-----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, AHgvPArxN/Iau6H+GUlSoDt2LTsyMDnPDJCGZfjj1buxYxwJxur1gs/gv9fI+mhi N/lm8rd5iFuTMWGzD7EU4w== 0000950116-97-001572.txt : 19970822 0000950116-97-001572.hdr.sgml : 19970822 ACCESSION NUMBER: 0000950116-97-001572 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19970821 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRONTLINE COMMUNICATION CORP CENTRAL INDEX KEY: 0001040850 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133950283 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-34115 FILM NUMBER: 97667879 BUSINESS ADDRESS: STREET 1: ONE BLUE HILL PLAZA 6C FLOOR STREET 2: P O BOX 1548 CITY: PEARL RIVER STATE: NY ZIP: 10965 BUSINESS PHONE: 9146238553 MAIL ADDRESS: STREET 1: ONE BLUE HILL PLAZA 6C FLOOR STREET 2: P O BOX 1548 CITY: PEARL RIVER STATE: NY ZIP: 10965 FORMER COMPANY: FORMER CONFORMED NAME: EASY STREET ONLINE INC DATE OF NAME CHANGE: 19970820 SB-2 1 As filed with the Securities and Exchange Commission on August 21, 1997 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------- Form SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- FRONTLINE COMMUNICATIONS CORPORATION (Exact name of small business issuer as specified in its charter)
Delaware 7379 13-3950283 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification No.) Identification No.)
One Blue Hill Plaza, 6th Floor P.O. Box 1548 Pearl River, New York 10965 (914) 623-8553 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------------- Stephen J. Cole-Hatchard, Chairman Frontline Communications Corporation One Blue Hill Plaza, 6th Floor P.O. Box 1548 Pearl River, New York 10965 (914) 623-8553 (Name, address and telephone number of agent for service) ---------------- Copies of all communications to: ROBERT J. MITTMAN, ESQ. ROBERT H. COHEN, ESQ. Tenzer Greenblatt LLP Morrison Cohen Singer The Chrysler Building & Weinstein, LLP 405 Lexington Avenue 750 Lexington Avenue New York, New York 10174 New York, New York 10022 Telephone: (212) 885-5000 Telephone: (212) 735-8680 Facsimile: (212) 885-5001 Facsimile: (212) 735-8708 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Secur-ities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / ------------ CALCULATION OF REGISTRATION FEE
===================================================================================================================== Proposed Proposed Maximum Offering Maximum Amount of Title of Each Class of Amount to Price Per Aggregate Offering Registration Securities to be Registered be Registered Security (1) Price (1) Fee - --------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share ........................... 1,150,000(2) $5.00 $5,750,000.00 $1,742.42 - --------------------------------------------------------------------------------------------------------------------- Warrants, each to purchase one share of Common Stock ............ 575,000(2) $ .10 $ 57,500.00 $ 17.42 - --------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share, issuable upon exercise of the Warrants (3) .................. 575,000 $5.50 $3,162,500.00 $ 958.33 - --------------------------------------------------------------------------------------------------------------------- Underwriter's Warrants, each to purchase one share of Common Stock (4) ........................ 100,000 $.001 $ 100.00 (5) - --------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share, issuable upon exercise of the Underwriter's Warrants (3) . 100,000 $5.50 $ 550,000.00 $ 166.66 - --------------------------------------------------------------------------------------------------------------------- Underwriter's Warrants, each to purchase one warrant (4) ......... 50,000 $.001 $ 50.00 (5) - --------------------------------------------------------------------------------------------------------------------- Warrants issuable upon exercise of the Underwriter's Warrants ...... 50,000 $ .11 $ 5,500.00 $ 1.66 - --------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share, issuable upon exercise of the warrants underlying the Underwriter's Warrants (3) ...... 50,000 $5.50 $ 275,000.00 $ 83.33 - --------------------------------------------------------------------------------------------------------------------- Total Registration Fee ........................................................................ $2,969.82 =====================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee. (2) Assumes the Underwriter's over-allotment option to purchase up to 150,000 additional shares of Common Stock and/or 75,000 Warrants is exercised in full. (3) Pursuant to Rule 416, there are also being registered such indeterminable additional shares of Common Stock as may become issuable pursuant to anti-dilution provisions contained in the Warrants, the Underwriter's Warrants and the warrants underlying the Underwriter's Warrants. (4) Represents warrants to be issued by the Company to the Underwriter at the time of delivery and acceptance of the securities to be sold by the Company to the public hereunder. (5) None, pursuant to Rule 457(g). The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ FRONTLINE COMMUNICATIONS CORPORATION Cross Reference Sheet Pursuant to Rule 404 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus ......... Forepart of the Registration Statement and Outside Front Cover of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus ................................. Inside Front and Outside Back Cover Pages of Prospectus 3. Summary of Information and Risk Factors ......... Prospectus Summary; Risk Factors 4. Use of Proceeds ................................. Use of Proceeds 5. Determination of Offering Price ............... Outside Front Cover Page of Prospectus; Underwriting 6. Dilution ....................................... Dilution 7. Selling Security Holders ........................ Not Applicable 8. Plan of Distribution ........................... Outside Front Cover Page of Prospectus; Underwriting 9. Legal Proceedings .............................. Business 10. Directors, Executive Officers, Promoters and Control Persons ........................... Management 11. Security Ownership of Certain Beneficial Owners and Management ........................... Principal Stockholders 12. Description of Securities ..................... Outside and Inside Front Cover Pages of Prospectus; Prospectus Summary; Capitalization; Description of Securities 13. Interest of Named Experts and Counsel ......... Not Applicable 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities .. Not Applicable 15. Organization Within Last Five Years ............ Certain Transactions 16. Description of Business ........................ Business 17. Plan of Operation .............................. Management's Discussion and Analysis of Financial Condition and Results of Operations 18. Properties .................................... Business 19. Certain Relationships and Related Transactions .................................... Certain Transactions 20. Market for Common Equity and Related Stockholder Matters ........................... Risk Factors; Management 21. Executive Compensation ........................ Management 22. Financial Statements ........................... Financial Statements 23. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure .................................... Not Applicable
Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. PRELIMINARY PROSPECTUS DATED AUGUST 21, 1997 SUBJECT TO COMPLETION FRONTLINE COMMUNICATIONS CORPORATION 1,000,000 Shares of Common Stock and Redeemable Warrants to Purchase 500,000 Shares of Common Stock The Company is offering 1,000,000 shares of Common Stock (the "Common Stock") and redeemable warrants to purchase 500,000 shares of Common Stock (the "Warrants"). The Common Stock and Warrants may be purchased separately and will be separately transferrable immediately upon issuance. Each Warrant entitles the registered holder thereof to purchase one share of Common Stock at a price of $5.50, subject to adjustment in certain circumstances, at any time commencing , 1998 through and including , 2002. The Warrants are redeemable by the Company at any time commencing , 1998, upon notice of not less than 30 days, at a price of $.10 per Warrant, provided that (i) the closing bid quotation of the Common Stock on all 20 trading days ending on the third day prior to the day on which the Company gives notice (the "Call Date") has been at least 150% (currently $8.25, subject to adjustment) of the then effective exercise price of the Warrants and (ii) the Company obtains the written approval of the Underwriter to such redemption prior to the Call Date. See "Description of Securities." Prior to this offering, there has been no public market for the Common Stock or Warrants and there can be no assurance that any such market will develop. It is anticipated that the Common Stock and Warrants will be quoted on the Nasdaq SmallCap Market ("Nasdaq") under the symbols "FCCN" and "FCCNW," respectively. For a discussion of the factors considered in determining the offering prices of the Common Stock and Warrants, see "Underwriting." ------------------ THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE SUBSTANTIAL RISKS AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" COMMENCING ON PAGE 6 AND "DILUTION." ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================ Price Underwriting Proceeds to Discounts and to Public Commissions(1) Company (2) - -------------------------------------------------------------------------------- Per Share ......... $5.00 $.50 $4.50 - -------------------------------------------------------------------------------- Per Warrant ...... $.10 $.01 $.09 - -------------------------------------------------------------------------------- Total (3) ......... $5,050,000 $505,000 $4,545,000 ================================================================================ (1) The Company has agreed to pay to the Underwriter a 3% nonaccountable expense allowance, to sell to the Underwriter warrants (the "Underwriter's Warrants") to purchase up to 100,000 shares of Common Stock and/or 50,000 warrants and to retain the Underwriter as a financial consultant. The Company has also agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting expenses, including the nonaccountable expense allowance in the amount of $151,500 ($174,225 if the Underwriter's over-allotment option is exercised in full), estimated at $651,500, payable by the Company. (3) The Company has granted to the Underwriter an option, exercisable within 45 days from the date of this Prospectus, to purchase up to an additional 150,000 shares of Common Stock and/or 75,000 additional Warrants on the same terms set forth above, solely for the purpose of covering over-allotments, if any. If the Underwriter's over-allotment option is exercised in full, the total price to public, underwriting discounts and commissions and proceeds to Company will be $5,807,500, $563,075 and $5,226,750, respectively. See "Underwriting." The shares of Common Stock and Warrants are being offered, subject to prior sale, when, as and if delivered to and accepted by the Underwriter and subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriter reserves the right to withdraw, cancel or modify the offering and to reject any order in whole or in part. It is expected that delivery of certificates representing the Common Stock and Warrants will be made against payment therefor at the offices of the Underwriter, 100 Quentin Roosevelt Blvd., Garden City, New York, on or about , 1997. ------------------ Rockefeller Securities Group, Inc. The date of this Prospectus is , 1997 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS, ON NASDAQ, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE, WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICES OF THE COMMON STOCK AND WARRANTS. SPECIFICALLY, THE UNDERWRITER MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK AND WARRANTS IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. Unless otherwise indicated, all information in this Prospectus gives effect to a reorganization in May 1997 (the "Reorganization") pursuant to which (i) each of Hobbes & Co., LLC ("Hobbes"), INET Communications Company, LLC ("INET") and Sara Girl & Co., LLC ("Sara Girl") (collectively, the "Predecessor Companies") transferred all of their assets, subject to all of their liabilities, to the Company, (ii) Messrs. Nicko Feinberg and Stephen J. Cole-Hatchard, officers, directors and principal stockholders of the Company, and Mr. Michael Char, a principal stockholder and former officer and director of the Company, exchanged their respective interests in the Predecessor Companies for promissory notes in the aggregate principal amount of $372,137 and (iii) each of the Predecessor Companies dissolved, and assumes no exercise of the Underwriter's over-allotment option to purchase an additional 150,000 shares of Common Stock and/or 75,000 additional warrants. See "Certain Transactions" and "Underwriting." The Company Frontline Communications Corporation (the "Company") is an Internet service provider that offers "dial-up" Internet access primarily to individual subscribers. The Company provides subscribers with direct access to a wide range of Internet applications and resources, including electronic mail, world wide web sites and regional and local information and data services. The Company believes that its low subscriber to modem ratio, its technical and customer support and ancillary services position the Company to capitalize on the emerging and expanding markets for Internet services. In recent years, the Internet has experienced a rapid increase in the number of users. Industry sources estimate that the number of online households in the United States was approximately 9.6 million at the end of 1995, 13.6 million at the end of 1996, and project that the number of online households will exceed 35.2 million by the year 2000. The Company believes that increasing penetration of computers and modems into households and businesses, the growth of the informational, entertainment and commercial resources of the Internet and the increasing availability of user-friendly navigational tools that enable easier access to the Internet's resources will continue to contribute favorably to the growth of the Internet. The Company's telecommunications network is currently comprised of leased high-speed data lines and ten points-of-presence ("POPs") serving suburban areas in Rockland, Orange, Dutchess, Sullivan, Putnam, Ulster and Westchester counties in New York and Bergen county in New Jersey. These POPs permit subscribers in these areas to access the Internet through a local telephone call. The Company currently supports 14.4, 28.8 and 36.6 Kbps modems at each of its POPs and has X2 56K and ISDN technologies at most of its POPs. The Company has approximately 1,150 subscribers as of the date of this Prospectus. Pursuant to its currently proposed plan of operation, the Company will seek to establish up to twenty-four additional POPs during the twelve months following the consummation of this offering. The Company's objective is to expand its network of POPs rapidly into selected geographic markets. The Company currently anticipates that it will initially seek to achieve significant penetration in suburban markets in the greater New York metropolitan area, including Morris and Passaic counties in New Jersey, and Fairfield and New Haven counties in Connecticut. The Company intends to target suburban markets with attractive demographic characteristics similar to the Company's existing POPs. To achieve its goal, the Company will seek to cluster POPs for operational efficiency and to share certain marketing, financial, customer service and management personnel. The Company will also seek to capitalize on demand for Internet access by offering subscriber service which combines the capabilities typically provided by large companies with the flexibility and responsiveness of a small Internet service provider. Since its inception, the Company has engaged in only limited operations and has not yet generated meaningful revenues. The Company requires the proceeds of this offering to fully implement its proposed 3 plan of operation. The Company expects to incur substantial up-front expenses in connection with establishing additional POPs, engaging in marketing activities and hiring executive, technical, marketing and other personnel, which will result in losses for the foreseeable future. There can be no assurance the Company will be able to successfully implement its business plans. See "Risk Factors." The Company was incorporated under the laws of the State of Delaware in February 1997 under the name Easy Street Online, Inc. as successor to the business of the Predecessor Companies, limited liability companies organized in May and August 1995 and July 1996 to own and operate POPs. Unless otherwise indicated, all references in this Prospectus to the Company include the Predecessor Companies. See "Certain Transactions." The Company's executive offices are located at One Blue Hill Plaza, 6th Floor, P.O. Box 1548, Pearl River, New York 10965, and its telephone number is (914) 623-8553. The Company's home page is located on the World Wide Web at www.fcc.net. The Offering Securities offered ...... 1,000,000 shares of Common Stock and Warrants to purchase 500,000 shares of Common Stock. See "Description of Securities." Common Stock to be outstanding after the offering(1)... 2,660,000 shares Warrants Number to be outstanding after the offering(2) 500,000 Warrants Exercise terms ......... Exercisable for a period of four years commencing , 1998, each to purchase one share of Common Stock at a price of $5.50, subject to adjustment in certain circumstances. See "Description of Securities -- Redeemable Warrants." Expiration date .... , 2002. Redemption ............ Redeemable by the Company at any time commencing , 1998, upon notice of not less than 30 days, at a price of $.10 per Warrant, provided that (i) the closing bid quotation of the Common Stock on all 20 trading days ending on the third day prior to the day on which the Company gives notice has been at least 150% (currently $8.25, subject to adjustment) of the then effective exercise price of the Warrants and (ii) the Company obtains the written consent of the Underwriter to such redemption prior to the Call Date. The Warrants will be exercisable until the close of business on the date fixed for redemption. See "Description of Securities -- Redeemable Warrants." Use of Proceeds ...... The Company intends to use the net proceeds of this offering for the acquisition of subscriber bases; the establishment of additional POPs; marketing and advertising; repayment of indebtedness; and the balance for working capital and general corporate purposes. See "Use of Proceeds." Risk Factors ......... The securities offered hereby are highly speculative and involve substantial risks and immediate substantial dilution and should not be purchased by investors who cannot afford the loss of their entire investment. See "Risk Factors" and "Dilution." Proposed NASDAQ symbols ............... Common Stock -- FCCN Warrants -- FCCNW 4 - ------------ (1) Does not include (i) 500,000 shares of Common Stock reserved for issuance upon exercise of the Warrants; (ii) an aggregate of 150,000 shares of Common Stock reserved for issuance upon exercise of the Underwriter's Warrants and the warrants included therein; (iii) 260,000 shares of Common Stock reserved for issuance upon exercise of outstanding options under the Company's 1997 Stock Option Plan (the "Plan"); and (iv) 240,000 shares of Common Stock reserved for issuance upon exercise of options available for future grant under the Plan. See "Management -- 1997 Stock Option Plan," and "Underwriting." (2) Does not include any Warrants referred to in clause (ii) of Note 1 above. Summary Financial Information The summary financial information set forth below is derived from and should be read in conjunction with the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Statement of Operations Data:
Five Months ended May 31, Year Ended ---------------------------------- December 31, 1996 1996 1997 ------------------- ------------ ------------------- Revenues ..................... $ 98,699 $ 16,234 $ 110,566 Net loss ..................... (54,206) (25,551) (251,495)(1) Net loss per share ............ (.03) (.01) (.14)(1) Weighted average number of shares outstanding .................. 1,816,000 1,816,000 1,816,000
Balance Sheet Data: May 31, 1997 ------------------------------- Actual As Adjusted(2) ------------- --------------- Working capital (deficit) ............ $ (82,954) $3,810,546 Total assets ........................ 485,538 3,978,901 Total liabilities .................. 492,564 120,427 Accumulated deficit .................. (313,626) (313,626) Stockholders' equity (deficit) ...... (7,026) 3,886,474 - ------------ (1) Includes non-recurring compensation expense of $205,000. See Combined Financial Statements. (2) Gives effect to the sale of the Common Stock and Warrants offered hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 5 RISK FACTORS The securities offered hereby are highly speculative and involve substantial risks. Prospective investors should carefully consider the following risk factors before making an investment decision. Recent Organization; Early Stage Company. The Company was organized in February 1997 as successor to the business of the Predecessor Companies and is in an early stage of development. Accordingly, the Company has a limited operating history upon which an evaluation of its performance and prospects can be made. The Company is subject to all of the risks, uncertainties, expenses, delays, problems and difficulties frequently encountered in the establishment of a new business in a rapidly evolving industry characterized by intense competition and an increasing and substantial number of new market entrants and new Internet products and services. See "Business." Proposed Plan of Operation. The Company's proposed plan of operation and prospects will be largely dependent upon the Company's ability to successfully establish and equip additional POPs on a timely and cost effective basis; hire and retain skilled management, technical, marketing and other personnel; and attract and retain significant numbers of subscribers. The Company has limited experience in commercializing new Internet products and services and there is limited information available concerning the potential performance or market acceptance of the Company's POPs. There can be no assurance that the Company will be able to successfully implement its business plan or that unanticipated expenses, problems or technical difficulties will not occur which would result in material delays in its implementation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Limited Revenues; Losses. The Company has not yet generated any meaningful revenues, and will not generate any meaningful revenues until after the Company establishes additional POPs and attracts and retains a significant number of subscribers, which the Company does not anticipate will occur until several months following the consummation of this offering, if at all. For the period from May 1, 1995 (inception) to May 31, 1997, the Company incurred a cumulative net loss of approximately $313,626. Since May 31, 1997, the Company has incurred losses and anticipates that it will continue to incur significant losses until, at the earliest, the Company generates sufficient revenues to offset the substantial up-front expenditures and operating costs associated with establishing additional POPs and attracting and retaining a significant subscriber base. There can be no assurance that the Company will be able to attract and retain a sufficient number of subscribers to generate meaningful revenues or achieve profitable operations. See Combined Financial Statements. Dependence on Offering Proceeds; Possible Need for Additional Financing. The capital requirements relating to implementation of the Company's business plan will be significant. The Company is dependent on the proceeds of this offering or other financing in order to fully implement its proposed plan of operation. Based on currently proposed plans and assumptions relating to the implementation of its business plans (including the timetable of, and costs associated with, establishing additional POPs), the Company believes that the proceeds of this offering will be sufficient to satisfy its contemplated cash requirements for at least twelve months following the consummation of this offering. In the event that the Company's plans change, its assumptions change or prove to be inaccurate or if the proceeds of this offering prove to be insufficient to implement its business plans, the Company would be required to seek additional financing sooner than currently anticipated. There can be no assurance that the proceeds in this offering will be sufficient to permit the Company to implement its proposed business plan or that any assumptions relating to the implementation of such plan will prove to be accurate. To the extent that the proceeds of this offering are not sufficient to enable the Company to generate meaningful revenues or achieve profitable operations, the inability to obtain additional financing will have a material adverse effect on the Company. There can be no assurance that any such financing will be available to the Company on commercially reasonable terms, or at all. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operation." Limited Number of POPs; Geographic Concentration; Uncertainty of Network Expansion. There are currently ten POPs in operation, only three of which have been in operation for more than one year, and all of which are in the greater New York metropolitan area. Consequently, the results achieved to date by the Company's POPs may not be indicative of the prospects or market acceptance of a larger number of POPs, particularly in 6 wider and more geographically dispersed areas with varied demographic characteristics. The process of identifying suitable sites and establishing additional POPs is lengthy and network installation typically requires six to eight weeks to complete from the time a lease for a new POP is entered into. There can be no assurance that the Company will be successful in identifying suitable sites or in establishing additional POPs. Unforeseen events, including failure to obtain and install telephone lines and network equipment on a timely and cost-effective basis, could materially delay the Company's plans in target markets. The Company has relatively limited experience in establishing POPs and has limited financial and other resources. There can be no assurance that the Company will be able, for financial or other reasons, to successfully expand its network or that any expansion will not be subject to unforeseen delays and costs. See "Business -- Network Infrastructure." Dependence on Sole Suppliers and Manufacturers; Possible Service Interruptions and Equipment Failures. The Company is currently dependent on a sole supplier to provide Internet access via leased telecommunications lines on a cost-effective and continuous basis. The Company has not entered into an interconnect agreement with such supplier. Although the Company believes that it currently has sufficient access to telecommunications networks on favorable terms and believes that its relationship with such supplier is satisfactory, any increase in rates charged by such supplier would materially adversely affect the Company's operating margins. Failure to obtain continuing access to such networks would also have a material adverse effect on the Company, including possibly requiring the Company to significantly curtail or cease its operations. The Company also is dependent on third-party manufacturers of hardware components. Certain components used by the Company in providing its networking services are generally acquired from only one source, including high performance routers manufactured by Cisco Systems, Inc. and remote access servers manufactured by U.S. Robotics, Inc. The Company has not entered into agreements with any equipment manufacturer and purchases equipment components pursuant to purchase orders placed from time to time in the ordinary course of business. Although the Company believes that network equipment is currently available from numerous sources, failure by manufacturers to deliver quality products on a timely basis or the inability to develop alternative sources if and as required, could result in delays which could materially adversely affect the Company's business and limit the Company's ability to expand its operations. In addition, the Company's operations require that its POPs and its third-party telecommunications networks operate on a continuous basis. It is possible that the Company's POPs and third-party telecommunications networks may from time to time experience service interruptions or equipment failures. Service interruptions and equipment failures resulting in material delays would adversely affect subscriber confidence as well as the Company's business operations and reputation. See "Business -- Internet Access Providers and Suppliers." New Industry; Uncertainty of Market Acceptance; Limited Marketing, Service and Support Capabilities. The Internet connectivity services industry is characterized by a limited operating history and a high rate of business failures. Because the market is relatively new and current and future competitors are likely to introduce competing Internet connectivity and/or online services and products, it is difficult to predict the rate at which the market will grow or at which new or increased competition will result in market saturation. The novelty of the market for Internet access services may adversely affect the Company's ability to retain new subscribers who may be unfamiliar with the Internet and more likely to discontinue the Company's services after an initial trial period. Any significant decline in demand for Internet connectivity services or in the computer industry generally or in particular target markets would have a material adverse effect on the Company's business and prospects. The Company's success will be largely dependent upon the Company's ability to continually attract and retain additional subscribers and replace terminating subscribers. To date, the Company has relied entirely on the efforts of its executive officers for the marketing of its services. Full scale marketing of the Company's services to individuals may require reliance on third party distribution channels, such as retail stores, catalogs, book publishers and computer hardware and software vendors. There can be no assurance that the Company will be able to successfully develop or maintain relationships with these parties. The successful implementation of the Company's business plans will also require the Company to expand customer service and support capabilities necessary to satisfy customer requirements. The Company currently has limited marketing experience and limited marketing, service, customer support and other resources. There can be no assurance that the Company will be able to successfully expand its marketing activities or customer service or support capabilities, or that the Company's efforts will result in initial or continued market acceptance for the Company's Internet access services. See "Business -- Marketing and Sales." 7 Subscriber Attrition. The Company's operating results will be significantly affected by subscriber attrition rates. Subscribers may discontinue service without penalty at any time, and there can be no assurance that subscribers will continue to purchase services from the Company or that the Company will not be subject to significant subscriber attrition. The Company has historically experienced a subscriber attrition rate of less than 20%. Significant levels of subscriber attrition in the future would have a material adverse effect on the Company's operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Competition. The market for Internet access services is highly competitive. There are no substantial barriers to entry, and the Company expects that competition will intensify in the future. The Company believes that its ability to compete successfully will be significantly affected by numerous factors, including price, ease of use, reliability, customer support, geographic coverage and industry and general economic trends (particularly unfavorable economic conditions adversely affecting consumer discretionary spending). The Company's competitors include many large companies that have substantially greater market presence and financial, technical, marketing and other resources than the Company, including (i) international, national and regional commercial Internet service providers, such as Performance Systems International, Inc., Bolt Beranek & Newman, Inc. and UUNET Technologies, Inc.; (ii) established on-line services companies that currently offer Internet access, such as America Online, Inc., CompuServe Incorporated, Prodigy Services Company, Earthlink and Delphi Internet Services; (iii) computer hardware and software and other technology companies, such as IBM and Microsoft Corp.; (iv) national long distance carriers, such as AT&T Corp., MCI Communications Corp. and Sprint Corp.; (v) regional telephone companies; and (vi) cable operators, such as Tele-Communications, Inc. New competitors, including large computer hardware and software, media, cable and telecommunications companies, have increased their focus on the Internet access market. Increased competition has resulted and could continue to result in significant price competition, which in turn could result in significant price reductions. In addition, increased competition for new subscribers could result in increased sales and marketing expenses and related subscriber acquisition costs, which could materially adversely affect the Company's potential profitability. There can be no assurance that the Company will be able to offset the effects of any such competition or resulting price reductions through an increase in the number of its subscribers, higher revenue from enhanced services or cost reductions or that the Company will have the financial resources, technical expertise or marketing and support capabilities to compete successfully. See "Business -- Competition." Capacity Constraints; System Failure and Security Risks. The Company's operations will depend upon the capacity, reliability and security of its network infrastructure. The Company currently has limited network capacity and will be required to continually expand its network infrastructure to accommodate significant numbers of users and increasing amounts of information they may wish to access. Expansion of the Company's network infrastructure will require significant financial, operational and management resources. There can be no assurance that the Company will be able to expand its network infrastructure to meet potential demand on a timely basis, at a commercially reasonable cost, or at all. Failure by the Company to expand its network infrastructure on a timely basis would have a material adverse effect on the Company. The Company's operations will also be dependent on the Company's ability to protect its computer equipment against damage from fire, power loss, telecommunications failures and similar events. The Company's network infrastructure will be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with the Company's computer systems. Computer viruses or problems caused by third parties could lead to material interruptions, delays or cessation in service to consumers. Inappropriate use of the Internet by third parties could also potentially jeopardize the security of confidential information stored in the computer systems of consumers. Security and privacy concerns of consumers may limit the Company's ability to develop a significant subscriber base. See "Business -- Network Infrastructure." Technological Change. The market for Internet access is characterized by rapidly changing technology, evolving industry standards, emerging competition and frequent new software and service introductions. There can be no assurance that the Company can successfully identify new product and service opportunities as they arise and develop and bring new products and services to market in a timely manner or that software, services or technologies developed by others will not render the Company's services or technologies noncompetitive, obsolete or less marketable. The Company currently does not have any proprietary applications software. The Company's business is also subject to fundamental changes in the way Internet access services are delivered. 8 Currently, Internet services are accessed primarily by computers and are delivered by telephone lines. To the extent that the Internet becomes increasingly accessible by screen-based telephones, television or other consumer electronic devices or customer requirements change the way Internet access is provided, the Company may be required to acquire or develop new technology or modify its existing technology to accommodate these developments. Technological advances include compression, full-motion video, and integration of video, voice, data and graphics. The pursuit of these technological advances may require substantial time and expense, and there can be no assurance that the Company will succeed in adapting its Internet service business to alternate access devices and conduits. See "Business -- Network Infrastructure." Risks Associated with Expansion and Acquisitions. The Company intends to use the proceeds of this offering to expand its operations through internal growth and acquisition. The Company plans to establish additional POPs, attract significant numbers of additional subscribers, expand its work force and expand its presence in selected geographic markets. To successfully manage growth, the Company will be required to continue to implement and improve its operating systems, train and manage its employees, monitor operations, control costs and maintain effective quality controls. The Company has limited experience in effectuating rapid expansion and in managing operations which are geographically dispersed, and there can be no assurance that the Company will be able to successfully expand its operations or manage growth. The Company intends to pursue opportunities by making selective acquisitions of subscriber bases. While the Company from time to time evaluates possible acquisition opportunities, as of the date of this Prospectus, the Company has no plans, agreements, commitments, understandings or arrangements with respect to any such acquisition. There can be no assurance that the Company will ultimately effect any acquisition, that it will be able to successfully integrate into its operations any subscriber base which it may acquire or that the Company will not incur significant amortization expense associated with attrition of newly acquired subscriber bases. The Company may determine, depending upon the opportunities available to it, to seek additional debt or equity financing to fund the cost of acquiring subscriber bases. To the extent that the Company finances an acquisition with equity securities, any such issuance of equity securities would result in dilution to the interests of the Company's stockholders. Additionally, to the extent that the Company incurs indebtedness or issues debt securities in connection with any acquisition, the Company will be subject to risks associated with incurring substantial indebtedness, including the risks that interest rates may fluctuate and cash flow may be insufficient to pay principal and interest on any such indebtedness. See "Use of Proceeds" and "Business -- Company Strategy." Potential Litigation. In June 1997, Michael Char, a founder, principal stockholder and former officer and director of the Company, indicated that he disagreed with other members of management with respect to various business matters. The Company has been unsuccessful in resolving such disagreements or in negotiating a settlement with Mr. Char and, after a prolonged absence, in August 1997, the Company removed Mr. Char as a director and terminated his employment. While the Company does not believe that Mr. Char has any meritorious claims against the Company or members of management, there can be no assurance that Mr. Char will not institute an action against the Company seeking substantial damages. Any such claims, with or without merit, can be time consuming, costly and difficult to defend and, if successful, could have a material adverse effect on the Company. See "Business -- Legal Proceedings." Government Regulation; Potential Liability for Content. Recently enacted federal, state and local legislation aimed at limiting the use of the Internet to transmit certain content and materials could result in significant potential liability to Internet service providers. These types of legislative actions present the potential for increased focus and attempts to impose liability upon Internet access providers for information disseminated through their systems. The adoption or strict enforcement of any such laws or regulations may limit the growth of the Internet, which could in turn decrease the demand for the Company's services and increase the Company's cost of doing business. Inasmuch as the applicability to the Internet of the existing laws governing issues such as property ownership, libel and personal privacy is uncertain, any such new legislation or regulation or the application of existing laws and regulations to the Internet could have an adverse effect on the Company's business and prospects. Changes in the regulatory environment relating to the Internet connectivity industry, including regulatory changes which directly or indirectly affect telecommunication costs or increase the likelihood or scope of competition from local and regional telephone companies or others, could also have an adverse effect on the Company's business and prospects. See "Business." 9 Limited Intellectual Property Protection. The Company relies on a combination of copyright and trademark laws, trade secrets, software security measures, license agreements and nondisclosure agreements to protect its proprietary information. The Company currently has no registered copyrights or patents or patent applications pending. It may be possible for unauthorized third parties to copy aspects of, or otherwise obtain and use, the Company's proprietary information without authorization. In addition, there can be no assurance that any confidentiality agreements between the Company and its employees or any license agreements with its customers will provide meaningful protection for the Company's proprietary information in the event of any unauthorized use or disclosure of such proprietary information. See "Business." Dependence on Key Personnel; Limited Management; Need for Qualified Management and Other Personnel. The success of the Company will be dependent on the personal efforts of Nicko Feinberg, Chief Information Officer and Vice President of Technology, Stephen J. Cole-Hatchard, Chairman, Chief Executive Officer and President, and other key personnel. The loss of the services of such individuals could have a material adverse effect on the Company's business and prospects. The Company intends to obtain "key-man" insurance on the life of each of Messrs. Feinberg and Cole-Hatchard in the amount of $1,000,000. Mr. Cole-Hatchard currently serves on a part-time basis, and the Company has only three full-time employees in addition to its executive officers. The success of the Company is largely dependent upon its ability to hire and retain additional qualified management, marketing, technical, financial and other personnel, including a full-time President. Competition for qualified personnel is intense, and there can be no assurance that the Company will be able to hire or retain additional qualified personnel. Any inability to attract and retain qualified management and other personnel will have a material adverse effect on the Company. See "Business -- Employees" and "Management." Broad Discretion in Application of Proceeds; Benefits to Related Parties. Approximately $951,500 (24.4%) of the estimated net proceeds of this offering has been allocated to working capital and general corporate purposes. Accordingly, the Company's management will have broad discretion as to the application of such proceeds. The Company also intends to use $163,537, $141,800 and $126,800, respectively, of the net proceeds of this offering to repay outstanding principal amount of indebtedness to Messrs. Char, Feinberg and Cole-Hatchard. Additionally, a portion of the proceeds of this offering allocated to working capital may be used to pay the salaries of executive officers (which is anticipated to be approximately $320,000 during the twelve months following this offering) to the extent operating cash flow is insufficient for such purpose. See "Use of Proceeds" and "Certain Transactions." Control by Current Stockholders. Upon consummation of this offering, the Company's current stockholders will beneficially own, in the aggregate, approximately 62.4% of the outstanding shares of Common Stock (assuming no exercise of the Warrants). Accordingly, such persons, acting together, will be in a position to control the Company, elect all of the Company's directors, cause an increase in the authorized capital or the dissolution, merger or sale of the assets of the Company, and generally to direct the affairs of the Company. See "Management" and "Principal Stockholders." No Dividends. To date, the Company has not paid any cash dividends on its Common Stock and does not expect to declare or pay dividends on the Common Stock in the foreseeable future. See "Description of Securities -- Dividend Policy." Limitation on Liability. The Company's Certificate of Incorporation includes provisions to limit, to the full extent permitted by Delaware Law, the personal liability of directors of the Company for monetary damages arising from a breach of their fiduciary duties as directors. As a result of such provisions in the Certificate of Incorporation, stockholders may be unable to recover damages against the directors of the Company for actions taken by them which constitute negligence, gross negligence or a violation of certain of their fiduciary duties, which may reduce the likelihood of stockholders instituting derivative litigation against directors and may discourage or deter stockholders from suing directors for breaches of their duty of care, even though such an action, if successful, might otherwise benefit the Company and its stockholders. See "Management -- Indemnification of Directors and Officers." Immediate and Substantial Dilution. This offering involves an immediate and substantial dilution of $3.54 per share (70.8%) between the net tangible book value per share after the offering and the initial public offering price per share. See "Dilution." 10 Shares Eligible for Future Sale. Upon consummation of this offering, the Company will have 2,660,000 shares of Common Stock outstanding (assuming no exercise of the Warrants or outstanding options), of which the 1,000,000 shares of Common Stock offered hereby will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"). All of the remaining 1,660,000 shares of Common Stock outstanding are "restricted securities," as that term is defined under Rule 144 promulgated under the Securities Act and will become eligible for sale, pursuant to Rule 144, on various dates commencing February 1998, subject to the contractual restrictions described below. The holders of all of such shares, other than 320,000 shares held by Michael Char and 200,000 shares issued in connection with a private placement in May 1997, have agreed not to sell such shares for a period of twelve months from the date of this Prospectus without the Underwriter's prior written consent. The holders of 200,000 shares issued in the private placement have agreed not to sell such shares for a period of six months from the date of this Prospectus. The Company has granted certain demand and "piggy-back" registration rights to the Underwriter with respect to the securities issuable upon exercise of the Underwriter's Warrants. No prediction can be made as to the effect, if any, that sales of shares of Common Stock or even the availability of such shares for sale will have on the market prices prevailing from time to time. The possibility that substantial amounts of Common Stock may be sold in the public market may adversely affect the prevailing market price for the Common Stock and could impair the Company's ability to raise capital through the sale of its equity securities. See "Shares Eligible for Future Sale" and "Underwriting." No Assurance of Public Market; Arbitrary Offering Price; Possible Volatility of Market Price of Common Stock and Warrants; Underwriter's Potential Influence on the Market. Prior to this offering, there has been no public trading market for the Common Stock or Warrants. There can be no assurance that a regular trading market for the Common Stock or Warrants will develop after this offering or that, if developed, it will be sustained. Moreover, the initial public offering prices of the Common Stock and the Warrants and the exercise price of the Warrants have been determined by negotiations between the Company and the Underwriter and, as such, are arbitrary in that they do not necessarily bear any relationship to the assets, book value or potential earnings of the Company or any other recognized criteria of value and may not be indicative of the prices that may prevail in the public market. The market prices of the Company's securities following this offering may be highly volatile. Factors such as the Company's operating results and announcements by the Company or its competitors may have a significant impact on the market price of the Company's securities. In addition, in recent years, the stock market has experienced a high level of price and volume volatility and market prices for the stock of many companies have experienced wide price fluctuations which have not necessarily been related to the operating performance of such companies. Although it has no obligation to do so, the Underwriter intends to make a market in the Common Stock and Warrants and may otherwise effect transactions in the Common Stock and Warrants. If the Underwriter makes a market in the Common Stock or Warrants, such activities may exert a dominating influence on the market and such activity may be discontinued at any time. The prices and liquidity of the Common Stock and Warrants may be significantly affected to the extent, if any, that the Underwriter participates in such market. See "Underwriting." Possible Delisting of Securities from Nasdaq System; Risks Relating to Low-Priced Stocks. It is currently anticipated that the Company's Common Stock and Warrants will be eligible for listing on Nasdaq upon the completion of this offering. In order to continue to be listed on Nasdaq, however, the Company must maintain $2,000,000 in total assets, a $200,000 market value of the public float and $1,000,000 in total capital and surplus. In addition, continued inclusion requires two market makers and a minimum bid price of $1.00 per share; provided, however, that if the Company falls below such minimum bid price, it will remain eligible for continued inclusion on Nasdaq if the market value of the public float is at least $1,000,000 and the Company has $2,000,000 in capital and surplus. Nasdaq has recently proposed new maintenance criteria which, if implemented, would eliminate the foregoing exception to the minimum bid price requirement and require, among other things, $2,000,000 in net tangible assets, $1,000,000 market value of the public float and adherence to certain corporate governance provisions. The failure to meet these maintenance criteria in the future may result in the delisting of the Company's securities from Nasdaq, and trading, if any, in the Company's securities would thereafter be conducted in the non-Nasdaq over-the-counter market. As a result of such delisting, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Company's securities. In addition, if the Common Stock were to become delisted from trading on Nasdaq and the trading price of the Common Stock were to fall below $5.00 per share on the date the Company's securities were 11 delisted, trading in such securities would also be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally institutions). For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in the Company's securities, which could severely limit the market price and liquidity of such securities and the ability of purchasers in this offering to sell their securities of the Company in the secondary market. Potential Adverse Effect of Warrant Redemption. The Warrants are subject to redemption by the Company at any time commencing on , 1998, upon notice of not less than 30 days, at a price of $.10 per Warrant, provided that the closing bid quotation of the Common Stock on all 20 trading days ending on the third day prior to the day on which the Company gives notice has been at least 150% (currently $8.25, subject to adjustment) of the then effective exercise price of the Warrants and the Company obtains the written consent of the Underwriter to such redemption prior to the Call Date. Redemption of the Warrants could force the holders to exercise the Warrants and pay the exercise price at a time when it may be disadvantageous for the holders to do so, to sell the Warrants at the then current market price when they might otherwise wish to hold the Warrants, or to accept the redemption price, which is likely to be substantially less than the market value of the Warrants at the time of redemption. See "Description of Securities -- Redeemable Warrants." Possible Inability to Exercise Warrants. The Company intends to qualify the sale of the securities offered hereby in a limited number of states. Although certain exemptions in the securities laws of certain states might permit the Warrants to be transferred to purchasers in states other that those in which the Warrants were initially qualified, the Company will be prevented from issuing Common Stock in such states upon the exercise of the Warrants unless an exemption from qualification is available or unless the issuance of Common Stock upon exercise of the Warrants is qualified. The Company may decide not to seek or may not be able to obtain qualification of the issuance of such Common Stock in all of the states in which the ultimate purchasers of the Warrants reside. In such a case, the Warrants held by purchasers will expire and have no value if such Warrants cannot be sold. Accordingly, the market for the Warrants may be limited because of these restrictions. Further, a current prospectus covering the Common Stock issuable upon exercise of the Warrants must be in effect before the Company may accept Warrant exercises. There can be no assurance the Company will be able to have a prospectus in effect when this Prospectus is no longer current, notwithstanding the Company's commitment to use its best efforts to do so. See "Description of Securities -- Redeemable Warrants." 12 USE OF PROCEEDS The net proceeds to the Company from the sale of the securities offered hereby are estimated to be $3,893,500 ($4,477,525 if the Underwriter's over-allotment option is exercised in full). The Company expects to use the net proceeds during the twelve months following this offering approximately as follows:
Approximate Approximate Percentage of Application of Proceeds Dollar Amount Dollar Amount - ----------------------- --------------- -------------- Acquisition of subscriber bases(1) ..................... $1,250,000 32.1% Establishment of additional POPs(2) ..................... 750,000 19.3 Marketing and advertising(3) ........................... 500,000 12.8 Repayment of indebtedness(4) ........................... 442,000 11.4 Working capital and general corporate purposes(5) ...... 951,500 24.4 ----------- ------ Total ............................................... . $3,893,500 100.0% =========== ======
- ------------ (1) Represents anticipated costs to acquire subscriber bases. As of the date of this Prospectus, the Company has no plans, agreements, commitments, understandings or arrangements with respect to any such acquisition. See "Business -- Company Strategy." (2) Represents anticipated costs associated with the establishment of up to twenty-four additional POPs, including the cost of equipment, telephone lines and initial rent, the cost of adding subscriber capacity to existing POPs and salaries for up to ten additional technical and support personnel. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Plan of Operation." (3) Includes costs associated with advertising in local newspapers and trade publications, fees for independent marketing consultants and the salaries for up to three marketing and sales personnel. See "Business -- Marketing and Sales." (4) Represents aggregate amounts to be used to repay outstanding principal and estimated accrued interest through October 1, 1997 to Messrs. Char, Feinberg and Cole-Hatchard, principal stockholders of the Company. Approximately $375,000 of such indebtedness is repayable on the earlier of (i) the consummation of this offering or (ii) May 30, 1999 (May 1, 1998 in the case of $163,537 principal amount of indebtedness payable to Mr. Char), bears interest at the rate of 8% per annum and was incurred in connection with the Reorganization in May 1997. Included in such indebtedness is $21,737 and $35,000, respectively, of advances made to the Company by Messrs. Char and Cole-Hatchard to establish additional POPs. The balance of such indebtedness represents a $60,000 advance made by Mr. Cole-Hatchard in August 1997 for the purchase of network equipment, which bears interest at the rate of 9.25% per annum and is repayable on the earlier of (i) the consummation of this offering or (ii) May 1, 1999. See "Certain Transactions." (5) Working capital may be used, among other things, to pay salaries of the Company's executive officers (which is anticipated to be approximately $320,000 during the twelve months following the offering), rent, trade payables, professional fees and other operating expenses. If the Underwriter exercises its over-allotment option in full, the Company will realize additional net proceeds of $584,025, which will be added to the Company's working capital. Based on currently proposed plans and assumptions relating to the implementation of its business plans, the Company believes that the proceeds of this offering will be sufficient to satisfy its contemplated cash requirements for at least twelve months following the consummation of this offering. In the event that the Company's plans change, its assumptions change or prove to be inaccurate or if the proceeds of this offering otherwise prove to be insufficient to implement its business plans, the Company may find it necessary or desirable to reallocate a portion of the proceeds within the above described categories, use proceeds for other purposes, seek additional financing or curtail its operations. There can be no assurance that any additional financing will be available to the Company on acceptable terms, or at all. 13 Proceeds not immediately required for the purposes described above will be invested principally in United States government securities, short-term certificates of deposit, money market funds or other short-term interest bearing investments. DILUTION The difference between the initial public offering price per share of Common Stock and the net tangible book value per share after this offering constitutes the dilution to investors in this offering. Net tangible book value per share of Common Stock is determined by dividing the net tangible book value of the Company (total tangible assets less total liabilities) by the number of shares of Common Stock outstanding. As of May 31, 1997, the Company had a negative net tangible book value of ($35,026) or ($.02) per share of Common Stock. After giving effect to the sale of the securities offered hereby (less underwriting discounts and commissions and estimated expenses of this offering), the pro forma net tangible book value of the Company as of May 31, 1997 would have been $3,886,474 or $1.46 per share, representing an immediate increase in net tangible book value of $1.48 per share of Common Stock to existing stockholders and an immediate dilution of $3.54 per share to new investors. The following table illustrates this dilution to new investors on a per share basis: Initial public offering price ................................. $5.00 Net tangible book value before offering .................. ($ .02) Increase attributable to investors in this offering ...... 1.48 ------ Net tangible book value after offering ........................ 1.46 ------ Dilution to new investors ....................................... $3.54 ======
The following table sets forth, with respect to existing stockholders and new investors in this offering, a comparison of the number of shares of Common Stock issued by the Company, the percentage of ownership of such shares, the total cash consideration paid, the percentage of total cash consideration paid and the average price per share.
