisfactory from time to time to Lessor. A policy or certificate evidencing such insurance together with a paid bill shall be delivered to Lessor not less than fifteen (15) days prior to the commencement of the Term hereof. Such insurance policy or certificate will provide an undertaking by the insurers to notify Lessor and the mortgagees or ground lessors (if any) of Lessor in writing not less than thirty (30) days prior to any material change, reduction in coverage, cancellation, or other termination thereof. Should a certificate of insurance initially be provided a policy shall be furnished by Lessee within thirty (30) days of the Term's commencement. (3) In the event of damage to or destruction of the Building and/or Premises entitling Lessor or Lessee to terminate this Lease pursuant to Section 10 hereof, and if this Lease be so terminated, Lessee will immediately pay to Lessor all of its insurance proceeds, if any, relating to the leasehold improvements and alterations (but not Lessee's trade fixtures, equipment, furniture or other personal property of Lessee in the Premises) which have become Lessor's property on installation or would have become Lessor's property at the Term's expiration or sooner termination. If the termination of the Lease, at Lessor's election, is due to damage to the Building, and if the Premises have not been so damaged, Lessee will deliver to Lessor, in accordance with the provisions of this Lease, the improvements and alterations to the Premises which have become an installation or would have become, at the Term's natural expiration, Lessor's property. (4) Lessee agrees that it will not keep or use or offer for sale (if sales of goods is a permitted use pursuant to Section 4 hereof) in or upon the Premises or within the Building, Complex or Parcel, any article which may be prohibited by any insurance policy in force from time to time covering the 26 Building, Complex or Parcel. In the event Lessee's occupancy or conduct of business in or on the Premises, Building, Complex or Parcel, whether or not Lessor has consented to the same, results in any increase in premiums for insurance carried from time to time by Lessor with respect to the Building, Complex or Parcel, Lessee shall pay such increase in premiums as Additional Rent within ten (10) days after being billed therefor by Lessor. In determining whether increased premiums are a result of Lessee's use and occupancy, a schedule issued by the organization computing the insurance rate on the Building, Complex or Parcel showing the components of such rate shall be conclusive evidence of the items and charges making up such rate. Lessee shall promptly comply with all reasonable requirements of the insurance authority or of any insurer now or hereafter in effect relating to the Premises Building, Complex or Parcel. (5) If any insurance policy carried by either party as required by this Section 32 shall be cancelled or cancellation shall be threatened or the coverage thereunder reduced or threatened to be reduced in any way by reason of the use or occupation of the Premises, Building, Complex or Parcel or any part thereof by Lessee or any assignee or sublessee of Lessee or anyone permitted by Lessee to be upon the Premises, and if Lessee fails to remedy the conditions giving rise to said cancellation or threatened cancellation or reduction in coverage on or before the earlier of (i) forty-eight (48) hours after notice thereof from Lessor, or (ii) prior to said cancellation or reduction becoming effective, Lessee shall be in default hereunder and Lessor shall have all of the remedies available to Lessor pursuant to this Lease. (B) Lessor's Insurance. Lessor covenants and agrees that throughout the Term it will insure the Building, excluding any property with respect to which Lessee is obligated to insure pursuant to Subsection 32(A) (1) (a) above, against damage by fire and standard extended coverage perils and public liability insurance in such reasonable amounts with such reasonable deductibles as required by any mortgagee or ground lessor, or if none, as would be carried by a prudent owner of a similar building in the area. In addition, Lessor shall maintain and keep in force and effect during the Term, rental income insurance insuring Lessor against abatement or loss of Term Fixed Basic Rent, including items of Additional Rent, in case of fire or other casualty similarly insured against, in an amount at least equal to the Term Fixed Basic Rent and Additional Rent during, at the minimum, one (1) Lease Year hereunder. Lessor may, but shall not be obligated to, take out and carry any other forms of insurance as it or the mortgagee or ground lessor (if any) of Lessor may require or reasonably determine available. All insurance carried by Lessor on the Building, Complex or Parcel shall be included as an Operating Cost pursuant to Subsection 25(A). Notwithstanding its inclusion as an Operating Cost or any contribution by Lessee to the cost of insurance premiums by Lessee as provided herein, Lessee acknowledges that it has no right to receive any proceeds from any such insurance policies carried by Lessor. Lessee further acknowledges that the exculpatory provisions of this Lease as set forth in Section 39 and the provisions of this Section 32 as to Lessee's insurance are designed to insure adequate coverage as to Lessee's property and business without regard to fault and avoid Lessor obtaining similar coverage for said loss for its negligence or that of its agents, servants or employees which could result in additional costs includable as part of Operating Costs which are payable by Lessee. Lessor will not carry insurance of any kind on Lessee's furniture or furnishings, or on any fixtures, equipment, appurtenances or improvements of Lessee under this Lease and Lessor shall not be obligated to repair any damage thereto or replace the same. 27 (C) Waiver of Subrogation. All policies of fire, extended coverage or similar casualty insurance, which either party obtains in connection with the Premises, Building, Complex or Parcel shall include a clause or endorsement denying the insurer any rights of subrogation against the other party (i.e. Lessor or Lessee) for all perils covered by said policy. Should such waiver not be available, then the policy for which the waiver is not available must name the other party as an additional named insured affording it the same coverage as that provided the party obtaining said coverage. 33. NO OTHER REPRESENTATIONS. No representations or promises shall be binding on the parties hereto except those representations and promises contained herein or in some future writing signed by the party making such representation(s) or promise(s). 34. QUIET ENJOYMENT. Lessor covenants that if, and so long as, Lessee pays the Term Fixed Basic Rent and any Additional Rent as herein provided, and performs the covenants hereof, Lessor shall do nothing to affect Lessee's right to peaceably and quietly have, hold and enjoy the Premises for the Term herein mentioned, subject to the provisions of this Lease and to any ground lease, mortgage or deed of trust to which this Lease shall be subordinate. 35. INDEMNITY. Lessee shall indemnify and save harmless Lessor and its agents against and from (a) any and all claims (i) arising from (x) the conduct or management by Lessee, its subtenants, licensees, its or their employees, agents, contractors or invitees on the Demised Premises or of any business therein, or (y) any work or thing whatsoever done, or any condition created (other than by Lessor for Lessor's or Lessee's account) in or about the Demised Premises during the Term of this Lease or during the period of time, if any, prior to the Commencement Date that Lessee may have been given access to the Demised Premises, or (ii) arising from any negligent or otherwise wrongful act or omission of Lessee or any of its subtenants or licensees or its or their employees, agents, contractors or invitees, and (b) all costs, expenses and liabilities incurred in or in connection with each such claim or action or proceeding brought thereon. In case any action or proceeding be brought against Lessor by reason of any such claim, Lessee, upon notice from Lessor, shall resist and defend such action or proceeding. The provisions of this Section 35 shall survive the expiration or sooner termination of this Lease. 36. RULES OF CONSTRUCTION/APPLICABLE LAW. Any table of contents, captions, headings and titles in this Lease are solely for convenience of reference and shall not affect its interpretation. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. If any words or phrases in this Lease shall have been stricken out or otherwise eliminated, whether or not any other words or phrases have been added, this Lease shall be construed as if the words or phrases so stricken out or otherwise eliminated were never included in this Lease no implication or inference shall be drawn from the fact that said words or phrases were so stricken out or otherwise eliminated. Each covenant, agreement, obligation or other provision of this Lease on Lessee's part to be performed, shall be deemed and construed as a separate and independent covenant of Lessee, not dependent on any other provision of this Lease. All terms and words used in this Lease, regardless of the number or gender in which they are used, shall be deemed to include any other number and any other gender as the context may require. This Lease shall be governed and construed in accordance with the laws of the State of New Jersey (excluding New Jersey conflict of laws) and by the State courts of New Jersey. If any of the provisions of this Lease, or the application thereof to any person or circumstances, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such provision or provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 28 37. APPLICABILITY TO HEIRS AND ASSIGNS. The provisions of this Lease shall apply to, bind and inure to the benefit of Lessor and Lessee, and their respective heirs, successors, legal representatives and assigns. It is understood that the term "LESSOR" as used in this Lease means only the owner, a mortgagee in possession or a term lessee of the Building, so that in the event of any sale of the Building or of any lease thereof, or if a mortgagee shall take possession of the Premises, the Lessor named herein shall be and hereby is entirely freed and relieved of all covenants and obligations of Lessor hereunder accruing thereafter, and it shall be deemed without further agreement that the purchaser, the term lessee of the Building, or the mortgagee in possession has assumed and agreed to carry out any and all covenants and obligations of Lessor hereunder. 