Shares Purchased Total Cash Consideration ----------------------- ------------------------ Average Price Number Percent Amount Percent Per Share ----------- --------- ------------ --------- ---------- Existing stockholders ...... 1,660,000 62.4% $ 414,600 7.7% $ .25 New Investors ............... 1,000,000 37.6 $5,000,000 92.3 5.00 --------- ------ ----------- ------ Total ................. . 2,660,000 100.0% $5,414,600 100.0% ========= ====== =========== ======
The above tables assume no exercise of the Underwriter's over-allotment option. If such option is exercised in full, the new investors will have paid $5,750,000 for 1,150,000 shares of Common Stock, representing approximately 93.3% of the total consideration for 40.9% of the total number of shares of Common Stock outstanding. The above tables assume no exercise of outstanding stock options or warrants. As of the date of this Prospectus, there are outstanding stock options to purchase an aggregate of 260,000 shares of Common Stock at an exercise price of $2.00 per share. To the extent that stock options are exercised, there will be further dilution to new investors. See "Management -- 1997 Stock Option Plan," "Description of Securities" and "Underwriting." 14 CAPITALIZATION The following table sets forth the capitalization of the Company as of May 31, 1997, on an actual basis, and as adjusted to give effect to the sale of the securities offered hereby and the anticipated application of the estimated net proceeds therefrom:
May 31, 1997 ---------------------------- Actual As Adjusted ------------- ------------ Short term debt ....................................... $ 372,137 $ -- ========== ========== Stockholders' equity (deficit): Preferred Stock, $.01 par value, 1,000,000 shares authorized, no shares issued and outstanding ...... $ -- $ -- Common stock, $.01 par value, 10,000,000 shares authorized, 1,660,000 shares outstanding, 2,660,000 as adjusted(1) .................................... 16,600 26,600 Additional paid-in-capital ........................ 295,000 4,178,500 Stock subscriptions receivable ..................... (5,000) (5,000) Accumulated deficit ................................. (313,626) (313,626) ---------- ---------- Total stockholders' equity (deficit) .................. (7,026) 3,886,474 ---------- ---------- Total capitalization ................................. ($ 7,026) $3,886,474 ========== ==========
(1) Does not include (i) 500,000 shares of Common Stock reserved for issuance upon exercise of the Warrants; (ii) an aggregate of 150,000 shares of Common Stock reserved for issuance upon exercise of the Underwriter's Warrants and the warrants included therein; (iii) 260,000 shares of Common Stock reserved for issuance upon exercise of outstanding options under the Plan; and (iv) 240,000 shares of Common Stock reserved for issuance upon exercise of options available for future grant under the Plan. See "Management -- 1997 Stock Option Plan," and "Underwriting." 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Overview The Company was organized in February 1997 as successor to the business of the Predecessor Companies and is in an early stage of development. The Company's financial statements include the accounts of the Company and the Predecessor Companies. The Company's revenues are derived primarily from providing Internet access services to individuals and to a lesser extent to business subscribers. Revenues are comprised principally of recurring revenues from the Company's customer base, non-recurring start-up fees for X2 56K and leased line connections and from various ancillary services. The Company charges subscription fees which are billed monthly or quarterly, in advance, typically pursuant to pre-authorized credit card accounts. For the five months ended May 31, 1997, sales to individuals accounted for approximately 81.5% of the Company's revenues. The Company's subscribers do not incur hourly usage fees. Monthly subscription service revenue is recognized over the period in which services are provided. Service revenues derived from dedicated access services, which require the use of Company provided installation of equipment at a subscriber's location, are recognized when the service is commenced. Fee revenues for ancillary services are recognized as services are performed. The Company has not yet generated any meaningful revenues, and will not generate any meaningful revenues until after the Company establishes additional POPs and attracts and retains a significant number of subscribers, which the Company does not anticipate will occur until several months following the consummation of this offering, if at all. For the period from May 1, 1995 (inception) to May 31, 1997, the Company incurred a cumulative net loss of approximately $313,626 (after giving effect to non-recurring compensation expense of $205,000). Since May 31, 1997, the Company has incurred losses and anticipates that it will continue to incur significant losses until, at the earliest, the Company generates sufficient revenues to offset the substantial up-front expenditures and operating costs associated with establishing additional POPs and attracting and retaining a significant subscriber base. There can be no assurance that the Company will be able to attract and retain a sufficient number of subscribers to generate meaningful revenues or achieve profitable operations. The Company's operating results will be significantly affected by subscriber attrition rates. Subscribers may discontinue service without penalty at any time, and there can be no assurance that subscribers will continue to purchase services from the Company or that the Company will not be subject to significant subscriber attrition. The Company has historically experienced a subscriber attrition rate of less than 20%. Significant levels of subscriber attrition in the future would have a material adverse effect on the Company's operating results. Acceleration in the growth of the Company's subscriber base or changes in usage patterns among subscribers may increase operating costs. Acceleration in the growth of the subscriber base could require the Company to hire additional personnel and increase the Company's expenses related to marketing, network infrastructure and customer support sooner than anticipated. An increase in peak time usage or an overall increase in usage by subscribers could adversely affect the Company's ability to consistently meet the demand for its access services. As a result, the Company may be required to hire additional personnel and increase expenses related to network infrastructure capacity with minimal corresponding increases in revenue on a per subscriber basis. Plan of Operation The Company's proposed plan of operation and prospects will be largely dependent upon the Company's ability to successfully establish and equip additional POPs on a timely and cost effective basis; hire and retain skilled management, technical, marketing and other personnel; and attract and retain significant numbers of subscribers. The Company's telecommunications network is currently comprised of leased high-speed data lines and ten POPs. Pursuant to its currently proposed plan of operation, the Company will seek to establish up to twenty-four additional POPs during the twelve months following the consummation of this offering. The number of POPs 16 will be dependent upon, among other things, market acceptance and demand in target geographic markets and the technical effectiveness of alternative delivery technologies. Certain new network services known as "display virtual private networks" may permit the Company to establish a presence in particular geographic markets without establishing additional POPs by permitting the Company to connect its existing POPs to such networks. See "Business--Network Infrastructure." The Company anticipates that the average cost to acquire and install equipment (consisting of a router, access server and communications hub) and telephone lines in each POP will be approximately $13,000. The Company expects to expand the capacity of its network through POP expansion at existing locations. The Company's POPs, as initially configured, accommodate up to approximately 160 subscribers. The Company expects that the average cost to upgrade a POP to accommodate each additional 160 subscribers will be approximately $8,500. The Company's existing network configuration has capacity for up to approximately 3,000 subscribers. The Company currently has three full-time employees in addition to its executive officers. Depending upon the level of its business activity, the Company anticipates that it will use a portion of the proceeds of this offering to hire up to three additional employees over the next twelve months to market the Company's access services to potential subscribers. The Company also intends to hire up to ten additional technical and support personnel during the twelve months following the offering. Results of Operations The Company commenced operations in late 1995 and established four POPs during 1996. The Company had approximately 700 subscribers at December 31, 1996. Revenues for the five months ended May 31, 1997 were $110,566, compared to $16,234 for the prior comparable period. The increase was primarily attributable to "dial-up" customer growth at the Company's Nyack and Goshen, New York POPs. At May 31, 1997 and May 31, 1996, the Company had ten and two POPs, respectively. The Company had approximately 1,100 and 200 subscribers, respectively, at May 31, 1997 and May 31, 1996. For the five months ended May 31, 1997, the Company's Nyack and Goshen, New York POPs accounted for approximately 92.5% of the Company's revenues. Six POPs were established in April and May 1997. Such POPs have not yet contributed significantly to revenue growth. Cost of revenues for 1996 were $67,582, or approximately 68.5% of revenues, approximately $42,000 of which related to communications expense for the installation of customer dial-up lines and high speed T-1 line access to the Internet. Cost of revenues for the five months ended May 31, 1997 were $67,707, or approximately 61.2% of revenues, as compared to $14,831, or 91.4%, for the prior comparable period. The increase in cost of revenues was due to communications expense, depreciation and personnel costs for maintaining equipment and were directly related to volume increases in revenue. The Company expects these costs to increase in absolute dollars as additional POPs are established. Operating expenses for 1996 were $81,220, or 82.3% of revenues, approximately $40,400 of which related to advertising and payroll. Operating expenses for the five months ended May 31, 1997 (excluding a non-recurring non-cash charge of $205,000) were $85,680 or 77.5% of revenues, compared to $29,327 or 181% of revenues, for the five months ended May 31, 1996. The increase in operating expenses was attributable to payroll, rent and professional fees. Payroll increases were directly related to volume increases in revenues. Rent increases were attributable to the addition of new POPs and the establishment of larger administrative space. Management anticipates future increases in operating expenses for advertising, rent, payroll, depreciation and professional fees. Interest expense for the five months ended May 31, 1997 was $3,174 or 2.9% of revenues, as compared to $907, or 5.6% of revenues for the prior comparable period. Interest expense relates primarily to financing the purchase of computer hardware. Interest expense for the year ended December 31, 1996 was $6,677. For the year ended December 31, 1996 and the five months ended May 31, 1996 and May 31, 1997, the Company incurred net losses of $54,206, $25,551 and $251,495, respectively. 17 Liquidity and Capital Resources The Company's primary capital requirements have been and will continue to be to fund the purchase and installation of network equipment at its POPs, as well as for working capital, including the salaries of executive and other personnel. To date, the Company has financed its capital requirements through the issuance of debt and equity securities. At May 31, 1997, the Company had a working capital deficit of $82,954. In May 1997, the Company consummated a private placement pursuant to which it issued 200,000 shares of Common Stock and received proceeds of $400,000. The proceeds were used primarily for the purchase of network equipment, salaries and expenses in connection with this offering. See "Certain Transactions." In May 1997, the Company effected the Reorganization, pursuant to which it issued promissory notes in the amounts of $141,800, $163,537 and $66,800, respectively, to Messrs. Feinberg, Char and Cole-Hatchard, principal stockholders of the Company. Such indebtedness bears interest at the rate of 8% per annum and is repayable on the earlier of (i) the consummation of this offering or (ii) May 30, 1999 (May 1, 1998 in the case of indebtedness owed to Mr. Char). The Company intends to use a portion of the proceeds of this offering to repay the entire principal amount of and accrued interest on such indebtedness. See "Certain Transactions." In August 1997, the Company borrowed $60,000 from Mr. Cole-Hatchard. Such indebtedness bears interest at the rate of 9.25% per annum and is repayable on the earlier of (i) the consummation of this offering or (ii) May 1, 1999. The Company intends to use a portion of the proceeds of this offering to repay such indebtedness. See "Certain Transactions." The capital requirements relating to implementation of the Company's business plan will be significant. During the twelve months following the consummation of this offering, the Company intends to purchase computer equipment in connection with the establishment of additional POPs, upgrade its existing POPs and hire additional technical and support personnel. Other than as described above, as of the date of this Prospectus, the Company has no material commitments for capital expenditures. The Company is dependent on the proceeds of this offering or other financing in order to fully implement its proposed plan of operation. Based on currently proposed plans and assumptions relating to the implementation of its business plans (including the timetable of, and costs associated with, establishing additional POPs), the Company believes that the proceeds of this offering will be sufficient to satisfy its contemplated cash requirements for at least twelve months following the consummation of this offering. In the event that the Company's plans change, its assumptions change or prove to be inaccurate or if the proceeds of this offering prove to be insufficient to implement its business plans, the Company would be required to seek additional financing sooner than currently anticipated. There can be no assurance that the proceeds in this offering will be sufficient to permit the Company to implement its proposed business plan or that any assumptions relating to the implementation of such plan will prove to be accurate. To the extent that the proceeds of this offering are not sufficient to enable the Company to generate meaningful revenues or achieve profitable operations, the inability to obtain additional financing will have a material adverse effect on the Company. There can be no assurance that any such financing will be available to the Company on commercially reasonable terms, or at all. 18 BUSINESS The Company is an Internet service provider that offers "dial-up" Internet access primarily to individual subscribers. The Company provides subscribers with direct access to a wide range of Internet applications and resources, including electronic mail, world wide web sites and regional and local information and data services. The Company believes that its low subscriber to modem ratio, its technical and customer support and ancillary services position the Company to capitalize on the emerging and expanding markets for Internet services. Market Trends In recent years, the Internet has experienced a rapid increase in the number of users. Industry sources estimate that the number of online households in the United States was approximately 9.6 million at the end of 1995, 13.6 million at the end of 1996, and project that the number of online households will exceed 35.2 million by the year 2000. The Company believes that the following key trends will contribute favorably to expected continued popularity of the Internet: o Continuing Penetration of Computers and Modems in the Home: An increasing percentage of computer owners also own modems, which are now pre-installed in a growing number of new computers. According to Software Publishers Association, more than 33.9 million or 34% of households in the United States owned a personal computer at the end of 1995, of which approximately 70% also owned a modem. The Company believes that this growth is accompanied by increasing use of computers for communications such as facsimile transmissions and electronic mail. o Growth of the Informational, Entertainment and Commercial Applications of the Internet: Use of the Internet has grown rapidly since its commercialization in the early 1990s. An increasing number of servers and websites are being connected to the Internet, making available text, graphics, audio and video information which may be accessed by consumers. Through an Internet connection, users can access commercial, educational and governmental databases, entertainment software, photographs and videos, newspapers, magazines, library card catalogs, industry newsletters, weather updates and other information. Traditional and emerging Internet applications, including electronic mail, the World Wide Web and USENET news groups, are also increasing in popularity. o Increasing Availability of User-friendly Navigational Tools: Internet use is also being promoted by the development of software tools that simplify access to the Internet's applications and resources. As users become more familiar with the Internet and the Internet increasingly becomes a medium for entertainment and personal communication, the Company believes that demand by individuals for competitively priced, direct, high speed access to personal home pages, interactive multimedia games and entertainment will continue to grow. Company Strategy The Company's objective is to expand its network of POPs rapidly in selected geographic markets. The Company's strategy is to aggressively build its subscriber base by: Providing Internet Access to Individuals. The Company is primarily focused on providing access services to individual subscribers, one of the fastest growing segments of the Internet market. The Company seeks to establish brand identity by offering high speed access service and highly responsive customer support. The Company believes that its low subscriber to modem ratio helps prevent busy signals which is attractive to subscribers. The Company also offers Internet access to business and other commercial users, many of which often require access to a dedicated Internet connection to maintain a competitive position. Offering Competitive Pricing. The Company has established a simple pricing structure of charging subscribers a flat monthly fee of $19.95 for unlimited access. The Company believes that this structure encourages usage by eliminating subscribers' concern about incurring significant hourly charges, which may increase subscriber retention rates. The Company believes that its pricing structure will help attract new subscribers and facilitate continued market penetration. The Company also intends to implement alternative price plans, permitting subscribers and customers to select hourly or other special billing features. 19 Continuing Network Expansion. The Company is aggressively expanding its high speed, digital network. The Company believes that rapid expansion is necessary to build its subscriber base and to promote regional brand name recognition. The Company plans to augment the capacity of existing POPs to satisfy increased subscriber demand. The Company currently supports 14.4, 28.8 and 36.6 Kbps modems at each of its POPs and has introduced X2 56K and ISDN technologies into its network for dial-up accounts. The Company continually evaluates alternative technologies, including satellite television delivery systems and cable modems. Targeting Suburban Markets. The Company intends to target suburban markets with attractive demographic characteristics similar to the Company's existing POPs. To achieve its goal, the Company will seek to cluster POPs for operational efficiency and to share certain marketing, financial, customer service and management personnel. By targeting suburban markets which will initially be subject to less intensive competition than in large metropolitan areas, the Company believes it will be able to avoid competition from large Internet service providers. The Company will also seek to capitalize a demand for Internet access by offering subscriber service which combines the capabilities typically provided by large companies with the flexibility and responsiveness of a small Internet service provider. Pursuing Selective Acquisitions. Consistent with its strategy, the Company intends to pursue opportunities by making selective acquisitions of subscriber bases which the Company believes will enhance its prospects and maximize revenues. The Company believes that it operates in a highly fragmented segment of the Internet connectivity industry and that selective acquisitions will enhance penetration in new and existing markets. The Company's strategy and future marketing plans are subject to change as a result of a number of factors, including progress or delays in the Company's expansion efforts, changes in market conditions, the nature of possible acquisitions which may become available to it in the future and technological and competitive factors. There can be no assurance that the Company will be able to successfully implement its business strategy or otherwise successfully expand its operations. Internet Services The Company provides a variety of competitively priced Internet access services. The Company's primary focus is on individuals who connect to the Internet via a modem (referred to as "dial-up" accounts). Dial-up subscribers can access the Internet by calling the Company's local POPs. The Company bills its subscribers on a monthly or quarterly basis, in advance, typically through pre-authorized credit card accounts. Dial-Up Accounts: The Company believes that dial-up accounts present an attractive opportunity for growth. A user can quickly activate an account with the Company, obtain an Internet E-mail address, web space and establish automatic billing to the user's credit card. Subscriber accounts are priced at $19.95 per month for unlimited connections and $80 per month for an unlimited ISDN use account. There is no connect fee, except for a $20 start-up fee for X2 56K connections. Connections for ISDN services require the customer to obtain an ISDN line from the local telephone company. The Company's network supports connectivity software which utilizes standard communication protocols such as TCP/IP, which enable a user's computer to communicate with other computers over the Internet. As of the date of this Prospectus, the Company had 1,068 individual and 88 business accounts. Dedicated Access: The Company also offers high speed, high bandwidth dedicated leased lines principally for business users who desire to connect internal computer networks to the Internet, 24 hours a day, seven days a week. The Company offers leased line accounts to provide Internet services to businesses at various speeds, including X2 56K circuits, fractional T-1 and full T-1 lines, depending on the customer's needs. The Company provides its customers with dedicated leased lines and bills subscribers on a monthly basis through a consolidated bill (which includes the phone company's charges). Web Design and Hosting Services: Without incurring the expense of setting up and maintaining a web server, including in-house technical support to design and maintain a web site, a subscriber can rent space on a server for an Internet presence. The Company offers web site hosting services for a 24-hour interactive presence on the Internet. The Company's web servers connect directly to the Internet via high speed T-1 lines providing maximum bandwidth. This service includes domain name registration, 24-hour access, file upload and/or download capability, and statistical logs. The Company also offers web page design and development services and will seek to expand the scope of such services in the future. 20 Co-Location Space: The Company provides a physical location at its facility for a customer to install equipment and connect directly to the Internet. This service provides customers with a low cost direct connection to the Company's router. The Company provides this service under maintenance agreements with pricing determined by the amount of space occupied. Subscriber Applications The Company provides its subscribers with access to the full range of available Internet applications, including: Electronic Mail: E-mail is an Internet application by which an Internet user can exchange messages with any other user who has an E-mail address. Messages can be sent almost instantly to designated individuals or groups on a mailing list. World Wide Web: The World Wide Web is a browsing and searching system comprised of thousands of computer servers, referred to as home pages, each linked by a special communications protocol. This open protocol allows Internet users to view and access text, graphics, digital video and audio resident on a home page or to connect instantaneously to related and linked information on the same server or other home pages. Since the Internet is an open system, any company can create a home page on the World Wide Web in order to provide users with product or service information. Users can then solicit more information and, in some cases, make purchases electronically. Browsers such as Netscape, Mosaic and Microsoft Explorer, which incorporates its own World Wide Web browser, have helped contribute to the rapid growth of the World Wide Web. The Company expects the World Wide Web to continue to grow rapidly as more businesses and consumers become aware of the advantages of communications on the Internet. As part of its service, the Company provides each subscriber with one megabyte of web space on the Company's World Wide Web servers. USENET News Groups: USENET is a network of thousands of computers attached to the Internet that provide forums, or news groups, that allow users to exchange information on a variety of topics of shared interest. Internet users can seek or provide information on diverse topics ranging from sports or other hobbies, to job opportunities, to restaurant and travel suggestions. Databases and Public Domain Software: An increasing number of host computers are being connected to the Internet, which make available growing amounts of text, graphics, audio and video information and public domain software. For example, with an Internet connection, a user can access commercial, educational and government databases, newspapers, magazines, library card catalogs, industry newsletters, weather updates, and other information. File Transfer Protocol: The Internet can be easily used to move electronic files (including data, programs or text) from one computer to another. This can be very useful for parties in separate locations that collaborate on data files. Data transferred over the Internet remains in digital format and does not need to be re-entered by a receiving party; it can be manipulated and then re-transmitted to other Internet users. Network Infrastructure The Company's operations will depend upon the capacity, reliability and security of its network infrastructure. The Company currently has limited network capacity and will be required to continually expand its network infrastructure to accommodate significant numbers of users and increasing amounts of information they may wish to access. Expansion of the Company's network infrastructure will require significant financial, operational and management resources. The Company maintains a telecommunications infrastructure that enables it to provide digital Internet connectivity services to its subscribers. The Company's network of POPs gives subscribers access to the Internet by means of a local telephone call. The Company's network is currently comprised of multiple T-1 lines which are connected directly to seven of the Company's POPs (three of the Company's POPs are connected via T-1 to the Company's Nyack, New York facility). The Company closely monitors data traffic on its network and expects to expand the capacity of its network by the addition of POPs and POP expansion at existing locations as demand increases. POPs are monitored by 21 management software at the Company's computer facilities in Nyack and Pearl River, New York. In order to build its subscriber base, the Company intends to continue to expand the number of its POPs. As of the date of this Prospectus, the Company had a total of ten POP locations in suburban areas servicing Rockland, Orange, Dutchess, Sullivan, Putnam, Ulster and Westchester counties in New York and Bergen County in New Jersey. The Company intends to continue its expansion of POPs in the greater New York metropolitan area, including in Morris and Passaic counties in New Jersey and New Haven and Fairfield counties in Connecticut. The number of POPs will be dependent upon, among other things, market acceptance and demand in target geographic markets and the technical effectiveness of alternative delivery technologies. Certain new network services known as "display virtual private networks" may permit the Company to establish a presence in particular geographic markets without establishing additional POPs by permitting the Company to connect its existing POPs to such networks. The Company maintains a telecommunications center at its Nyack facility and Pearl River headquarters. Through these centers, the Company's technical staff constantly monitors network utilization and security, including equipment at individual POPs to ensure reliable Internet connectivity service. The Company is subject to significant risks from a natural disaster or other unanticipated event at these sites, and any damage or failure that causes interruptions in the Company's operations could have a material adverse effect on the Company. The Company currently maintains $1,000,000 of general liability insurance which includes coverage for business interruption and property damage. The Company plans to connect all of its POPs to its Pearl River facility in the future. Internet Access Providers and Suppliers The Company currently relies on a sole supplier to provide Internet access via leased telecommunications lines on a cost-effective and continuous basis. The Company has not entered into an interconnect agreement with such supplier. Although the Company believes that it currently has sufficient access to telecommunications networks on favorable terms and believes that its relationship with such supplier is satisfactory, any increase in rates charged by such supplier would materially adversely affect the Company's operating margins. Failure to obtain continuing access to such networks would also have a material adverse effect on the Company, including possibly requiring the Company to significantly curtail or cease its operations. The Company also is dependent on third-party manufacturers of hardware components. Certain components used by the Company in providing its networking services are acquired from only one source, including high performance routers manufactured by Cisco Systems, Inc. and remote access servers manufactured by U.S. Robotics, Inc. The Company has not entered into agreements with any equipment manufacturer and purchases equipment components pursuant to purchase orders placed from time to time in the ordinary course of business. Although the Company believes that network equipment is currently available from numerous sources, failure by manufacturers to deliver quality products on a timely basis or the inability to develop alternative sources if and as required, could result in delays which could materially adversely affect the Company's business and limit the Company's ability to expand its operations. Marketing and Sales The Company's primary focus is on providing Internet services to individuals who subscribe to the Company's dial-up service. The Company currently sells its Internet access services through its executive officers responding to inbound calls and E-mail, largely generated by referrals from other subscribers. The Company anticipates that it will hire up to three sales personnel during the twelve months following this offering to market the Company's services and respond to subscription inquiries. The Company is seeking to build its regional brand identity. The Company engages in marketing and advertising activities, including advertising of its services in specialty and regional publications, and participates in computer trade shows. The Company also engages in various local promotional programs, primarily to support newly opened POPs. The Company recently retained the services of a marketing and advertising firm in order to develop a sales and marketing program to complement the Company's planned expansion activities. The agreement provides for payments of $1,500 per month and may be terminated upon 90 days' notice. 22 Customer Support The Company believes that it is important to provide prompt and effective assistance to its subscribers and customers. The Company provides network monitoring and emergency subscriber assistance services 24 hours a day, seven days a week. The Company provides regular support and technical assistance 12 hours per day Monday through Friday and 8 hours on Saturdays and Sundays. The Company's two support personnel respond to telephone inquiries, and are dedicated to responding to E-mail inquiries. The Company intends to increase the number of its technical and customer support staff by hiring up to ten additional persons over the next twelve months. There can be no assurance, however, that the Company's customer support resources will be sufficient to manage any expansion in the Company's subscriber base. Any failure to adequately match customer support resources to projected increases in subscribers could adversely affect the Company. Competition The market for Internet access services is highly competitive. There are no substantial barriers to entry, and the Company expects that competition will intensify in the future. The Company believes that its ability to compete successfully will be significantly affected by numerous factors, including price, ease of use, reliability, customer support, geographic coverage and industry and general economic trends (particularly unfavorable economic conditions adversely affecting consumer discretionary spending). The Company's competitors include many large companies that have substantially greater market presence and financial, technical, marketing and other resources than the Company, including (i) international, national and regional commercial Internet service providers, such as Performance Systems International, Inc., Bolt Beranek & Newman, Inc. and UUNET Technologies, Inc. ("UUNET"); (ii) established on-line services companies that currently offer Internet access, such as America Online, Inc. ("AOL"), CompuServe Incorporated, Prodigy Services Company, Earthlink, and Delphi Internet Services; (iii) computer hardware and software and other technology companies, such as IBM and Microsoft Corp. ("Microsoft"); (iv) national long distance carriers, such as AT&T Corp., MCI Communications Corp. and Sprint Corp.; (v) regional telephone companies; and (vi) cable operators, such as Tele-Communications, Inc. New competitors, including large computer hardware and software, media, cable and telecommunications companies, have increased their focus on the Internet access market, resulting in even greater competition for the Company. Increased competition has resulted and could continue to result in significant price competition, which in turn could result in significant reductions in the average selling price of the Company's services. In addition, increased competition for new subscribers could result in increased sales and marketing expenses and related subscriber acquisition costs, which could materially adversely affect the Company's potential profitability. There can be no assurance that the Company will be able to offset the effects of any such competition or resulting price reductions through an increase in the number of its subscribers, higher revenue from enhanced services or cost reductions or that the Company will have the financial resources, technical expertise or marketing and support capabilities to compete successfully. Most of the established on-line services companies and telecommunications companies currently offer Internet access. In addition, new competitors, including large computer hardware and software, media and telecommunications companies, have increased their focus on the Internet access market, resulting in even greater competition for the Company. In particular, Microsoft has introduced an Internet access solution, including front-end software and an on-line service, called "Microsoft Network." The application software for this on-line service is bundled with Microsoft's Windows 95 operating system, which may give the service a significant advantage over other on-line and Internet services. Microsoft has undertaken a strategic alliance with UUNET that provides Microsoft customers access to the Internet through UUNET's POPs. Microsoft has also purchased an interest in Comcast, a leading cable operator, to converge software and cable networks to deliver Internet access. In addition, IBM's most recent version of its OS/2 operating system software includes Internet utilities, and IBM offers Internet access through its own private communications network. AOL is offering direct Internet access. The ability of these competitors or others to bundle services and products with Internet connectivity services could place the Company at a significant competitive disadvantage. The market for Internet access is characterized by rapidly changing technology, evolving industry standards, emerging competition and frequent new software and service introductions. There can be no assurance that the 23 Company can successfully identify new product and service opportunities as they arise and develop and bring new products and services to market in a timely manner or that software, services or technologies developed by others will not render the Company's services or technologies noncompetitive, obsolete or less marketable. The Company currently does not have any proprietary applications software. Employees As of July 31, 1997, the Company had three full-time employees in addition to its executive officers. Of such employees, two are engaged in customer support and one in accounting. The Company also engages part-time employees. None of the Company's employees is represented by a union. The Company considers its employee relations to be good. Properties The Company's executive offices are located in Pearl River, New York, where the Company leases approximately 5,525 square feet under a lease that expires in June 2002. The annual rental is $96,000. The Company also leases space (typically, less that 100 square feet) in various geographic locations to house the telecommunications equipment for each of its POPs. Leased facilities for POPs have various expiration dates ranging from November 1997 through April 2002. Aggregate annual rentals for POPs are approximately $28,000 over the next twelve months. The Company does not anticipate difficulties in obtaining future leased space for its POPs. Legal Proceedings In June 1997, Michael Char, a founder, principal stockholder and former officer and director of the Company, indicated that he disagreed with other members of management with respect to various business matters. The Company has been unsuccessful in resolving such disagreements or in negotiating a settlement with Mr. Char and, after a prolonged absence, in August 1997, the Company removed Mr. Char as a director and terminated his employment. While the Company does not believe that Mr. Char has any meritorious claims against the Company or members of management, there can be no assurance that Mr. Char will not institute an action against the Company seeking substantial damages. Any such claims, with or without merit, can be time consuming, costly and difficult to defend and, if successful, could have a material adverse effect on the Company. 24 MANAGEMENT The directors and executive officers of the Company are as follows:
Name Age Position - ---- ----- -------- Stephen J. Cole-Hatchard ...... 39 Chairman of the Board, Chief Executive Officer and President Nicko Feinberg ............... 26 Chief Information Officer, Vice President of Technology and Director Peter Morris .................. 39 Chief Financial Officer, Vice President and Director Michael Olbermann ............ 41 Vice President of Business Development and Director
Stephen J. Cole-Hatchard has been Chairman, Chief Executive Officer and President of the Company since August 1997. Mr. Cole-Hatchard was Vice President of Finance of the Company from February 1997 to August 1997 and has been a director of the Company since February 1997. Mr. Cole-Hatchard currently serves in these capacities on a part-time basis devoting approximately thirty hours a week of his business time to the Company's affairs. Mr. Cole-Hatchard has been a director and executive officer of Hudson Technologies, Inc., a publicly-traded company engaged in providing refrigerant management services, since January 1993. Mr. Cole-Hatchard is a member of the bar of the State of New York and is employed as a detective with the Clarkstown, New York Police Department, Legal Division. Nicko Feinberg has been a director and Vice President of Technology of the Company since November 1996 and Chief Information Officer since August 1997. From April 1994 to October 1996, Mr. Feinberg was a Sales Manager and, from April 1991 to April 1994, a Sales Account Executive for Microage Computer Outlet, Inc., a company engaged in computer sales and training. From September 1989 to March 1991, Mr. Feinberg owned and operated Creative Images, Inc., a pre-press service bureau. Creative Images, Inc. filed for protection under Chapter 7 of the United States Bankruptcy Code in 1991. Peter Morris has been Chief Financial Officer, Vice President and a director of the Company since June 1997. From April 1986 to June 1997, Mr. Morris was Vice President and Controller of Georgette Klinger, Inc., a company engaged in providing cosmetic services. Mr. Morris is a New York State Certified Public Accountant. Michael Olbermann has been Vice President of Business Development and a director of the Company since February 1997. Mr. Olbermann has owned and operated Rock House Construction Co., Inc., a company engaged in commercial and residential construction, since 1986. All directors hold office until the next annual meeting of stockholders for the ensuing year or until their successors have been duly elected and qualified. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. The Company has agreed, for a period of three years from the effective date of this Prospectus, if so requested by the Underwriter, to recommend and use its best efforts to elect a designee of the Underwriter as a non-voting advisor to the Company's Board of Directors. The Underwriter has not yet exercised its right to designate such a person. The Company intends to obtain "key man" life insurance on the life of each of Nicko Feinberg and Stephen J. Cole-Hatchard in the amount of $1,000,000. Executive Compensation The following table sets forth the compensation paid to Nicko Feinberg for the fiscal year ended December 31, 1996. No executive officer of the Company received aggregate compensation which exceeded $100,000 during such year. 25 Summary Compensation Table
Long-Term Annual Compensation Compensation Awards($)(1) --------------------------------------------- -------------------------- Securities Restricted Underlying Other Annual Stock Options/ Name and Principal Position Year Salary($) Bonus ($) Compensation($) Award SARs(#) - --------------------------------------- ------ ----------- ----------- ----------------- ------------ ----------- Nicko Feinberg, Vice President ...... 1996 $5,400 $-- $-- -- --
- ------------ (1) The Company did not have any long-term incentive or option plans during the fiscal year ended December 31, 1996. Employment Agreements The Company has entered into three-year employment agreements with each of Messrs. Feinberg, Cole-Hatchard, Olbermann and Morris which provide for an annual base compensation of $88,000, $45,000, $90,000 and $95,000, respectively, and such bonuses as the Board of Directors may from time to time determine. The employment agreements provide for employment on a full-time basis (except for the Company's agreement with Mr. Cole-Hatchard) and contain a provision that the employee will not compete or engage in a business competitive with the current or anticipated business of the Company during the term of the employment agreement and for a period of two years thereafter (one year in the case of Mr. Morris). Indemnification of Directors and Officers The Company's Certificate of Incorporation provides for the Company to indemnify each director and officer of the Company to the fullest extent permitted by the Delaware General Corporation Law. The foregoing provision may reduce the likelihood of derivative litigation against directors and may discourage or deter stockholders or management from suing directors for breaches of their duty of care, even though such an action, if successful, might otherwise benefit the Company and its stockholders. Liability Insurance The Company intends to procure and maintain a policy of insurance under which the directors and officers of the Company will be insured, subject to the limits of the policy, against certain losses arising from claims made against such directors and officers by reason of any acts or omissions covered under such policy in their respective capacities as directors or officers, including liabilities under the Securities Act. 1997 Stock Option Plan In February 1997, the Board of Directors and stockholders of the Company adopted the 1997 Stock Option Plan (the Plan ), pursuant to which 500,000 shares of Common Stock are reserved for issuance upon exercise of options. The Plan is designed to serve as an incentive for retaining qualified and competent employees, directors and consultants. The Company's Board of Directors, or a committee thereof, administers the Plan and is authorized, in its discretion, to grant options thereunder to all eligible employees of the Company, including officers and directors (whether or not employees) of, and consultants to, the Company. The Plan provides for the granting of both "incentive stock options" (as defined in Section 422 of the Internal Revenue Code of 1986, as amended) and non-qualified stock options. Options can be granted under the Plan on such terms and at such prices as determined by the Board of Directors, or a committee thereof, except that the per share exercise price of options will not be less than the fair market value of the Common Stock on the date of grant. In the case of an incentive stock option granted to a stockholder who owns stock of the Company possessing more than 10% of the total combined voting power of all classes of stock ("10% stockholder"), the per share exercise price will not be less 26 than 110% of such fair market value. The aggregate fair market value (determined on the date of grant) of the shares covered by incentive stock options granted under the Plan that become exercisable by a grantee for the first time in any calendar year is subject to a $100,000 limit. Options granted under the Plan will be exercisable during the period or periods specified in each option agreement. Options granted under the Plan are not exercisable after the expiration of ten years from the date of grant (five years in the case of incentive stock options granted to a 10% stockholder) and are not transferable other than by will or by the laws of descent and distribution. As of the date of this Prospectus, the Company has granted options to purchase an aggregate of 260,000 shares of Common Stock (net of forfeitures) under the Plan at an exercise price of $2.00 per share. Of such options, options to purchase 40,000 shares were issued to each of Messrs. Feinberg, Cole-Hatchard and Olbermann, and options to purchase 30,000 shares were issued to Mr. Morris. Such options are exercisable as to one-third of the shares covered thereby on the first, second and third anniversary of the date of grant. 27 PRINCIPAL STOCKHOLDERS The following table sets forth certain information, as of the date of this Prospectus (based on information obtained from the persons named below), relating to the beneficial ownership of shares of Common Stock by: (i) each person or entity who is known by the Company to own beneficially five percent or more of the outstanding Common Stock; (ii) each of the Company's directors; and (iii) all directors and executive officers of the Company as a group.