38. PARKING. Lessor agrees that Lessee, its employees, agents, permitted subtenants, customers and invitees shall be entitled, in the aggregate, to the use of those parking spaces as enumerated on the Reference Page, from time to time, as, when and where available in the parking areas appurtenant to the Building. Lessor hereby expressly reserves the right, from time to time, to change the area, level, location and arrangement of the parking areas; to build multi-story parking facilities; to restrict parking by tenants and to the occupants of the Building and their employees, agents, permitted subtenants, customers and invitees; to enforce parking charges (by operation of meters or otherwise) and to close temporarily all or any portion of the parking areas or other common areas for the purpose of making repairs or changes thereto and to discourage non-customer parking. If any vehicle of Lessee, or of any subtenant, licensee, or concessionaire, or of their respective officers, agents or employees, is parked in any part of the Common Facilities other than the employee parking area(s) designated therefor by Lessor, Lessee shall pay to Lessor such reasonable penalty as may be fixed by Lessor from time to time. All amounts due under the provisions of this Section shall be deemed to be Additional Rent. Lessee agrees promptly to execute Lessor's standard parking agreement if, as and when promulgated by Lessor for use in connection with the Building, provided that Lessee shall have been provided with a copy of such agreement. Notwithstanding anything contained herein to the contrary, it is understood and agreed that a gate-controlled area is utilized for covered parking spaces. The spaces within said covered area shall not be specifically assigned on an individual basis and those spaces enumerated on the Reference Page as being covered shall be undercover but not specifically earmarked for Lessee, said spaces to be available on a first come first serve basis to all those entitled to covered spaces who have been assigned spaces within said area. The total spaces available within said area shall equal the total number of people with access to said area. Nothing contained herein shall be deemed to impose any obligation on Lessor to police the parking area. 29 39. LESSOR'S EXCULPATION. Lessor shall not be liable to Lessee for any loss suffered by Lessee under any circumstances, including, but not limited to (i) that arising from the negligence of Lessor, its agents, servants, invitees, contractors or subcontractors, or from defects, errors or omissions in the construction or design of the Premises and/or the Building and/or the Complex and/or the Parcel including the structural and nonstructural portions thereof; or (ii) for loss of or injury to Lessee or to Lessee's property or that for which Lessee is legally liable from any cause whatsoever, including but not limited to theft or burglary; or (iii) for that which results from or is incidental to the furnishing of or failure to furnish or the interruption in connection with the furnishing of any service which Lessor is obligated to furnish pursuant to this Lease; or (iv) for that which results from any inspection, repair, alteration or addition or the failure thereof undertaken or failed to be undertaken by Lessor; or (v) for any interruption to Lessee's business, however occurring. The aforesaid exculpatory Section is to induce the Lessor, in its judgment, to avoid or minimize covering risks which are better quantified and covered by Lessee either through insurance (or self-insurance or combinations thereof if specifically permitted pursuant to this Lease), thereby permitting potential cost savings in connection with the Operating Costs borne by Lessee pursuant to Section 25. 40. COMMISSION. Lessee represents and warrants that no broker was involved in negotiating and bringing about this Lease and Lessee further represents and warrants to the Lessor that no broker brought about this transaction, and Lessee agrees to indemnify and hold Lessor harmless from any and all claims of any brokers arising out of or in connection with the negotiations of or the entering into this Lease by Lessee and Lessor. In no event shall Lessor's mortgagee(s) have any obligation to any broker involved in this transaction. 41. RECORDATION. Lessee shall not record this Lease or a short form memorandum hereof without the prior written consent of Lessor. If Lessee does record this Lease or a short form memorandum without the prior written consent of Lessor, it shall be considered an incurable default under the Lease entitling the Lessor to terminate the Lessee's occupancy. Lessee hereby irrevocably appoints Lessor as Lessee's attorney-in-fact to execute and file a termination of any such memorandum. 42. NO OPTION. The submission of this Lease Agreement for examination does not constitute a reservation of, or option for, the Premises, and this Lease Agreement becomes effective as a Lease Agreement only upon execution and delivery thereof by Lessor and Lessee. 43. DEFINITIONS. (A) Affiliate. Affiliate shall mean any corporation related to Lessee as a parent, subsidiary or brother-sister corporation so that such corporation and such party or such corporation and such party and other corporations constitute a controlled group as determined under Section 1563 of the Internal Revenue Code of 1986, as amended and as elaborated by the Treasury Regulations promulgated thereunder or any business entity in which Lessee has more than a fifty (50%) percent interest. (B) Business Days and Building Hours. As used in this Lease, the "BUSINESS DAYS" and the "BUILDING HOURS" shall be Monday through Friday, 8:00 a.m. to 6:00 p.m., and on Saturdays from 8:00 a.m. to 1:00 p.m., excluding those Federal and/or State holidays observed by the employees of Lessor, except that Common Facilities, lighting in the Building, the Complex and Parcel shall be maintained for such additional hours as, in Lessor's sole judgment, is necessary or desirable to insure proper operation of the Building, the Complex and Parcel. Notwithstanding the foregoing, Lessee shall be permitted access to the Building and Premises twenty-four (24) hours a day, three hundred sixty-five (365) days a year. 30 (C) Common Facilities. Common Facilities shall include, by way of example and not by way of limitation, the parking areas; ingress and egress areas to the Complex; lobby; elevator(s); public hallways; public lavatories, all other general Building or Complex facilities that service all Building tenants; air conditioning rooms; fan rooms; janitors' closets; electrical closets; telephone closets; elevator shafts and machine rooms; flues; stacks; pipe shafts and vertical ducts with their enclosing walls. Lessee's use of those Common Facilities not open to all tenants is subject to Lessor's consent which may be denied for any reason. Lessor may at any time close temporarily any of the Common Facilities to make repairs or changes therein or to effect construction, repairs or changes within the Building, Complex or Parcel, or to discourage non-tenant parking or to prevent the dedication of the same, and may do such other acts in and to any of the Common Facilities as in its judgment may be desirable to improve the convenience thereof but shall always in connection therewith endeavor to minimize any inconvenience to Lessee. (D) Force Majeure. Force Majeure shall mean and include those situations beyond either party's control, including by way of example and not by way of limitation, acts of God; accidents; repairs; strikes; shortages of labor, supplies or materials; inclement weather; or, where applicable, the passage of time while waiting for an adjustment of insurance proceeds. Any time limits required to be met by either party hereunder, whether specifically made subject to Force Majeure or not, except those related to the payment of Term Fixed Basic Rent or Additional Rent and except as to the time periods set forth in Section 27, shall, unless specifically stated to the contrary elsewhere in this Lease, be automatically extended by the number of days by which any performance called for is delayed due to Force Majeure. (E) Lessee's Percentage. The parties agree that Lessee's Percentage, as defined on the Reference Page, reflects and will be continually adjusted to reflect the sum arrived at by dividing the gross square feet of the area rented to Lessee (including an allocable share of all Common Facilities) as set forth in Section 1, as the numerator, plus any additional gross square footage leased from time to time pursuant to this Lease, by the total number of gross square feet of the Complex (or additional buildings that may be constructed within the Parcel), as the denominator, measured outside wall to outside wall less five (5%) percent vacancy allowance of the Complex. Lessor shall have the right to make changes or revisions in the Common Facilities of the Building or Complex so as to provide additional leasing area. Lessor shall also have the right to construct additional buildings in the Parcel for such purposes as Lessor may deem appropriate and subdivide the lands for that purpose if necessary, and upon so doing, the Parcel shall become the subdivided lot on which the Building in which the Demised Premises is located. If any service provided for in Subsection 25(A) or any utility provided for in Subsection 25(B) is separately billed or separately metered within the Building or within the Complex, then the square footage so billed or metered shall be deemed vacant and if applicable subject to the Occupancy Adjustment set forth in Subsection 25(H). Lessee understands that as a result of changes in the layout of the Common Facilities from time to time occurring due to, by way of example and not by way of limitation, the rearrangement of corridors, the aggregate of all tenant Building proportionate shares or complex proportionate shares may be equal to, less than or greater than one hundred (100%) percent. 31 44. LEASE COMMENCEMENT. Notwithstanding anything contained herein to the contrary, if Lessor, for any reason whatsoever, including Lessor's negligence, cannot deliver possession of the Premises to Lessee at the commencement of the agreed Term as set forth in Section 2, this Lease shall not be void or voidable, nor shall Lessor be liable to Lessee for any loss or damage resulting therefrom, but in that event, the Lease Term shall be for the full Term as specified above to commence from and after the date Lessor shall have delivered possession of the Premises to Lessee (herein the "COMMENCEMENT DATE") and to terminate midnight of the Termination Date, and if requested by Lessor, Lessor and Lessee shall, by a writing signed by the parties, ratify and confirm said commencement and termination dates. Nothing contained herein shall be deemed to modify the commencement of the Lease Term as set forth in Section 2 and Lessee's obligations hereunder if Lessor is unable to deliver the Demised Premises on the Commencement Date by reason of Lessee's failure to comply with the requirements of Subsection 29(B). 