Percentage of Shares Beneficially Owned ---------------------------- Number of Shares Name of Beneficially Before Beneficial Owner Owned(1) Offering After Offering - ------------------------------------ ------------------------- ---------- --------------- Nicko Feinberg .................. 320,000 (19.3% 12.0% Michael Char ..................... 320,000 19.3 12.0 Stephen J. Cole-Hatchard ......... 320,000 (19.3 12.0 Michael Olbermann ............... 235,000 (14.2 8.8 Peter Morris ..................... 20,000 (4) 1.2 * All directors and executive officers as a group (four persons) ...... 895,000 (53.9% 33.6%
- ------------ * Less than 1% (1) The Company believes that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. (2) Does not include options to purchase 40,000 shares of Common Stock. (3) Includes 180,000 shares held by the Cole-Hatchard Family Limited Partnership, of which Mr. Cole-Hatchard is the general partner. Does not include (i) options to purchase 40,000 shares of Common Stock and (ii) 25,000 shares held by Mr. Cole-Hatchard's mother and brother. (4) Does not include options to purchase 30,000 shares of Common Stock. (5) Does not include options to purchase 150,000 shares of Common Stock. Messrs. Char, Feinberg and Cole-Hatchard may be deemed to be "promoters" of the Company as such term is defined in federal securities laws. 28 CERTAIN TRANSACTIONS In February 1997, the Company issued 320,000 shares to each of Messrs. Char, Feinberg and Cole-Hatchard, and issued 235,000 and 20,000 shares, respectively, to Messrs. Olbermann and Morris, in each case in consideration of $.01 per share. During the year ended December 31, 1996, the Company borrowed $37,000 and $15,000, respectively, from Messrs. Char and Cole-Hatchard. In January 1997, the Company borrowed an additional $20,000 from Mr. Cole-Hatchard. Pursuant to the Reorganization, Messrs. Feinberg, Char and Cole-Hatchard exchanged their respective interests in the Predecessor Companies for promissory notes in the principal amounts of $141,800 $163,537 and $66,800, respectively (inclusive of previously outstanding indebtedness of $21,737 and $35,000, respectively, to Messrs. Char and Cole-Hatchard described above). All of such indebtedness bears interest at the rate of 8% per annum and is repayable upon the earlier of (i) the consummation of this offering or (ii) May 30, 1999 (May 1, 1998 in the case of indebtedness owed to Mr. Char). The Company intends to use a portion of the proceeds of this offering to repay such indebtedness. Mr. Cole-Hatchard's mother and brother purchased 15,000 shares and 10,000 shares, respectively, pursuant to the Company's private placement in May 1997. In August 1997, the Company borrowed $60,000 from Mr. Cole-Hatchard. Such indebtedness bears interest at the rate of 9.25% per annum (the rate at which Mr. Cole-Hatchard borrowed such funds from an institutional lender) and is repayable on the earlier of (i) the consummation of this offering or (ii) May 1, 1999. The Company intends to use a portion of the proceeds of this offering to repay such indebtedness. 29 DESCRIPTION OF SECURITIES General The Company is authorized to issue 10,000,000 shares of Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred Stock, par value $.01 per share. As of the date of this Prospectus, there are 1,660,000 shares of Common Stock outstanding and no shares of Preferred Stock outstanding. Common Stock The holders of Common Stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voting for the election of directors can elect all of the directors then up for election. The holders of Common Stock are entitled to receive ratably such dividends when, as and if declared by the Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining which are available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the Common Stock. Holders of shares of Common Stock, as such, have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to the Common Stock. All of the outstanding shares of Common Stock are, and the shares of Common Stock offered hereby, when issued in exchange for the consideration set forth in this Prospectus, will be, fully paid and nonassessable. Preferred Stock The Company is authorized to issue 1,000,000 shares of Preferred Stock from time to time in one or more series, in all cases ranking senior to the Common Stock with respect to payment of dividends and in the event of the liquidation, dissolution or winding-up of the Company. There are currently no shares of Preferred Stock outstanding. The Board has the power, without stockholder approval, to issue shares of one or more series of Preferred Stock, at any time, for such consideration and with such relative rights, privileges, preferences and other terms as the Board may determine (including, but not limited to, terms relating to dividend rates, redemption rates, liquidation preferences and voting, sinking fund and conversion or other rights). The rights and terms relating to any new series of Preferred Stock could adversely affect the voting power or other rights of the holders of the Common Stock or could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Redeemable Warrants Each Warrant offered hereby entitles the registered holder thereof (the "Warrant Holders") to purchase one share of Common Stock at a price of $5.50, subject to adjustment in certain circumstances, at any time between , 1998 and 5:00 p.m., Eastern Time, on , 2002. The Warrants are redeemable by the Company at any time commencing , 1998, upon notice of not less than 30 days, at a price of $.10 per Warrant, provided that the closing bid quotation of the Common Stock on all 20 trading days ending on the third day prior to the day on which the Company gives notice has been at least 150% (currently $8.25, subject to adjustment) of the then effective exercise price of the Warrants and the Company obtains the written approval of the Underwriter to such redemption prior to the Call Date. The Warrant Holders shall have the right to exercise their Warrants until the close of business on the date fixed for redemption. The Warrants will be issued in registered form under a warrant agreement by and among the Company, Continental Stock Transfer and Trust Company, as warrant agent, and the Underwriter (the "Warrant Agreement"). The exercise price and number of shares of Common Stock or other securities issuable on exercise of the Warrants are subject to adjustment in certain circumstances, including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation of the Company. However, the Warrants are not 30 subject to adjustment for issuances of Common Stock at prices below the exercise price of the Warrants. Reference is made to the Warrant Agreement (which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part) for a complete description of the terms and conditions therein (the description herein contained being qualified by reference thereto). The Warrants may be exercised upon surrender of the Warrant certificate during the exercise period at the offices of the warrant agent, with the exercise form on the reverse side of the Warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price (by certified check or bank draft payable to the Company) to the warrant agent for the number of Warrants being exercised. The Warrant Holders do not have the rights or privileges of holders of Common Stock. No Warrant will be exercisable unless at the time of exercise the Company has filed a current registration statement with the Commission covering the shares of Common Stock issuable upon exercise of such Warrant and such shares have been registered or qualified or deemed to be exempt from registration or qualification under the securities laws of the state of residence of the holder of such Warrant. The Company will use its best efforts to have all such shares so registered or qualified on or before the exercise date and to maintain a current prospectus relating thereto until the expiration of the Warrants, subject to the terms of the Warrant Agreement. While it is the Company's intention to do so, there can be no assurance that it will be able to do so. No fractional shares will be issued upon exercise of the Warrants. However, if a Warrant Holder exercises all Warrants then owned of record by him, the Company will pay to such Warrant Holder, in lieu of the issuance of any fractional share which is otherwise issuable, an amount in cash based on the market value of the Common Stock on the last trading day prior to the exercise date. Dividend Policy To date, the Company has not declared or paid any dividends on its Common Stock. The payment by the Company of dividends, if any, is within the discretion of the Board of Directors and will depend on the Company's earnings, if any, its capital requirements and financial condition, as well as other relevant factors. The Board of Directors does not intend to declare any dividends in the foreseeable future, but instead intends to retain earnings, if any, for use in the Company's business operations. Delaware Anti-Takeover Law Upon the consummation of this offering, the Company will be governed by the provisions of Section 203 of the DGCL. In general, the law prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. "Business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the corporation's voting stock. Transfer Agent and Warrant Agent The transfer agent for the Common Stock and the warrant agent for the Warrants is Continental Stock Transfer and Trust Company, 2 Broadway, New York, New York 10004. Reports to Stockholders The Company intends to file a registration statement with the Securities and Exchange Commission to register its Common Stock and Warrants under the provisions of Section 12(g) of the Exchange Act prior to the date of this Prospectus and has agreed with the Underwriter that it will use its best efforts to continue to maintain such registration. Such registration will require the Company to comply with periodic reporting, proxy solicitation and certain other requirements of the Exchange Act. 31 SHARES ELIGIBLE FOR FUTURE SALE Upon the consummation of this offering, the Company will have 2,660,000 shares of Common Stock outstanding (assuming no exercise of Warrants). All 1,000,000 shares of Common Stock being offered hereby will be immediately tradable without restriction or further registration under the Securities Act. The remaining 1,660,000 shares of Common Stock outstanding are deemed to be "restricted securities," as that term is defined under Rule 144 promulgated under the Securities Act, in that such shares were acquired by the stockholders of the Company in transactions not involving a public offering, and, as such, may only be sold pursuant to a registration statement under the Securities Act, in compliance with the exemption provisions of Rule 144, or pursuant to another exemption under the Securities Act. The 1,660,000 restricted shares of Common Stock will become eligible for sale under Rule 144, subject to the volume limitations prescribed by the Rule and the contractual restrictions described below on various dates commencing February 1998. In general, under Rule 144 a person (or persons who may be deemed to be "affiliates" of the Company as that term is defined under the Securities Act), is entitled to sell within any three-month period a number of restricted shares beneficially owned for at least one year that does not exceed the greater of (i) 1% of the then outstanding Common Shares, or (ii) an amount equal to the average weekly trading volume in the Common Shares during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice and the availability of current public information about the Company. However, a person who is not deemed an affiliate and has beneficially owned such shares for at least three years is entitled to sell such shares without regard to the volume or other resale requirements. Under Rule 701 of the Securities Act, persons who purchase shares upon exercise of options granted prior to the date of this Prospectus are entitled to sell such shares after the 90th day following the date of this Prospectus in reliance on Rule 144, without having to comply with the holding period requirements of Rule 144 and, in the case of non-affiliates, without having to comply with the public information, volume limitation or notice provisions of Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90-day period, but without a holding period. The Company's officers, directors and all of the Company's securityholders, other than Michael Char who holds 320,000 shares, and the holders of 200,000 shares purchased pursuant to the Company's private placement in May 1997, have agreed not to sell or otherwise dispose of any securities of the Company beneficially owned by them for a period of twelve months from the date of this Prospectus, without the prior written consent of the Underwriter. The holders of 200,000 shares issued in the private placement have agreed not to sell such shares for a period of six months from the date of this Prospectus. Prior to this offering, there has been no market for the Common Stock and no prediction can be made as to the effect, if any, that public sales of shares of Common Stock or the availability of such shares for sale will have on the market prices of the Common Stock and the Warrants prevailing from time to time. Nevertheless, the possibility that substantial amounts of Common Stock may be sold in the public market may adversely affect prevailing market prices for the Common Stock and the Warrants and could impair the Company's ability in the future to raise additional capital through the sale of its equity securities. 32 UNDERWRITING Rockefeller Securities Group, Inc. (the "Underwriter") has agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase 1,000,000 shares of Common Stock and 500,000 Warrants from the Company. The Underwriter is committed to purchase and pay for all of the Common Stock and Warrants offered hereby if any of such securities are purchased. The Common Stock and Warrants are being offered by the Underwriter, subject to prior sale, when, as and if delivered to and accepted by the Underwriter and subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriter has advised the Company that it proposes to offer the Common Stock and Warrants to the public at the public offering prices set forth on the cover page of this Prospectus. The Underwriter may allow to certain dealers who are members of the National Association of Securities Dealers, Inc. (the "NASD") concessions, not in excess of $ per share of Common Stock and $ per Warrant, of which not in excess of $ per share of Common Stock and $ per Warrant may be reallowed to other dealers who are members of the NASD. The Company has granted to the Underwriter an option, exercisable for 45 days from the date of this Prospectus, to purchase up to 150,000 additional shares of Common Stock and/or 75,000 additional Warrants at the public offering prices set forth on the cover page of this Prospectus, less the underwriting discounts and commissions. The Underwriter may exercise this option in whole or, from time to time, in part, solely for the purpose of covering over-allotments, if any, made in connection with the sale of the shares of Common Stock and/or Warrants offered hereby. The Company has agreed to pay the Underwriter a nonaccountable expense allowance of 3% of the gross proceeds of this offering, of which $40,000 has been paid as of the date of this Prospectus. Of such amount, $10,000 was paid to Adams Stevens, Inc., an NASD member. The Company has also agreed to pay all expenses in connection with qualifying the shares of Common Stock and Warrants offered hereby for sale under the laws of such states as the Underwriter may designate, including expenses of counsel retained for such purpose by the Underwriter. The Company has agreed to sell to the Underwriter and its designees for an aggregate of $100, warrants (the "Underwriter's Warrants") to purchase up to 100,000 shares of Common Stock at an exercise price of $5.50 per share (110% of the public offering price per share) and up to 50,000 Warrants (each exercisable to purchase one share of Common Stock at a price of $5.50 per share) at an exercise price of $.11 per Warrant (110% of the public offering price per Warrant). The Underwriter's Warrants may not be sold, transferred, assigned or hypothecated for one year from the date of this Prospectus, except to the officers and partners of the Underwriter and members of the selling group and are exercisable at any time and from time to time, in whole or in part, during the five-year period commencing on the date of this Prospectus (the "Warrant Exercise Term"). During the Warrant Exercise Term, the holders of the Underwriter's Warrants are given, at nominal cost, the opportunity to profit from a rise in the market price of the Common Stock. To the extent that the Underwriter's Warrants are exercised, dilution to the interests of the Company's stockholders will occur. Further, the terms upon which the Company will be able to obtain additional equity capital may be adversely affected since the holders of the Underwriter's Warrants can be expected to exercise them at a time when the Company would, in all likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided in the Underwriter's Warrants. Any profit realized by the Underwriter on the sale of the Underwriter's Warrants, the underlying shares of Common Stock or the underlying warrants, or the shares of Common Stock issuable upon exercise of such underlying warrants may be deemed additional underwriting compensation. The Company has agreed, at the request of the holders of a majority of the Underwriter's Warrants, at the Company's expense, to register the Underwriter's Warrants, the shares of Common Stock and warrants underlying the Underwriter's Warrants, and the shares of Common Stock issuable upon exercise of the underlying warrants under the Securities Act on one occasion during the Warrant Exercise Term and to include the Underwriter's Warrants and all such underlying securities in any appropriate registration statement which is filed by the Company during the seven years following the date of this Prospectus. The Company has also agreed, for a period of three years from the date of this Prospectus, if so requested by the Underwriter, to elect a designee of the Underwriter as a non-voting advisor to the Company's Board of Directors. The Underwriter has not yet exercised its right to designate such a person. 33 In addition, the Company has agreed to enter into a consulting agreement to retain the Underwriter as a financial consultant for a period of two years from the consummation of this offering at an annual fee of $50,000, the entire $100,000 payable in full, in advance. The consulting agreement will not require the consultant to devote a specific amount of time to the performance of its duties thereunder. In the event that the Underwriter originates a financing or a merger, acquisition, joint venture or other transaction to which the Company is a party, the Underwriter will be entitled to receive a finder's fee in consideration for origination of such transaction. The Company has agreed, in connection with the exercise of the Warrants pursuant to solicitation (commencing one year from the date of this Prospectus), to pay to the Underwriter a fee of 5% of the exercise price for each Warrant exercised; provided, however, that the Underwriter will not be entitled to receive such compensation in Warrant exercise transactions in which (i) the market price of Common Stock at the time of exercise is lower than the exercise price of the Warrants; (ii) the Warrants are held in any discretionary account; (iii) disclosure of compensation arrangements is not made, in addition to the disclosure provided in this Prospectus, in documents provided to holders of Warrants at the time of exercise; (iv) the exercise of the Warrants is unsolicited by the Underwriter; or (v) the solicitation of exercise of the Warrants was in violation of Regulation M promulgated under the Exchange Act. The Underwriter has advised the Company that it does not expect sales made to discretionary accounts to exceed 1% of the securities offered hereby. The Company has agreed to indemnify the Underwriter against certain civil liabilities, including liabilities under the Securities Act. Prior to this offering, there has been no public trading market for the Common Stock or Warrants. Consequently, the initial public offering price of the Common Stock and Warrants and the exercise price of the Warrants have been determined by negotiations between the Company and the Underwriter. Among the factors considered in determining these prices were the Company's financial condition and prospects, market prices of similar securities of comparable publicly-traded companies and the general condition of the securities market. In order to facilitate the offering, the Underwriter may engage in transactions that stabilize, maintain or otherwise affect the prices of the Common Stock and Warrants. Specifically, the Underwriter may over-allot in connection with the offering, creating a short position in the Common Stock and/or Warrants for its own account. In addition, to cover over-allotments or to stabilize the price of the Common Stock and Warrants, the Underwriter may bid for, and purchase, shares of Common Stock and Warrants in the open market. The Underwriter may also reclaim selling concessions allowed to a dealer for distributing the Common Stock and Warrants in the offering, if the Underwriter repurchases previously distributed Common Stock and Warrants in transactions to cover short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock and Warrants above independent market levels. The Underwriter is not required to engage in these activities, and may end any of these activities at any time. EXPERTS The financial statements of the Company included in this Prospectus have been audited by BDO Seidman LLP, independent certified public accountants, to the extent and for the periods set forth in their report appearing elsewhere herein and is included in reliance upon such report given upon the authority of said firm as experts in accounting and auditing. LEGAL MATTERS The legality of the securities offered by this Prospectus will be passed upon for the Company by Tenzer Greenblatt LLP, New York, New York. Morrison Cohen Singer & Weinstein, LLP, New York, New York, has acted as counsel to the Underwriter in connection with this offering. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form SB-2 (the "Registration Statement") under the Securities Act with respect to the securities 34 offered by this Prospectus. This Prospectus, filed as a part of such Registration Statement, does not contain all of the information set forth in, or annexed as exhibits to, the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and this offering, reference is made to the Registration Statement, including the exhibits filed therewith, which may be inspected without charge at the Office of the Commission, 450 Fifth Street, N.W., Washington D.C. 20549; and at the following regional offices: Midwest Regional Office, Northwestern Atrium Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661-2511, and the Northeast Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of the Registration Statement may be obtained from the Commission at its principal office upon payment of prescribed fees. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete and, where the contract or other document has been filed as an exhibit to the Registration Statement, each statement is qualified in all respects by reference to the applicable document filed with the Commission. As of the date of this Prospectus, the Company will become subject to the reporting requirements of the Exchange Act and, in accordance therewith, will file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities of the Commission set forth above, and copies of such materials can be obtained from the Commission's Public Reference Section at prescribed rates. The Company intends to furnish its stockholders with annual reports containing audited financial statements and such other periodic reports as the Company deems appropriate or as may be required by law. 35 GLOSSARY Dial-up Accounts ............... Accounts with an Internet connectivity provider that utilize a telephone call to a modem rather than a dedicated data line. E-mail ........................ Electronic mail. An application that allows a user to send or receive text messages to or from any other user with an Internet address, commonly termed an E-mail address. FTP ........................... File Transfer Protocol. A protocol that allows file transfer between a host and a remote computer. ISDN ........................... Integrated Services Digital Network. An information trans- fer standard for transmitting digital voice and data over telephone lines at speeds up to 128 Kbps. Internet ........................ A worldwide network of computer networks that are inter- connected at certain points and utilize a common commu- nications protocol, TCP/IP. Kbps ........................... Kilobits per second. A measure of digital information trans- mission rates. One kilobit equals 1,000 bits of digital infor- mation. Mbps ........................... Megabits per second. A measure of digital information transmission rates. One megabit equals 1,000 Kbps. On-line Service Providers ...... Commercial information services that offer a computer user access through a modem to a specified slate of information, entertainment and communications menus. These services are generally closed systems and many offer limited, if any, Internet access. OEM ........................... Original Equipment Manufacturer. POP ........................... Point-of-Presence. An interlinked group of modems, rout- ers and other computer equipment, located in a particular city or metropolitan area, that allows a nearby subscriber to access the Internet through a local telephone call. T-1 ........................... A data communications line capable of transmission speeds of 1.54 Mbps. TCP/IP ........................ Transmission Control Protocol/Internet Protocol. A compi- lation of network- and transport-level protocols that allow computers with different architectures and operating sys- tem software to communicate with other computers on the Internet. World Wide Web .................. A network of servers that uses a special communications protocol to link different servers throughout the Internet and permits communication of graphics, video and sound. X2 56K ........................ A new transmission technique which supplies 56 Kbps "downstream" for transmissions from service providers.