45. NOTICES. Any notice by either party to the other shall be in writing and shall be deemed to have been duly given only if (a) delivered personally or (b) sent by registered mail or certified mail in a postpaid envelope or by regulated carrier service with return receipt or (c) sent by nationally recognized overnight courier service such as Federal Express, addressed if to Lessee, at the above-described Building; if to Lessor, at Lessor's address as set forth above, with copy to Meister Seelig & Fein LLP, Two Grand Central Tower, 140 East 45th Street, 19th Floor, New York, New York 10017, Attention: Stephen B. Meister, Esq.; or to either at such other address as Lessee or Lessor, respectively, may designate in writing. Notice shall be deemed to have been duly given upon its receipt or rejection as evidenced by a bill of lading or return receipt or upon delivery if personally served. 46. ACCORD AND SATISFACTION. No payment by Lessee or receipt by Lessor of a lesser amount than the Monthly Fixed Basic Rent and Additional Rent payable hereunder shall be deemed to be other than payment on account of the earliest stipulated Monthly Fixed Basic Rent and Additional Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment for Fixed Basic Rent or Additional Rent be deemed an accord and satisfaction, and Lessor may accept such check or payment without prejudice to Lessors s right to recover the balance of such Fixed Basic Rent and Additional Rent or pursue any other remedy provided herein or by law. 47. EFFECT OF WAIVERS. No failure by Lessor to insist upon the strict performance of any covenant, agreement, term or condition of this Lease, or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial Monthly Fixed Basic Rent or Additional Rent during the continuance of any such breach, shall constitute a waiver of any such breach or of such covenant, agreement, term or condition. No consent or waiver, express or implied, by Lessor to or of any breach of any covenant, condition or duty of Lessee shall be construed as a consent or waiver to or of any other breach of the same or any other covenant, condition or duty, unless in writing signed by Lessor. 32 48. LESSOR'S RESERVED RIGHT. Lessor and Lessee acknowledge that the Premises are in a Building and Complex which are not open to the general public. Access to the Building or Complex is restricted to Lessor, Lessee, their agents, employees and contractors and to their invited visitors. In the event of a labor dispute including a strike, picketing, informational or associational activities directed at Lessee or any other tenant, Lessor reserves the right unilaterally to alter Lessee's ingress and egress to the Building or Complex or make any other change in operating conditions to restrict pedestrian, vehicular or delivery ingress and egress to a particular location. 49. RELOCATION BY LESSEE. Lessor hereby reserves the right, at its sole expense and on at least ninety (90) days' prior written notice, to require Lessee to move from the Premises to other space within the Complex of comparable size and decor in order to permit Lessor to consolidate the space leased to Lessee with any other space leased or to be leased provided, however, that in the event of receipt of any such notice, Lessee, by written notice to Lessor, may elect not to move to the other space and in lieu thereof terminate this Lease effective sixty (60) days after the date of the original notice of relocation by Lessor. In the event Lessee elects to terminate as aforesaid, Lessor shall have the option to withdraw its exercise of the relocation option. In the event of any such relocation, Lessor will pay all expenses of preparing and decorating the new premises so that they will be substantially similar to the Premises from which Lessee is moving and Lessor will also pay the expense of moving Lessee's furniture and equipment to the new premises. In such event, this Lease and each and all of the terms, covenants and conditions hereof, shall remain in full force and effect and thereupon be deemed applicable to such new space except that the description of the Premises shall be revised and if applicable Lessee's Percentage shall likewise be revised. 50. CORPORATE AUTHORITY. If Lessee is a corporation, Lessee represents and warrants that this Lease and the undersigned's execution of this Lease has been duly and irrevocably authorized and approved by the corporation's Board of Directors. The undersigned officers and representatives of the corporation executing this Lease on behalf of the corporation represent and warrant that they are officers of the corporation with authority to execute this Lease on behalf of the corporation, and within fifteen (15) days of execution hereof, Lessee will provide Lessor with a corporate resolution confirming the aforesaid. 51. NUMBER AND GENDER. The terms "LESSOR" and "LESSEE" or any pronoun used in place thereof shall indicate and include Landlord and Tenant, the masculine or feminine, the singular or plural number, individuals, firms or corporations, and their and each of their respective successors, executors, administrators and permitted assigns, according to the context hereof. In any case, where this Lease is signed by more than one person, the obligations hereunder shall be joint and several. 52. LESSEE RESTRICTION. Lessee acknowledges that it has been advised by Lessor that Lessor shall be precluded from permitting leases in the Building or Complex to any cafeteria/restaurant operation including take-out service, coffee wagon service, delivery service and/or catering service, and Lessee agrees that it shall not use or suffer the use of all or any of the Premises for any such restricted uses. 33 53. GOVERNMENT REQUIREMENTS. In the event of the imposition of Federal, State, or local governmental control, rules, regulations, or restrictions on the use or consumption of energy or other utilities or with respect to any other aspect of this Lease during the Term, both Lessor and Lessee shall be bound thereby. In the event of a difference in interpretation of any governmental control, rule, regulation or restriction between Lessor and Lessee, the interpretation of Lessor shall prevail, and Lessor shall have the right to enforce compliance, including the right of entry into the Premises to effect compliance. 54. LIMITATION OF LESSOR'S LIABILITY. Notwithstanding anything to the contrary provided in this Lease, it is specifically understood and agreed, such agreement being a primary consideration for the execution of this Lease by Lessor, that there shall be absolutely no personal liability on the part of Lessor, its constituent members (to include but not be limited to officers, directors, partners and trustees), their respective successors, assigns or any mortgagee in possession (for the purposes of this Section, collectively referred to as 'Lessor') with respect to any of the terms, covenants and conditions of this Lease, and that Lessee shall look solely to the equity of Lessor in the Building for the satisfaction of each and every remedy of Lessee in the event of any breach by Lessor of any of the terms, covenants and conditions of this Lease to be performed by Lessor, such exculpation of liability to be absolute and without any exceptions whatsoever. A deficit capital account of any portion in Lessor shall not be deemed an asset or property of Lessor. The foregoing limitation of liability shall be noted in any judgment secured against Lessor and in the judgment index. 55. 24-HOUR ACCESS. Lessee shall be entitled to 24-hour, seven (7) day a week access to the Premises, but this shall not be construed as authorization to make use of the Building services beyond the Building Hours without reimbursing Lessor for the cost thereof, and shall be subject to any governmental or municipal laws and regulations with respect to said 24-hour, seven (7) day a week access. Lessee shall obtain access by means of a key or other similar means to be provided by Lessor to afford access to the Building. 56. RENT CONCESSION. Provided Lessee is not in default and notwithstanding anything contained herein to the contrary, Lessee shall be entitled to a Term Fixed Basic Rent abatement in the amount of Twenty Three Thousand Four Hundred Fifty Four and 17/100 ($23,454.17) Dollars per month, or a proportionate part thereof in the event the Lease commences on a day other than the first day of the month, up to an aggregate amount of Seventy Thousand Three Hundred Sixty Two and 51/100 ($70,362.51) Dollars, said concession to be applied against the installments of Monthly Fixed Basic Rent due pursuant to this Lease for the second (2nd), third (3rd) and fourth (4th ) months of the Term (herein the "Concession Period"). The entire Fixed Basic Rent otherwise due and payable during the Concession Period shall become immediately due and payable to the Lessor upon the occurrence of an event of default by Lessee under the Lease. [SIGNATURE PAGE TO FOLLOW] 34 IN WITNESS WHEREOF, the parties hereto have hereunto set forth their hands and seals the day and year first above written. LESSEE: LESSOR: GOAMERICA COMMUNICATIONS CORP. STELLAR CONTINENTAL LLC By: Stellar Capital Investors, LLC Its Manager By: By: ------------------------------- ------------------------------- Name: Name: Its: Its: 35 EXHIBIT A PREMISES [TO BE SUPPLIED BY LESSOR] EXHIBIT B RULES AND REGULATIONS EXHIBIT B TO LEASE DATED THE ____ DAY OF JULY, 2004 BETWEEN STELLAR CONTINENTAL LLC, a Delaware limited liability company with an office at 156 William Street, New York, New York 10038 (hereinafter called "LESSOR"), and GOAMERICA COMMUNICATIONS CORP., a corporation whose address is 401 Hackensack Avenue, Hackensack, New Jersey 07601 (hereinafter called "LESSEE"). 1. No sign, placard, picture, advertisement, name or notice shall be installed or displayed in any part of the outside or inside of the Building if visible from a public area without prior written consent of the Lessor. Lessor shall have the right to remove, at Lessee's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering in public corridors shall be inscribed or affixed at the expense of Lessee by a person or vendor chosen by Lessor and in conformance with the Building standard signage program. In addition, Lessor reserves the right to change from time to time the format of the signs or lettering and to require previously approved signs or lettering to be appropriately altered. Lessor agrees to install, at Lessee's sole cost and expense, Building standard signage identifying (i) Lessee's name on or adjacent to the door to Lessee's Premises, and (ii) Lessee's location on the Building floor occupied by Lessee. 2. Lessee shall use and keep in place the Building standard window covering. Lessee shall not place anything or allow anything to be placed against or near any doors or windows which may appear unsightly, in the opinion of the Lessor, from outside the Premises. 3. Lessee shall not obstruct any sidewalks, halls, passages, exits, entrances, elevators, escalators or stairways of the Building. The halls, passages, exits, entrances, shopping malls, elevators, escalators and stairways are not for the general public, and Lessor shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Lessor would be prejudicial to the safety, character, reputation and interests of the Building and its tenants. However, nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. No tenant and no employee or invitee of any tenant shall go upon the roof of the Building. 4. The directory of the Building will be provided exclusively for the display of the name and location of tenants only and Lessor reserves the right to exclude any other names therefrom. No more than two entries on the directory located in the Building lobby and no more than one entry on the directory located in the Building lower lobby designating Lessee shall be installed, at Lessee's sole cost and expense. 5. All cleaning services for the Premises shall be arranged exclusively through the Lessor. Lessee shall not cause any unnecessary labor or service by carelessness or indifference to the good order and cleanliness of the Premises, however occurring 6. Lessor will furnish Lessee free of charge with two keys to each door lock in the Premises. Lessor may make a reasonable charge for any additional keys. Lessee shall not make or have made additional keys, and Lessee shall not alter any lock or install a new or additional locks or bolt on any door of its Premises. Lessee, upon the termination of its tenancy, shall deliver to Lessor the keys of all doors which have been furnished to Lessee, and in the event of loss of any keys so furnished, shall pay Lessor therefor. 7. If Lessee requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain, and comply with, Lessor's instructions for their installation. 8. No equipment, materials, furniture, packages, supplies, or other property will be received in the Building or carried in the elevators except between such hours and in such elevators as may be designated by Lessor. Furniture, equipment or supplies shall be moved in and out of the Building only during such hours, and in such manner, and by vendors designated by Lessor. 9. Lessee shall not place a load upon any floor which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Lessor through Lessor's structural engineer, whose fee shall be paid for by Lessor, shall have the right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects shall stand on such platforms as determined by Lessor to be necessary to properly distribute weight. Business machines and mechanical equipment belonging to Lessee which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to Lessor or to any tenants shall be placed and maintained by Lessee, at Lessee's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. The persons employed to move such equipment in or out of the Building must be acceptable to Lessor. Lessee will be responsible for loss of, or damage done to the Building by maintaining or moving such equipment or other property. 10. Lessee shall not use any method of heating or air conditioning such as space heaters or fans other than that supplied by Lessor. Lessee shall not waste electricity, water or air conditioning. Lessee shall keep corridor doors closed. 11. Lessor reserves the right to exclude from the Building during non-Building Hours as defined by Lessor any person unless that person has a Building pass issued by Lessor at Lessee's written request. Lessee shall be responsible for all persons for who it requests passes and shall be liable to Lessor for all acts of such persons. Lessor shall not be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. 12. Lessee shall close and lock the doors of its Premises and entirely shut all water faucets or other water apparatus before Lessee and its employees leave the Premises. Lessee shall be responsible for any damage or injuries sustained by other tenants or occupants of the Building or by Lessor for noncompliance with this rule. 13. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed. No foreign substance of any kind whatsoever shall be thrown therein, and the expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by Lessee who, or whose employees or invitees, shall have caused it. 14. Lessee shall not install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building. Lessee shall not interfere with radio or television broadcasting or reception from or in the Building elsewhere. 15. Except as approved by Lessor, Lessee shall not mark, drive nails, screw or drill into partitions, woodwork or plaster or in any way deface the Premises. Lessee shall not cut or bore holes for wires. Lessee shall not affix any floor covering to the floor of the Premises in any manner except as approved by Lessor. Lessee shall repair any damage resulting from noncompliance with this rule. 16. Lessee shall not install, maintain or operate upon the Premises any vending machines or video game machines. 17. Lessee shall store all its trash and garbage within its Premises. Lessee shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Lessor. 18. No cooking shall be done or permitted by any Lessee in the Premises, except that use of Underwriters' Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages shall be permitted, provided that such equipment and use is in accordance with all applicable federal, state and city laws, codes, ordinances, rules and regulations. 19. Lessee shall not use in the Building any hand trucks except those equipped with the rubber tires and side guards or such other material-handling equipment as Lessor may approve. Lessee shall not bring any other vehicles of any kind into the Building. 20. Lessee shall not use the name of the Building in connection with or in promoting or advertising the business of Lessee except as Lessee's address, or in any way impair the Building's reputation. 21. Lessee shall pay on demand the cost of replacement of any glass doors broken in or on the perimeter of the Premises during the continuance of the Lease, unless the glass shall be broken by Lessor, its employees or agents. 22. The requirements of Lessee will be attended to only upon appropriate application to the office of the Building by an authorized individual. Employees of Lessor shall not perform any work or do anything outside of their duties unless under instructions from Lessor. 23. Lessor may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Lessor shall be construed as a waiver of such Rules and Regulations in favor of any other tenant or tenants, nor prevent Lessor from thereafter enforcing any such Rules and Regulations. 24. No animals, vehicles or bicycles shall be allowed in the Building, except animals such as seeing-eye dogs, etc., as may be reasonably required to accommodate the needs of individuals with disabilities. 25. The use of oil, gas or flammable liquids for heating, lighting or cleaning or any other purpose is expressly prohibited. Explosives or other articles deemed hazardous shall not be brought into the Building. 26. Canvassing, soliciting and peddling in or about the Building is expressly prohibited. 27. Lessee shall not permit any portion of the Premises to be used as an office for public stenographer or typist, or as a barber or manicure shop, or as an employment bureau. Lessee shall not advertise for laborers giving an address at the Building. 28. Lessee shall not purchase or permit the purchase of spring water, ice, food, beverage, cleaning towels or other like services, from any person not approved by Lessor. 29. No space shall be used for banking, lodging, manufacturing, storage of or sale of merchandise, goods or property of any kind or any other business that involves patronage from the general public. 30. For the benefit of all tenants, Lessor shall have the right to reasonably limit elevator use during peak use hours. 31. The Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of any premises in the Building. EXHIBIT C CLEANING SPECIFICATIONS I. GENERAL a. All cleaning personnel must enter and exit the complex through the security command post, sign-in and be issued a Continental Plaza property badge (in addition to a picture ID badge, which will be issued by the cleaning company). b. The day porters must wear uniforms and ID badges at all times. c. The night supervisors should keep track of all items that are malfunctioning, such as soap dispensers, sanitary napkin dispensers, clogged toilet bowls, etc. and notice the Management Office the next day. d. The night supervisor should be at Continental Plaza by 4:30 PM to pick-up all messages from the Management Office for that particular day. e. All equipment should be in good working order and kept in a designated area. f. There should be adequate supplies on-site at all times. g. The day porters and supervisor must be able to understand English and able to communicate in a respectable fashion. h. Clean all areas of the building interior, including entrance lobbies, corridors, loading docks, garages, stairwells, lavatories and elevators. Not included are a stand-alone restaurant (407 Hackensack Avenue) and elevator shafts. i. Employees assigned to the building shall be carefully interviewed, screened and bonded. They shall be neat and clean in appearance wearing a uniform and properly identified with a picture ID badge. j. Every week, a copy of each employee's time card will be given to Stellar Capital Management. k. Employees shall abide by all building regulations and safety rules. l. Employees shall not eat, drink or smoke on duty. They shall not disturb paper on desks, open drawers or cabinets, use telephones, televisions, walkmans or radios. m. Competent supervisory personnel shall be employed and they will, at a minimum, have completed a supervisory training course. n. The supervisor will report to Stellar Capital Management any maintenance conditions such as leaky faucets, stopped toilets and