36 Frontline Communications Corporation Contents
Page ----------- Report of independent certified public accountants ...... F-2 Combined financial statements: Balance sheets ....................................... F-3 Statements of operations .............................. F-4 Statements of stockholders' deficit .................. F-5 Statements of cash flows .............................. F-6 Notes to financial statements ........................ F-7 - F-12
F-1 Report of Independent Certified Public Accountants To the Board of Directors of Frontline Communications Corporation We have audited the accompanying combined balance sheet of Frontline Communications Corporation (the "Company") as described in Note 1 to the financial statements, as of December 31, 1996, and the related combined statements of operations, stockholders' deficit and cash flows for the year ended December 31, 1996 and the period from May 1, 1995 (inception) to December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1996, and the results of its operations and its cash flows for the year ended December 31, 1996 and the period from May 1, 1995 (inception) to December 31, 1995, in conformity with generally accepted accounting principles. BDO Seidman, LLP Valhalla, New York July 27, 1997 F-2 Frontline Communications Corporation Combined Balance Sheets
December 31, May 31, 1996 1997 -------------- ------------ (Unaudited) Assets Current: Cash ......................................................... $ 2,303 $ 371,793 Accounts receivable .......................................... 506 9,439 Prepaid expenses and other ................................. 3,048 378 Deferred registration costs ................................. -- 28,000 --------- ---------- Total current assets .................................... 5,857 409,610 Equipment, net (Note 4) ....................................... 46,760 74,076 Deposits ...................................................... 1,613 1,852 --------- ---------- $ 54,230 $ 485,538 ========= ========== Liabilities and Stockholders' Deficit Current: Notes payable to stockholders (Note 5) ..................... $ -- $ 372,137 Accounts payable and accrued expenses (Note 3) ............... 58,358 103,927 Deferred revenues .......................................... -- 16,500 Due to stockholders (Note 5) ................................. 15,266 -- --------- ---------- Total current liabilities ................................. 73,624 492,564 Due to stockholders (Note 5) .................................... 36,737 -- --------- ---------- Total liabilities ....................................... 110,361 492,564 --------- ---------- Commitments and contingencies (Notes 6 and 7) Stockholders' deficit Preferred stock, $.01 par value, 1,000,000 authorized, 0 issued and outstanding ............................................. -- -- Common stock, $.01 par value, 10,000,000 shares authorized, 1,660,000 issued and outstanding ........................... -- 16,600 Additional paid-in capital ................................. 6,000 295,000 Accumulated deficit .......................................... (62,131) (313,626) Stock subscriptions receivable .............................. -- (5,000) --------- ---------- Total stockholders' deficit .............................. (56,131) (7,026) --------- ---------- $ 54,230 $ 485,538 ========= ==========
See accompanying notes to combined financial statements. F-3 Frontline Communications Corporation Combined Statements of Operations
Period from Five Months Ended May 1, 1995 ---------------------------- (Inception) to Year ended (Unaudited) December December May 31, May 31, 31, 1995 31, 1996 1996 1997 ---------------- ------------ ------------ ------------- Revenues ................................. $ 1,880 $ 98,699 $ 16,234 $ 110,566 Cost of revenues ........................... 3,347 67,582 14,831 67,707 ---------- ---------- ---------- ---------- Gross (loss) profit ..................... (1,467) 31,117 1,403 42,859 Operating expenses: Selling, general and administrative ...... 6,458 81,220 29,327 85,680 Special non-cash compensation charge (Note 1) .............................. -- -- -- 205,000 ---------- ---------- ---------- ---------- Loss from operations ..................... (7,925) (50,103) (27,924) (247,821) Other income (expense): Interest ................................. -- (6,677) (907) (3,174) Other .................................... -- 2,574 3,280 (500) ---------- ---------- ---------- ---------- Net loss ................................. $ (7,925) $ (54,206) $ (25,551) $ (251,495) ========== ========== ========== ========== Loss per share of common stock and com- mon stock equivalents -- (.03) (.01) (.14) ========== ========== ========== ========== Weighted average number of shares out- standing 1,816,000 1,816,000 1,816,000 1,816,000 ========== ========== ========== ==========
See accompanying notes to combined financial statements. F-4 Frontline Communications Corporation Combined Statements of Stockholders' Deficit
Common Stock Additional Stock Total ---------------------- Paid-in Accumulated Subscriptions Stockholders' Shares Amount Capital Deficit Receivable Deficit ----------- --------- ------------ ------------- --------------- -------------- Balance, May 1, 1995 (inception) . -- $ -- $ -- $ -- $ -- $ -- Net loss ........................... -- -- -- (7,925) -- (7,925) ---------- -------- ---------- ---------- -------- ---------- Balance, December 31, 1995 ......... -- -- -- (7,925) -- (7,925) Officer salary contributed to capital -- -- 6,000 -- -- 6,000 Net loss ........................... -- -- -- (54,206) -- (54,206) ---------- -------- ---------- ---------- -------- ---------- Balance, December 31, 1996 ......... -- -- 6,000 (62,131) -- (56,131) For five months ended May 31, 1997 (Unaudited): Frontline reorganization (See Note 2) ........................ 640,000 6,400 (325,000) -- -- (318,600) Shares issued as compensation ...... 820,000 8,200 205,000 -- (5,000) 208,200 Officer salary contributed to capital -- -- 3,000 -- -- 3,000 Private placement of shares at $2 per share ........................... 200,000 2,000 398,000 -- -- 400,000 Common stock options issued for services ........................... -- -- 8,000 -- -- 8,000 Net loss ........................... -- -- -- (251,495) -- (251,495) ---------- -------- ---------- ---------- -------- ---------- Balance, May 31, 1997 (Unaudited) ........................ 1,660,000 $16,600 $ 295,000 $ (313,626) $ (5,000) $ (7,026) ========== ======== ========== ========== ======== ==========
See accompanying notes to combined financial statements. F-5 Frontline Communications Corporation Combined Statements of Cash Flows Increase (Decrease) in Cash
Period from Five Months Ended May 1, 1995 ---------------------------- (Inception) Year ended (Unaudited) to December 31, December 31, May 31, May 31, 1995 1996 1996 1997 ------------------ -------------- ----------- -------------- Cash flows from operating activities: Net loss .................................... $ (7,925) $ (54,206) $(25,551) $ (251,495) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation .............................. -- 9,962 3,817 10,630 Officer salary contributed to capital ...... -- 6,000 2,500 3,000 Common stock options issued for services -- -- -- 8,000 Special non cash compensation charge ...... -- -- -- 205,000 Changes in assets and liabilities: Accounts receivable ........................ (681) 175 (1,829) (8,933) Prepaid expenses and other ............... -- (1,661) (1,163) (239) Other assets .............................. -- (3,000) (3,000) 2,670 Accounts payable and accrued expenses 3,109 55,249 21,443 45,569 Deferred revenue ........................... -- -- 4,300 16,500 Deferred financing costs .................. -- -- -- (28,000) -------- --------- --------- ---------- Net cash provided by (used in) oper- ating activities (5,497) 12,519 517 2,702 -------- --------- --------- ---------- Cash flows from investing activities: Acquisitions of equipment ..................... (1,608) (55,114) (19,391) (37,946) -------- --------- --------- ---------- Cash flows from financing activities: Proceeds from stockholder loans, net ......... 18,933 33,070 11,556 4,734 Proceeds from sale of common stock ............ -- -- -- 400,000 -------- --------- --------- ---------- Net cash provided by financing activities .............................. 18,933 33,070 11,556 404,734 -------- --------- --------- ---------- Net increase (decrease) in cash ............... 11,828 (9,525) (7,318) 369,490 Cash, beginning of period ..................... -- 11,828 11,828 2,303 -------- --------- --------- ---------- Cash, end of period ........................... $ 11,828 $ 2,303 $ 4,510 $ 371,793 ======== ========= ========= ========== Supplemental disclosure of cash flow informa- tion: Cash paid for interest ........................ $ -- $ 6,600 $ 890 $ 3,105 Non-cash investing and financing activities: Common stock issued for reduction of stock- holder loans $ -- $ -- $ -- $ 9,600 Notes payable to stockholders issued as dis- tributions $ -- $ -- $ -- $ 325,000 Common stock subscriptions .................. $ -- $ -- $ -- $ 5,000 ======== ========= ========= ==========
See accompanying notes to combined financial statements. F-6 Frontline Communications Corporation Notes to Combined Financial Statements (Amounts related to May 31, 1997 and for the five month periods ended May 31, 1996 and 1997 are unaudited) 1. Summary of Significant Accounting Policies Business Frontline Communications Corporation ("Frontline" or the "Company") is an internet service provider that provides subscribers with direct access to a wide range of internet applications and resources including electronic mail, world wide web sites and regional and local information and data services. Reorganization and Principles of Combination The financial statements include the accounts of Hobbes & Co., LLC ("Hobbes"), INET Communications Company, LLC ("INET") and Sara Girl & Co., LLC ("Sara Girl"), (collectively the "Predecessor Companies") and Frontline Communications Corporation. As described more fully in Note 2, on May 30, 1997, Frontline acquired the net assets of the Predecessor Companies. For accounting purposes, the business combination has been accounted for as if the acquirer is Hobbes. With respect to the acquisition of INET, the acquisition has been accounted for as a combination of entities under common control in a manner similar to a pooling of interests and reflects the combined financial position, operating results and cash flows of Hobbes and INET as if they had been combined for all periods presented. With respect to Sara Girl and Frontline, the business combination has been accounted for using purchase accounting, which resulted in the recording of a special non-cash charge of $205,000 at May 30, 1997. The non-cash charge represents the estimated fair market value of the Company's 820,000 shares of common stock issued to certain founding shareholders for current and future services. The Predecessor Companies were dissolved and Frontline is the continuing legal entity. All intercompany accounts and transactions have been eliminated. Interim Financial Information The financial statements as of May 31, 1997 and for the five months ended May 31, 1996 and 1997 are unaudited but in the opinion of management, include all adjustments (consisting only of normal recurring adjustments and accruals) which the Company considers necessary for the fair presentation of the financial position, operating results and cash flows for that period. Results of interim periods are not necessarily indicative of results for the entire year. Equipment and Depreciation Equipment is stated at cost, less accumulated depreciation. Depreciation is computed over the estimated useful lives of the assets using the straight-line method for book purposes and accelerated methods for income tax purposes. The following estimated useful lives are applied in the computation of depreciation: Years ------ Computer equipment ............................... 3-5 === Upon retirement or sale, the cost and related accumulated depreciation are removed from the accounts and any resulting gains or losses are included in the statement of operations. Revenue Recognition Revenues are derived from the sale of direct access to the internet and various internet applications to subscribers. Revenues are recognized in the period when internet access is provided. F-7 Frontline Communications Corporation Notes to Combined Financial Statements -- (Continued) (Amounts related to May 31, 1997 and for the five month periods ended May 31, 1996 and 1997 are unaudited) 1. Summary of Significant Accounting Policies -- (Continued) Income Taxes Deferred income taxes are provided on differences between the financial reporting and income tax bases of assets and liabilities based upon statutory tax rates enacted for future periods. Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade accounts receivable. The Company's cash investments are placed with high credit quality financial institutions and may exceed the amount of federal deposit insurance. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base. Cash and cash equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Use of Estimates In preparing the financial statements in conformity with generally accepted accounting principles, management is required 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 amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial Instruments The carrying amounts of financial instruments including cash, accounts receivable, due to stockholders and accounts payable approximated fair value as of December 31, 1996, because of the relatively short maturity of these instruments. The carrying value of notes payable to stockholders cannot be determined because of the nature of their terms. Loss Per Share of Common Stock Loss per share of common stock is calculated by dividing net loss by the weighted average number of shares of common stock and common stock equivalents, if dilutive, outstanding during each of the periods presented. In addition, when an initial public offering is contemplated, common stock and common stock equivalents issued during and subsequent to the Frontline reorganization (see Note 2) by the Company at a price less than the estimated initial public offering price during the twelve months immediately preceding the anticipated initial filing of the offering are treated as outstanding for all periods presented, using the treasury stock method. Deferred Registration Costs Costs incurred in connection with the Company's anticipated public offering are deferred and will be charged against stockholders' equity upon successful completion of the offering. If the offering is not consummated, deferred costs will be charged to expense. Recent Accounting Pronouncements During February, 1997 the FASB issued SFAS No. 128 "Earnings Per Share" which replaces the presentation of primary earnings per share ("EPS") with basic EPS. It also requires dual presentation of basic and diluted EPS. SFAS No. 128 is effective for periods ending after December 15, 1997. The Company believes the adoption of this pronouncement will not have a material effect on the financial statements. F-8 Frontline Communications Corporation Notes to Combined Financial Statements -- (Continued) (Amounts related to May 31, 1997 and for the five month periods ended May 31, 1996 and 1997 are unaudited) 1. Summary of Significant Accounting Policies -- (Continued) During June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Because of the recent issuance of this standard, management has been unable to fully evaluate the impact, if any, the standard may have on future financial statement disclosures. Results of operations and financial position, however, will be unaffected by implementation of this standard. Long-Lived Assets In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of " ("SFAS No. 121"). SFAS No. 121 requires, among other things, impairment losses on assets to be held and gains or losses from assets that are expected to be disposed of be included as a component of income from continuing operations before taxes on income. The Company adopted SFAS No. 121 as of January 1, 1996 and its implementation did not have a material effect on the financial statements. Stock-Based Compensation In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a fair value method for accounting for stock-based compensation plans either through recognition or disclosure. The Company adopted the employee stock-based compensation provisions of SFAS No. 123 by disclosing the pro forma net income and pro forma net income per share amounts assuming the fair value method as of January 1, 1995. The adoption of this standard did not impact the Company's results of operations, financial position or cash flows. Stock arrangements with non-employees, if applicable, are recorded at fair value. Advertising All costs associated with advertising services are expensed in the period incurred. Advertising expense was approximately $1,000, $19,000, $8,000 and $8,500 for the years ended December 31, 1995 and 1996, and the five month periods ended May 31, 1996 and 1997, respectively. 2. Reorganization On May 30, 1997, the Predecessor Companies were acquired by the Company by issuing three notes aggregating $325,000 (excluding $47,137 of certain advances) (See Note 5) for all the membership interest in the Predecessor Companies. For accounting purposes Hobbes has been considered to be the acquirer. As a result, the business combination of Hobbes and INET has been accounted for as a combination of entities under common control in a manner similar to a pooling of interests. The business combination with Sara Girl and Frontline have been accounted for as purchases. The net assets and operations of Sara Girl and Frontline are not material to the Company's financial statements. Notes payable to the members of the Predecessor Companies are accounted for as distributions in the accompanying statement of stockholders' equity. F-9 Frontline Communications Corporation Notes to Combined Financial Statements -- (Continued) (Amounts related to May 31, 1997 and for the five month periods ended May 31, 1996 and 1997 are unaudited) 3. Accounts Payable and Accrued Expenses Accrued expenses were approximately $13,000 and $55,000 at December 31, 1996 and May 31, 1997, respectively. Accrued expenses consisted of various items including telephone charges, professional fees, rent and supplies. 4. Equipment Equipment consist of the following: December 31, May 31, 1996 1997 -------------- -------- Computer equipment .................. $56,722 $94,668 -------- -------- Less accumulated depreciation ...... 9,962 20,592 -------- -------- Equipment, net ..................... $46,760 $74,076 ======== ======== 5. Related Party Transactions On May 30, 1997, the Company issued notes aggregating $372,137 to three of its stockholders related to the reorganization discussed in Note 2, and certain advances made to the Company since inception. The notes bear interest at 8% and are payable at the earlier of an initial public offering or on May 30, 1999, except for $163,537, which is due on the earlier of an initial public offering or May 1, 1998. At December 31, 1996, due to stockholders represents advances made to the Company for working capital purposes. 6. Commitments and Contingencies Leases The Company rents office space and equipment under operating leases. Future minimum rental payments required under operating leases as of May 31, 1997 are as follows: 1998 .......................... $114,127 1999 .......................... 114,301 2000 .......................... 121,358 2001 .......................... 117,545 2002 .......................... 107,611 --------- Total .......................... $574,942 ========= Rental expense was $0, $17,475, $6,143 and $15,209 for the years ended December 31, 1995 and 1996 and the five month periods ended May 31, 1996 and 1997, respectively. Potential Litigation In June 1997, Michael Char, a founder and principal stockholder of the Company, had disagreements with other members of management with respect to various business matters. The Company has been unsuccessful in resolving such disagreements or in negotiating a settlement with Mr. Char and, after a prolonged absence, in August 1997, the Company removed Mr. Char as a director and terminated his employment. While the Company does not believe that Mr. Char has any meritorious claims against the Company or members of management, there can be no assurance that Mr. Char will not institute an action against the Company, seeking substantial damages. Any such claims, with or without merit, can be time consuming, costly and difficult to defend and, if successful, could have a material adverse effect on the Company. F-10 Frontline Communications Corporation Notes to Combined Financial Statements -- (Continued) (Amounts related to May 31, 1997 and for the five month periods ended May 31, 1996 and 1997 are unaudited) 7. Stock Options Effective March 1, 1997, the Board of Directors (the "Board") approved the 1997 stock option plan (the "Plan"), which authorized the issuance of incentive options and non-qualified options to purchase up to 500,000 shares of common stock. The plan has a ten year term. The Board retained the authority to determine the individuals to whom, and the times at which, stock options would be made, along with the number of shares, vesting schedule and other provisions related to the stock options. For the period ended May 31, 1997, the Company issued incentive options to purchase 220,000 shares of common stock to employees and non-qualified options to purchase 40,000 shares of common stock to certain non-employees. These options have a five year term and are exercisable at any time on or after March 1, 1998 at $2 per share. The Company applies Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations by recording compensation expense for the excess of fair market value over the exercise price per share as of the date of the grant in accounting for its stock options. Accordingly, no compensation costs have been recognized for its issuance of 220,000 options to employees since the exercise price exceeded the then fair market value on the date of the grant. In accordance with SFAS No. 123, the Company has recognized $8,000 as the fair value of services received for the 40,000 options granted to non-employees. SFAS No. 123 requires the Company to provide pro forma information regarding net loss and net loss per share as if compensation cost for the Company's stock options had been determined in accordance with the fair value based method prescribed in SFAS No. 123. The Company estimates fair value of each stock based option at the date of the grant using the Black Scholes option-pricing model with the following weighted average assumptions used for options in 1997: Risk-free interest rate ...... 6.51% Expected life ............... 5 Years Expected volatility ......... 0.00% Dividend yield ............... None Had compensation cost for the issuance of options been determined based on the fair value at the grant dates consistent with the fair value method of SFAS No. 123, the Company's net loss would not have changed since options at the grant date were considered to have no value.
Weighted Weighted Average Average Remaining Exercise Life Shares Price ------------ --------- --------- Outstanding, January 1, 1997 ........................... -- $ -- Granted ................................................ 260,000 2.00 -------- ------ Outstanding, May 31, 1997 .............................. 4.75 years 260,000 2.00 ======== ====== Options exercisable at end of period .................. -- -- Weighted average fair value of options granted during the period ................................................ $ -- ======
During the initial phase-in period of SFAS No. 123, the effects on pro forma results are not likely to be representative of the effects on pro forma results in future years since additional awards could be made each year. F-11 Frontline Communications Corporation Notes to Combined Financial Statements -- (Continued) (Amounts related to May 31, 1997 and for the five month periods ended May 31, 1996 and 1997 are unaudited) 8. Income Taxes The Company had net operating loss carryforwards of approximately $59,000 and $62,000 at December 31, 1996 and May 31, 1997, respectively, which expire in 2111 and 2112. A valuation allowance has been provided for these loss carryforwards since their realization is not considered to be more likely than not. 9. Subsequent Events a) The Company has a letter of intent with Rockefeller Securities Group, Inc. in connection with a proposed offering and sale to the public of one million shares of common stock of the Company at a price of $5 per share and 500,000 warrants at a price of $.10 per warrant. Each warrant will be exercisable to purchase one share of common stock at $5.50 per share. b) The Company has entered into employment contracts expiring on various dates from June 2000 to August 2000 with four officers of the Company for aggregate annual salaries of $318,000. c) In August 1997, the Chairman advanced the Company $60,000 for working capital purposes. F-12 ================================================================================ No dealer, sales person or other person has been authorized to give any information or to make any representations other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or the Underwriter. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this Prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which such offer or solicitation is not authorized or is unlawful. The delivery of this Prospectus shall not, under any circumstances, create any implication that the information contained herein is correct as of any time subsequent to the date hereof. -------------------------- TABLE OF CONTENTS Page ----------- Prospectus Summary .................. 3 Risk Factors ........................ 6 Use of Proceeds ..................... 13 Dilution .............................. 14 Capitalization ........................ 15 Plan of Operation ..................... 16 Business .............................. 19 Management ........................... 25 Principal Stockholders ............... 28 Certain Transactions .................. 29 Description of Securities ............ 30 Shares Eligible for Future Sale ...... 32 Underwriting ........................ 33 Experts .............................. 34 Legal Matters ........................ 34 Additional Information ............... 34 Glossary .............................. 36 Index to Financial Statements ......... F-1 -------------------------- Until , 1997 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities offered hereby, whether or not participating in this distribution may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ================================================================================ ================================================================================ FRONTLINE COMMUNICATIONS CORPORATION 1,000,000 Shares of Common Stock and Redeemable Warrants to Purchase 500,000 Shares of Common Stock ------------- PROSPECTUS ------------ Rockefeller Securities Group, Inc. , 1997 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers. Section 145 of the Delaware General Corporation Law (the "DGCL") contains the provisions entitling the Registrant's directors and officers to indemnification from judgments, fines, amounts paid in settlement, and reasonable expenses (including attorney's fees) as the result of an action or proceeding in which they may be involved by reason of having been a director or officer of the Registrant. In its Certificate of Incorporation, the Registrant has included a provision that limits, to the fullest extent now or hereafter permitted by the DGCL, the personal liability of its directors to the Registrant or its stockholders for monetary damages arising from a breach of their fiduciary duties as directors. Under the DGCL as currently in effect, this provision limits a director's liability except where such director (i) breaches his duty of loyalty to the Registrant or its stockholders, (ii) fails to act in good faith or engages in intentional misconduct or a knowing violation of law, (iii) authorizes payment of an unlawful dividend or stock purchase or redemption as provided in Section 174 of the DGCL, or (iv) obtains an improper personal benefit. This provision does not prevent the Registrant or its stockholders from seeking equitable remedies, such as injunctive relief or rescission. If equitable remedies are found not to be available to stockholders in any particular case, stockholders may not have any effective remedy against actions taken by directors that constitute negligence or gross negligence. The Certificate of Incorporation also includes provisions to the effect that (subject to certain exceptions) the Registrant shall, to the maximum extent permitted from time to time under the law of the State of Delaware, indemnify, and upon request shall advance expenses to, any director or officer to the extent that such indemnification and advancement of expenses is permitted under such law, as may from time to time be in effect. In addition, the By-Laws require the Registrant to indemnify, to the full extent permitted by law, any director, officer, employee or agent of the Registrant for acts which such person reasonably believes are not in violation of the Registrant's corporate purposes as set forth in the Certificate of Incorporation. At present, the DGCL provides that, in order to be entitled to indemnification, an individual must have acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the Registrant's best interests. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to any charter provision, by-law, contract, arrangement, statute or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. See Item 28. Item 25. Other Expenses of Issuance and Distribution. The estimated expenses payable by the Registrant in connection with the issuance and distribution of the securities being registered (other than underwriting discounts and commissions and the Underwriter's non-accountable expense allowance) are as follows: Securities and Exchange Commission registration fee ............... $ 2,969.82 NASD filing fee ................................................... 1,480.06 Nasdaq listing fee ................................................ * Underwriter's consulting fee ....................................... 100,000.00 Printing and engraving expenses .................................... * Legal fees and expenses ............................................. * Accounting fees and expenses ....................................... * Blue sky fees and expenses (including legal fees) .................. * Transfer agent, warrant agent and registrar fees and expenses ...... * Miscellaneous ...................................................... * ------------ Total ............................................................. $
- ------------ * To be filed by amendment. II-1 Item 26. Recent Sales of Unregistered Securities In February 1997, the Company issued an aggregate of 1,460,000 shares of Common Stock to twelve persons, including Messrs. Char, Feinberg, Cole-Hatchard, Olbermann and Morris, in consideration of $.01 per share. In February 1997, the Company issued options to purchase 260,000 shares of Common Stock (net of forfeitures). In May 1997, the Company issued 200,000 shares of Common Stock to twenty persons for a consideration of $400,000 or $2.00 per share. In connection with the above referenced issuances, the Company relied on Section 4(2) under the Securities Act of 1933 as transactions by an issuer not involving any public offering. Item 27. Exhibits 1.1 Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Registrant. 3.2 Bylaws of the Registrant. 4.1 Form of Underwriter's Warrant Agreement, including Form of Warrant Certificate. 4.2 Form of Public Warrant Agreement among the Registrant, Rockefeller Securities Group, Inc., as Underwriter and Continental Transfer & Trust Company as Warrant Agent. *4.3 Form of Registrant's Public Warrant Certificate. *5.1 Opinion of Tenzer Greenblatt LLP. 10.1 Exchange Agreement. 10.2 Promissory Note issued by Registrant to Mr. Feinberg, amended. 10.3 Promissory Note issued by Registrant to Mr. Cole-Hatchard, as amended. 10.4 Promissory Note issued by Registrant to Mr. Char. 10.5 1997 Stock Option Plan. 10.6 Office Lease between Registrant and Glorious Sun Robert Martin LLC. *10.7 Employment Agreements with Messrs. Morris, Cole-Hatchard, Feinberg and Olbermann. 10.8 Promissory Note issued to Mr. Cole-Hatchard. 23.1 Consent of BDO Seidman LLP, Independent Certified Public Accountants. *23.2 Consent of Tenzer Greenblatt LLP (will be contained in such firm's opinion filed as Exhibit 5.1). 24.1 A power of attorney relating to the signing of amendments hereto is incorporated in the signature pages of this Registration Statement. 27 Financial Data Schedule (SEC use only).
- ------------ * To be filed by amendment. Item 28. Undertakings. The undersigned registrant hereby undertakes to: (1) file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) include any prospectus required by section 10(a)(3) of the Securities Act. (ii) reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information set forth in the Registration Statement; (iii) include any additional or changed material information on the plan of distribution; (2) for determining liability under the Securities Act, treat each such post-effective amendment as a new registration of the securities offered, and the offering of such securities at that time to be initial bona fide offering; and (3) file a post-effective amendment to remove from registration any of the securities that remain unsold at the termination of the offering. II-2 Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes (1) to provide to the underwriters at the closing specified in the standby under writing agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser; (2) that for the purpose of determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this Registration Statement as of the time the Securities and Exchange Commission declares it effective; and (3) that for the purpose of determining any liability under the Securities Act, treat each post-effective amendment that contains a form of Prospectus as a new Registration Statement for the securities offered in the Registration Statement therein, and treat the offering of the securities at that time as the initial bona fide offering of those securities. II-3 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this Registration Statement to be signed on its behalf by the undersigned, in the city of Pearl River, State of New York on August 21, 1997. FRONTLINE COMMUNICATIONS CORPORATION By: /s/ Stephen J. Cole-Hatchard ------------------------------------- Stephen J. Cole-Hatchard, Chairman POWER OF ATTORNEY Each person whose signature appears below on this Registration Statement hereby constitutes and appoints Stephen J. Cole-Hatchard and Nicko Feinberg and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities (until revoked in writing) to sign any and all amendments (including pre-effective amendments and post-effective amendments and amendments thereto) to this Registration Statement on Form SB-2 of Frontline Communications Corporation and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone or his substitute, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date - ------------------------------ ---------------------------------------------- ---------------- /s/ Stephen J. Cole-Hatchard Chairman of the Board, President and August 21, 1997 - ------------------------- Secretary Stephen J. Cole-Hatchard /s/ Nicko Feinberg Chief Information Officer, Vice President of August 21, 1997 - ------------------------- Technology and Director Nicko Feinberg /s/ Peter Morris Chief Financial Officer, Vice President, August 21, 1997 - ------------------------- Treasurer and Director Peter Morris /s/ Michael Olbermann Vice President of Business Development and August 21, 1997 - ------------------------- Director Michael Olbermann
II-4 EXHIBIT INDEX
Exhibit No. Description - ---------- --------------------------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Registrant. 3.2 Bylaws of the Registrant. 4.1 Form of Underwriter's Warrant Agreement, including Form of Warrant Certificate. 4.2 Form of Public Warrant Agreement among the Registrant, Rockefeller Securities Group, Inc., as Underwriter and Continental Transfer & Trust Company as Warrant Agent. *4.3 Form of Registrant's Public Warrant Certificate. *5.1 Opinion of Tenzer Greenblatt LLP. 10.1 Exchange Agreement. 10.2 Promissory Note issued by Registrant to Mr. Feinberg, amended. 10.3 Promissory Note issued by Registrant to Mr. Cole-Hatchard, as amended. 10.4 Promissory Note issued by Registrant to Mr. Char. 10.5 1997 Stock Option Plan. 10.6 Office Lease between Registrant and Glorious Sun Robert Martin LLC. *10.7 Employment Agreements with Messrs. Morris, Cole-Hatchard, Feinberg and Olbermann. 10.8 Promissory Note issued to Mr. Cole-Hatchard. 23.1 Consent of BDO Seidman LLP, Independent Certified Public Accountants. *23.2 Consent of Tenzer Greenblatt LLP (will be contained in such firm's opinion filed as Exhibit 5.1). 24.1 A power of attorney relating to the signing of amendments hereto is incorporated in the signature pages of this Registration Statement. 27 Financial Data Schedule (SEC use only).
- ------------ * To be filed by amendment. EX-1.1 2 EXHIBIT 1.1 FRONTLINE COMMUNICATIONS CORPORATION 1,000,000 Shares of Common Stock (Par Value $.01 Per Share) and Warrants to Purchase 500,000 Shares of Common Stock UNDERWRITING AGREEMENT Rockefeller Securities Group, Inc. , 1997 100 Quentin Roosevelt Blvd. Suite 502 Garden City, New York 11530 Ladies and Gentlemen: Frontline Communications Corporation, a Delaware corporation (the "Company"), proposes to issue and sell to Rockefeller Securities Group, Inc. (the "Underwriter") an aggregate of one million (1,000,000) shares of common stock of the Company, par value $.01 per share (the "Offered Shares"), which Offered Shares are presently authorized but unissued shares of the common stock, par value $.01 per share (individually a "Common Share" and collectively the "Common Shares"), of the Company, at a price of Five Dollars ($5.00) per Offered Share, and five hundred thousand (500,000) Common Share purchase warrants (the "Offered Warrants"), at a price of Ten Cents ($.10) per Offered Warrant, entitling the holder of each Offered Warrant to purchase, during the five (5) year period commencing , 1997, one (1) Common Share, at an exercise price of $5.50 per share (subject to adjustment in certain circumstances). The Company shall have the right to call each Offered Warrant for redemption upon not less than thirty (30) days' written notice at any time after becoming exercisable at a redemption price of Ten Cents ($.10) per Offered Warrant; provided that the closing bid quotation of the Common Stock has been at least 150% (currently $8.25) of the then-effective exercise price of the Warrants on all twenty (20) trading days ending on the third trading day prior to the day on which the Company gives notice (the "Call Date") and that the Company obtains the written consent of the Underwriter to such redemption prior to the Call Date. In addition, the Underwriter, in order to cover over-allotments in the sale of the Offered Shares and/or Offered Warrants, may purchase an aggregate of not more than one hundred fifty thousand (150,000) Common Shares (the "Optional Shares") and/or seventy-five thousand (75,000) Common Share purchase warrants (the "Optional Warrants") entitling the holder of each Optional Warrant to purchase one (1) Common Share on the same terms as the Offered Warrants. The Offered Shares and the Optional Shares are hereinafter sometimes collectively referred to as the "Shares"; and the Offered Warrants and the Optional Warrants are hereinafter collectively referred to as the "Warrants." The Warrants will be issued pursuant to a Warrant Agreement (the "Warrant Agreement") to be dated as of the Closing Date (as hereinafter defined) by and among the Company, the Underwriter and Continental Stock Transfer & Trust Company, as warrant agent (the "Warrant Agent"). The Company also proposes to issue and sell to the Underwriter for its own account and the accounts of its designees, warrants (the "Underwriter's Warrants") to purchase up to an aggregate of one hundred thousand (100,000) Common Shares (collectively, the "Underlying Shares") and/or fifty thousand (50,000) warrants similar, but not identical to, the Warrants (collectively, the "Underlying Warrants"), which sale will be consummated in accordance with the terms and conditions of the form of Underwriter's Warrant Agreement filed as an exhibit to the Registration Statement (as hereinafter defined). The Underlying Shares and the Common Shares issuable upon exercise of the Warrants and the Underlying Warrants are hereinafter sometimes referred to as the "Warrant Shares". The Shares, the Warrants, the Underwriter's Warrants, the Underlying Warrants and the Warrant Shares (collectively, the "Securities") are more fully described in the Registration Statement and the Prospectus, as defined below. The Company hereby confirms its agreement with the Underwriter as follows: 1. Purchase and Sale of Offered Shares and Offered Warrants. On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company hereby agrees to sell the Offered Shares and Offered Warrants to the Underwriter, and the Underwriter agrees to purchase the Offered Shares and Offered Warrants from the Company, at a purchase price of $____ per Offered Share and $___ per Offered Warrant. The Underwriter plans to offer the Offered Shares and Offered Warrants to the public at a public offering price of $____ per Offered Share and $___ per Offered Warrant. 2. Payment and Delivery. (a) Payment for the Offered Shares and Offered Warrants will be made to the Company by wire transfer or certified or official bank check or checks payable to its order in New York Clearing House funds, at the offices of the Underwriter, 100 Quentin Roosevelt Blvd., Suite 502, Garden City, New York 11530, against delivery of the Offered Shares and Offered Warrants to the Underwriter. Such payment and delivery will be made at or about 10:00 A.M., New York City time, on the third business day following the Effective Date as defined below (the fourth business day following the Effective Date in the event that trading of the Offered Shares commences on the day following the Effective Date), the date and time of such payment and delivery being herein called the "Closing Date." The certificates representing the Offered Shares and Offered Warrants -2- to be delivered will be in such denominations and registered in such names as the Underwriter may request not less than three full business days prior to the Closing Date, and will be made available to the Underwriter for inspection, checking and packaging at the office of the Company's transfer agent or correspondent in New York City, Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004, not less than one full business day prior to the Closing Date. (b) On the Closing Date, the Company will sell the Underwriter's Warrants to the Underwriter or to its designees. The Underwriter's Warrants will be in the form of, and in accordance with, the provisions of the Underwriter's Warrant attached as an exhibit to the Registration Statement. The aggregate purchase price for the Underwriter's Warrants is One Hundred Dollars ($100.00). The Underwriter's Warrants will be restricted from sale, transfer, assignment or hypothecation for a period of one (1) year from the Effective Date, except to officers and partners of the Underwriter and members of the selling group and/or their officers or partners. Payment for the Underwriter's Warrants will be made to the Company by check or checks payable to its order on the Closing Date against delivery of the certificates representing the Underwriter's Warrants. The certificates representing the Underwriter's Warrants will be in such denominations and such names as the Underwriter may request prior to the Closing Date. 3. Option to Purchase Optional Shares and/or Optional Warrants. (a) For the purposes of covering any over-allotments in connection with the distribution and sale of the Offered Shares and Offered Warrants as contemplated by the Prospectus, the Underwriter is hereby granted an option to purchase all or any part of the Optional Shares and/or Optional Warrants from the Company. The purchase price to be paid for the Optional Shares and Optional Warrants will be the same price per Optional Share and Optional Warrant as the price per Offered Share or Offered Warrant, as the case may be, set forth in Section 1 hereof. The option granted hereby may be exercised by the Underwriter as to all or any part of the Optional Shares and/or the Optional Warrants at any time within 45 days after the Effective Date. The Underwriter will not be under any obligation to purchase any Optional Shares or Optional Warrants prior to the exercise of such option. -3- (b) The option granted hereby may be exercised by the Underwriter by giving oral notice to the Company, which must be confirmed by a letter, facsimile, telex or telegraph setting forth the number of Optional Shares and Optional Warrants to be purchased, the date and time for delivery of and payment for the Optional Shares and Optional Warrants to be purchased and stating that the Optional Shares and Optional Warrants referred to therein are to be used for the purpose of covering over-allotments in connection with the distribution and sale of the Offered Shares and Offered Warrants. If such notice is given prior to the Closing Date, the date set forth therein for such delivery and payment will not be earlier than either two full business days thereafter or the Closing Date, whichever occurs later. If such notice is given on or after the Closing Date, the date set forth therein for such delivery and payment will not be earlier than five full business days thereafter. In either event, the date so set forth will not be more than 15 full business days after the date of such notice. The date and time set forth in such notice is herein called the "Option Closing Date." Upon exercise of such option, the Company will become obligated to convey to the Underwriter, and, subject to the terms and conditions set forth in Section 3(d) hereof, the Underwriter will become obligated to purchase, the number of Optional Shares and Optional Warrants specified in such notice. (c) Payment for any Optional Shares and Optional Warrants purchased will be made to the Company by wire transfer or certified or official bank check or checks payable to its order in New York Clearing House funds, at the office of the Underwriter, against delivery of the Optional Shares and Optional Warrants purchased to the Underwriter. The certificates representing the Optional Shares and Optional Warrants to be delivered will be in such denominations and registered in such names as the Underwriter requests not less than two full business days prior to the Option Closing Date, and will be made available to the Underwriter for inspection, checking and packaging at the aforesaid office of the Company's transfer agent or correspondent not less than one full business day prior to the Option Closing Date. (d) The obligation of the Underwriter to purchase and pay for any of the Optional Shares or Optional Warrants is subject to the accuracy and completeness (as of the date hereof and as of the Option Closing Date) of and compliance in all material respects with the representations and warranties of the Company herein, to the accuracy and completeness of the statements of the Company or its officers made in any certificate or other document to be delivered by the Company pursuant to this Agreement, to the performance in all material respects by the Company of its obligations hereunder, to the satisfaction by the Company of the conditions, as of the date hereof and as of the Option Closing Date, set forth in Section 6 hereof, and to the delivery to the Underwriter of opinions, certificates and letters -4- dated the Option Closing Date substantially similar in scope to those specified in Section 5, 6(b), (c), (d) and (e) hereof, but with each reference to "Offered Shares," "Offered Warrants" and "Closing Date" to be, respectively, to the Optional Shares, Optional Warrants and the Option Closing Date. 4. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the Underwriter that: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full corporate power and authority to own or lease and operate its properties and to conduct its business as described in the Registration Statement and to execute, deliver and perform this Agreement, the Warrant Agreement and the Underwriter's Warrant Agreement and to consummate the transactions contemplated hereby and thereby. The Company is duly qualified to do business as a foreign corporation in New York, New Jersey and Connecticut. (b) Each of this Agreement and the consulting agreement described in Section 5(r) hereof (the "Consulting Agreement") has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company, and each of the Warrant Agreement and the Underwriter's Warrant Agreement, when executed and delivered by the Company on the Closing Date, will be the valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. The execution, delivery and performance of this Agreement, the Consulting Agreement, the Warrant Agreement and the Underwriter's Warrant Agreement by the Company, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms of this Agreement, the Consulting Agreement, the Warrant Agreement and the Underwriter's Warrant Agreement have been duly authorized by all necessary corporate action and do not and will not, with or without the giving of notice or the lapse of time, or both, (i) result in any violation of the Certificates of Incorporation or By-Laws, each as amended, of the Company; (ii) result in a breach of or conflict with any of the terms or provisions of, or constitute a default under, or result in the modification or termination of, or result in the creation or imposition of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company pursuant to any indenture, mortgage, note, contract, commitment, lease or other agreement or instrument to which the Company is a party or by which the Company or any of its properties or assets are bound; (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its properties or business; or (iv) have any effect on any permit, certification, registration, approval, -5- consent, order, license, franchise or other authorization (collectively, "Permits") necessary for the Company to own or lease and operate its properties and to conduct its business or the ability of the Company to make use thereof, which, in the case of clauses (ii), (iii) and (iv) of this Section 4(b), would have a material adverse effect on the financial condition, results of operations, business or properties of the Company (a "Material Adverse Effect"). (c) No Permit of any court or governmental agency or body, other than under the Securities Act of 1933, as amended (the "Act"), the Regulations (as hereinafter defined) and applicable state securities or Blue Sky laws, is required for the valid authorization, issuance, sale and delivery of the Shares and Warrants to the Underwriter, and the consummation by the Company of the transactions contemplated by this Agreement, the Consulting Agreement, the Warrant Agreement or the Underwriter's Warrant Agreement. (d) The conditions for use of a registration statement on Form SB-2 set forth in the General Instructions to Form SB-2 have been satisfied with respect to the Company, the transactions contemplated herein and in the Registration Statement. The Company has prepared in conformity in all material respects with the requirements of the Act and the rules and regulations (the "Regulations") of the Securities and Exchange Commission (the "Commission") and filed with the Commission a registration statement (File No. 333-_____) on Form SB-2 and has filed one or more amendments thereto, covering the registration of the Securities under the Act, including the related preliminary prospectus or preliminary prospectuses (each thereof being herein called a "Preliminary Prospectus") and a proposed final prospectus. Each Preliminary Prospectus was endorsed with the legend required by Item 501(a)(8) of Regulation S-B of the Regulations and if applicable, Rule 430A of the Regulations. Such registration statement including any documents incorporated by reference therein and all financial schedules and exhibits thereto, as amended at the time it becomes effective, and the final prospectus included therein are herein, respectively, called the "Registration Statement" and the "Prospectus," except that, (i) if the prospectus filed by the Company pursuant to Rule 424(b) of the Regulations differs from the Prospectus, the term "Prospectus" will also include the prospectus filed pursuant to Rule 424(b), and (ii) if the Registration Statement is amended or such Prospectus is supplemented after the effective date of the Registration Statement (the "Effective Date") and prior to the Option Closing Date, the terms "Registration Statement" and "Prospectus" shall include the Registration Statement and such Prospectus as amended or supplemented. (e) Neither the Commission nor, to the best of the Company's knowledge, any state regulatory authority has issued any order preventing or suspending the use of any Preliminary Prospectus or has instituted or, to the best of the Company's knowledge, threatened to institute any proceedings with respect to such an order. -6- (f) The Registration Statement when it becomes effective, the Prospectus (and any amendment or supplement thereto) when it is filed with the Commission pursuant to Rule 424(b), and both documents as of the Closing Date and the Option Closing Date referred to below, will contain all statements which are required to be stated therein in accordance with the Act and the Regulations and will in all material respects conform to the requirements of the Act and the Regulations, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, on such dates, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that this representation and warranty does not apply to statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company in connection with the Registration Statement or Prospectus or any amendment or supplement thereto by the Underwriter expressly for use therein. (g) The Company had at the date or dates indicated in the Prospectus a duly authorized and outstanding capitalization as set forth in the Registration Statement and the Prospectus. Based on the assumptions stated in the Registration Statement and the Prospectus, the Company will have on the Closing Date the adjusted stock capitalization set forth therein. Except as set forth in the Registration Statement or the Prospectus, on the Effective Date and on the Closing Date, there will be no options to purchase, warrants or other rights to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell shares of the Company's capital stock or any such warrants, convertible securities or obligations. Except as set forth in the Prospectus, no holders of any of the Company's securities has any rights, "demand," "piggyback" or otherwise, to have such securities registered under the Act. (h) The descriptions in the Registration Statement and the Prospectus of contracts and other documents are accurate and present fairly the information required to be disclosed, and there are no contracts or other documents required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement under the Act or the Regulations which have not been so described or filed as required. (i) BDO Seidman, LLP, the accountants who have certified certain of the consolidated financial statements filed and to be filed with the Commission as part of the Registration -7- Statement and the Prospectus, are independent public accountants within the meaning of the Act and Regulations. The consolidated financial statements and schedules and the notes thereto filed as part of the Registration Statement and included in the Prospectus are complete, correct and present fairly the financial position of the Company as of the dates thereof, and the results of operations and changes in financial position of the Company for the periods indicated therein, all in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved except as otherwise stated in the Registration Statement and the Prospectus. The selected financial data set forth in the Registration Statement and the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited and unaudited financial statements included in the Registration Statement and the Prospectus. (j) The Company has filed with the appropriate federal, state and local governmental agencies, and all applicable foreign countries and political subdivisions thereof, all tax returns, including franchise tax returns, which are required to be filed or has duly obtained extensions of time for the filing thereof and has paid all taxes shown on such returns and all assessments received by it to the extent that the same have become due; and the provisions for income taxes payable, if any, shown on the consolidated financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid foreign and domestic taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. Except as disclosed in writing to the Underwriter, the Company has not executed or filed with any taxing authority, foreign or domestic, any agreement extending the period for assessment or collection of any income taxes and is not a party to any pending action or proceeding by any foreign or domestic governmental agency for assessment or collection of taxes; and no claims for assessment or collection of taxes have been asserted against the Company, the adverse determination of which would have a Material Adverse Effect. (k) The outstanding Common Shares, outstanding options and warrants to purchase Common Shares have been, or upon conversion will be, as the case may be, duly authorized and validly issued. The outstanding Common Shares are fully paid and nonassessable. The outstanding options and warrants to purchase Common Shares constitute the valid and binding obligations of the Company, enforceable in accordance with their terms, except as enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and general principles of equity and the discretion of the court before which any proceeding therefor may be brought. None of the outstanding Common Shares, or options or warrants to purchase Common Shares has been or will be, as the case may be, issued in violation of -8- the preemptive rights of any shareholder of the Company. None of the holders of the outstanding Common Shares is subject to personal liability solely by reason of being such a holder. The offers and sales of the outstanding Common Shares, and outstanding options and warrants to purchase Common Shares were at all relevant times either registered under the Act and the applicable state securities or Blue Sky laws or exempt from such registration requirements. The authorized Common Shares and outstanding options and warrants to purchase Common Shares conform to the descriptions thereof contained in the Registration Statement and Prospectus. Except as set forth in the Registration Statement and the Prospectus, on the Effective Date and the Closing Date, there will be no outstanding preferred shares, Common Shares, debentures, options or warrants for the purchase of, or other outstanding rights to purchase, Common Shares or securities convertible into Common Shares. (l) No securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by, or under common control with the Company within the three years prior to the date hereof, except as disclosed in the Registration Statement. (m) The issuance and sale of the Shares and the Warrant Shares have been duly authorized and, when the Shares and the Warrant Shares have been issued and duly delivered against payment therefor as contemplated by this Agreement or by the Warrant Agreement, as the case may be, the Shares and the Warrant Shares will be validly issued, fully paid and nonassessable. The holders of the Securities will not be subject to personal liability solely by reason of being such holders and none of the Securities will be subject to preemptive rights of any shareholder of the Company. (n) The issuance and sale of the Warrants, the Underwriter's Warrants and the Underlying Warrants have been duly authorized and, when issued, paid for and delivered pursuant to the terms of this Agreement or the Underwriter's Warrant Agreement, as the case may be, the Warrants, the Underwriter's Warrants and the Underlying Warrants will constitute valid and binding obligations of the Company, enforceable as to the Company in accordance with their terms. The Warrant Shares have been duly reserved for issuance upon exercise of the Warrants, the Underwriter's Warrants and the Underlying Warrants in accordance with the provisions of the Warrants, the Underwriter's Warrants and the Underlying Warrants. The Warrants, Underwriter's Warrants and Underlying Warrants will conform to the descriptions thereof contained in the Registration Statement and Prospectus. (o) The Company is not in violation of, or in default under, (i) any term or provision of its Certificate of Incorporation or By-Laws, as amended; (ii) any material term or provision or any financial covenants of any indenture, mortgage, -9- note, contract, commitment, lease or other agreement or instrument to which it is a party or by which it or any of its property or business is or may be bound or affected, except for such defaults for which it has received a waiver that is in full force and effect; or (iii) any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of the Company's properties or business, which, in the case of clauses (ii) and (iii) of this Section 4(o), would have a Material Adverse Effect. The Company owns, possesses or has obtained all governmental and other (including those obtainable from third parties) Permits necessary to own or lease, as the case may be, and to operate its properties, whether tangible or intangible, and to conduct any of the business or operations of the Company as presently conducted and all such Permits are outstanding and in good standing, and there are no proceedings pending or, to the best of the Company's knowledge, threatened (nor to the Company's knowledge is there any basis therefor) seeking to cancel, terminate or limit such Permits. (p) Except as set forth in the Prospectus, there are no claims, actions, suits, proceedings, arbitrations, investigations or inquiries before any governmental agency, court or tribunal, domestic or foreign, or before any private arbitration tribunal, pending, or, to the best of the Company's knowledge, threatened against the Company or involving the Company's properties or business which, if determined adversely to the Company would, individually or in the aggregate, result in any material adverse change in the financial position, shareholders' equity, results of operations, properties, business, management or affairs or business prospects of the Company or which question the validity of the capital stock of the Company or this Agreement or of any action taken or to be taken by the Company pursuant to, or in connection with, this Agreement; nor, to the best of the Company's knowledge, is there any basis for any such claim, action, suit, proceeding, arbitration, investigation or inquiry. There are no outstanding orders, judgments or decrees of any court, governmental agency or other tribunal naming the Company and enjoining the Company from taking, or requiring the Company to take, any action, or to which the Company, or the Company's properties or business, is bound or subject. (q) The Company owns or possesses adequate and enforceable rights to use all trademarks, service marks, copyrights, rights, trade secrets, confidential information, processes and formulations used or proposed to be used in the conduct of their businesses as described in the Prospectus (collectively, the "Intangibles"); to the best of the Company's knowledge, the Company has not infringed or is infringing upon the rights of others with respect to the Intangibles; and the Company has not received any notice that it has or may have infringed or is infringing upon the asserted rights of others with respect to the Intangibles which could, singly or in the -10- aggregate, materially adversely affect its business as presently conducted, financial condition or results of operations of the Company and the Company knows of no basis therefor; and, to the best of the Company's knowledge, no others have infringed upon the Intangibles of the Company. (r) Since the respective dates as of which information is given in the Registration Statement and the Prospectus and the Company's latest financial statements, the Company has not incurred any material liability or obligation, direct or contingent, or entered into any material transaction, whether or not in the ordinary course of business, and has not sustained any material loss or interference with its business from fire, storm, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree; and since the respective dates as of which information is given in the Registration Statement and the Prospectus, there have not been, and prior to the Closing Date referred to below there will not be, any changes in the capital stock or any material increases in the long-term debt of the Company or any material adverse change in or affecting the general affairs, management, financial condition, shareholders' equity, results of operations or prospects of the Company, otherwise than as set forth or contemplated in the Prospectus. (s) The Company does not own any real property. The Company has good title to all personal property (tangible and intangible) owned by it, free and clear of all security interests, charges, mortgages, liens, encumbrances and defects, except such as are described in the Registration Statement and Prospectus or such as do not materially affect the value or transferability of such property and do not interfere with the use of such property made, or proposed to be made, by the Company. The leases, licenses or other contracts or instruments under which the Company leases, holds or is entitled to use any property, real or personal, are valid, subsisting and enforceable only with such exceptions as are not material and do not interfere with the use of such property made, or proposed to be made, by the Company and all rentals, royalties or other payments accruing thereunder which became due prior to the date of this Agreement have been duly paid, and neither the Company nor, to the best of the Company's knowledge, any other party is in default thereunder and, to the best of the Company's knowledge, no event has occurred which, with the passage of time or the giving of notice, or both, would constitute a default thereunder, in each case which would have a Material Adverse Effect. The Company has not received notice of any violation of any applicable law, ordinance, regulation, order or requirement relating to its owned or leased properties. The Company has insured its properties against loss or damage by fire or other casualty and maintains, in amounts which it deems, in good faith, to be adequate, such other insurance including, but not limited to, liability -11- insurance as is usually maintained by companies engaged in the same or similar businesses located in the geographic areas in which the Company's properties and/or operations are located. (t) Each contract or other instrument (however characterized or described) to which the Company is a party or by which its properties and business is or may be bound or affected and to which reference is made in the Prospectus, has been duly and validly executed, is in full force and effect in all material respects and is enforceable against the parties thereto in accordance with its terms, and none of such contracts or instruments has been assigned by the Company, and neither the Company nor, to the best of the Company's knowledge, any other party, is in default thereunder and, to the best of the Company's knowledge, no event has occurred which, with the lapse of time or the giving of notice, or both, would constitute a default thereunder, which, in each case, would have a Material Adverse Effect. None of the material provisions of such contracts or instruments violates any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court having jurisdiction over the Company or any of their respective assets or businesses. (u) The employment and consulting agreements between the Company and its officers and employees, described in the Registration Statement, are binding and enforceable obligations upon the respective parties thereto in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws or arrangements affecting creditors' rights generally and subject to principles of equity. (v) Except as set forth in the Prospectus, the Company has no employee benefit plans (including, without limitation, profit sharing and welfare benefit plans) or deferred compensation arrangements that are subject to the provisions of the Employee Retirement Income Security Act of 1974. (w) To the best of the Company's knowledge, no labor problem exists with any of the Company's employees or is imminent which could result in a Material Adverse Effect. (x) The Company has not, directly or indirectly, at any time (i) made any contributions to any candidate for political office, or failed to disclose fully any such contribution in violation of law or (ii) made any payment to any state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments or contributions required or allowed by applicable law. The Company's internal accounting controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended. -12- (y) The Shares, Warrants and Warrant Shares have been approved for listing on the Nasdaq SmallCap Market ("NASDAQ"). Any certificate signed by an officer of the Company and delivered to the Underwriter or to Underwriter's Counsel shall be deemed to be a representation and warranty by the Company to the Underwriter as to the matters covered thereby. 5. Certain Covenants of the Company. The Company covenants with the Underwriter as follows: (a) The Company will not at any time, whether before the Effective Date or thereafter during such period as the Prospectus is required by law to be delivered in connection with the sales of the Shares and Warrants by the Underwriter or a dealer, file or publish any amendment or supplement to the Registration Statement or Prospectus of which the Underwriter has not been previously advised and furnished a copy, or to which the Underwriter shall reasonably object in writing. (b) The Company will use its best efforts to cause the Registration Statement to become effective and will advise the Underwriter immediately, and, if requested by the Underwriter, confirm such advice in writing, (i) when the Registration Statement, or any post-effective amendment to the Registration Statement or any supplemented Prospectus is filed with the Commission; (ii) of the receipt of any comments from the Commission; (iii) of any request of the Commission for amendment or supplementation of the Registration Statement or Prospectus or for additional information; and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any Preliminary Prospectus, or of the suspension of the qualification of the Shares and/or the Warrants for offering or sale in any jurisdiction, or of the initiation of any proceedings for any of such purposes. The Company will use its best efforts to prevent the issuance of any such stop order or of any order preventing or suspending such use and to obtain as soon as possible the lifting thereof, if any such order is issued. (c) The Company will deliver to the Underwriter, without charge, from time to time until the Effective Date, as many copies of each Preliminary Prospectus as the Underwriter may reasonably request, and the Company hereby consents to the use of such copies for purposes permitted by the Act. The Company will deliver to the Underwriter, without charge, as soon as the Registration Statement becomes effective, and thereafter from time to time as requested, such number of copies of the Prospectus (as supplemented, if the Company makes any supplements to the Prospectus) as the Underwriter may reasonably request. The Company has furnished or will furnish to the Underwriter two signed copies of the Registration Statement as originally filed and of all amendments thereto, whether filed before or after the Registration Statement becomes effective, two copies of all exhibits filed therewith and two signed copies of all consents and certificates of experts. -13- (d) The Company will comply with the Act, the Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder so as to permit the continuance of sales of and dealings in the Offered Shares and Offered Warrants, in any Optional Shares and Optional Warrants which may be issued and sold, and in the Warrant Shares underlying such Warrants. If, at any time when a prospectus relating to such Securities is required to be delivered under the Act, any event occurs as a result of which the Registration Statement and Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it shall be necessary to amend or supplement the Registration Statement and Prospectus to comply with the Act or the regulations thereunder, the Company will promptly file with the Commission, subject to Section 5(a) hereof, an amendment or supplement which will correct such statement or omission or which will effect such compliance. (e) The Company will furnish such proper information as may be required and otherwise cooperate in qualifying the Securities for offering and sale under the securities or Blue Sky laws relating to the offering or for sale in such jurisdictions as the Underwriter may reasonably designate, provided that no such qualification will be required in any jurisdiction where, solely as a result thereof, the Company would be subject to service of general process or to taxation or qualification as a foreign corporation doing business in such jurisdiction. (f) The Company will make generally available to its security holders, in the manner specified in Rule 158(b) under the Act, and deliver to the Underwriter and Underwriter's Counsel as soon as practicable and in any event not later than 45 days after the end of its fiscal quarter in which the first anniversary date of the effective date of the Registration Statement occurs, an earning statement meeting the requirements of Rule 158(a) under the Act covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement. (g) For a period of five years from the Effective Date, the Company will deliver to the Underwriter and to Underwriter's Counsel on a timely basis (i) a copy of each report or document, including, without limitation, reports on Forms 8-K, -14- 10-C, 10-KSB (or 10-K) and 10-QSB (or 10-Q) and exhibits thereto, filed or furnished to the Commission, any securities exchange or the National Association of Securities Dealers, Inc. (the "NASD") on the date each such report or document is so filed or furnished; (ii) as soon as practicable, copies of any reports or communications (financial or other) of the Company mailed to its security holders; and (iii) as soon as practicable, a copy of any Schedule 13D, 13G, 14D-1 or 13E-3 received or prepared by the Company from time to time. The Company will furnish to its shareholders annual reports containing audited financial statements and such other periodic reports as it may determine to be appropriate or as may be required by law. (h) Neither the Company nor any person that controls, is controlled by or is under common control with the Company will take any action designed to or which might be reasonably expected to cause or result in the stabilization or manipulation of the price of the Shares or Warrants. (i) If the transactions contemplated by this Agreement are consummated, the Underwriter shall retain the Forty Thousand Dollars ($40,000) previously paid to it, and the Company will pay or cause to be paid the following: all costs and expenses incident to the performance of the obligations of the Company under this Agreement, including, but not limited to, the fees and expenses of accountants and counsel for the Company; the preparation, printing, mailing and filing of the Registration Statement (including consolidated financial statements and exhibits), Preliminary Prospectuses and the Prospectus, and any amendments or supplements thereto; the printing and mailing of the Selected Dealer Agreement; the issuance and delivery of the Shares and Warrants to the Underwriter; all taxes, if any, on the issuance of the Shares and Warrants; the fees, expenses and other costs of qualifying the Shares and Warrants for sale under the Blue Sky or securities laws of those states in which the Shares and Warrants are to be offered or sold, the cost of printing and mailing the "Blue Sky Survey" and fees (not to exceed $25,000) and disbursements of counsel in connection therewith, including those of such local counsel as may have been retained for such purpose; the filing fees incident to securing any required review by the NASD; the cost of furnishing to the Underwriter copies of the Registration Statement, Preliminary Prospectuses and the Prospectus as herein provided; the costs, up to $10,000, of placing "tombstone advertisements" in any publications which may be selected by the Underwriter; and all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section 5(i). In addition, at the Closing Date or the Option Closing Date, as the case may be, the Underwriter will deduct from the payment for the Offered Shares and Offered Warrants or any Optional Shares and/or Optional Warrants purchased three percent (3%) (less the sum of Forty Thousand Dollars ($40,000) -15- previously paid to the Underwriter) of the gross proceeds of the offering, including the over-allotment option, as payment for the Underwriter's non-accountable expense allowance relating to the transactions contemplated hereby, which amount will include the fees and expenses of Underwriter's Counsel. (j) If the transactions contemplated by this Agreement or related hereto are not consummated because the Company decides not to proceed with the offering for any reason, or the Underwriter decides not to proceed with the offering because of a breach by the Company of any representation, warranty or covenant contained in this Agreement or as a result of adverse changes in the affairs of the Company, then the Underwriter may retain only an amount equal to its accountable out-of-pocket expenses up to the sum of Seventy-Five Thousand Dollars ($75,000) (including the Forty Thousand Dollars ($40,000) previously paid to it); provided, however, that if the Underwriter shall terminate this Agreement for any other reason, than the Company need only reimburse the Underwriter for its actual accountable out-of-pocket expenses up to a maximum of Fifty Thousand Dollars ($50,000), inclusive of the Forty Thousand Dollars ($40,000) previously paid to it. (k) The Company intends to apply the net proceeds from the sale of the Shares and Warrants for the purposes set forth in the Prospectus. Except as described in the Prospectus, the Company will not use any portion of the proceeds derived from the sale of the Shares and Warrants to repay any indebtedness, without the prior written consent of the Underwriter. The Company will file with the Commission all required reports on Form S-R in accordance with the provisions of Rule 463 promulgated under the Act and will provide a copy of each such report to the Underwriter and its counsel. (l) During the twelve (12) months following the date hereof, (i) none of the Company's officers, directors or securityholders will offer for sale or sell or otherwise dispose of, directly or indirectly, any securities of the Company, in any manner whatsoever, whether pursuant to Rule 144 of the Regulations or otherwise, and (ii) no holder of registration rights relating to the securities of the Company (except for the holders of the Bridge Shares) will exercise any such registration rights, without the prior written consent of the Underwriter. (m) The Company will not file any registration statement relating to the offer or sale of any of the Company's securities, including any registration statement on Form S-8, during the twelve (12) months following the date hereof without the Underwriter's prior written consent. (n) The Company maintains and will continue to maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed -16- in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (o) The Company will use its best efforts to maintain the listing of the Shares and Warrants on NASDAQ for so long as the Shares and Warrants are qualified for such listing. (p) The Company will, concurrently with the Effective Date, register the class of equity securities of which the Shares are a part under Section 12(g) of the Exchange Act and the Company will maintain the registration for a minimum of five (5) years after the Effective Date. (q) Subject to the sale of the Offered Shares and Offered Warrants, the Underwriter and its successors will have the right to designate a non-voting advisor to the Board of Directors of the Company until the expiration of three (3) years following the Effective Date. If the Underwriter does not exercise its option to designate a member of or advisor to the Company's Board of Directors, the Underwriter shall nonetheless have the right to send a representative (who need not be the same individual from meeting to meeting) to observe each meeting of the Board of Directors. The Company agrees to give the Underwriter notice of each such meeting and to provide the Underwriter with an agenda and minutes of the meeting no later than it gives such notice and provides such items to the directors. (r) The Company agrees to employ the Underwriter or a designee of the Underwriter as a financial consultant on a non-exclusive basis for a period of two (2) years from the Closing Date, pursuant to a separate written Consulting Agreement between the Company and the Underwriter and/or such designee, at an annual rate of Fifty Thousand Dollars ($50,000) (exclusive of any accountable out-of-pocket expenses), payable in full, in advance, on the Closing Date. In addition, the Consulting Agreement shall provide that the Company will pay the Underwriter a finder's fee in the event that the Underwriter originates a merger, acquisition, joint venture or other transaction to which the Company is a party. The Company further agrees to deliver a duly and validly executed copy of said Consulting Agreement, in form and substance acceptable to the Underwriter, on the Closing Date. (s) Subject to the provisions of applicable law, the Underwriter shall be entitled to receive a warrant solicitation fee of five percent (5%) of the aggregate exercise -17- price of the Warrants for each Warrant exercised during the period commencing one year after the Effective Date; provided, however, that the Underwriter will not be entitled to receive such compensation in Warrant exercise transactions in which (i) the market price of the Common Shares at the time of exercise is lower than the exercise price of the Warrants; (ii) the Warrants are held in any discretionary account; (iii) disclosure of compensation arrangements is not made in the Registration Statement and in documents provided to holders of Warrants at the time of exercise; (iv) the holder thereof has not confirmed in writing that the Underwriter solicited the exercise of the Warrants; or (v) the solicitation or exercise of the Warrants was in violation of Regulation M promulgated under the Exchange Act. (t) The Company shall retain a transfer agent for the Common Shares and Warrants, reasonably acceptable to the Underwriter, for a period of five (5) years from the Effective Date. In addition, for a period of five (5) years from the Effective Date, the Company, at its own expense, shall cause such transfer agent to provide the Underwriter, if so requested in writing, with copies of the Company's daily transfer sheets, and, when requested by the Underwriter, a current list of the Company's securityholders, including a list of the beneficial owners of securities held by a depository trust company and other nominees. (u) The Company shall, as of the date hereof, have applied for listing in Standard & Poor's Corporation Records Service (including annual report information) or Moody's Industrial Manual (Moody's OTC Industrial Manual not being sufficient for these purposes) and shall use its best efforts to have the Company listed in such manual and shall maintain such listing for a period of five (5) years from the Effective Date. (v) For a period of five (5) years from the Effective Date, the Company shall continue to retain BDO Seidman, LLP (or another nationally recognized accounting firm acceptable to the Underwriter) as the Company's independent public accountants and shall promptly, upon the Company's receipt thereof, submit to the Underwriter copies of such accountants' management reports and similar correspondence between such accountants and the Company. (w) So long as any Warrants are outstanding, the Company shall use its best efforts to cause post-effective amendments to the Registration Statement to become effective in compliance with the Act as shall be necessary to enable the sale of the Common Shares underlying the Warrants and cause a copy of each Prospectus, as then amended, to be delivered to each holder of record of a Warrant as they request and as otherwise required by law and, to furnish to the Underwriter and dealers as many copies of each such Prospectus as the Underwriter or dealer may reasonably request. In addition, for so long as any Warrant is -18- outstanding, the Company will promptly notify the Underwriter of any material change in the financial condition, business, results of operations or properties of the Company. (x) For a period of twenty-five (25) days from the Effective Date, the Company will not issue press releases or engage in any other publicity without the Underwriter's prior written consent, other than normal and customary releases issued in the ordinary course of the Company's business or those releases required by law. (y) For a period of two (2) years from the Effective Date, the Company will not offer or sell any of its securities pursuant to Regulation S promulgated under the Act without the prior written consent of the Underwriter. (z) For a period of three (3) years from the Effective Date, the Company will provide to the Underwriter ten day's written notice prior to any issuance by the Company or its subsidiaries of any equity securities or securities exchangeable for or convertible into equity securities of the Company, except for (i) shares of Common Stock issuable upon exercise of currently outstanding options and warrants or conversion of currently outstanding convertible securities and (ii) options (and shares issuable upon exercise of such options) available for future grant pursuant to any stock option plan in effect on the Effective Date. (aa) For a period of three (3) years from the Effective Date, the Company will promptly submit to the Underwriter copies of accountants' management reports and similar correspondence between the Company's accountants and the Company. 6. Conditions of the Underwriter's Obligation to Purchase the Offered Shares and Offered Warrants from the Company. The obligation of the Underwriter to purchase and pay for the Offered Shares and Offered Warrants which it has agreed to purchase from the Company is subject (as of the date hereof and the Closing Date) to the accuracy of and compliance in all material respects with the representations and warranties of the Company herein, to the accuracy of the statements of the Company or its officers made pursuant hereto, to the performance in all material respects by the Company of its obligations hereunder, and to the following additional conditions: (a) The Registration Statement will have become effective not later than 10:00 A.M., New York City time, on the day following the date of this Agreement, or at such later time or on such later date as the Underwriter may agree to in writing; prior to the Closing Date, no stop order suspending the effectiveness of the Registration Statement will have been issued and no proceedings for that purpose will have been initiated or will be pending or, to the best of the Underwriter's or the Company's -19- knowledge, will be contemplated by the Commission; and any request on the part of the Commission for additional information will have been complied with to the satisfaction of Underwriter's Counsel. (b) At the Closing Date, there will have been delivered to the Underwriter signed opinions of Tenzer Greenblatt LLP, counsel for the Company ("Company Counsel"), dated as of the date hereof or the Closing Date, as the case may be (and any other opinions of counsel referred to in such opinion of Company Counsel or relied upon by Company Counsel in rendering their opinion), reasonably satisfactory to Underwriter's Counsel. (c) At the Closing Date, there will have been delivered to the Underwriter a signed opinion of Underwriter's Counsel, dated as of the Closing Date, to the effect that the opinions delivered pursuant to Section 6(b) hereof appear on their face to be appropriately responsive to the requirements of this Agreement, except to the extent waived by the Underwriter, specifying the same, and with respect to such related matters as the Underwriter may require. (d) At the Closing Date (i) the Registration Statement and the Prospectus and any amendments or supplements thereto will contain all material statements which are required to be stated therein in accordance with the Act and the Regulations and will conform in all material respects to the requirements of the Act and the Regulations, and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) since the respective dates as of which information is given in the Registration Statement and the Prospectus, there will not have been any material adverse change in the financial condition, results of operations or general affairs of the Company from that set forth or contemplated in the Registration Statement and the Prospectus, except changes which the Registration Statement and the Prospectus indicates might occur after the Effective Date; (iii) since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall have been no material transaction, contract or agreement entered into by the Company, other than in the ordinary course of business, which would be required to be set forth in the Registration Statement and the Prospectus, other than as set forth therein; and (iv) no action, suit or proceeding at law or in equity will be pending or, to the best of the Company's knowledge, threatened against the Company which is required to be set forth in the Registration Statement and the Prospectus, other than as set forth therein, and no proceedings will be pending or, to the best of the Company's knowledge, threatened against the Company before or by any federal, state or other commission, board or -20- administrative agency wherein an unfavorable decision, ruling or finding would materially adversely affect the business, property, financial condition or results of operations of the Company, other than as set forth in the Registration Statement and the Prospectus. At the Closing Date, there will be delivered to the Underwriter a certificate signed by the Chairman of the Board or the President or a Vice President of the Company, dated the Closing Date, evidencing compliance with the provisions of this Section 6(d) and stating that the representations and warranties of the Company set forth in Section 4 hereof were accurate and complete in all material respects when made on the date hereof and are accurate and complete in all material respects on the Closing Date as if then made; that the Company has performed all covenants and complied with all conditions required by this Agreement to be performed or complied with by the Company prior to or as of the Closing Date; and that, as of the Closing Date, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or, to the best of his knowledge, are contemplated or threatened. In addition, the Underwriter will have received such other and further certificates of officers of the Company as the Underwriter or Underwriter's Counsel may reasonably request. (e) At the time that this Agreement is executed and at the Closing Date, the Underwriter will have received a signed letter from BDO Seidman, LLP dated the date such letter is to be received by the Underwriter and addressed to it, confirming that it is a firm of independent public accountants within the meaning of the Act and Regulations and stating that: (i) insofar as reported on by them, in their opinion, the consolidated financial statements of the Company included in the Prospectus comply as to form in all material respects with the applicable accounting requirements of the Act and the applicable Regulations; (ii) on the basis of procedures and inquiries (not constituting an examination in accordance with generally accepted auditing standards) consisting of a reading of the unaudited interim consolidated financial statements of the Company, if any, appearing in the Registration Statement and the Prospectus and the latest available unaudited interim consolidated financial statements of the Company, if more recent than that appearing in the Registration Statement and Prospectus, inquiries of officers of the Company responsible for financial and accounting matters as to the transactions and events subsequent to the date of the latest audited consolidated financial statements of the Company, and a reading of the minutes of meetings of the shareholders, the Board of Directors of the Company and any committees of the Board of Directors, as set forth in the minute books of the Company, nothing has come to their attention which, in their judgment, would indicate that (A) during the period from the date of the latest consolidated financial statements of the Company appearing in the Registration Statement and Prospectus to a specified date not more than three business days prior to the date of such -21- letter, there have been any decreases in net current assets or net assets as compared with amounts shown in such consolidated financial statements or decreases in net sales or increases in total or per share net loss compared with the corresponding period in the preceding year or any change in the capitalization or long-term debt of the Company, except in all cases as set forth in or contemplated by the Registration Statement and the Prospectus, and (B) the unaudited interim consolidated financial statements of the Company, if any, appearing in the Registration Statement and the Prospectus, do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Regulations or are not fairly presented in conformity with generally accepted accounting principles and practices on a basis substantially consistent with the audited consolidated financial statements included in the Registration Statement or the Prospectus; and (iii) they have compared specific dollar amounts, numbers of shares, numerical data, percentages of revenues and earnings, and other financial information pertaining to the Company set forth in the Prospectus (with respect to all dollar amounts, numbers of shares, percentages and other financial information contained in the Prospectus, to the extent that such amounts, numbers, percentages and information may be derived from the general accounting records of the Company, and excluding any questions requiring an interpretation by legal counsel) with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter, and found them to be in agreement. (f) There shall have been duly tendered to the Underwriter certificates representing the Offered Shares and the Offered Warrants to be sold on the Closing Date. (g) The NASD shall have indicated that it has no objection to the underwriting arrangements pertaining to the sale of the Shares and Warrants by the Underwriter. (h) No action shall have been taken by the Commission or the NASD the effect of which would make it improper, at any time prior to the Closing Date or the Option Closing Date, as the case may be, for any member firm of the NASD to execute transactions (as principal or as agent) in the Shares or Warrants, and no proceedings for the purpose of taking such action shall have been instituted or shall be pending, or, to the best of the Underwriter's or the Company's knowledge, shall be contemplated by the Commission or the NASD. The Company represents at the date hereof, and shall represent as of the Closing Date or Option Closing Date, as the case may be, that it has no knowledge that any such action is in fact contemplated by the Commission or the NASD. -22- (i) All proceedings taken at or prior to the Closing Date or the Option Closing Date, as the case may be, in connection with the authorization, issuance and sale of the Shares or Warrants shall be reasonably satisfactory in form and substance to the Underwriter and to Underwriter's Counsel. (j) On or prior to the Effective Date, the Company will have delivered to the Underwriter the undertakings of its officers, directors and securityholders, as the case may be, to the effect of the matters set forth in Sections 5(l) and (q) hereof. If any of the conditions specified in this Section 6 have not been fulfilled, this Agreement may be terminated by the Underwriter on notice to the Company. 