drains, broken fixtures, etc. The supervisor will also report any unusual happenings in the building, which are noticed or called to his/her attention by the contractor's employees. o. Necessary, appropriate tested and approved machinery and cleaning supplies, for the satisfactory performance of services will be provided. Products and equipment shall be in compliance with OSHA regulations. p. Stellar Capital Management shall assign sufficient space on the premises for storage of cleaning materials and machinery. Utilities will be provided without charge. q. A logbook will be maintained in the building in which a record shall be made of any events requiring Stellar Capital Management or the Contractor's attention. The supervisor will check the logbook daily; any clarifications will be cleared up at that time. r. All cleaning in a tenant's demised premises will be performed behind locked doors. s. Stellar Capital Management may require the immediate dismissal of any Contractor's employee who is objectionable. t. Upon completion of work, the Contractor will leave all slop sinks and equipment storage areas in neat and orderly condition, with all unnecessary lights out and all doors locked. u. Monthly inspections of the building shall be performed by a representative of the Contractor's management staff with Stellar Capital Management's representative. This is in addition to the regular nightly inspection to be performed by the supervisor. v. Contractor shall report all mechanical deficiencies and/or damage to a Stellar Capital Management representative on-site. w. Place and maintain doormats during hazardous conditions. x. Carpets will be spot cleaned as deemed necessary by Stellar Capital Management. y. The building workweek is Monday through Friday, normally between 5:30 PM and 10:30 PM. Four hours on Saturday and four hours on Sunday will also be required. Please breakout weekend hours separate from normal Monday through Friday cleaning. II. ENTRANCE AND LOBBY -- DAILY a. Entrance lobbies will be thoroughly cleaned. b. Lobby glass will be cleaned and dusted. c. Directory glass will be damp cleaned and wiped. d. Lobby walls will be dusted and kept free from finger marks and smudges. e. Floors and entrances are to be vacuumed, dusted, mopped and damp mopped daily. Floors and entrances are to be buffed and refinished to maintain a clean and glossy appearance at all times. III. ELEVATORS -- DAILY a. All elevators will be vacuumed. b. All stainless steel and metal will be cleaned. c. All elevator tracks will be vacuumed. d. Elevator button panels and elevator doors will be cleaned. e. Ceiling, overhead Plexiglas and/or special light fixtures will be cleaned. IV. OFFICES -- DAILY a. DUSTING - All furniture, office equipment and appliances, windowsills, etc., will be dusted with a treated cloth or static duster. This shall include all horizontal surfaces up to 7 feet high. Desks and tables not cleared of paper or work materials will only be dusted where desk is exposed. Telephones will be damp wiped. b. DUST MOPPING - After furniture dusting is completed, all non-carpeted floor areas will be dust mopped with a treated dust mop with special attention being given to areas under desks and furniture to prevent accumulation of dust and dirt. c. VACUUMING - All rugs and carpets in office areas, as well as corridors, are to be vacuumed daily in all traffic areas. d. WASTE CANS and ASHTRAYS - Waste cans and ashtrays will be emptied and wiped daily. Plastic liners, where used, will be changed as needed. Waste not in the cans will not be removed unless clearly marked TRASH. e. SPOT CLEANING CARPETS - All carpets will be inspected daily for spots and stains. All spots and stains will be removed as soon as possible. Where difficult spots are encountered, the customer or his agent will be notified. f. NON-CARPETED AREAS - All non-carpeted areas shall be swept and damp mopped with the proper solution for specific floor areas on a daily basis. Extreme care will be used in all mopping to avoid splashing the walls and furniture. Moving water and other liquids over carpeted areas will be done in a manner to avoid spillage. These areas will also be buffed and kept in scuff/spot free condition at all times. Care shall be taken in applying finish to keep it off of furniture, baseboards and walls. Floor machines will be used in a manner to avoid damage to the walls, baseboards and furniture. g. DRINKING FOUNTAINS - Drinking fountains will be cleaned, polished and sanitized daily. FIRST AMENDMENT TO LEASE FIRST AMENDMENT TO LEASE made as of August 1, 2004 (the "First Amendment") by and between STELLAR CONTINENTAL LLC, a Delaware limited liability company, with an office at 156 William Street, New York, New York 10038 ("Lessor"), and GOAMERICA COMMUNICATIONS CORP., a Delaware corporation, whose address is 433 Hackensack Avenue, Hackensack, New Jersey ("Lessee"). W I T N E S S E T H: WHEREAS, Lessee never took possession of the approximately 4,130 gross rentable square feet of space Tenant was entitled to occupy on the sixth (6th) floor of the Building (the "Surrendered Space") pursuant to a lease dated as of November 14, 2003 by and between Lessor and Lesser (herein referred to as the "Lease"); WHEREAS, Lessee is currently occupying approximately 10,000 rentable square feet of space on the third (3rd) Floor of the building located at 433 Hackensack Avenue, Hackensack, New Jersey (the "Building"); WHEREAS, Lessor and Lessee wish to amend the Lease only upon and subject to the provisions of this First Amendment. NOW, THEREFORE, in consideration of the sum of Ten ($10.00) Dollars and other good and valuable consideration exchanged by Lessor and Lessee, the receipt and sufficiency of which hereby expressly are acknowledged; it is AGREED: 1. For the purposes of this First Amendment, capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed to them in the Lease. 2. Lessor and Lessee hereby desire to redefine the term Demised Premises as set forth in the Lease as approximately 10,000 rentable square feet on the third (3rd) floor of the Building. 3. Lessee represents and warrants to Lessor that Lessee dealt with no broker(s) in bringing about this First Amendment. Lessee and Lessor each agrees to hold the other harmless and indemnify and defend the other from and against any and all loss, cost, liability, damage and expense arising out of the inaccuracy of the representation contained in the preceding sentence and each party represents to the other that it has not engaged and is not responsible for the payment of a fee, commission or other compensation to any other person in connection with this First Amendment. 4. Lessee and Lessor each represents, warrants and covenants that the other is not in default under any of its obligations under the Lease and that, to the best of its knowledge, the other is not in default of its obligations under the Lease, and no event has occurred nor do any circumstances exist which, with lapse of time or notice or both, would constitute a default by Lessor or Lessee under the Lease as modified by this First Amendment. 5. Except as modified by this First Amendment, the Lease and all of the covenants, agreements, terms, provisions and conditions thereof shall remain in full force and effect and are hereby ratified and affirmed. The covenants, agreements, terms, provisions and conditions contained in this First Amendment shall bind the parties hereto and their respective successor and assigns and shall inure to the benefit of the parties hereto and their respective permitted successors and assigns. In the event of any conflict between the provisions of this First Amendment and the Lease, the provisions contained in this First Amendment shall prevail and be paramount. IN WITNESS WHEREOF, Lessor and Lessee have entered into this Amendment as of the day and year first written above, and acknowledge one to the other that they possess the requisite authority to enter into this transaction and to sign this Amendment. GOAMERICA COMMUNICATIONS CORP STELLAR CONTINENTAL LLC By: Stellar Capital Investors, LLC Its Manager By: By: ------------------------------- ------------------------------- Name: Name: Its: Its: EX-21.1 4 v014977_ex21-1.txt EXHIBIT 21.1 LIST OF SUBSIDIARIES OF GOAMERICA, INC. GoAmerica, Inc. Subsidiaries 1. GoAmerica Communications Corp. (Delaware corporation) 2. GoAmerica Marketing, Inc. (Delaware corporation) 3. Wynd Communications Corporation (California corporation) 4. Hotpaper.com, Inc. (Delaware corporation) 5. OutBack Resource Group, Inc. (California corporation) EX-23.1 5 v014977_ex23-1.txt EXHIBIT 23.1 CONSENT OF WITHUMSMITH + BROWN, P.C. CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-47736 and 333-90088) pertaining to the GoAmerica Communications Corp. 1999 Stock Option Plan, the GoAmerica, Inc. 1999 Stock Plan and the GoAmerica, Inc. Employee Stock Purchase Plan of our report dated February 28, 2005, with respect to the financial statements and schedule of GoAmerica, Inc., for the years ended December 31, 2004, 2003 and 2002, included in the Annual Report (Form 10-K) for the year ended December 31, 2004. /s/ WithumSmith+Brown, P.C. New Brunswick, New Jersey March 31, 2005 EX-31.1 6 v014977_ex31-1.txt EXHIBIT 31.1 CERTIFICATION I, Daniel R. Luis, certify that: 1. I have reviewed this Annual Report on Form 10-K of GoAmerica, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 31, 2005 /s/ Daniel R. Luis --------------------------- Daniel R. Luis Chief Executive Officer EX-31.2 7 v014977_ex31-2.txt EXHIBIT 31.2 CERTIFICATION I, Donald G. Barnhart, certify that: 1. I have reviewed this Annual Report on Form 10-K of GoAmerica, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 31, 2005 /s/ Donald G. Barnhart --------------------------- Donald G. Barnhart Chief Financial Officer EX-32.1 8 v014977_ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of GoAmerica, Inc. (the "Company") on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission (the "Report"), I, Daniel R. Luis, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934;and (2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and consolidated results of operations of the Company for the periods presented. Dated: March 31, 2005 By: /s/ Daniel R. Luis ----------------------------- Daniel R. Luis Chief Executive Officer This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-32.2 9 v014977_ex32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of GoAmerica, Inc. (the "Company") on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission (the "Report"), I, Donald G. Barnhart, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934;and (2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and