7. Indemnification. (a) The Company agrees to indemnify and hold harmless the Underwriter, each officer, director, partner, employee and agent of the Underwriter, and each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from and against any and all losses, claims, damages, expenses or liabilities, joint or several (and actions in respect thereof), to which they or any of them may become subject under the Act or under any other statute or at common law or otherwise, and, except as hereinafter provided, will reimburse the Underwriter and each such person, if any, for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions, whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained (i) in the Registration Statement, in any Preliminary Prospectus or in the Prospectus (or the Registration Statement or Prospectus as from time to time amended or supplemented) or (ii) in any application or other document executed by the Company, or based upon written information furnished by or on behalf of the Company, filed in any jurisdiction in order to qualify the Shares and Warrants under the securities laws thereof (hereinafter "application"), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein not misleading, in light of the circumstances under which they were made, unless such untrue statement or omission was made in such Registration Statement, Preliminary Prospectus, Prospectus or application in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by the Underwriter or any such person through the Underwriter expressly for use therein; provided, however, that the indemnity agreement contained in this Section 7(a) with respect to any Preliminary Prospectus will not inure to the -23- benefit of the Underwriter (or to the benefit of any other person that may be indemnified pursuant to this Section 7(a)) if (A) the person asserting any such losses, claims, damages, expenses or liabilities purchased the Shares and/or Warrants which are the subject thereof from the Underwriter or other indemnified person; (B) the Underwriter or other indemnified person failed to send or give a copy of the Prospectus to such person at or prior to the written confirmation of the sale of such Shares and/or Warrants to such person; and (C) the Prospectus did not contain any untrue statement or alleged untrue statement or omission or alleged omission giving rise to such cause, claim, damage, expense or liability. (b) The Underwriter agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from and against any and all losses, claims, damages, expenses or liabilities, joint or several (and actions in respect thereof), to which they or any of them may become subject under the Act or under any other statute or at common law or otherwise, and, except as hereinafter provided, will reimburse the Company and each such director, officer or controlling person for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions, whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained (i) in the Registration Statement, in any Preliminary Prospectus or in the Prospectus (or the Registration Statement or Prospectus as from time to time amended or supplemented) or (ii) in any application (including any application for registration of the Shares and Warrants under state securities or Blue Sky laws), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein not misleading, in light of the circumstances under which they were made, but only insofar as any such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by the Underwriter expressly for use therein. (c) Promptly after receipt of notice of the commencement of any action in respect of which indemnity may be sought against any indemnifying party under this Section 7, the indemnified party will notify the indemnifying party in writing of the commencement thereof, and the indemnifying party will, subject to the provisions hereinafter stated, assume the defense of such action (including the employment of counsel reasonably satisfactory to the indemnified party and the payment of expenses) insofar as such action relates to an alleged liability in respect of which indemnity may be sought against the -24- indemnifying party. After notice from the indemnifying party of its election to assume the defense of such claim or action, the indemnifying party shall no longer be liable to the indemnified party under this Section 7 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if, in the reasonable judgment of the indemnified party or parties, it is advisable for the indemnified party or parties to be represented by separate counsel, the indemnified party or parties shall have the right to employ a single counsel to represent the indemnified parties who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the indemnified parties thereof against the indemnifying party, in which event the fees and expenses of such separate counsel shall be borne by the indemnifying party. Any party against whom indemnification may be sought under this Section 7 shall not be liable to indemnify any person that might otherwise be indemnified pursuant hereto for any settlement of any action effected without such indemnifying party's consent, which consent shall not be unreasonably withheld. 8. Contribution. To provide for just and equitable contribution, if (i) an indemnified party makes a claim for indemnification pursuant to Section 7 hereof (subject to the limitations thereof) and it is finally determined, by a judgment, order or decree not subject to further appeal, that such claim for indemnification may not be enforced, even though this Agreement expressly provides for indemnification in such case; or (ii) any indemnified or indemnifying party seeks contribution under the Act, the Exchange Act, or otherwise, then the Company (including, for this purpose, any contribution made by or on behalf of any director of the Company, any officer of the Company who signed the Registration Statement and any controlling person of the Company) as one entity and the Underwriter (including, for this purpose, any contribution by or on behalf of each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee and agent of the Underwriter) as a second entity, shall contribute to the losses, liabilities, claims, damages and expenses whatsoever to which any of them may be subject, so that the Underwriter is responsible for the proportion thereof equal to the percentage which the underwriting discount per Share and per Warrant set forth on the cover page of the Prospectus represents of the initial public offering price per Share and per Warrant set forth on the cover page of the Prospectus and the Company is responsible for the remaining portion; provided, however, that if applicable law does not permit such allocation, then, if applicable law permits, other relevant equitable considerations such as the relative fault of the Company and the Underwriter in connection with the facts which resulted in such losses, liabilities, claims, damages and expenses shall also be considered. The relative fault, in -25- the case of an untrue statement, alleged untrue statement, omission or alleged omission, shall be determined by, among other things, whether such statement, alleged statement, omission or alleged omission relates to information supplied by the Company or by the Underwriter, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement, alleged statement, omission or alleged omission. The Company and the Underwriter agree that it would be unjust and inequitable if the respective obligations of the Company and the Underwriter for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages and expenses or by any other method of allocation that does not reflect the equitable considerations referred to in this Section 8. No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee and agent of the Underwriter will have the same rights to contribution as the Underwriter, and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who has signed the Registration Statement and each director of the Company will have the same rights to contribution as the Company, subject in each case to the provisions of this Section 8. Anything in this Section 8 to the contrary notwithstanding, no party will be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 8 is intended to supersede, to the extent permitted by law, any right to contribution under the Act or the Exchange Act or otherwise available. 9. Survival of Indemnities, Contribution, Warranties and Representations. The respective indemnity and contribution agreements of the Company and the Underwriter contained in Sections 7 and 8 hereof, and the representations and warranties of the Company contained herein shall remain operative and in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of the Underwriter, the Company or any of its directors and officers, or any controlling person referred to in said Sections, and shall survive the delivery of, and payment for, the Shares and the Warrants. 10. Termination of Agreement. (a) The Company, by written or telegraphic notice to the Underwriter, or the Underwriter, by written or telegraphic notice to the Company, may terminate this Agreement prior to the earlier of (i) 10:00 A.M., New York City time, on the first full business day after the Effective Date; or (ii) the time when the -26- Underwriter, after the Registration Statement becomes effective, releases the Offered Shares and Offered Warrants for public offering. The time when the Underwriter "releases the Offered Shares and Offered Warrants for public offering" for the purposes of this Section 10 means the time when the Underwriter releases for publication the first newspaper advertisement, which is subsequently published, relating to the Offered Shares and Offered Warrants, or the time when the Underwriter releases for delivery to members of a selling group copies of the Prospectus and an offering letter or an offering telegram relating to the Offered Shares and Offered Warrants, whichever will first occur. (b) This Agreement, including without limitation, the obligation to purchase the Offered Shares and the Offered Warrants and the obligation to purchase the Optional Shares and/or Optional Warrants after exercise of the option referred to in Section 3 hereof, are subject to termination in the absolute discretion of the Underwriter, by notice given to the Company prior to delivery of and payment for all the Offered Shares and Offered Warrants or such Optional Shares and Optional Warrants, as the case may be, if, prior to such time, any of the following shall have occurred: (i) the Company withdraws the Registration Statement from the Commission or the Company does not or cannot expeditiously proceed with the public offering; (ii) the representations and warranties in Section 4 hereof are not materially correct or cannot be complied with; (iii) trading in securities generally on the New York Stock Exchange or the American Stock Exchange will have been suspended; (iv) limited or minimum prices will have been established on either such Exchange; (v) a banking moratorium will have been declared either by federal or New York State authorities; (vi) any other restrictions on transactions in securities materially affecting the free market for securities or the payment for such securities, including the Offered Shares and Offered Warrants or the Optional Shares and Optional Warrants, will be established by either of such Exchanges, by the Commission, by any other federal or state agency, by action of the Congress or by Executive Order; (vii) trading in any securities of the Company shall have been suspended or halted by any national securities exchange, the NASD or the Commission; (viii) there has been a materially adverse change in the condition (financial or otherwise), prospects or obligations of the Company; (ix) the Company will have sustained a material loss, whether or not insured, by reason of fire, flood, accident or other calamity; (x) any action has been taken by the government of the United States or any department or agency thereof which, in the judgment of the Underwriter, has had a material adverse effect upon the market or potential market for securities in general; or (xi) the market for securities in general or political, financial or economic conditions will have so materially adversely changed that, in the judgment of the Underwriter, it will be impracticable to offer for sale, or to enforce contracts made by the Underwriter for the resale of, the -27- Offered Shares and Offered Warrants or the Optional Shares and Offered Warrants, as the case may be. (c) If this Agreement is terminated pursuant to Section 6 hereof or this Section 10 or if the purchases provided for herein are not consummated because any condition of the Underwriter's obligations hereunder is not satisfied or because of any refusal, inability or failure on the part of the Company to comply with any of the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company shall be unable to or does not perform all of its obligations under this Agreement, the Company will not be liable to the Underwriter for damages on account of loss of anticipated profits arising out of the transactions covered by this Agreement, but the Company will remain liable to the extent provided in Sections 5(j), 7, 8 and 9 of this Agreement. 11. Information Furnished by the Underwriter to the Company. It is hereby acknowledged and agreed by the parties hereto that for the purposes of this Agreement, including, without limitation, Sections 4(g), 7(a), 7(b) and 8 hereof, the only information given by the Underwriter to the Company for use in the Prospectus are the statements set forth in the last sentence of the last paragraph on the cover page, the statement appearing in the last paragraph on the inside front cover with respect to stabilizing the market price of Shares and Warrants, the information in the second paragraph of the "Underwriting" section with respect to concessions and reallowances, and the information in the penultimate paragraph of the "Underwriting" section with respect to the determination of the public offering price, as such information appears in any Preliminary Prospectus and in the Prospectus. 12. Notices and Governing Law. All communications hereunder will be in writing and, except as otherwise provided, will be delivered at, or mailed by certified mail, return receipt requested, transmitted by facsimile or telegraphed to, the following addresses: if to the Underwriter, to Rockefeller Securities Group, Inc., 100 Quentin Roosevelt Blvd., Suite 502, Garden City, New York 11530, Attention: Mr. Lee Shapiro, with a copy to Morrison, Cohen, Singer & Weinstein, LLP, Attention: Robert H. Cohen, Esq.; if to the Company, addressed to it at Frontline Communications Corporation, One Blue Hill Plaza, 6th Floor, Pearl River, New York 10965, Attention: Mr. Stephen J. Cole-Hatchard, with a copy to Tenzer Greenblatt LLP, Attention: Robert J. Mittman, Esq., 405 Lexington Avenue, New York, New York 10174. This Agreement shall be deemed to have been made and delivered in New York City and shall be governed as to validity, interpretation, construction, effect and in all other respects by the internal laws of the State of New York. The Company (1) agrees that any legal suit, action or proceeding -28- arising out of or relating to this Agreement shall be instituted exclusively in New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, (2) waives any objection which the Company may have now or hereafter to the venue of any such suit, action or proceeding, and (3) irrevocably consents to the jurisdiction of the New York State Supreme Court, County of New York, and the United States District Court for the Southern District of New York in any such suit, action or proceeding. The Company further agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York and agrees that service of process upon the Company mailed by certified mail to the Company's address shall be deemed in every respect effective service of process upon the Company, in any such suit, action or proceeding. 13. Parties in Interest. This Agreement is made solely for the benefit of the Underwriter, the Company and, to the extent expressed, any person controlling the Company or the Underwriter, each officer, director, partner, employee and agent of the Underwriter, the directors of the Company, its officers who have signed the Registration Statement, and their respective executors, administrators, successors and assigns, and, no other person will acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" will not include any purchaser of the Shares or Warrants from the Underwriter, as such purchaser. 14. Counterparts. This Agreement may be executed in counterparts and each of such counterparts will for all purposes be deemed to be an original, and such counterparts will together constitute one and the same instrument. -29- If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement between the Company and the Underwriter in accordance with its terms. Very truly yours, FRONTLINE COMMUNICATIONS CORPORATION By:______________________________ Name: Title: Confirmed and accepted in New York, N.Y., as of the date first above written: ROCKEFELLER SECURITIES GROUP, INC. By:______________________________ Name: Title: -30- EX-3.1 3 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF EASY STREET ONLINE, INC. FIRST: The name of the Corporation is: EASY STREET ONLINE, INC. SECOND: The address of the Corporation's registered office in the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle, 19805-1297. The name of its registered agent at such address is Corporation Service Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the laws of the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of capital stock which the Corporation shall have authority to issue is Eleven Million (11,000,000) shares, of which Ten Million (10,000,000) shares shall be Common Stock, par value $.01 per share, and One Million (1,000,000) shares shall be Preferred Stock, par value $.01 per share. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Corporation is hereby expressly authorized to provide, by resolution or resolutions duly adopted by it prior to issuance, for the creation of each such series and to fix the designation and the powers, preferences, rights, qualifications, limitations and restrictions relating to the shares of each such series. The authority of the Board of Directors with respect to each series of Preferred Stock shall include, but not be limited to, determining the following: (a) the designation of such series, the number of shares to constitute such series and the stated value if different from the par value thereof; (b) whether the shares of such series shall have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights, which may be general or limited; (c) the dividends, if any, payable on such series, whether any such dividends shall be cumulative, and, if so, from what dates, the conditions and dates upon which such dividends shall be payable, and the preference or relation which such dividends shall bear to the dividends payable on any shares of stock of any other class or any other series of Preferred Stock; (d) whether the shares of such series shall be subject to redemption by the Corporation, and, if so, the times, prices and other conditions of such redemption; (e) the amount or amounts payable upon shares of such series upon, and the rights of the holders of such series in, the voluntary or involuntary liquidation, dissolution or winding up, or upon any distribution of the assets, of the Corporation; (f) whether the shares of such series shall be subject to the operation of a retirement or sinking fund and, if so, the extent to and manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or other -2- corporate purposes and the terms and provisions relating to the operation thereof; (g) whether the shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or any other series of Preferred Stock or any other securities and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions of conversion or exchange; (h) the limitations and restrictions, if any, to be effective while any shares of such series are outstanding upon the payment of dividends or the making of other distributions on, and upon the purchase, redemption or other acquisition by the Corporation of, the Common Stock or shares of stock of any other class or any other series of Preferred Stock; (i) the conditions or restrictions, if any, upon the creation of indebtedness of the Corporation or upon the issue of any additional stock, including additional shares of such series or of any other series of Preferred Stock or of any other class; and (j) any other powers, preferences and relative, participating, optional and other special rights, and any qualifications, limitations and restrictions, thereof. The powers, preferences and relative, participating, optional and other special rights of each series of Preferred Stock, and the qualifications, limitations or restrictions -3- thereof, if any, may differ from those of any and all other series at any time outstanding. All shares of any one series of Preferred Stock shall be identical in all respects with all other shares of such series, except that shares of any one series issued at different times may differ as to the dates from which dividends thereof shall be cumulative. FIFTH: The name and address of the sole incorporator is as follows: Name Address ----- ------- Ralph D. Mosley, Jr. 405 Lexington Avenue New York, New York l0l74 SIXTH: Unless required by law or determined by the chairman of the meeting to be advisable, the vote by stockholders on any matter, including the election of directors, need not be by written ballot. SEVENTH: The Corporation reserves the right to increase or decrease its authorized capital stock, or any class or series thereof, and to reclassify the same, and to amend, alter, change or repeal any provision contained in the Certificate of Incorporation under which the Corporation is organized or in any amendment thereto, in the manner now or hereafter prescribed by law, and all rights conferred upon stockholders in said Certificate of Incorporation or any amendment thereto are granted subject to the aforementioned reservation. EIGHTH: The Board of Directors shall have the power at any time, and from time to time, to adopt, amend and repeal any and all By-laws of the Corporation. NINTH: 1. Indemnification -4- The Corporation shall, and does hereby, indemnify to the fullest extent permitted or authorized by the Delaware General Corporation Law or judicial or administrative decisions, as the same exists or may hereafter be amended or interpreted differently in the future (but, in the case of any such amendment or interpretation, only to the extent that such amendment or interpretation permits the Corporation to provide broader indemnification rights than permitted prior thereto), each person (including the current and future heirs, beneficiaries, personal representatives and estate of such person) who was or is a party, or is threatened to be made a party, or was or is a witness, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding") and whether the basis of such Proceeding is an allegation of an action in an official capacity of such person related to the Corporation or any other capacity while such person is serving as an officer, director, employee or agent of the Corporation, against any liability (which for purposes of this Article shall include any judgment, settlement, penalty or fine) or cost, charge or expense (including attorneys' fees) asserted against him or incurred by him by reason of the fact that such indemnified person (1) is or was a director, officer or employee of the Corporation or (2) is or was an agent of the Corporation as to whom the Corporation, by action of its Board of Directors, has agreed to grant such indemnity or (3) is or was serving, at the request of the Corporation, as a director, officer or employee of another corporation, partnership, joint -5- venture, trust or other enterprise (including serving as a fiduciary of any employee benefit plan) or (4) is or was serving as an agent of such other corporation, partnership, joint venture, trust or other enterprise described in clause (3) hereof as to whom the Corporation, by action of its Board of Directors, has agreed to grant such indemnity. Each director, officer, employee or agent of the Corporation to whom indemnification rights under this Section 1 of this Article have been granted shall be referred to as an "Indemnified Person." Notwithstanding the foregoing, except as specified in Section 3 of this Article, the Corporation shall not be required to indemnify an Indemnified Person in connection with a Proceeding (or any part thereof) initiated by such Indemnified Person unless such authorization for such Proceeding (or any part thereof) was not denied by the Board of Directors of the Corporation prior to sixty (60) days after receipt of notice thereof from such Indemnified Person stating his intent to initiate such Proceeding and only upon such terms and conditions as the Board of Directors may deem appropriate. 2. Advance of Costs, Charges and Expenses Costs, charges and expenses (including attorneys' fees) incurred by an officer, director, employee or agent who is an Indemnified Person in defending a Proceeding shall be paid by the Corporation to the fullest extent permitted or authorized by the Delaware General Corporation Law or judicial or administrative decisions, as the same exists or may hereafter be amended or interpreted differently in the future (but, in the case of any -6- such future amendment or interpretation, only to the extent that such amendment or interpretation permits the Corporation to provide broader rights to advance costs, charges and expenses than permitted prior thereto), in advance of the final disposition of such Proceeding, upon receipt of an undertaking by or on behalf of the Indemnified Person to repay all amounts so advanced in the event that it shall ultimately be determined by final judicial decision that such person is not entitled to be indemnified by the Corporation as authorized in this Article and upon such other terms and conditions, in the case of an agent as to whom the Corporation has agreed to grant such indemnity, as the Board of Directors may deem appropriate. The Corporation may, upon approval of the Indemnified Person, authorize the Corporation's counsel to represent such person in any Proceeding, whether or not the Corporation is a party to such Proceeding. Such authorization may be made by the Board of Directors by majority vote, including directors who are parties to such Proceeding. 3. Procedure for Indemnification Any indemnification or advance under this Article shall be made promptly and in any event within sixty (60) days upon the written request of the Indemnified Person (except in the case of a claim for an advancement of costs, charges or expenses, in which case the applicable period shall be twenty (20) days). The right to indemnification or advances as granted by this Article shall be enforceable by the Indemnified Person in any court of competent jurisdiction if the Corporation denies such request -7- under this Article, in whole or in part, or if no disposition thereof is made within sixty (60) days or twenty (20) days, as may be applicable. Such Indemnified Person's costs and expenses incurred in connection with successfully establishing his right to indemnification or advancement of costs, charges or expenses, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action that the claimant has not met the standard of conduct, if any, required by the Delaware General Corporation Law or judicial or administrative decisions, as the same exists or may hereafter be amended or interpreted differently in the future (but, in the case of any such future amendment or interpretation, only to the extent that such amendment or interpretation does not impose a more stringent standard of conduct than permitted prior thereto), but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or any committee thereof, its independent legal counsel, and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant or advancement for the claimant is proper in the circumstances because he has met the applicable standard of conduct, if any, nor the fact that there has been an actual determination by the Corporation (including its Board of Directors or any committee thereof, its independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action -8- or create a presumption that the claimant has not met the applicable standard of conduct. 4. Non-Exclusivity; Survival of Indemnification The indemnification and advancement provided by this Article shall not be deemed exclusive of any other rights to which those Indemnified Persons may be entitled under any agreement, vote of stockholders or disinterested directors or recommendation of counsel or otherwise, both as to actions in such person's official capacity and as to actions in any other capacity while holding such office or position, and shall continue as to an Indemnified Person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, beneficiaries, personal representatives and the estate of such person. All rights to indemnification and advancement under this Article shall be deemed to be a contract between the Corporation and each Indemnified Person who serves or served in such capacity at any time while this Article is in effect. Any repeal or modification of this Article or any repeal or modification of relevant provisions of the Delaware General Corporation Law or any other applicable laws shall not in any way diminish any rights to indemnification of such Indemnified Person, or the obligations of the Corporation arising hereunder, for claims relating to matters occurring prior to such repeal or modification. 5. Insurance The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee -9- or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (including serving as a fiduciary of an employee benefit plan) against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article or the applicable provisions of the Delaware General Corporation Law. 6. Savings Clause If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify and advance costs to each Indemnified Person as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any Proceeding, including an action by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Article that shall not have been invalidated and as permitted by the Delaware General Corporation Law. TENTH: No director of the Corporation shall be personally liable to the Corporation or its stockholders for any monetary damages for breaches of fiduciary duty as a director, provided that this provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders; (ii) for acts -10- or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Section 174 of the General Corporation Law of the State of Delaware; or (iv) for any transaction from which the director derived an improper personal benefit. No repeal or amendment of this Article shall adversely affect any rights of any person pursuant to this Article TENTH which existed at the time of such repeal or amendment with respect to acts or omissions occurring prior to such repeal or amendment. The undersigned incorporator hereby affirms that the statements made herein are true under penalties of perjury, and is hereby executing this Certificate of Incorporation this 18th day of February, l997. /s/ Ralph D. Mosley, Jr. (L.S.) -------------------------------------- Ralph D. Mosley, Jr. -11- EX-3.2 4 EXHIBIT 3.2 EASY STREET ONLINE, INC. BY-LAWS ARTICLE I OFFICES 1. The location of the registered office of the Corporation in the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle, and the name of its registered agent at such address is The Prentice-Hall Corporation System, Inc. 2. The Corporation shall in addition to its registered office in the State of Delaware establish and maintain an office or offices at such place or places as the Board of Directors may from time to time find necessary or desirable. ARTICLE II CORPORATE SEAL The corporate seal of the Corporation shall have inscribed thereon the name of the Corporation and may be in such form as the Board of Directors may determine. Such seal may be used by causing it or a facsimile thereof to be impressed, affixed or otherwise reproduced. ARTICLE III MEETINGS OF STOCKHOLDERS 1. All meetings of the stockholders shall be held at the registered office of the Corporation in the State of Delaware or at such other place as shall be determined from time to time by the Board of Directors. 2. The annual meeting of stockholders shall be held on such day and at such time as may be determined from time to time by resolution of the Board of Directors, when they shall elect by plurality vote, a Board of Directors to hold office until the annual meeting of stockholders held next after their election and their successors are respectively elected and qualified or until their earlier resignation or removal. Any other proper business may be transacted at the annual meeting. 3. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise expressly provided by statute, by the Certificate of Incorporation or by these By-laws. If, however, such majority shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting (except as otherwise provided by statute). At such adjourned meeting at which the requisite amount of voting stock shall be represented any business may be transacted which might have been transacted at the meeting as originally notified. 4. At all meetings of the stockholders each stockholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years prior to said meeting, unless such instrument provides for a longer period. 5. At each meeting of the stockholders each stockholder -2- shall have one vote for each share of capital stock having voting power, registered in his name on the books of the Corporation at the record date fixed in accordance with these By-law, or otherwise determined, with respect to such meeting. Except as otherwise expressly provided by statute, by the Certificate of Incorporation or by these By-laws, all matters coming before any meeting of the stockholders shall be decided by the vote of a majority of the number of shares of stock present in person or represented by proxy at such meeting and entitled to vote thereat, a quorum being present. 6. Notice of each meeting of the stockholders shall be mailed to each stockholder entitled to vote thereat not less than 10 nor more than 60 days before the date of the meeting. Such notice shall state the place, date and hour of the meeting and, in the case of a special meeting, the purposes for which the meeting is called. 7. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute, may be called by the President or by the Board of Directors, and shall be called by the Secretary at the request in writing of stockholders owning a majority of the amount of the entire capital stock of the Corporation issued and outstanding and entitled to vote. Such request by stockholders shall state the purpose or purposes of the proposed meeting. 8. Business transacted at each special meeting shall be confined to the purpose or purposes stated in the notice of such meeting. -3- 9. The order of business at each meeting of stockholders shall be determined by the presiding officer. ARTICLE IV DIRECTORS 1. The business and affairs of the Corporation shall be managed under the direction of a Board of Directors, which may exercise all such powers and authority for and on behalf of the Corporation as shall be permitted by law, the Certificate of Incorporation or these By-laws. Each of the directors shall hold office until the next annual meeting of stockholders and until his successor has been elected and qualified or until his earlier resignation or removal. 2. The Board of Directors may hold their meetings within or outside of the State of Delaware, at such place or places as it may from time to time determine. 3. The number of directors comprising the Board of Directors shall be such number as may be from time to time fixed by resolution of the Board of Directors. In case of any increase, the Board shall have power to elect each additional director to hold office until the next annual meeting of stockholders and until his successor is elected and qualified or his earlier resignation or removal. Any decrease in the number of directors shall take effect at the time of such action by the Board only to the extent that vacancies then exist; to the extent that such decrease exceeds the number of such vacancies, the decrease shall not become effective, -4- except as further vacancies may thereafter occur, until the time of and in connection with the election of directors at the next succeeding annual meeting of the stockholders. 4. If the office of any director becomes vacant, by reason of death, resignation, disqualification or otherwise, a majority of the directors then in office, although less than a quorum, may fill the vacancy by electing a successor who shall hold office until the next annual meeting of stockholders and until his successor is elected and qualified or his earlier resignation or removal. 5. The directors shall elect from among their members Co-Chairmen of the Board of Directors each of whom shall serve until the next annual meeting of directors and until their respective successors have been duly elected and qualify. The Co-Chairmen shall preside at the meetings of the Board of Directors and at the meetings of stockholders and each shall perform such other duties as from time may be assigned to him by the Board of Directors or the Executive Committee. 6. Any director may resign at any time by giving written notice of his resignation to the Board of Directors. Any such resignation shall take effect upon receipt thereof by the Board, or at such later date as may be specified therein. Any such notice to the Board shall be addressed to it in care of the Secretary. -5- ARTICLE V COMMITTEES OF DIRECTORS 1. By resolutions adopted by a majority of the whole Board of Directors, the Board may designate an Executive Committee and one or more other committees, each such committee to consist of one or more directors of the Corporation. The Executive Committee shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation (except as otherwise expressly limited by statute), including the power and authority to declare dividends and to authorize the issuance of stock, and may authorize the seal of the corporation to be affixed to all papers which may require it. Each such committee shall have such of the powers and authority of the Board as may be provided from time to time in resolutions adopted by a majority of the whole Board. 2. The requirements with respect to the manner in which the Executive Committee and each such other committee shall hold meetings and take actions shall be set forth in the resolutions of the Board of Directors designating the Executive Committee or such other committee. ARTICLE VI COMPENSATION OF DIRECTORS The directors shall receive such compensation for their services as may be authorized by resolution of the Board of Directors, which compensation may include an annual fee and a fixed sum for expense of attendance at regular or special meetings of the -6- Board or any committee thereof. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. ARTICLE VII MEETINGS OF DIRECTORS; ACTION WITHOUT A MEETING 1. Regular meetings of the Board of Directors may be held without notice at such time and place, either within or without the State of Delaware, as may be determined from time to time by resolution of the Board. 2. Special meetings of the Board of Directors shall be held whenever called by the President of the Corporation or the Board of Directors on at least 24 hours' notice to each director. Except as may be otherwise specifically provided by statute, by the Certificate of Incorporation or by these By-laws, the purpose or purposes of any such special meeting need not be stated in such notice, although the time and place of the meeting shall be stated. 3. At all meetings of the Board of Directors, the presence in person of a majority of the members of the Board of Directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and, except as otherwise provided by statute, by the Certificate of Incorporation or by these By-laws, if a quorum shall be present the act of a majority of the directors present shall be the act of the Board. 4. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all the members of the Board or such -7- committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of committee. Any director may participate in a meeting of the Board, or any committee designated by the Board, by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this sentence shall constitute presence in person at such meeting. ARTICLE VIII OFFICERS 1. The officers of the Corporation shall be chosen by the Board of Directors and shall be a President, one or more Vice Presidents, a Secretary and a Treasurer. The Board may also choose one or more Assistant Secretaries and Assistant Treasurers, and such other officers as it shall deem necessary. Any number of offices may be held by the same person. 2. The salaries of all officers of the Corporation shall be fixed by the Board of Directors, or in such manner as the Board may prescribe. 3. The officers of the Corporation shall hold office until their successors are elected and qualified, or until their earlier resignation or removal. Any officer may be at any time removed from office by the Board of Directors, with or without cause. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. 4. Any officer may resign at any time by giving written -8- notice of his resignation to the Board of Directors. Any such resignation shall take effect upon receipt thereof by the Board or at such later date as may be specified therein. Any such notice to the Board shall be addressed to it in care of the Secretary. ARTICLE IX PRESIDENT The President shall be the chief executive and chief operating officer of the Corporation. Subject to the supervision and direction of the Board of Directors, he shall be responsible for managing the affairs of the Corporation. He shall have supervision and direction of all of the other officers of the Corporation and shall have the powers and duties usually and customarily associated with the office of the President. In the absence or non election of the Co-Chairman of the Board of Directors he shall preside at meetings of the stockholders and of the Board of Directors. ARTICLE X VICE PRESIDENTS The Vice Presidents shall have such powers and duties as may be delegated to them by the President. ARTICLE XI SECRETARY AND ASSISTANT SECRETARY 1. The Secretary shall attend all meetings of the Board of Directors and of the stockholders, and shall record the minutes of all proceedings in a book to be kept for that purpose. He shall perform like duties for the committees of the Board when required. -9- 2. The Secretary shall give, or cause to be given, notice of meetings of the stockholders, of the Board of Directors and of the committees of the Board. He shall keep in safe custody the seal of the Corporation, and when authorized by the President, an Executive Vice President or a Vice President, shall affix the same to any instrument requiring it, and when so affixed it shall be attested by his signature or by the signature of an Assistant Secretary. He shall have such other powers and duties as may be delegated to him by the President. 3. The Assistant Secretary shall, in case of the absence of the Secretary, perform the duties and exercise the powers of the Secretary, and shall have such other powers and duties as may be delegated to them by the President. ARTICLE XII TREASURER AND ASSISTANT TREASURER 1. The Treasurer shall have the custody of the corporate funds and securities, and shall deposit or cause to be deposited under his direction all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors or pursuant to authority granted by it. He shall render to the President and the Board whenever they may require it an account of all his transactions as Treasurer and of the financial condition of the Corporation. He shall have such other powers and duties as may be delegated to him by the President. 2. The Assistant Treasurer shall, in case of the -10- absence of the Treasurer, perform the duties and exercise the powers of the Treasurer, and shall have such other powers and duties as may be delegated to them by the President. ARTICLE XIII CERTIFICATES OF STOCK The certificates of stock of the Corporation shall be numbered and shall be entered in the books of the Corporation as they are issued. They shall exhibit the holder's name and number of shares and shall be signed by the President or an Executive Vice President or Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary. ARTICLE XIV CHECKS All checks, drafts and other orders for the payment of money and all promissory notes and other evidences of indebtedness of the Corporation shall be signed by such officer or officers or such other person as may be designated by the Board of Directors or pursuant to authority granted by it. ARTICLE XV FISCAL YEAR The fiscal year of the Corporation shall be as determined from time to time by resolution duly adopted by the Board of Directors. ARTICLE XVI NOTICES AND WAIVERS 1. Whenever by statute, by the Certificate of -11- Incorporation or by these By-laws it is provided that notice shall be given to any director or stockholder, such provision shall not be construed to require personal notice, but such notice may be given in writing, by mail, by depositing the same in the United States mail, postage prepaid, directed to such stockholder or director at his address as it appears on the records of the Corporation, and such notice shall be deemed to be given at the time when the same shall be thus deposited. Notice of regular or special meetings of the Board of Directors may also be given to any director by telephone or by telex, telegraph or cable, and in the latter event the notice shall be deemed to be given at the time such notice, addressed to such director at the address hereinabove provided, is transmitted by telex (with confirmed answerback), or delivered to and accepted by an authorized telegraph or cable office. 2. Whenever by statute, by the Certificate of Incorporation or by these By-laws a notice is required to be given, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of any stockholder or director at any meeting thereof shall constitute a waiver of notice of such meeting by such stockholder or director, as the case may be, except as otherwise provided by statute. ARTICLE XVII INDEMNIFICATION All persons who the Corporation is empowered to indemnify pursuant to the provisions of Section 145 of the General -12- Corporation Law of the State of Delaware (or any similar provision or provisions of applicable law at the time in effect) shall be indemnified by the Corporation to the full extent permitted thereby. The foregoing right of indemnification shall not be deemed to be exclusive of any other such rights to which those seeking indemnification from the Corporation may be entitled, including, but not limited to, any rights of indemnification to which they may be entitled pursuant to any agreement, insurance policy, other by-law or charter provision, vote of stockholders or directors, or otherwise. No repeal or amendment of this Article XVIII shall adversely affect any rights of any person pursuant to this Article XVIII which existed at the time of such repeal or amendment with respect to acts or omissions occurring prior to such repeal or amendment. ARTICLE XVIII ALTERATION OF BY-LAWS The By-laws of the Corporation may be altered, amended or repealed, and new By-laws may be adopted, by the stockholders or by the Board of Directors. -13- EX-4.1 5 EXHIBIT 4.1 WARRANT AGREEMENT dated as of , 1997 between Frontline Communications Corporation, a Delaware corporation (the "Company"), and Rockefeller Securities Group, Inc. (hereinafter referred to as the "Underwriter"). W I T N E S S E T H: WHEREAS, the Company proposes to issue to the Underwriter warrants (the "Warrants") to purchase up to 100,000 shares (as such number may be adjusted from time to time pursuant to Article 8 of this Warrant Agreement) (the "Shares") of Common Stock of the Company, par value $.01 per share (the "Common Stock", of the Company, and up to 50,000 (as such number may be adjusted from time to time pursuant to Article 8 of this Warrant Agreement) Common Stock purchase warrants (the "Underlying Warrants"); and WHEREAS, the Underwriter has agreed, pursuant to the underwriting agreement (the "Underwriting Agreement") dated , 1997 between the Underwriter and the Company, to act as the underwriter in connection with the Company's proposed public offering (the "Public Offering") of 1,150,000 (including overallotments) shares of Common Stock (the "Public Shares") at an initial public offering price of $5.00 per Public Share and 575,000 (including overallotments) warrants (the "Public Warrants") at an initial public offering price of $.10 per Public Warrant; and WHEREAS, the Warrants issued pursuant to this Agreement are being issued by the Company to the Underwriter or its designees who are directors, officers and partners of the Underwriter or to members of the selling group participating in the distribution of the Public Shares and Public Warrants to the public in the Public Offering and/or their respective directors, officers or partners (collectively, the "Designees"), in consideration for, and as part of the Underwriter's compensation in connection with, the Underwriter acting as the Underwriter pursuant to the Underwriting Agreement; NOW, THEREFORE, in consideration of the premises, the payment by the Underwriter or its designees to the Company of One Hundred Dollars ($100.00), the agreements herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Grant. The Underwriter and/or the Designees are hereby granted the right to purchase, at any time from , 1997 until 5:00 P.M., New York time, on , 2002 (the "Warrant Exercise Term"), up to 100,000 fully-paid and non-assessable Shares at an initial exercise price (subject to adjustment as provided in Articles 6 and 8 hereof) of $5.50 per Share and up to 50,000 Underlying Warrants at an initial exercise price (subject to adjustment as provided in Articles 6 and 8 hereof) of $.11 per Underlying Warrant. The Underlying Warrants -2- are each exercisable to purchase one (1) fully-paid and non-assessable share of Common Stock at a price of $5.50 per share (the "Underlying Warrant Shares"). The Underlying Warrants are exercisable commencing , 1997 or such earlier date as the Underwriter consents to the exercise of the warrants issued pursuant to the Public Warrant Agreement (as hereinafter defined) until 5:00 P.M., New York City time on , 2002. The Holder may purchase, upon exercise of this Warrant, either the Shares or the Underlying Warrants or both. Except as provided in Article 13 hereof, the Shares and the Underlying Warrants are in all respects identical to the Public Shares and Public Warrants being sold to the public pursuant to the terms and provisions of the Underwriting Agreement. 2. Warrant Certificates. The warrant certificates delivered and to be delivered pursuant to this Agreement (the "Warrant Certificates") shall, for the Warrants exercisable for the purchase of Shares, be in the form set forth in Exhibit A attached hereto and made a part hereof, and, for the Warrants exercisable for the purchase of Underlying Warrants, in the form of Exhibit B attached hereto and made a part hereof, each with such appropriate insertions, omissions, substitutions and other variations as required or permitted by this Agreement. 3. Exercise of Warrant. 