consolidated results of operations of the Company for the periods presented. Dated: March 31, 2005 By: /s/ Donald G. Barnhart --------------------------- Donald G. Barnhart Chief Financial Officer EX-99.1 10 v014977_ex99-1.txt EXHIBIT 99.1 RISK FACTORS RISKS PARTICULAR TO GOAMERICA WE HAVE HISTORICALLY INCURRED LOSSES AND THESE LOSSES WILL CONTINUE IN THE FORESEEABLE FUTURE. We have never earned a profit. We had net losses of $4.4 million, $8.2 million, and $55.9 million for the years ended December 31, 2004, 2003 and 2002, respectively. Since our inception, we have invested significant capital to build our wireless network operations and e-commerce systems as well as our billing system. We also have provided mobile devices made by third parties to our customers at prices below our costs for such devices. In addition, although we have reduced our exposure to subscriber-related costs through our relationship with EarthLink, our costs of subscriber revenue, consisting principally of our purchase of wireless airtime from network carriers, have historically exceeded our subscriber revenue. Further, we have experienced negative overall gross margins, which consist of margins on our subscriber revenues, equipment sales and other revenue, and may experience negative overall gross margins again in the future. We will need to generate increased revenue to become profitable and sustain profitability on a quarterly and annual basis. We may not achieve or sustain our revenue or profit goals, and our ability to do so depends on the factors specified elsewhere in "Risk Factors" - as well as on a number of factors outside of our control, including the extent to which: o our competitors announce and develop, or lower the prices of, competing services; o wireless network carriers, data providers and manufacturers of mobile devices dedicate resources to selling our services or increase the costs of, or limit the use of, services or devices that we purchase from them; and o prices for our services decrease as a result of reduced demand or competitive pressures. As a result, we may not be able to increase revenue or achieve profitability on a quarterly or annual basis. WE MAY BE UNABLE TO EXECUTE OUR BUSINESS STRATEGY. Our business strategy is centered on the pursuit of certain priorities, centered on the offering of services to deaf or hard of hearing customers by our Wynd Communications subsidiary. These priorities and the principal risks associated with each priority include: o Growth of Wynd Communications' core wireless services business. We cannot assure you that we will be able to grow our core business. For us to grow this business internally, we will need to improve our margins and demonstrate an ability to operate profitably. For us to grow by means of product or service acquisitions, we will require additional capital to fund acquisitions and we will confront the risks, described below, inherent in an acquisition strategy. o Development and marketing of new communications services, including branded Internet Protocol and Video Relay services. To remain competitive in our primary marketing areas, we must continue to offer innovative products and services. We will be limited in the extent to which we can focus upon technological development by capital constraints, by the time that it takes to commercialize product and service concepts and by the steps that may be taken by our competitors. In our rapidly changing environment, developments that appear to present significant advantages may become obsolete before we are able to benefit from our development efforts. In recent years, our shortage of liquidity has required us to reduce the amount of resources devoted to marketing. We expect that capital constraints will continue to limit our marketing efforts. o Streamlining of operations to enable superior customer support. Our business model will be materially adversely affected if we are unable to offer superior customer support to deaf and hard of hearing customers. In the past, capital constraints have limited our customer support functions. We rely upon EarthLink to provide customer support in other aspects of our business, but will need to provide customer support on our own or through outsourcing in our Wynd Communications business. In order to provide such support, we have contracted with an experienced third party organization to provide secondary customer and technical support while leveraging internal resources to provide primary support. We cannot assure you that our efforts in this area will be successful in improving the quality of the interaction our customers have with us. If we do not respond effectively to these risks, our business could be significantly and adversely affected. We may need additional funds which, if available, could result in increased interest expenses or additional dilution to our stockholders. If additional funds are needed and are not available, our business could be negatively impacted. Our strategy is centered on the pursuit of three priorities, centered on our deaf, hard of hearing and/or speech impaired busineses: (a) growth of our core wireless services business; (b) development and marketing of new communications services, including branded Internet protocol and video relay services; and (c) effective management of our streamlined operations. If we continue to operate unprofitably, if unanticipated contingencies arise or if new business opportunities are presented to us, it will be necessary for us to raise additional capital either through public or private equity or debt financing to primarily finance the execution of our anticipated strategic initiatives. At this time, we do not have any bank credit facility or other working capital credit line under which we may borrow funds for working capital or other general corporate purposes. If our plans or assumptions change or are inaccurate regarding new lines of business within our target market, timeliness and effectiveness of implementation of new services we expect to offer, and/or weakness or lack of appreciable growth in our core business, we may be required to seek additional capital. If funds are raised through the issuance of equity securities, the percentage ownership of our then-current stockholders will be reduced and the holders of new equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. If additional funds are raised through a bank credit facility or the issuance of debt securities, the holder of such indebtedness would have rights senior to the rights of common stockholders and the terms of such indebtedness could impose restrictions on our operations. If we need to raise additional funds, we may not be able to do so on terms favorable to us, or at all. If additional capital is required but is not available on acceptable terms or at all, we may be required to sell or otherwise dispose of portions of our business in order to sustain our operations and implement our new business plan. We may not be able to effect such sales on satisfactory terms or at all. OUR LIMITED CASH RESOURCES WILL LIKELY RESTRICT OUR FLEXIBILITY AND OVERALL OPERATIONS. In order for us to execute our new business plan, it will be necessary for us to continue to operate under significant budgetary constraints. These constraints limit our ability to respond to business opportunities or issues as they arise. Since the wireless communications industry remains in an early stage and its needs are dynamic, our budgetary constraints may adversely affect our ability to respond to market demands and our ability to compete. WE HAVE ONLY A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE AN INVESTMENT IN OUR COMMON STOCK. We have only a limited operating history on which you can evaluate our business, financial condition and operating results. We face a number of risks encountered by early stage technology companies that participate in new technology markets, including our ability to: o manage our dependence on wireless data services which have only limited market acceptance to date; o maintain our engineering and support organizations, as well as our distribution channels; o negotiate and maintain favorable usage rates with telecommunications carriers; o retain and expand our subscriber base at profitable rates; o recoup our expenses associated with the wireless devices we resell to subscribers; o manage expanding operations, including our ability to expand our systems if our subscriber base grows substantially; o attract and retain management and technical personnel; and o anticipate and respond to market competition and changes in technologies such as wireless data protocols and wireless devices. We may not be successful in addressing or mitigating these risks and uncertainties, and if we are not successful our business could be significantly and adversely affected. WE MAY ACQUIRE OR MAKE INVESTMENTS IN COMPANIES OR TECHNOLOGIES THAT COULD CAUSE LOSS OF VALUE TO OUR STOCKHOLDERS AND DISRUPTION OF OUR BUSINESS. Subject to our capital constraints, we intend to continue to explore opportunities to acquire companies or technologies in the future, principally as enhancements to our offerings of products and services to our deaf and hard of hearing customers. Entering into an acquisition entails many risks, any of which could adversely affect our business, including: o failure to integrate the acquired assets and/or companies with our current business; o the price we pay may exceed the value we eventually realize; o loss of share value to our existing stockholders as a result of issuing equity securities as part or all of the purchase price; o potential loss of key employees from either our current business or the acquired business; o entering into markets in which we have little or no prior experience; o diversion of management's attention from other business concerns; o assumption of unanticipated liabilities related to the acquired assets; and o the business or technologies we acquire or in which we invest may have limited operating histories, may require substantial working capital, and may be subject to many of the same risks we are. STEPS WE HAVE TAKEN IN THE PAST FEW YEARS TO RESPOND TO OUR DIMINISHED LIQUIDITY MAY NEGATIVELY IMPACT OUR ABILITY TO DO BUSINESS IN THE FUTURE. We have taken many steps since 2002 that we may not have taken had we had substantial additional liquidity. In addition to our relationship with EarthLink, we have implemented substantial cost-cutting measures in order to survive. Among other things, we: o reduced our headcount from 225 employees at December 31, 2001 to 35 employees at December 31, 2004; o reduced our expenditures on development from approximately $4,174,000 in 2001 to approximately $507,000 in 2004; o reduced our expenditures on advertising from approximately $4,900,000 in 2001 to approximately $17,000 in 2004; and o reduced our office space under lease from approximately 66,000 total square feet at December 31, 2001 to approximately 10,000 total square feet at December 31, 2004. We understand that our capacity to do business may have been damaged by the cutbacks which we were forced to implement. If we are unable to restore our capacity, our business could be significantly and adversely affected. WE HAVE LIMITED RESOURCES AND WE MAY BE UNABLE TO SUPPORT EFFECTIVELY OUR OPERATIONS. We must continue to develop and expand our systems and operations in order to remain competitive. Our need to continually innovate has placed, and we expect it to continue to place, significant strain on our managerial, operational and financial resources. Even with the net proceeds from our recently completed private placement, we may be unable to develop and expand our systems and operations or implement our new business plan for one or more of the following reasons: o we may not be able to retain at reasonable compensation rates qualified engineers and other employees necessary to expand our capacity on a timely basis; o we may not be able to dedicate the capital necessary to effectively develop and expand our systems and operations; and o we may not be able to expand our customer service, billing and other related support systems. o If we cannot manage our operations effectively, our business and operating results will suffer. Additionally, any failure on our part to develop and maintain our wireless data services if we experience rapid growth could significantly adversely affect our reputation and brand name which could reduce demand for our services and adversely affect our business, financial condition and operating results. OUR BUSINESS PROSPECTS DEPEND IN PART ON OUR ABILITY TO MAINTAIN AND IMPROVE OUR SERVICES AS WELL AS TO DEVELOP NEW SERVICES. We believe that our business prospects depend in part on our ability to maintain and improve our current services and to develop new services. Our services will have to achieve market acceptance, maintain technological competitiveness and meet an expanding range of customer requirements. As a result of the complexities inherent in our service offerings, major new wireless data services and service enhancements require long development and testing periods. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new services and service enhancements. Additionally, our new services and service enhancements may not achieve market acceptance. IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL CHANGE, OUR BUSINESS COULD SUFFER. The wireless and data communications industries are characterized by rapidly changing technologies, industry standards, customer needs and competition, as well as by frequent new product and service introductions. Our services are integrated with wireless handheld devices and must also be compatible with the data networks of wireless carriers. In certain aspects of our business, our services must be integrated with the computer systems of corporate customers. We must respond to technological changes affecting both our customers and suppliers. We may not be successful in developing and marketing, on a timely and cost-effective basis, new services that respond to technological changes, evolving industry standards or changing customer requirements. Our success will depend, in part, on our ability to accomplish all of the following in a timely and cost-effective manner: o effectively use and integrate new technologies; o continue to develop our technical expertise; o enhance our wireless data, engineering and system design services; o develop applications for new wireless networks and services; o develop services that meet changing customer needs; o influence and respond to emerging industry standards and other changes; and o advertise and market our services. WE DEPEND UPON WIRELESS CARRIERS' NETWORKS. IF WE DO NOT HAVE CONTINUED ACCESS TO SUFFICIENT CAPACITY ON RELIABLE NETWORKS, OUR BUSINESS WILL SUFFER. Our success partly depends on our ability to buy sufficient capacity on or offer our services over the networks of wireless carriers such as Velocita (formerly Cingular Interactive), Motient and WebLink Wireless and on the reliability and security of their systems. We depend on these companies to provide uninterrupted and "bug free" service and would be adversely affected if they failed to provide the required capacity or needed level of service. In recent years, certain wireless carriers experienced financial difficulties and sought protection under the bankruptcy laws. We cannot assure you that these companies will emerge from bankruptcy or that others will not seek similar protection. Such bankruptcies may result in discontinued or interrupted service and fewer network alternatives. In addition, although we have some forward price protection in our existing agreements with certain carriers, we could be adversely affected if wireless carriers were to increase the prices of their services. Our existing agreements with the wireless carriers generally have one-to-three year terms. Some of these wireless carriers are, or could become, our competitors. WE DEPEND ON THIRD PARTIES FOR SALES OF CERTAIN OF OUR PRODUCTS AND SERVICES WHICH COULD RESULT IN VARIABLE AND UNPREDICTABLE REVENUES. We rely substantially on the efforts of others to sell many of our wireless data communications services. Should our relationships with distribution parties cease or be less successful than anticipated, our business results of operations, and financial conditions would be materially adversely affected. While we monitor the activities of our distributors and resellers, we cannot control how those who sell and market our products and services perform and we cannot be certain that their performance will be satisfactory. If the number of customers we obtain through these efforts is substantially lower than we expect for any reason, this would have a material adverse effect on our business, operating results and financial condition. WE DEPEND ON RETAINING KEY PERSONNEL. THE LOSS OF OUR KEY EMPLOYEES AND THE INABILITY TO RECRUIT TALENTED NEW PERSONNEL COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS. Due to the technical nature of our services and the dynamic market in which we compete, our performance depends on retaining and hiring certain key employees, including technically proficient personnel. Competitors and others have recruited our employees in recent years as we have found it necessary to implement cost controls that have reduced the attractiveness of employment with us. A major part of our compensation to our key employees is in the form of stock option grants. The prolonged depression in our stock price has made it difficult for us to retain our employees and recruit additional qualified personnel. WIRELESS DATA SYSTEMS FAILURES COULD HARM OUR BUSINESS BY INJURING OUR REPUTATION OR LEAD TO CLAIMS OF LIABILITY FOR DELAYED, IMPROPER OR UNSECURED TRANSMISSION OF DATA. A significant barrier to the growth of electronic commerce and wireless data services has been the need for secure and reliable transmission of confidential information. Our existing wireless data services are dependent on near immediate, continuous feeds from various sources. The ability of our subscribers to quickly access data requires timely and uninterrupted connections with our wireless network carriers. Any significant disruption from our backup landline feeds could result in delays in our subscribers' ability to receive such information. In addition, our systems could be disrupted by unauthorized access, computer viruses and other accidental or intentional actions. We may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by such breaches. If a third party were able to misappropriate our subscribers' personal or proprietary information or credit card information, we could be subject to claims, litigation or other potential liabilities that could materially adversely impact our business. There can be no assurance that our systems will operate appropriately if we experience a hardware or software failure. A failure in our systems could cause delays in transmitting data and, as a result, we may lose customers or face litigation that could materially adversely affect our business. AN INTERRUPTION IN THE SUPPLY OF PRODUCTS AND SERVICES THAT WE OBTAIN FROM THIRD PARTIES COULD CAUSE A DECLINE IN SALES OF OUR SERVICES. In designing, developing and supporting our wireless data services, we rely on wireless carriers, mobile device manufacturers, content providers and software providers. These suppliers may experience difficulty in supplying us products or services sufficient to meet our needs or they may terminate or fail to renew contracts for supplying us these products or services on terms we find acceptable. Any significant interruption in the supply of any of these products or services could cause a decline in sales of our services, unless and until we are able to replace the functionality provided by these products and services. We also depend on third parties to deliver and support reliable products, enhance their current products, develop new products on a timely and cost-effective basis and respond to emerging industry standards and other technological changes. WE MAY FACE INCREASED COMPETITION WHICH MAY NEGATIVELY IMPACT OUR PRICES FOR OUR SERVICES OR CAUSE US TO LOSE BUSINESS OPPORTUNITIES. The market for our services is becoming increasingly competitive. The widespread adoption of industry standards in the wireless data communications market may make it easier for new market entrants and existing competitors to introduce services that compete against ours. We developed our solutions using standard industry development tools. Many of our agreements with wireless carriers, wireless handheld device manufacturers and data providers are non-exclusive. Our competitors may use the same products and services in competition with us. With time and capital, it would be possible for competitors to replicate our services and offer similar services at a lower price. We expect that we will compete primarily on the basis of the functionality, breadth, quality and price of our services. Our current and potential competitors include: o wireless network carriers, such as Cingular AT&T Wireless, Verizon Wireless, Velocita, Sprint PCS, T-Mobile and Nextel Communications, Inc.; o wireless software application developers such as IBM, Microsoft and Sybase and Many of our existing and potential competitors have substantially greater financial, technical, marketing and distribution resources than we do. Additionally, many of these companies have greater name recognition and more established relationships with our target customers. Furthermore, these competitors may be able to adopt more aggressive pricing policies and offer customers more attractive terms than we can. In addition, we have established strategic relationships with many of our potential competitors. In the event such companies decide to compete directly with us, such relationships would likely be terminated, which could have a material adverse effect on our business and reduce our market share or force us to lower prices to unprofitable levels. OUR INTELLECTUAL PROPERTY RIGHTS MAY NOT BE ADEQUATELY PROTECTED UNDER THE CURRENT STATE OF THE LAW. We rely primarily on trade secret laws, copyright law, trademark law, unfair competition law and confidentiality agreements to protect our intellectual property. To the extent that our technology is not adequately protected by intellectual property law, other companies could develop and market similar products or services which could materially adversely affect our business. WE MAY BE SUED BY THIRD PARTIES FOR INFRINGEMENT OF THEIR PROPRIETARY RIGHTS AND WE MAY INCUR DEFENSE COSTS AND POSSIBLY ROYALTY OBLIGATIONS OR LOSE THE RIGHT TO USE TECHNOLOGY IMPORTANT TO OUR BUSINESS. The telecommunications and software industries are characterized by protection and vigorous enforcement of applicable intellectual property rights. As the number of participants in our market increases, the possibility of an intellectual property claim against us increases. Any intellectual property claims, with or without merit, could be time consuming and expensive to litigate or settle and could divert management attention from administering our business. A third party asserting infringement claims against us or our customers with respect to our current or future products may materially adversely affect us by, for example, causing us to enter into costly royalty arrangements or forcing us to incur settlement or litigation costs. WE MAY BE SUBJECT TO LIABILITY FOR TRANSMITTING CERTAIN INFORMATION, AND OUR INSURANCE COVERAGE MAY BE INADEQUATE TO PROTECT US FROM THIS LIABILITY. We may be subject to claims relating to information transmitted over systems we develop or operate. These claims could take the form of lawsuits for defamation, negligence, copyright or trademark infringement or other actions based on the nature and content of the materials. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify us for all liability that may be imposed. OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND, AS A RESULT, PERIOD-TO-PERIOD COMPARISONS OF OUR RESULTS OF OPERATIONS ARE NOT NECESSARILY MEANINGFUL. Our quarterly operating results may fluctuate significantly in the future as a result of a variety of factors. These factors include: o the demand for and market acceptance of our services; o downward price adjustments by our competitors on services they offer that are similar to ours; o changes in the mix of services sold by our competitors; o technical difficulties or network downtime affecting wireless communications generally; o the ability to meet any increased technological demands of our customers; and o economic conditions specific to our industry. Therefore, our operating results for any particular quarter may differ materially from our expectations or those of security analysts and may not be indicative of future operating results. The failure to meet expectations may cause the price of our common stock to decline. IF WE FAIL TO MANAGE GROWTH EFFECTIVELY, OUR BUSINESS COULD BE DISRUPTED WHICH COULD HARM OUR OPERATING RESULTS. If we are successful in implementing our new business plan, we may experience growth in our business. In that event, it will be necessary for us to expand our workforce and to train, motivate and manage additional employees as the need for additional personnel arises. Our personnel, systems, procedures and controls may not be adequate to support our future operations. Any failure to effectively manage future growth could have a material adverse effect on our business. WE ARE VULNERABLE TO CIRCUMSTANCES OUTSIDE OF OUR CONTROL WHICH COULD SERIOUSLY DISRUPT OUR BUSINESS. Our software, as well as any ancillary hardware, is vulnerable to damage or interruption from: o fire, flood, and other natural disasters; o power loss, computer systems failures, Internet and telecommunications or data network failure, operator negligence, improper operation by or supervision of employees, physical and electronic loss of data or security breaches, misappropriation, and similar events; and o computer viruses. Any disruption in the operation of our software, the loss of employees knowledgeable about such software, or our failure to continue to effectively modify and upgrade such software could interrupt our operations or interfere with our ability to provide service to our customers, which could result in reduced sales and affect our operations and financial performance. RISKS PARTICULAR TO OUR INDUSTRY THE MARKET FOR OUR SERVICES IS HIGHLY UNCERTAIN. The market for wireless data services has grown rapidly in recent years and the number and variety of competitive services is significant. Current barriers to market acceptance of these services include cost, reliability, functionality and ease of use. Based on these factors and competitive aspects of the wireless data market, we cannot be certain of initial or continuing market acceptance of our services. If the market for our services does not grow or grows slower than we currently anticipate, our business, financial condition and operating results could be materially adversely affected. NEW LAWS AND REGULATIONS THAT IMPACT OUR INDUSTRY COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS. We are not currently subject to direct regulation by the Federal Communications Commission or any other governmental agency, other than regulations applicable to businesses in general. However, in the future, we may become subject to regulation by the FCC or another regulatory agency. In addition, the wireless carriers who supply us airtime are subject to regulation by the FCC and regulations that affect them could materially adversely affect our business. Our business could suffer significantly depending on the extent to which our activities or those of our customers or suppliers are regulated. RISKS PARTICULAR TO STOCK PRICE OUR STOCK PRICE, LIKE THAT OF MANY TECHNOLOGY COMPANIES, HAS BEEN AND MAY CONTINUE TO BE VOLATILE. We expect that the market price of our common stock will fluctuate as a result of variations in our quarterly operating results and other factors beyond our control. These fluctuations may be exaggerated if the trading volume of our common stock is low. In addition, due to the technology-intensive and emerging nature of our business, the market price of our common stock may rise and fall in response to a variety of factors, including: o announcements of technological or competitive developments; o acquisitions or strategic alliances by us or our competitors; o the gain or loss of a significant customer or order; o changes in estimates of our financial performance or changes in recommendations by securities analysts regarding us or our industry; or o general market or economic conditions. This risk may be heightened because our industry is new and evolving, characterized by rapid technological change and susceptible to the introduction of new competing technologies or competitors. In addition, equity securities of many technology companies have experienced significant price and volume fluctuations. These price and volume fluctuations often have been unrelated to the operating performance of the affected companies. Volatility in the market price of our common stock could result in securities class action litigation. This type of litigation, regardless of the outcome, could result in substantial costs and a diversion of management's attention and resources. WE HAVE ISSUED A SUBSTANTIAL NUMBER OF WARRANTS THAT ENABLE THEIR HOLDERS TO PURCHASE OUR COMMON STOCK AT A PRICE OF $12.00 PER SHARE, WHICH COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. As a result of our 2004 private placement, we issued warrants to purchase 144,731 shares of our common stock at a price of $12.00 per share (splits-adjusted). The significant number of shares that may be issuable at a price which could be less than the current market price of our common stock could adversely affect the market price of our common stock The issuance in the future of additional authorized shares may have the effect of diluting the earnings per share and book value per share, as well as the stock ownership and voting rights, of the currently outstanding shares of our common stock. In addition, the existence of authorized, but unissued, shares of our common stock may be construed as having an anti-takeover effect. We could, subject to the board's fiduciary duties and applicable law, issue such authorized shares to purchasers who might oppose a hostile takeover bid or any efforts to amend or repeal certain provisions of our restated certificate of incorporation or bylaws. Such a use of these additional authorized shares could render more difficult, or discourage, an attempt to acquire control of us through a transaction opposed by the board. WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION AND COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK. Provisions of our certificate of incorporation and bylaws and provisions of Delaware law could delay or prevent an acquisition or change of control of GoAmerica or otherwise adversely affect the price of our common stock. For example, our certificate of incorporation authorizes undesignated preferred stock which our board of directors can designate and issue without further action by our stockholders, establishes a classified board of directors, eliminates the rights of stockholders to call a special meeting of stockholders, eliminates the ability of stockholders to take action by written consent, and requires stockholders to comply with advance notice requirements before raising a matter at a stockholders' meeting. As a Delaware corporation, we are also subject to the Delaware anti-takeover statute contained in Section 203 of the Delaware General Corporation Law. WE DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK. We have never paid or declared any cash dividends on our common stock or other securities and intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them. -----END PRIVACY-ENHANCED MESSAGE-----