3.1. Cash Exercise. The Warrants initially are exercisable at a price of $5.50 per Share purchased and $.11 per -3- Underlying Warrant purchased, payable in cash or by check to the order of the Company, or any combination thereof, subject to adjustment as provided in Article 8 hereof. Upon surrender of the Warrant Certificate(s) with the annexed Form of Election to Purchase duly executed, together with payment of the Exercise Price (as hereinafter defined) for the Shares and Underlying Warrants purchased, at the Company's principal offices (currently located at One Blue Hill Plaza, 6th Floor, P.O. Box 1548, Pearl River, New York 10965) the registered holder of a Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a certificate or certificates for the Shares so purchased and/or a certificate or certificates for the Underlying Warrants so purchased. The purchase rights represented by each Warrant Certificate are exercisable at the option of the Holder thereof, in whole or in part (but not as to fractional Shares or fractional Underlying Warrants). In the case of the purchase of less than all the Shares or Underlying Warrants purchasable under any Warrant Certificate, the Company shall cancel said Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate of like tenor for the balance of the Shares or Underlying Warrants purchasable thereunder. 3.2. Cashless Exercise. At any time during the Warrant Exercise Term, the Holder may, at the Holder's option, exchange, in whole or in part, the Warrants represented by such Holder's Warrant Certificate, which are exercisable for the -4- purchase of Shares (a "Warrant Exchange"), into the number of Shares and Underlying Warrants determined in accordance with this Section 3.2, by surrendering such Warrant Certificate at the principal office of the Company or at the office of its transfer agent, accompanied by a notice stating such Holder's intent to effect such exchange, the number of Warrants to be so exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the date specified in the Notice of Exchange or, if later, the date the Notice of Exchange is received by the Company (the "Exchange Date"). Certificates for the Shares issuable upon such Warrant Exchange and, if applicable, a new Warrant Certificate of like tenor representing Warrants which were subject to the surrendered Warrant Certificate and not included in the Warrant Exchange, shall be issued as of the Exchange Date and delivered to the Holder within three (3) days following the Exchange Date. In connection with any Warrant Exchange, the Holder shall be entitled to subscribe for and acquire (i) the number of Shares (rounded to the next highest integer) which would, but for such Warrant Exchange, then be issuable pursuant to the provisions of Section 3.1 above upon the exercise of the Warrants specified by the Holder in its Notice of Exchange (the "Total Share Number") less (ii) the number of Shares equal to the quotient obtained by dividing (a) the product of the Total Share Number and the existing Exercise Price per -5- Share (as hereinafter defined) by (b) the Market Price (as hereinafter defined) of a Public Share on the day preceding the Warrant Exchange. "Market Price" at any date shall be deemed to be the last reported sale price prior to the Exchange Date or, in case no such reported sales takes place on such day, the average of the last reported sale prices for the last three (3) trading days, in either case as officially reported by the principal securities exchange on which the Common Stock is listed or admitted to trading or as reported in the NASDAQ National Market System, or, if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted on the NASDAQ National Market System, the closing bid price as furnished by (i) the National Association of Securities Dealers, Inc. through NASDAQ or (ii) a similar organization if NASDAQ is no longer reporting such information. 4. Issuance of Certificates. Upon the exercise of the Warrants, the issuance of certificates for the Shares purchased and certificates for the Underlying Warrants purchased, and upon the exercise of the Underlying Warrants, the issuance of certificates for the Underlying Warrant Shares purchased shall be made forthwith (and in any event within three (3) business days thereafter) without charge to the Holder thereof including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall (subject to the provisions of Article 5 -6- hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Warrant Certificates and the certificates representing the Shares and the Underlying Warrants shall be executed on behalf of the Company by the manual or facsimile signature of the present or any future Chairman or Vice Chairman of the Board of Directors or President or Vice President of the Company under its corporate seal reproduced thereon, attested to by the manual or facsimile signature of the present or any future Secretary or Assistant Secretary of the Company. Warrant Certificates and certificates representing the Underlying Warrants shall be dated the date of execution by the Company upon initial issuance, division, exchange, substitution or transfer. Upon exercise, in part or in whole, of the Warrants, certificates representing the Shares and the Underlying Warrants purchased, and upon exercise, in whole or in part, of the Underlying Warrants, certificates representing the Underlying -7- Warrant Shares purchased (collectively, the "Warrant Securities"), shall bear a legend substantially similar to the following: "The securities represented by this certificate and the other securities issuable upon exercise thereof have not been registered for purposes of public distribution under the Securities Act of 1933, as amended (the "Act"), and may not be offered or sold except (i) pursuant to an effective registration statement under the Act, (ii) to the extent applicable, pursuant to Rule 144 under the Act (or any similar rule under such Act relating to the disposition of securities), or (iii) upon the delivery by the holder to the Company of an opinion of counsel, reasonably satisfactory to counsel to the Company, stating that an exemption from registration under such Act is available." 5. Restriction on Transfer of Warrants. The Holder of a Warrant Certificate, by the Holder's acceptance thereof, covenants and agrees that the Warrants are being acquired as an investment and not with a view to the distribution thereof, and that the Warrants may not be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or in part, for a period of one (1) year from the date hereof [the Effective Date], except to the Underwriter or to the Designees. -8- 6. Price. 6.1. Initial and Adjusted Exercise Price. The Warrant's initial exercise price of each Warrant shall be $5.50 per Share and $.11 per Underlying Warrant. The adjusted exercise price per Share and the adjusted exercise price per Underlying Warrant shall be the prices which shall result from time to time from any and all adjustments of the initial exercise price per Share or per Underlying Warrant, as the case may be, in accordance with the provisions of Article 8 hereof. 6.2. Exercise Price. The term "Exercise Price" herein shall mean the initial exercise price or the adjusted exercise price, depending upon the context. 7. Registration Rights. 7.1. Registration Under the Securities Act of 1933. None of the Warrants, the Shares, the Underlying Warrants, or the Underlying Warrant Shares have been registered for purposes of public distribution under the Securities Act of 1933, as amended (the "Act"). 7.2. Registrable Securities. As used herein the term "Registrable Security" means each of the Warrants, the Shares, the Underlying Warrants, the Underlying Warrant Shares and any shares of Common Stock issued upon any stock split or stock dividend in respect of such Shares or Underlying Warrant Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a -9- Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Act and disposed of pursuant thereto, (ii) registration under the Act is no longer required for subsequent public distribution of such security, or (iii) it has ceased to be outstanding. The term "Registrable Securities" means any and/or all of the securities falling within the foregoing definition of a "Registrable Security." In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of "Registrable Security" as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Article 7. 7.3. Piggyback Registration. If, at any time during the seven years following the effective date of the Public Offering, the Company proposes to prepare and file one or more post-effective amendments to the registration statement filed in connection with the Public Offering or any new registration statement or post-effective amendments thereto covering equity or debt securities of the Company, or any such securities of the Company held by its shareholders (in any such case, other than in connection with a merger, acquisition or pursuant to Form S-8 or successor form) (for purposes of this Article 7, collectively, the "Registration Statement"), it will give written notice of its intention to do so by registered mail ("Notice"), at least thirty -10- (30) business days prior to the filing of each such Registration Statement, to all holders of the Registrable Securities. Upon the written request of such a holder (a "Requesting Holder"), made within twenty (20) business days after receipt of the Notice, that the Company include any of the Requesting Holder's Registrable Securities in the proposed Registration Statement, the Company shall, as to each such Requesting Holder, use its best efforts to effect the registration under the Act of the Registrable Securities which it has been so requested to register ("Piggyback Registration"), at the Company's sole cost and expense and at no cost or expense to the Requesting Holders; provided, however, that if, in the written opinion of the Company's managing underwriter, if any, for such offering, the inclusion of all or a portion of the Registrable Securities requested to be registered, when added to the securities being registered by the Company or the selling shareholder(s), will exceed the maximum amount of the Company's securities which can be marketed (i) at a price reasonably related to their then current market value, or (ii) without otherwise materially adversely affecting the entire offering, then the Company may exclude from such offering all or a portion of the Registrable Securities which it has been requested to register. If securities are proposed to be offered for sale pursuant to such Registration Statement by other security holders of the Company and the total number of securities to be offered -11- by the Requesting Holders and such other selling security holders is required to be reduced pursuant to a request from the managing underwriter (which request shall be made only for the reasons and in the manner set forth above) the aggregate number of Registrable Securities to be offered by Requesting Holders pursuant to such Registration Statement shall equal the number which bears the same ratio to the maximum number of securities that the underwriter believes may be included for all the selling security holders (including the Requesting Holders) as the original number of Registrable Securities proposed to be sold by the Requesting Holders bears to the total original number of securities proposed to be offered by the Requesting Holders and the other selling security holders. Notwithstanding the provisions of this Section 7.3, the Company shall have the right at any time after it shall have given written notice pursuant to this Section 7.3 (irrespective of whether any written request for inclusion of Registrable Securities shall have already been made) to elect not to file any such proposed Registration Statement, or to withdraw the same after the filing but prior to the effective date thereof. Nothing contained in the foregoing sentence shall require the Company to undergo an audit, other than in the ordinary course of business. -12- 7.4. Demand Registration. (a) At any time during the Warrant Exercise Term, any "Majority Holder" (as such term is defined in Section 7.4(d) below) of the Registrable Securities shall have the right (which right is in addition to the piggyback registration rights provided for under Section 7.3 hereof), exercisable by written notice to the Company (the "Demand Registration Request"), to have the Company prepare and file with the Securities and Exchange Commission (the "Commission") on one occasion, at the sole expense of the Company (except as provided in Section 7.5(b) hereof), a Registration Statement and such other documents, including a prospectus, as may be necessary (in the opinion of both counsel for the Company and counsel for such Majority Holder) in order to comply with the provisions of the Act, so as to permit a public offering and sale of the Registrable Securities by the holders thereof. The Company shall use its best efforts to cause the Registration Statement to become effective under the Act, so as to permit a public offering and sale of the Registrable Securities by the holders thereof. Once effective, the Company will use its best efforts to maintain the effectiveness of the Registration Statement until the earlier of (i) the date that all of the Registrable Securities have been sold, or (ii) the date that the holders thereof receive an opinion of counsel to the Company that all of the Registrable Securities may be freely traded without registration under the -13- Act, under Rule 144(k) promulgated under the Act or otherwise. Nothing herein contained shall require the Company to undergo an audit, other than in the ordinary course of business. (b) The Company covenants and agrees to give written notice of any Demand Registration Request to all holders of the Registrable Securities within ten (10) business days from the date of the Company's receipt of any such Demand Registration Request. After receiving notice from the Company as provided in this Section 7.4(b), holders of Registrable Securities may request the Company to include their Registrable Securities in the Registration Statement to be filed pursuant to Section 7.4(a) hereof by notifying the Company of their decision to have such securities included within ten (10) days of their receipt of the Company's notice. (c) The term "Majority Holder" as used in Section 7.4 hereof shall mean any holder or any combination of holders of Registrable Securities, if included in such holders' Registrable Securities are that aggregate number of shares of Common Stock (including Shares already issued, Shares issuable pursuant to the exercise of outstanding Warrants, Underlying Warrant Shares already issued and Underlying Warrant Shares issuable pursuant to the exercise of outstanding Underlying Warrants) as would constitute a majority of the aggregate number of shares of Common Stock (including Shares already issued, Shares issuable pursuant to the exercise of outstanding Warrants, -14- Underlying Warrant Shares already issued and Underlying Warrant Shares issuable pursuant to the exercise of outstanding Underlying Warrants) included in all the Registrable Securities. 7.5. Covenants of the Company With Respect to Registration. The Company covenants and agrees as follows: (a) In connection with any registration under Section 7.4 hereof, the Company shall file the Registration Statement as expeditiously as possible, but in any event no later than twenty (20) days following receipt of any demand therefor, shall use its best efforts to have any such Registration Statement declared effective at the earliest possible time, and shall furnish each holder of Registrable Securities such number of prospectuses as shall reasonably be requested. (b) The Company shall pay all costs, fees and expenses (other than indemnity fees, discounts and nonaccountable expense allowance applicable to the Registrable Securities and fees and expenses of counsel retained by the holders of Registrable Securities) in connection with all Registration Statements filed pursuant to Sections 7.3 and 7.4(a) hereof including, without limitation, the Company's legal and accounting fees, printing expenses, and blue sky fees and expenses. (c) The Company will take all necessary action which may be required in qualifying or registering the Registrable Securities included in the Registration Statement, -15- for offering and sale under the securities or blue sky laws of such states as are requested by the holders of such securities; provided that the Company shall not be obligated to execute or file any general consent to service of process to qualify as a foreign corporation to do business under the laws of any such jurisdiction. (d) The Company shall indemnify any holder of the Registrable Securities to be sold pursuant to any Registration Statement and any underwriter or person deemed to be an underwriter under the Act and each person, if any, who controls such holder or underwriter or person deemed to be an underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriter as set forth in Section 7 of the Underwriting Agreement and to provide for just and equitable contribution as set forth in Section 8 of the Underwriting Agreement. -16- (e) Any holder of Registrable Securities to be sold pursuant to a registration statement, and such Holder's successors and assigns, shall severally, and not jointly, indemnify, the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such holder, or such Holder's successors or assigns, for specific inclusion in such Registration Statement to the same extent and with the same effect as the provisions pursuant to which the Underwriter has agreed to indemnify the Company as set forth in Section 7 of the Underwriting Agreement and to provide for just and equitable contribution as set forth in Section 8 of the Underwriting Agreement. (f) Nothing contained in this Agreement shall be construed as requiring any holder to exercise the Warrants or the Underlying Warrants held by such Holder prior to the initial filing of any registration statement or the effectiveness thereof. -17- 8. Adjustments of Exercise Price and Number of Securities. The following adjustments apply to the Exercise Price of the Warrants with respect to the Shares and the number of Shares purchasable upon exercise of the Warrants. In the event the Exercise Price per Share and/or the number of Shares so purchasable is adjusted, then the Exercise Price of the Warrants relating to the Underlying Warrants and the number of underlying Warrants purchasable hereunder shall, be adjusted in the same proportion. 8.1. Computation of Adjusted Price. In case the Company shall at any time after the date hereof pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, then upon such dividend or distribution the Exercise Price per Share in effect immediately prior to such dividend or distribution shall forthwith be reduced to a price determined by dividing: (a) an amount equal to the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution multiplied by the Exercise Price in effect immediately prior to such dividend or distribution, by (b) the total number of shares of Common Stock outstanding immediately after such issuance or sale. For the purposes of any computation to be made in accordance with the provisions of this Section 8.1, the Common Stock issuable by way of dividend or other distribution on -18- any stock of the Company shall be deemed to have been issued immediately after the opening of business on the date following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution. 8.2. Subdivision and Combination. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Exercise Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. 8.3. Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this Article 8, the number of Shares issuable upon the exercise of each Warrant shall be adjusted to the nearest full number by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of Shares issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price provided, however that if an event occurs that results in an adjustment of the number and/or price of the shares of Common Stock issuable upon exercise of the Public Warrants pursuant to Section 9 of the Warrant Agreement by and among the Company, the Underwriter and Continental Stock Transfer & Trust Company dated as of , 1997 (the "Public Warrant Agreement"), resulting in automatic adjustment in the number and/or price of the Underlying Warrant Shares issuable upon -19- exercise of the Underlying Warrants pursuant to Section 8.5 hereof, then the adjustment provided for in this Section 8.3 shall not, in such instance, result in any further adjustment in the aggregate number of shares of Common Stock ultimately issuable upon exercise of the Underlying Warrants. 8.4. Reclassification, Consolidation, Merger, etc. In case of any reclassification or change of the outstanding shares of Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in the case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in any reclassification or change of the outstanding shares of Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or in the case of a sale or conveyance to another corporation of the property of the Company as an entirety, the Holders shall thereafter have the right to purchase the kind and number of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance as if the Holders were the owners of both the Shares and the Underlying Warrant Shares immediately prior to any such events, at a price equal to the product of (x) the number of shares of Common Stock issuable upon exercise of the Holders' -20- Warrants and the Underlying Warrants and (y) the exercise prices for the Warrants and Underlying Warrants in effect immediately prior to the record date for such reclassification, change, consolidation, merger, sale or conveyance as if such Holders had exercised the Warrants and the Underlying Warrants. 8.5. Determination of Outstanding Common Shares. The number of Common Shares at any one time outstanding shall include the aggregate number of shares issued and the aggregate number of shares issuable upon the exercise of options, rights, warrants and upon the conversion or exchange of convertible or exchangeable securities. 8.6. Adjustment of Exercise Price and Securities Issuable Upon Exercise of Underlying Warrants. With respect to any of the Underlying Warrants, whether or not the Warrants have been exercised and whether or not the Warrants are issued and outstanding, the exercise price for, and the number of, Underlying Warrant Shares issuable upon exercise of the Underlying Warrants shall be automatically adjusted in accordance with Section 9 of the Public Warrant Agreement, upon the occurrence of any of the events described therein. Thereafter, until the next such adjustment or until otherwise adjusted in accordance with this Section 8, the Underlying Warrants shall be exercisable at such adjusted exercise price and for such adjusted number of Underlying Warrant Shares. -21- 9. Exchange and Replacement of Warrant Certificates. Each Warrant Certificate is exchangeable without expense, upon the surrender thereof by the registered Holder at the principal executive office of the Company, for a new Warrant Certificate of like tenor and date representing in the aggregate the right to purchase the same number of securities in such denominations as shall be designated by the Holder thereof at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Warrant Certificate, if mutilated, the Company will make and deliver a new Warrant Certificate of like tenor, in lieu thereof. 10. Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of Shares or fractions of Underlying Warrants upon the exercise of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of Shares and Underlying Warrants. -22- 11. Reservation and Listing of Securities. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of the Warrants and the Underlying Warrants, such number of shares of Common Stock as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all Shares issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any shareholder. The Company further covenants and agrees that upon exercise of the Underlying Warrants and payment of the respective Underlying Warrant exercise price therefor, all Underlying Warrant Shares issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any shareholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon the exercise of the Warrants and the Underlying Warrants and all Underlying Warrants to be listed on or quoted by NASDAQ or listed on such national securities exchange, in the event the Common Stock is listed on a national securities exchange. 12. Notices to Warrant Holders. Nothing contained in this Agreement shall be construed as conferring upon the Holder or Holders the right to vote or to -23- consent or to receive notice as a shareholder in respect of any meetings of shareholders for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of the Warrants and their exercise, any of the following events shall occur: (a) the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; or -24- (d) reclassification or change of the outstanding shares of Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in any reclassification or change of the outstanding shares of Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or a sale or conveyance to another corporation of the property of the Company as an entirety is proposed; or (e) The Company or an affiliate of the Company shall propose to issue any rights to subscribe for shares of Common Stock or any other securities of the Company or of such affiliate to all the shareholders of the Company; then, in any one or more of said events, the Company shall give written notice to the Holder or Holders of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, options or -25- warrants, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend or distribution, or the issuance of any convertible or exchangeable securities or subscription rights, options or warrants, or any proposed dissolution, liquidation, winding up or sale. 13. Underlying Warrants. The form of the certificates representing the Underlying Warrants (and the form of election to purchase shares of Common Stock upon the exercise of the Underlying Warrants and the form of assignment printed on the reverse thereof) shall be substantially as set forth in Exhibit "A" to the Public Warrant Agreement; provided, however, (i) each Underlying Warrant issuable upon exercise of the Warrants shall evidence the right to initially purchase one (1) fully paid and non-assessable share of Common Stock in respect of the Underlying Warrant at an initial purchase price of $5.50 per share commencing , 1997 or such earlier date as the Underwriter consents to the exercise of the warrants issued pursuant to the Public Warrant Agreement until , 2002 and (ii) the Target Redemption Price (as defined in the Public Warrant Agreement) of the Underlying Warrants is 150% of the then effective exercise price -26- of the Underlying Warrants. As set forth in Section 8.5 of this Agreement, the exercise price of the Underlying Warrants and the number of shares of Common Stock issuable upon the exercise of the Underlying Warrants are subject to adjustment, whether or not the Warrants have been exercised and the Underlying Warrants have been issued, in the manner and upon the occurrence of the events set forth in Section 9 of the Public Warrant Agreement, which is hereby incorporated herein by reference and made a part hereof as if set forth in its entirety herein. Subject to the provisions of this Agreement and upon issuance of the Underlying Warrants, each registered holder of such Underlying Warrants shall have the right to purchase from the Company (and the Company shall issue to such registered holders) up to the number of fully paid and non-assessable Underlying Warrant Shares (subject to adjustment as provided herein and in the Public Warrant Agreement), free and clear of all preemptive rights of shareholders, provided that such registered holder complies, in connection with the exercise of such holders' Underlying Warrants, with the terms governing exercise of the Public Warrants set forth in the Public Warrant Agreement, and pays the applicable exercise price, determined in accordance with the terms of the Public Warrant Agreement. Upon exercise of the Underlying Warrants, the Company shall forthwith issue to the registered holder of any such Underlying Warrants, in such holder's name or in such name as may be directed by such holder, certificates for the number of Underlying Warrant Shares -27- so purchased. The Underlying Warrants shall be transferable in the manner provided in the Public Warrant Agreement, and upon any such transfer, a new Underlying Warrant shall be issued promptly to the transferee. The Company covenants to, and agrees with, each Holder that without the prior written consent of all the Holders, the Public Warrant Agreement will not be modified, amended, cancelled, altered or superseded, and that the Company will send to each Holder, irrespective of whether or not the Warrants have been exercised, any and all notices required by the Public Warrant Agreement to be sent to holders of the Public Warrants. 14. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made when delivered, or mailed by registered or certified mail, return receipt requested: (a) If to a registered Holder of the Warrants, to the address of such Holder as shown on the books of the Company; or (b) If to the Company, to the address set forth in Section 3 of this Agreement or to such other address as the Company may designate by notice to the Holders. 15. Supplements and Amendments. The Company and the Underwriter may from time to time supplement or amend this Agreement without the approval of any -28- Holders of the Warrants and/or Warrant Securities in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Underwriter may deem necessary or desirable and which the Company and the Underwriter deem not to adversely affect the interests of the Holders of Warrant Certificates. 16. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company and the Holders inure to the benefit of their respective successors and assigns hereunder. 17. Termination. This Agreement shall terminate at the close of business on , 2005. Notwithstanding the foregoing, this Agreement will terminate on any earlier date when all Warrants and Underlying Warrants have been exercised and all Warrant Securities have been resold to the public; provided, however, that the provisions of Section 7 shall survive any termination pursuant to this Section 17 until the close of business on , 2008. 18. Governing Law. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of -29- the State of New York and for all purposes shall be construed in accordance with the laws of said State. 19. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Underwriter and any other registered holder or holders of the Warrant Certificates or Warrant Securities any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive benefit of the Company and the Underwriter and any other holder or holders of the Warrant Certificates or Warrant Securities. 20. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. -30- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. FRONTLINE COMMUNICATIONS CORPORATION By:__________________________________ Name: Title: Attest: ROCKEFELLER SECURITIES GROUP, INC. _________________________ By:________________________________ Name: Title: EXHIBIT A THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE ON OR COMMENCING _________, 1997 UNTIL 5:00 P.M., NEW YORK TIME, _______, 2002 No. W- _______ Warrants WARRANT CERTIFICATE This Warrant Certificate certifies that ________ _____________________________ or registered assigns, is the registered holder of __________ Warrants to purchase, at any time from _______, 1998 until 5:00 P.M. New York City time on _______, 2002 ("Expiration Date"), an aggregate of up to _______ fully-paid and non-assessable shares (the "Shares") of the common stock, par value $.01 per share (the "Common Stock"), of Frontline Communications Corporation, a Delaware corporation (the "Company"), at an initial exercise price, subject to adjustment in certain events (the "Exercise Price"), of $____ per Share, upon surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the warrant agreement dated as of _______, 1997 between the Company and Rockefeller Securities Group, Inc. (the "Warrant Agreement"). Payment of the Exercise Price may be made in cash, or by certified or official bank check in New York Clearing House funds payable to the order of the Company, or any combination thereof. No Warrant may be exercised after 5:00 P.M., New York City time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, shall thereafter be void. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to in a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. The Warrant Agreement provides that upon the occurrence of certain events, the Exercise Price and the type and/or number of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair, the rights of the holder as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant Agreement, without any charge except for any tax, or other governmental charge imposed in connection therewith. Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of unexercised Warrants. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal. Dated: , 1997 FRONTLINE COMMUNICATIONS CORPORATION By:__________________________ Name: Title: Attest: - ---------------------- [FORM OF ELECTION TO PURCHASE] The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase _________ Shares of Common Stock and herewith tenders in payment for such securities, cash or a certified or official bank check payable in New York Clearing House Funds to the order of Frontline Communications Corporation in the amount of $_______, all in accordance with the terms hereof. The undersigned requests that a certificate for such securities be registered in the name of ________________, whose address is ___________________, and that such Certificate be delivered to ____________, whose address is _____________. Dated: Signature:___________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) -------------------------------- -------------------------------- (Insert Social Security or Other Identifying Number of Holder) . [FORM OF ASSIGNMENT] (To be executed by the registered holder if such holder desires to transfer the Warrant Certificate.) FOR VALUE RECEIVED___________________________________________ hereby sells, assigns and transfers unto _______________________________________________________________________________ (Please print name and address of transferee) this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________, Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution. Dated: Signature:_______________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate) - ------------------------------- - ------------------------------- (Insert Social Security or Other Identifying Number of Assignee) EXHIBIT B THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE COMMENCING _______, 1997 UNTIL 5:00 P.M., NEW YORK TIME, _______, 200__ No. W- _________ Warrants WARRANT CERTIFICATE This Warrant Certificate certifies that _____________ ____________________, or registered assigns, is the registered holder of ___________________________ (_______) Warrants to purchase, at any time from _______, 1997 until 5:00 P.M. New York City time on _______, 200__ ("Expiration Date"), an aggregate of up to ___________________________ (_______) common stock purchase warrants, each common stock purchase warrant entitling the holder thereof to purchase one share of common stock, par value $.01 per share (collectively, the "Underlying Warrants"), of Frontline Communications Corporation, a Delaware corporation (the "Company"), at an initial exercise price, subject to adjustment in certain events (the "Exercise Price"), of $____ per Underlying Warrant, upon surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the warrant agreement dated as of _______, 1997 between the Company and Rockefeller Securities Group, Inc. (the "Warrant Agreement"). Payment of the Exercise Price may be made in cash, or by certified or official bank check in New York Clearing House funds payable to the order of the Company, or any combination thereof. The Underlying Warrants issuable upon exercise of the Warrants will be exercisable at any time from _______, 1997 until 5:00 P.M. Eastern Time _______, 2002, each Underlying Warrant entitling the holder thereof to purchase one fully-paid and non-assessable share of common stock of the Company, at an initial exercise price, subject to adjustment in certain events, of $____ per share. The Underlying Warrants are issuable pursuant to the terms and provisions of a certain agreement dated as of _______, 199__ by and among the Company, Rockefeller Securities Group, Inc. and _______________ (the "Public Warrant Agreement"). The Public Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to (except as otherwise provided in the Warrant Agreement) for a description of the rights, limitations of rights, manner of exercise, anti-dilution provisions and other provisions with respect to the Underlying Warrants. No Warrant may be exercised after 5:00 P.M., New York City time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, shall thereafter be void. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to in a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. The Warrant Agreement provides that, upon the occurrence of certain events, the Exercise Price and the type and/or number of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair the rights of the holder as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant Agreement, without any charge except for any tax or other governmental charge imposed in connection therewith. Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of unexercised Warrants. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal. Dated: , 1997 FRONTLINE COMMUNICATIONS CORPORATION By:__________________________ Name: Title: Attest: - ---------------------- [FORM OF ELECTION TO PURCHASE] The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase _________ Underlying Warrants and herewith tenders, in payment for such securities, cash or a certified or official bank check payable in New York Clearing House Funds to the order of Frontline Communications Corporation in the amount of $ ______, all in accordance with the terms hereof. The undersigned requests that a certificate for such securities be registered in the name of _______________, whose address is __________________, and that such Certificate be delivered to _______, whose address is _____________. Dated: Signature:____________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) -------------------------------- -------------------------------- (Insert Social Security or Other Identifying Number of Holder) [FORM OF ASSIGNMENT] (To be executed by the registered holder if such holder desires to transfer the Warrant Certificate.) FOR VALUE RECEIVED___________________________________________ hereby sells, assigns and transfers unto _______________________________________________________________________________ (Please print name and address of transferee) this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________, Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution. Dated: Signature:________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate) - -------------------------------- - -------------------------------- (Insert Social Security or Other Identifying Number of Assignee) EX-4.2 6 EXHIBIT 4.2 FRONTLINE COMMUNICATIONS CORPORATION a Delaware corporation and CONTINENTAL STOCK TRANSFER & TRUST COMPANY Warrant Agent and ROCKEFELLER SECURITIES GROUP, INC. Underwriter WARRANT AGREEMENT Table of Contents
Section Page 1 Appointment of Warrant Agent................................................................ 1 2 Form of Warrant............................................................................. 2 3 Countersignature and Registration........................................................... 3 4 Transfers and Exchanges..................................................................... 3 5 Exercise of Warrants; Payment of Warrant Solicitation Fee......................................................................................... 4 6 Payment of Taxes............................................................................ 8 7 Mutilated or Missing Warrants............................................................... 9 8 Reservation of Common Stock................................................................. 9 9 Warrant Price; Adjustments.................................................................. 11 10 Fractional Interest......................................................................... 18 11 Notices to Warrantholders................................................................... 18 12 Disposition of Proceeds on Exercise of Warrants............................................. 20 13 Redemption of Warrants...................................................................... 21 14 Merger or Consolidation or Change of Name of Warrant Agent....................................................................................... 21 15 Duties of Warrant Agent..................................................................... 22 16 Change of Warrant Agent..................................................................... 26 17 Identity of Transfer Agent.................................................................. 27 18 Notices..................................................................................... 27 19 Supplements and Amendments.................................................................. 29 20 New York Contract........................................................................... 29 21 Benefits of this Agreement.................................................................. 29 22. Successors.................................................................................. 30 Exhibit A - Form of Warrant
-i- WARRANT AGENT AGREEMENT dated as of , 1997, by and among Frontline Communications Corporation, a Delaware corporation (the "Company"), Rockefeller Securities Group, Inc. (the "Underwriter") and Continental Stock Transfer & Trust Company, as warrant agent (hereinafter called the "Warrant Agent"). WHEREAS, the Company proposes to issue and sell to the public up to 1,150,000 shares of the Common Stock of the Company, par value $.01 per share (hereinafter, together with the stock of any other class to which such shares may hereafter have been changed, called "Common Stock"), and up to 575,000 Common Stock purchase warrants (the "Warrants"); WHEREAS, each Warrant will entitle the holder thereof to purchase one (1) share of Common Stock; WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer, exchange and exercise of the Warrants; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: Section 1. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act as Warrant Agent for the Company in accordance with the instructions hereinafter set forth in this Agreement, and the Warrant Agent hereby accepts such appointment. Section 2. Form of Warrant. The text of the Warrants and of the form of election to purchase Common Stock to be printed on the reverse thereof shall be substantially as set forth in Exhibit A attached hereto. Each Warrant shall entitle the registered holder thereof to purchase one share of Common Stock at a purchase price of $5.50, at any time from , 1998 or such earlier date upon which the Underwriter consents to the exercise of the Warrants until 5:00 p.m. Eastern time, on , 2002 (the "Warrant Exercise Period"). The warrant price and the number of shares of Common Stock issuable upon exercise of the Warrants are subject to adjustment upon the occurrence of certain events, all as hereinafter provided. The Warrants shall be executed on behalf of the Company by the manual or facsimile signature of the present or any future President or Vice President of the Company, attested to by the manual or facsimile signature of the present or any future Secretary or Assistant Secretary of the Company. Warrants shall be dated as of the issuance by the Warrant Agent either upon initial issuance or upon transfer or exchange. In the event the aforesaid expiration date of the Warrants falls on a Saturday or Sunday, or on a legal holiday on which the New York Stock Exchange is closed, then the Warrants shall expire at 5:00 p.m. Eastern time on the next succeeding business day. Section 3. Countersignature and Registration. The Warrant Agent shall maintain books for the transfer and -2- registration of the Warrants. Upon the initial issuance of the Warrants, the Warrant Agent shall issue and register the Warrants in the names of the respective holders thereof. The Warrants shall be countersigned manually or by facsimile by the Warrant Agent (or by any successor to the Warrant Agent then acting as warrant agent under this Agreement) and shall not be valid for any purpose unless so countersigned. Warrants may, however, be so countersigned by the Warrant Agent (or by its successor as Warrant Agent) and be delivered by the Warrant Agent, notwithstanding that the persons whose manual or facsimile signatures appear thereon as proper officers of the Company shall have ceased to be such officers at the time of such countersignature or delivery. Section 4. Transfers and Exchanges. The Warrant Agent shall transfer, from time to time, any outstanding Warrants upon the books to be maintained by the Warrant Agent for that purpose, upon surrender thereof for transfer properly endorsed or accompanied by appropriate instructions for transfer. Upon any such transfer, a new Warrant shall be issued to the transferee and the surrendered Warrant shall be cancelled by the Warrant Agent. Warrants so cancelled shall be delivered by the Warrant Agent to the Company from time to time upon request. Warrants may be exchanged at the option of the holder thereof, when surrendered at the office of the Warrant Agent, for another Warrant, or other Warrants of different denominations of like tenor and representing in the aggregate the right to purchase a like number of shares of Common Stock. -3- Section 5. Exercise of Warrants; Payment of Warrant Solicitation Fee. (a) Subject to the provisions of this Agreement, each registered holder of Warrants shall have the right, which may be exercised commencing at the opening of business on the first day of the Warrant Exercise Period, to purchase from the Company (and the Company shall issue and sell to such registered holder of Warrants) the number of fully paid and non-assessable shares of Common Stock specified in such Warrants upon surrender of such Warrants to the Company at the office of the Warrant Agent, with the form of election to purchase on the reverse thereof duly filled in and signed, and upon payment to the Company of the warrant price, determined in accordance with the provisions of Sections 9 and 10 of this Agreement, for the number of shares of Common Stock in respect of which such Warrants are then exercised. Payment of such warrant price shall be made in cash or by certified check or bank draft to the order of the Company. Subject to Section 6, upon such surrender of Warrants and payment of the warrant price, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the registered holder of such Warrants and in such name or names as such registered holder may designate, a certificate or certificates for the number of full shares of Common Stock so purchased upon the exercise of such Warrants. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have -4- become a holder of record of such shares of Common Stock as of the date of the surrender of such Warrants and payment of the warrant price as aforesaid. The rights of purchase represented by the Warrants shall be exercisable, at the election of the registered holders thereof, either as an entirety or from time to time for a portion of the shares specified therein and, in the event that any Warrant is exercised in respect of less than all of the shares of Common Stock specified therein at any time prior to the date of expiration of the Warrants, a new Warrant or Warrants will be issued to the registered holder for the remaining number of shares of Common Stock specified in the Warrant so surrendered, and the Warrant Agent is hereby irrevocably authorized to countersign and to deliver the required new Warrants pursuant to the provisions of this Section and of Section 3 of this Agreement and the Company, whenever requested by the Warrant Agent, will supply the Warrant Agent with Warrants duly executed on behalf of the Company for such purpose. Anything in the foregoing to the contrary notwithstanding, no Warrant will be exercisable unless at the time of exercise the Company has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933, as amended (the "Act"), covering the shares of Common Stock issuable upon exercise of such Warrant and such shares have been so registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of such Warrant. The Company shall use its best -5- efforts to have all shares so registered or qualified on or before the date on which the Warrants become exercisable. (b) If at the time of exercise of any Warrant after , 1998 (i) the per share market price of the Company's Common Stock is equal to or greater than the then exercise price of the Warrant, (ii) the exercise of the Warrant is solicited by the Underwriter at such time while the Underwriter is a member of the National Association of Securities Dealers, Inc. ("NASD"), (iii) the Warrant is not held in a discretionary account, (iv) disclosure of the compensation arrangement is made in documents provided to the holders of the Warrants; and (v) the solicitation of the exercise of the Warrant is not in violation of Regulation M (as such regulation or any successor regulation may be in effect as of such time of exercise) promulgated under the Securities Exchange Act of 1934, then the Underwriter shall be entitled to receive from the Company upon exercise of each of the Warrant(s) so exercised a fee of five percent (5%) of the aggregate price of the Warrants so exercised (the "Exercise Fee"). The procedures for payment of the warrant solicitation fee are set forth in Section 5(c) below. (c) (1) Within five (5) days of the last day of each month commencing with , 1998, the Warrant Agent will promptly notify the Underwriter of each Warrant Certificate which has been properly completed for exercise by holders of Warrants during the last month. The Company and Warrant Agent shall determine, in their sole and absolute -6- discretion, whether a Warrant Certificate has been properly completed. The Warrant Agent will provide the Underwriter with such information, in connection with the exercise of each Warrant, as the Underwriter shall reasonably request. (2) The Company hereby authorizes and instructs the Warrant Agent to deliver to the Underwriter the Exercise Fee promptly after receipt by the Warrant Agent from the Company of a check payable to the order of the Underwriter in the amount of the Exercise Fee. In the event that an Exercise Fee is paid to the Underwriter with respect to a Warrant which the Company or the Warrant Agent determines is not properly completed for exercise or in respect of which the Underwriter is not entitled to an Exercise Fee, the Underwriter will promptly return such Exercise Fee to the Warrant Agent which shall forthwith return such fee to the Company. The Underwriter and the Company may at any time, after , 1998, and during business hours, examine the records of the Warrant Agent, including its ledger of original Warrant certificates returned to the Warrant Agent upon exercise of Warrants. Notwithstanding any provision to the contrary, the provisions of paragraphs 5(b) and 5(c) may not be modified, amended or deleted without the prior written consent of the Underwriter. Section 6. Payment of Taxes. The Company will pay any documentary stamp taxes attributable to the initial issuance of Common Stock issuable upon the exercise of Warrants; provided, however, that the Company shall not be required to pay -7- any tax which may be payable in respect of any transfer involved in the issue or delivery of any certificates of shares of Common Stock in a name other than that of the registered holder of Warrants in respect of which such shares are issued, and in such case neither the Company nor the Warrant Agent shall be required to issue or deliver any certificate for shares of Common Stock or any Warrant until the person requesting the same has paid to the Company the amount of such tax or has established to the Company's satisfaction that such tax has been paid or that such person has an exemption from the payment of such tax. Section 7. Mutilated or Missing Warrants. In case any of the Warrants shall be mutilated, lost, stolen or destroyed, the Company may, in its discretion, issue and the Warrant Agent shall countersign and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant, or in lieu of and in substitution for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing an equivalent right or interest, but only upon receipt of evidence satisfactory to the Company and the Warrant Agent of such loss, theft or destruction and, in case of a lost, stolen or destroyed Warrant, indemnity, if requested, also satisfactory to them. Applicants for such substitute Warrants shall also comply with such other reasonable regulations and pay such reasonable charges as the Company or the Warrant Agent may prescribe. Section 8. Reservation of Common Stock. There have been reserved, and the Company shall at all times keep reserved, out of the authorized and unissued shares of Common Stock, a -8- number of shares of Common Stock sufficient to provide for the exercise of the rights of purchase represented by the Warrants, and the transfer agent for the shares of Common Stock and every subsequent transfer agent for any shares of the Company's Common Stock issuable upon the exercise of any of the rights of purchase aforesaid are irrevocably authorized and directed at all times to reserve such number of authorized and unissued shares of Common Stock as shall be required for such purpose. The Company agrees that all shares of Common Stock issued upon exercise of the Warrants shall be, at the time of delivery of the certificates of such shares, validly issued and outstanding, fully paid and nonassessable and listed on any national securities exchange upon which the other shares of Common Stock are then listed. So long as any unexpired Warrants remain outstanding, the Company will file such post-effective amendments to the registration statement (Form SB-2, Registration No. 333- ) (the "Registration Statement") filed pursuant to the Act with respect to the Warrants (or other appropriate registration statements or post-effective amendment or supplements) as may be necessary to permit it to deliver to each person exercising a Warrant, a prospectus meeting the requirements of Section 10(a)(3) of the Act and otherwise complying therewith, and will deliver such a prospectus to each such person. To the extent that during any period it is not reasonably likely that the Warrants will be exercised, due to market price or otherwise, the Company need not file such a post-effective amendment during such period. The Company will -9- keep a copy of this Agreement on file with the transfer agent for the shares of Common Stock and with every subsequent transfer agent for any shares of the Company's Common Stock issuable upon the exercise of the rights of purchase represented by the Warrants. The Warrant Agent is irrevocably authorized to requisition from time to time from such transfer agent stock certificates required to honor outstanding Warrants. The Company will supply such transfer agent with duly executed stock certificates for that purpose. All Warrants surrendered in the exercise of the rights thereby evidenced shall be cancelled by the Warrant Agent and shall thereafter be delivered to the Company, and such cancelled Warrants shall constitute sufficient evidence of the number of shares of Common Stock which have been issued upon the exercise of such Warrants. Promptly after the date of expiration of the Warrants, the Warrant Agent shall certify to the Company the total aggregate amount of Warrants then outstanding, and thereafter no shares of Common Stock shall be subject to reservation in respect of such Warrants which shall have expired. Section 9. Warrant Price; Adjustments. (a) The warrant price at which Common Stock shall be purchasable upon the exercise of the Warrants shall be $5.00 per share or after adjustment, as provided in this Section, shall be such price as so adjusted (the "Warrant Price"). (b) The Warrant Price shall be subject to adjustment from time to time as follows: -10- (i) In case the Company shall at any time after the date hereof pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, then upon such dividend or distribution the Warrant Price in effect immediately prior to such dividend or distribution shall forthwith be reduced to a price determined by dividing: (A) an amount equal to the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution multiplied by the Warrant Price in effect immediately prior to such dividend or distribution, by (B) the total number of shares of Common Stock outstanding immediately after such dividend or distribution. For the purposes of any computation to be made in accordance with the provisions of this Section 9(b)(i), the following provisions shall be applicable: Common Stock issuable by way of dividend or other distribution on any stock of the Company shall be deemed to have been issued immediately after the opening of business on the date following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution. (ii) In case the Company shall at any time subdivide or combine the outstanding Common Stock, the Warrant Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination to the nearest one cent. Any such adjustment shall become effective at the time such subdivision or combination shall become effective. -11- (iii) Within a reasonable time after the close of each quarterly fiscal period of the Company during which the Warrant Price has been adjusted as herein provided, the Company shall (A) file with the Warrant Agent a certificate signed by the President or Vice President of the Company and by the Treasurer or Assistant Treasurer or the Secretary or an Assistant Secretary of the Company, showing in detail the facts requiring all such adjustments occurring during such period and the Warrant Price after each such adjustment; and (B) the Warrant Agent shall have no duty with respect to any such certificate filed with it except to keep the same on file and available for inspection by holders of Warrants during reasonable business hours, and the Warrant Agent may conclusively rely upon the latest certificate furnished to it hereunder. The Warrant Agent shall not at any time be under any duty or responsibility to any holder of a Warrant to determine whether any facts exist which may require any adjustment of the Warrant Price, or with respect to the nature or extent of any adjustment of the Warrant Price when made, or with respect to the method employed in making any such adjustment, or with respect to the nature or extent of the property or securities deliverable hereunder. In the absence of a certificate having been furnished, the Warrant Agent may conclusively rely upon the provisions of the Warrants with -12- respect to the Common Stock deliverable upon the exercise of the Warrants and the applicable Warrant Price thereof. (iv) Notwithstanding anything contained herein to the contrary, no adjustment of the Warrant Price shall be made if the amount of such adjustment shall be less than $.05, but in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to not less than $.05. (v) In the event that the number of outstanding shares of Common Stock is increased by a stock dividend payable in Common Stock or by a subdivision of the outstanding Common Stock, then, from and after the time at which the adjusted Warrant Price becomes effective pursuant to Subsection (b) of this Section by reason of such dividend or subdivision, the number of shares of Common Stock issuable upon the exercise of each Warrant shall be increased in proportion to such increase in outstanding shares. In the event that the number of shares of Common Stock outstanding is decreased by a combination of the outstanding Common Stock, then, from and after the time at which the adjusted Warrant Price becomes effective pursuant to this Section 9(b) of this Section by reason of such combination, the number of shares of Common Stock issuable upon the exercise of each Warrant shall be decreased in proportion to such decrease in the outstanding shares of Common Stock. -13- (vi) In case of any reorganization or reclassification of the outstanding Common Stock (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination), or in case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification of the outstanding Common Stock), or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, the holder of each Warrant then outstanding shall thereafter have the right to purchase the kind and amount of shares of Common Stock and other securities and property receivable upon such reorganization, reclassification, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock which the holder of such Warrant shall then be entitled to purchase; such adjustments shall apply with respect to all such changes occurring between the date of this Warrant Agreement and the date of exercise of such Warrant. (vii) Subject to the provisions of this Section 9, in case the Company shall, at any time prior to the exercise of the Warrants, make any distribution of its assets to holders of its Common Stock as a liquidating or a partial liquidating dividend, then the holder of Warrants who exercises its Warrants after the record date for the determination of those holders of Common Stock entitled to such distribution of assets as a -14- liquidating or partial liquidating dividend shall be entitled to receive for the Warrant Price per Warrant, in addition to each share of Common Stock, the amount of such distribution (or, at the option of the Company, a sum equal to the value of any such assets at the time of such distribution as determined by the Board of Directors of the Company in good faith), which would have been payable to such holder had he been the holder of record of the Common Stock receivable upon exercise of its Warrant on the record date for the determination of those entitled to such distribution. (viii) In case of the dissolution, liquidation or winding up of the Company, all rights under the Warrants shall terminate on a date fixed by the Company, such date to be no earlier than ten (10) days prior to the effectiveness of such dissolution, liquidation or winding up and not later than five (5) days prior to such effectiveness. Notice of such termination of purchase rights shall be given to the last registered holder of the Warrants, as the same shall appear on the books of the Company maintained by the Warrant Agent, by registered mail at least thirty (30) days prior to such termination date. (ix) In case the Company shall, at any time prior to the expiration of the Warrants and prior to the exercise thereof, offer to the holders of its Common Stock any rights to subscribe for additional shares of any class of the Company, then the Company shall give written notice thereof to the last registered holder thereof not less than thirty (30) -15- days prior to the date on which the books of the Company are closed or a record date is fixed for the determination of the stockholders entitled to such subscription rights. Such notice shall specify the date as to which the books shall be closed or record date fixed with respect to such offer of subscription and the right of the holder thereof to participate in such offer of subscription shall terminate if the Warrant shall not be exercised on or before the date of such closing of the books or such record date. (x) Any adjustment pursuant to the aforesaid provisions of this Section 9(b) shall be made on the basis of the number of shares of Common Stock which the holder thereof would have been entitled to acquire by the exercise of the Warrant immediately prior to the event giving rise to such adjustment. (xi) Irrespective of any adjustments in the Warrant Price or the number or kind of shares purchasable upon exercise of the Warrants, Warrants previously or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Warrants initially issuable pursuant to this Warrant Agreement. (xii) The Company may retain a firm of independent public accountants (who may be any such firm regularly employed by the Company) to make any computation required under this Section 9, and any certificate setting forth such computation signed by such firm shall be conclusive -16- evidence of the correctness of any computation made under this Section 9. (xiii) If at any time, as a result of an adjustment made pursuant to Section 9(b)(vi) above, the holders of a Warrant or Warrants shall become entitled to purchase any securities other than shares of Common Stock, thereafter the number of such securities so purchasable upon exercise of each Warrant and the Warrant Price for such shares shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Section 9(b)(ii) through (v). Section 10. Fractional Interest. The Warrants may only be exercised to purchase full shares of Common Stock and the Company shall not be required to issue fractions of shares of Common Stock on the exercise of Warrants. However, if a Warrant holder exercises all Warrants then owned of record by it and such exercise would result in the issuance of a fractional share, the Company will pay to such Warrant holder, in lieu of the issuance of any fractional share otherwise issuable, an amount of cash based on the market value of the Common Stock of the Company on the last trading day prior to the exercise date. Section 11. Notices to Warrantholders. (a) Upon any adjustment of the Warrant Price and the number of shares of Common Stock issuable upon exercise of a Warrant, then and in each such case the Company shall give written notice thereof to the Warrant Agent, which notice shall state the Warrant Price resulting from such adjustment and the -17- increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of a Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. The Company shall also mail such notice to the holders of the Warrants at their addresses appearing in the Warrant register. Failure to give or mail such notice, or any defect therein, shall not affect the validity of the adjustments. (b) In case at any time: (i) the Company shall pay dividends payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; or (ii) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; or (iii) there shall be any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale or substantially all of its assets to, another corporation; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then in any one or more of such cases, the Company shall give written notice in the manner set forth in Section 11(a) of the date on which (A) a record shall be taken for such dividend, distribution or subscription rights, or (B) such reorganization, reclassification, consolidation, merger, sale, dissolution, -18- liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up as the case may be. Such notice shall be given at least thirty (30) days prior to the action in question and not less than thirty (30) days prior to the record date in respect thereof. Failure to give such notice, or any defect therein, shall not affect the legality or validity of any of the matters set forth in this Section 11(b). (C) The Company shall cause copies of all financial statements and reports, proxy statements and other documents that are sent to its stockholders to be sent by first-class mail, postage prepaid, on the date of mailing to such stockholders, to each registered holder of Warrants at his address appearing in the warrant register as of the record date for the determination of the stockholders entitled to such documents. Section 12. Disposition of Proceeds on Exercise of Warrants. (i) The Warrant Agent shall promptly forward to the Company all monies received by the Warrant Agent for the purchase of shares of Common Stock through the exercise of such Warrants; provided, however, that the Warrant Agent may retain -19- an amount equal to the Exercise Fee, if any, until the Company has satisfied its obligations under Section 5(c)(ii). (ii) The Warrant Agent shall keep copies of this Agreement available for inspection by holders of Warrants during normal business hours. Section 13. Redemption of Warrants. The Warrants are redeemable by the Company, in whole or in part, on not less than thirty (30) days' prior written notice at a redemption price of $.10 per Warrant at any time commencing , 1998; provided that (i) the closing bid quotation price of the Common Stock on all twenty (20) trading days ending on the third trading day prior to the day on which the Company gives notice (the "Call Date") of redemption has been at least 150% of the then effective exercise price of the Warrants (the "Target Redemption Price") and the Company obtains the written consent of the Underwriter to such redemption prior to the Call Date and (ii) the Warrants are currently exercisable. The redemption notice shall be mailed to the holders of the Warrants at their addresses appearing in the Warrant register. Holders of the Warrants will have exercise rights until the close of business on the date fixed for redemption. Section 14. Merger or Consolidation or Change of Name of Warrant Agent. Any corporation or company which may succeed to the corporate trust business of the Warrant Agent by any merger or consolidation or otherwise shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of any of the parties -20- hereto, provided that such corporation would be eligible to serve as a successor Warrant Agent under the provisions of Section 16 of this Agreement. In case at the time such successor to the Warrant Agent shall succeed to the agency created by this Agreement, any of the Warrants shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent and deliver such Warrants so countersigned. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrants shall have been countersigned but not delivered, the Warrant Agent may adopt the countersignature under its prior name and deliver Warrants so countersigned. In all such cases such Warrants shall have the full force provided in the Warrants and in the Agreement. Section 15. Duties of Warrant Agent. The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Warrants, by their acceptance thereof, shall be bound: (a) The statements of fact and recitals contained herein and in the Warrants shall be taken as statements of the Company, and the Warrant Agent assumes no responsibility for the correctness of any of the same except such as describe the Warrant Agent or action taken or to be taken by it. The Warrant Agent assumes no responsibility with -21- respect to the distribution of the Warrants except as herein expressly provided. (b) The Warrant Agent shall not be responsible for any failure of the Company to comply with any of the covenants in this Agreement or in the Warrants to be complied with by the Company. (c) The Warrant Agent may consult at any time with counsel satisfactory to it (who may be counsel for the Company) and the Warrant Agent shall incur no liability or responsibility to the Company or to any holder of any Warrant in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the opinion or the advice of such counsel. (d) The Warrant Agent shall incur no liability or responsibility to the Company or to any holder of any Warrant for any action taken in reliance on any notice, resolution, waiver, consent, order, certificate or other instrument believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (e) The Company agrees to pay to the Warrant Agent reasonable compensation for all services rendered by the Warrant Agent in the execution of this Agreement, to reimburse the Warrant Agent for all expenses, taxes and governmental charges and other charges incurred by the Warrant Agent in the execution of this Agreement and to indemnify the Warrant Agent and save it harmless against any and all liabilities, including judgments, costs and reasonable counsel fees, for anything done -22- or omitted by the Warrant Agent in the execution of this Agreement except as a result of the Warrant Agent's negligence, willful misconduct or bad faith. (f) The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expenses unless the Company or one or more registered holders of Warrants shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred, but this provision shall not affect the power of the Warrant Agent to take such action as the Warrant Agent may consider proper, whether with or without any such security or indemnity. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrants or the production thereof at any trial or other proceeding, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the registered holders of the Warrants, as their respective rights and interests may appear. (g) The Warrant Agent and any stockholder, director, officer, partner or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to or otherwise act as fully and freely as though it were not the Warrant Agent under this Agreement. Nothing herein -23- shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. (h) The Warrant Agent shall act hereunder solely as agent and its duties shall be determined solely by the provisions hereof. (i) The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys, agents or employees, and the Warrant Agent shall not be answerable or accountable for any such attorneys, agents or employees or for any loss to the Company resulting from such neglect or misconduct, provided reasonable care had been exercised in the selection and continued employment thereof. (j) Any request, direction, election, order or demand of the Company shall be sufficiently evidenced by an instrument signed in the name of the Company by its President or a Vice President or its Secretary or an Assistant Secretary or its Treasurer or an Assistant Treasurer (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Warrant Agent by a copy thereof certified by the Secretary or an Assistant Secretary of the Company. Section 16. Change of Warrant Agent. The Warrant Agent may resign and be discharged from its duties under this Agreement by giving to the Company notice in writing, and to the holders of the Warrants notice by mailing such notice to the holders at their addresses appearing on the Warrant register, of -24- such resignation, specifying a date when such resignation shall take effect. The Warrant Agent may be removed by like notice to the Warrant Agent from the Company and the like mailing of notice to the holders of the Warrants. If the Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Warrant Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent or after the Company has received such notice from a registered holder of a Warrant (who shall, with such notice, submit his Warrant for inspection by the Company), then the registered holder of any Warrant may apply to any court of competent jurisdiction for the appointment of a successor to the Warrant Agent. Any successor Warrant Agent, whether appointed by the Company or by such a court, shall be a bank or trust company, in good standing, incorporated under New York or federal law. After appointment, the successor Warrant Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed and the former Warrant Agent shall deliver and transfer to the successor Warrant Agent all cancelled Warrants, records and property at the time held by it hereunder, and execute and deliver any further assurance or conveyance necessary for the purpose. Failure to file or mail any notice provided for in this Section, however, or any defect therein, -25- shall not affect the validity of the resignation or removal of the Warrant Agent or the appointment of the successor Warrant Agent, as the case may be. Section 17. Identity of Transfer Agent. Forthwith upon the appointment of any transfer agent for the shares of Common Stock or of any subsequent transfer agent for the shares of Common Stock or other shares of the Company's Common Stock issuable upon the exercise of the rights of purchase represented by the Warrants, the Company will file with the Warrant Agent a statement setting forth the name and address of such transfer agent. Section 18. Notices. Any notice pursuant to this Agreement to be given by the Warrant Agent, or by the registered holder of any Warrant to the Company, shall be sufficiently given if sent by first-class mail, postage prepaid, addressed (until another is filed in writing by the Company with the Warrant Agent) as follows: Frontline Communications Corporation One Blue Hill Plaza Pearl River, New York 10965 Attention: Stephen J. Cole-Hatchard, Chairman and a copy thereof to: Tenzer Greenblatt LLP 405 Lexington Avenue New York, New York 10174 Attention: Robert J. Mittman, Esq. Any notice pursuant to this Agreement to be given by the Company or by the registered holder of any Warrant to the -26- Warrant Agent shall be sufficiently given if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company) as follows: Continental Stock Transfer & Trust Company 2 Broadway New York, New York 10004 Attention: Steve Nelson Any notice pursuant to this Agreement to be given by the Warrant Agent or by the Company to the Underwriter shall be sufficiently given if sent by first-class mail, postage prepaid, addressed (until another address if filed in writing with the Warrant agent) as follows: Rockefeller Securities Group, Inc. 100 Quentin Roosevelt Blvd. Garden City, New York 11530 Attention: Lee Shapiro, Chairman and a copy thereof to: Morrison Cohen Singer & Weinstein, LLP 750 Lexington Avenue New York, New York Attention: Robert H. Cohen, Esq. Section 19. Supplements and Amendments. The Company and the Warrant Agent may from time to time supplement or amend this Agreement in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Warrant Agent may deem necessary or desirable and which shall not be inconsistent with -27- the provisions of the Warrants and which shall not adversely affect the interest of the holders of Warrants. Section 20. New York Contract. This Agreement and each Warrant issued hereunder shall be deemed to be a contract made under the laws of the State of New York and shall be construed in accordance with the laws of New York applicable to agreements to be performed wholly within New York. Section 21. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Warrant Agent and the registered holders of the Warrants any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent and the registered holders of the Warrants. Section 22. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company, the Warrant Agent or the Underwriter shall bind and inure to the benefit of their respective successors and assigns hereunder. -28- IN WITNESS WHEREOF, the parties have entered into this Agreement on the date first above written. FRONTLINE COMMUNICATIONS CORPORATION By: ____________________________________ Name: Title: CONTINENTAL STOCK TRANSFER & TRUST COMPANY By: ____________________________________ Name: Title: ROCKEFELLER SECURITIES GROUP, INC. By: ____________________________________ Name: Title: EX-10.1 7 EXHIBIT 10.1 EXCHANGE AGREEMENT AGREEMENT made as of the 30th day of May 1997 by and among Easy Street Online, Inc. (the "Company"), Hobbes & Co., LLC, INET Communications Company, LLC, Sara Girl & Co., LLC, each a limited liability company organized under the laws of the State of New York (hereinafter referred to individually, as "LLC" and collectively, as "LLCs"), Nicko Feinberg, Michael Char and Stephen J. Cole-Hatchard (hereinafter referred to individually, as "Member" and collectively, as "Members"). WHEREAS, the Company intends to consummate a private placement of securities (the "Offering") pursuant to a Confidential Private Offering Memorandum (the "Memorandum") dated March 25, 1997; WHEREAS, the Company and each LLC, as a condition to the consummation of the Offering, have agreed to effect the Reorganization (as defined in the Memorandum); NOW THEREFORE, in consideration of the mutual promises and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Exchange of Assets: Each LLC acting through its Members shall, in accordance with the terms and subject to the conditions contained in the Memorandum, sell, transfer and convey to the Company on or prior to the closing of the Offering (the "Closing") all of the assets and properties (whether real, personal or mixed and whether tangible or intangible) owned by each LLC in consideration of (i) the assumption by the Company of all liabilities of each LLC and (ii) the issuance of an aggregate of $372,137 principal amount of promissory notes to the Members on the terms and in the amounts set forth in the Memorandum in the form attached hereto as Exhibit A (which amount includes $325,000 pursuant to the terms hereof and $47,137 of outstanding indebtedness to the Members). 2. Dissolution of LLCs: As promptly as practicable after the Closing, the Members shall cause the LLCs to dissolve. 3. Authority of Members: The Members shall execute, acknowledge and deliver in the name of and on behalf of each LLC any and all documents and shall do and perform all acts required by applicable law or which the Company as its successor deems necessary or desirable in order to give effect to this Agreement and the transactions contemplated hereby. 4. Amendment to Operating Agreement: Notwithstanding anything to the contrary contained in any Operating Agreement governing any of the LLCs, this Agreement shall be deemed to be an amendment to the Operating Agreement, expressly authorizing the Members to effectuate the transactions contemplated hereby and in the Memorandum. 5. Governing Law: This Agreement shall be governed by and construed in accordance with the substantive laws of the State of New York, without regard to the principles of conflicts of law thereof. 6. Entire Agreement: This agreement constitutes the entire agreement of the parties hereto and supersedes all prior agreements whether oral or written. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. HOBBES & CO., LLC By: /s/ Michael Char ---------------------------- INET COMMUNICATIONS COMPANY, LLC By: /s/ Michael Char ---------------------------- SARA GIRL & CO., LLC By: /s/ Michael Char ---------------------------- EASY STREET ONLINE, INC. By: /s/ Michael Char ---------------------------- /s/ Nicko Feinberg ---------------------------- Nicko Feinberg /s/ Michael Char ---------------------------- Michael Char /s/ Stephen J. Cole-Hatchard ---------------------------- Stephen J. Cole-Hatchard -2- EX-10.2 8 EXHIBIT 10.2 PROMISSORY NOTE $141,800 May 30, 1997 New York, New York FOR VALUE RECEIVED, the undersigned, Easy Street Online, Inc., a Delaware corporation, having an address at 15 North Mill Street, Nyack, New York 10960 (the "Payor"), hereby promises to pay to Nicko Feinberg (the "Payee"), having an address at 12 Woodland Terrace, Nanuet, NY 10954, on the earlier to occur of (i) May 1, 1998 or (ii) the consummation of an initial public offering of securities of the Payor (the "Maturity Date"), at the Payee's address set forth above, or at such other place as the holder of this Note shall hereafter specify in writing, the principal sum of One Hundred Forty One Thousand and Eight Hundred Dollars ($141,800), in such coin or currency of the United States of America as at the time shall be legal tender for the payment of public and private debts and in funds immediately available at such payment office. This Note evidences all of the indebtedness owed to Payee set forth in the Confidential Private Offering Memorandum dated March 25, 1997. 1. Interest and Payment. 1.1. The principal amount hereof outstanding from time to time shall bear simple interest (computed on the basis of a 360-day year, using the number of days actually elapsed) from the date hereof at the annual rate of 8% until the Maturity Date (or until any such earlier date of payment if this Note is prepaid or its maturity is accelerated upon the occurrence of an Event of Default as provided in this Note). 1.2. Interest shall be payable on the Maturity Date (or on any such earlier date of payment if this Note is accelerated). 1.3. If payment of the principal amount hereof or interest accrued thereon is not made when due and payable at the Maturity Date, or upon acceleration, then interest shall accrue on such overdue amount, to the extent permitted by law, from the date of such default to the date of payment at the annual rate of 10%. 2. Prepayment. This Note may be prepaid in whole or in part at any time prior to the Maturity Date. 3. Events of Default. 3.1. Each of the following shall constitute an Event of Default ("Event of Default") under this Note: (a) Payor shall default in the payment of the principal of, or any interest on, the Note when the same becomes due, whether at maturity, upon acceleration or otherwise; or (b) Payor shall default in the payment when due (including any grace period provided therefor) of the principal, or interest on, any other indebtedness with an aggregate principal amount in excess of $50,000 (whether such principal or interest shall become due at scheduled maturity, by required prepayment, by acceleration, by demand or otherwise), or if the Payor shall default in the performance of any other covenant, agreement, term or condition contained in any agreement or instrument under which any such indebtedness is created, secured or guaranteed, if the effect of such default is to cause, or to permit the holder or holders of such indebtedness (or a trustee on behalf of such holder or holders) to cause, such indebtedness to become due prior to its stated maturity; or (c) A final judgment for the payment of money which, together with all other such undischarged judgments, against the Payor exceeds an aggregate of $50,000 and not discharged; or (d) A proceeding shall have been instituted in a court having jurisdiction in the premises seeking a decree or order for relief in respect of the Payor in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Payor or for any substantial part of its property, or for the winding-up or liquidation of its affairs, and such proceeding shall remain undismissed or unstayed and in effect for a period of 60 consecutive days or such court shall enter a decree or order granting the relief sought in such proceeding; or (e) The Payor shall become insolvent or bankrupt, however evidenced, or shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a -2- receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) for any substantial part of its property, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any action in furtherance of any of the foregoing; then and in any such event the outstanding principal of, and interest accrued on, the Note shall be immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived. 4. Unconditional Obligation; Fees, Waivers, Other. 4.1. The obligations to make the payments provided for in this Note are absolute and unconditional and not subject to any defense, set-off, counterclaim, rescission, recoupment or adjustment whatsoever. 4.2. Payor agrees to pay, on demand, all costs and expenses paid or incurred by Payee in seeking to collect this Note, including, without limitation, reasonable attorneys' fees and disbursements paid or incurred by Payee, with interest thereon at the Default Rate until paid in full. 4.3. No forbearance, indulgence, delay or failure to exercise any right or remedy with respect to this Note shall operate as a waiver, nor as an acquiescence in any default, nor shall any single or partial exercise of any right or remedy preclude any other of further exercise thereof or the exercise of any other right or remedy. 4.4. This Note may not be modified or discharged (other than payment of this Note), except by a writing duly executed by the Payor and the Payee. 4.5. The Payor hereby expressly waives demand and presentment for payment, notice of nonpayment, notice of dishonor, protest, notice of protest, bring of suit, and diligence in taking any action to collect amounts called for hereunder, and shall be directly and primarily liable for the payment of all sums owing and to be owing hereon, regardless of and without any notice, diligence, act or omission with respect to the collection of any amount called for hereunder or in connection with any right, lien, interest or property at any and all times which the Payee had or is existing as security for any amount called for hereunder. 5. Miscellaneous. 5.1. This Note and the obligations of the Payor and the rights of the Payee shall be governed by and construed in -3- accordance with the internal substantive laws of the State of New York without giving effect to choice of law principles. 5.2. This Note shall bind the Payor and its successors and assigns. EASY STREET ONLINE, INC. By: /s/ Stephen J. Cole-Hatchard ----------------------------- -4- EXTENSION AGREEMENT THIS AGREEMENT, entered into this 16th day of August between Nicko Feinberg and Frontline Communications Corporation, effectuates the extension of a certain promissory note executed on the 30th day of May, 1997, by and between Nicko Feinberg and Frontline Communications Corporation, in the principle amount of one hundred forty one thousand eight hundred dollars ($141,800): IT IS HEREBY ACKNOWLEDGED AND AGREED that for the sum of ten dollars ($10) and other good and valuable consideration, receipt of which by Nicko Feinberg is hereby acknowledged, the promissory note executed on the 30th day of May, 1997, by and between Nicko Feinberg and Frontline Communications Corporation, in the principle amount of one hundred forty one thousand eight hundred dollars ($141,800), is modified and amended to extend the date of repayment to the earlier of an initial public offering of the Company's securities, or May 30, 1999. THE AFORESAID NOTE, dated May 30, 1997, is confirmed by the undersigned parties in all other respects. ACCEPTED: FRONTLINE COMMUNICATIONS CORPORATION By: /s/ Peter Morris, /s/ Nicko Feinberg ------------------------------ ------------------------------- Peter Morris, VP/CFO Nicko Feinberg EX-10.3 9 EXHIBIT 10.3 PROMISSORY NOTE $66,800 May 30, 1997 New York, New York FOR VALUE RECEIVED, the undersigned, Easy Street Online, Inc., a Delaware corporation, having an address at 15 North Mill Street, Nyack, New York 10960 (the "Payor"), hereby promises to pay to Stephen J. Cole-Hatchard, (the "Payee"), having an address at 315 Route 210, Stony Point, NY 10980, on the earlier to occur of (i) May 1, 1998 or (ii) the consummation of an initial public offering of securities of the Payor (the "Maturity Date"), at the Payee's address set forth above, or at such other place as the holder of this Note shall hereafter specify in writing, the principal sum of Sixty Six Thousand Eight Hundred Dollars ($66,800), in such coin or currency of the United States of America as at the time shall be legal tender for the payment of public and private debts and in funds immediately available at such payment office. This Note evidences all of the indebtedness owed to Payee set forth in the Confidential Private Offering Memorandum dated March 25, 1997. 1. Interest and Payment. 1.1. The principal amount hereof outstanding from time to time shall bear simple interest (computed on the basis of a 360-day year, using the number of days actually elapsed) from the date hereof at the annual rate of 8% until the Maturity Date (or until any such earlier date of payment if this Note is prepaid or its maturity is accelerated upon the occurrence of an Event of Default as provided in this Note). 1.2. Interest shall be payable on the Maturity Date (or on any such earlier date of payment if this Note is accelerated). 1.3. If payment of the principal amount hereof or interest accrued thereon is not made when due and payable at the Maturity Date, or upon acceleration, then interest shall accrue on such overdue amount, to the extent permitted by law, from the date of such default to the date of payment at the annual rate of 10%. 2. Prepayment. This Note may be prepaid in whole or in part at any time prior to the Maturity Date. 3. Events of Default. 3.1. Each of the following shall constitute an Event of Default ("Event of Default") under this Note: (a) Payor shall default in the payment of the principal of, or any interest on, the Note when the same becomes due, whether at maturity, upon acceleration or otherwise; or (b) Payor shall default in the payment when due (including any grace period provided therefor) of the principal, or interest on, any other indebtedness with an aggregate principal amount in excess of $50,000 (whether such principal or interest shall become due at scheduled maturity, by required prepayment, by acceleration, by demand or otherwise), or if the Payor shall default in the performance of any other covenant, agreement, term or condition contained in any agreement or instrument under which any such indebtedness is created, secured or guaranteed, if the effect of such default is to cause, or to permit the holder or holders of such indebtedness (or a trustee on behalf of such holder or holders) to cause, such indebtedness to become due prior to its stated maturity; or (c) A final judgment for the payment of money which, together with all other such undischarged judgments, against the Payor exceeds an aggregate of $50,000 and not discharged; or (d) A proceeding shall have been instituted in a court having jurisdiction in the premises seeking a decree or order for relief in respect of the Payor in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Payor or for any substantial part of its property, or for the winding-up or liquidation of its affairs, and such proceeding shall remain undismissed or unstayed and in effect for a period of 60 consecutive days or such court shall enter a decree or order granting the relief sought in such proceeding; or (e) The Payor shall become insolvent or bankrupt, however evidenced, or shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a -2- receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) for any substantial part of its property, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any action in furtherance of any of the foregoing; then and in any such event the outstanding principal of, and interest accrued on, the Note shall be immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived. 4. Unconditional Obligation; Fees, Waivers, Other. 4.1. The obligations to make the payments provided for in this Note are absolute and unconditional and not subject to any defense, set-off, counterclaim, rescission, recoupment or adjustment whatsoever. 4.2. Payor agrees to pay, on demand, all costs and expenses paid or incurred by Payee in seeking to collect this Note, including, without limitation, reasonable attorneys' fees and disbursements paid or incurred by Payee, with interest thereon at the Default Rate until paid in full. 4.3. No forbearance, indulgence, delay or failure to exercise any right or remedy with respect to this Note shall operate as a waiver, nor as an acquiescence in any default, nor shall any single or partial exercise of any right or remedy preclude any other of further exercise thereof or the exercise of any other right or remedy. 4.4. This Note may not be modified or discharged (other than payment of this Note), except by a writing duly executed by the Payor and the Payee. 4.5. The Payor hereby expressly waives demand and presentment for payment, notice of nonpayment, notice of dishonor, protest, notice of protest, bring of suit, and diligence in taking any action to collect amounts called for hereunder, and shall be directly and primarily liable for the payment of all sums owing and to be owing hereon, regardless of and without any notice, diligence, act or omission with respect to the collection of any amount called for hereunder or in connection with any right, lien, interest or property at any and all times which the Payee had or is existing as security for any amount called for hereunder. 5. Miscellaneous. 5.1. This Note and the obligations of the Payor and the rights of the Payee shall be governed by and construed in -3- accordance with the internal substantive laws of the State of New York without giving effect to choice of law principles. 5.2. This Note shall bind the Payor and its successors and assigns. EASY STREET ONLINE, INC. By: /s/ Michael Char --------------------------- -4- EXTENSION AGREEMENT THIS AGREEMENT, entered into this 16th day of August between Stephen J. Cole-Hatchard and Frontline Communications Corporation, effectuates the extension of a certain promissory note executed on the 30th day of May, 1997, by and between Stephen J. Cole-Hatchard and Frontline Communications Corporation, in the principle amount of sixty six thousand eight hundred dollars ($66,800): IT IS HEREBY ACKNOWLEDGED AND AGREED that for the sum of ten dollars ($10) and other good and valuable consideration, receipt of which by Stephen J. Cole-Hatchard is hereby acknowledged, the promissory note executed on the 30th day of May, 1997, by and between Stephen J. Cole-Hatchard and Frontline Communications Corporation, in the principle amount of sixty six thousand eight hundred dollars ($66,800), is modified and amended to extend the date of repayment to the earlier of an initial public offering of the Company's securities, or May 30, 1999. THE AFORESAID NOTE, dated May 30, 1997, is confirmed by the undersigned parties in all other respects. ACCEPTED: FRONTLINE COMMUNICATIONS CORPORATION By: /s/ Peter Morris, /s/ Stephen J. Cole-Hatchard ------------------------------ ------------------------------- Peter Morris, VP/CFO Stephen J. Cole-Hatchard EX-10.4 10 EXHIBIT 10.4 PROMISSORY NOTE $163,537 May 30, 1997 New York, New York FOR VALUE RECEIVED, the undersigned, Easy Street Online, Inc., a Delaware corporation, having an address at 15 North Mill Street, Nyack, New York 10960 (the "Payor"), hereby promises to pay to Michael Char, (the "Payee"), having an address at 107 Gair Street, Piermont, NY 10968, on the earlier to occur of (i) May 1, 1998 or (ii) the consummation of an initial public offering of securities of the Payor (the "Maturity Date"), at the Payee's address set forth above, or at such other place as the holder of this Note shall hereafter specify in writing, the principal sum of One Hundred Sixty Three Thousand Five Hundred and Thirty Seven Dollars ($163,537), in such coin or currency of the United States of America as at the time shall be legal tender for the payment of public and private debts and in funds immediately available at such payment office. This Note evidences all of the indebtedness owed to Payee set forth in the Confidential Private Offering Memorandum dated March 25, 1997. 1. Interest and Payment. 1.1. The principal amount hereof outstanding from time to time shall bear simple interest (computed on the basis of a 360-day year, using the number of days actually elapsed) from the date hereof at the annual rate of 8% until the Maturity Date (or until any such earlier date of payment if this Note is prepaid or its maturity is accelerated upon the occurrence of an Event of Default as provided in this Note). 1.2. Interest shall be payable on the Maturity Date (or on any such earlier date of payment if this Note is accelerated). 1.3. If payment of the principal amount hereof or interest accrued thereon is not made when due and payable at the Maturity Date, or upon acceleration, then interest shall accrue on such overdue amount, to the extent permitted by law, from the date of such default to the date of payment at the annual rate of 10%. 2. Prepayment. This Note may be prepaid in whole or in part at any time prior to the Maturity Date. 3. Events of Default. 3.1. Each of the following shall constitute an Event of Default ("Event of Default") under this Note: (a) Payor shall default in the payment of the principal of, or any interest on, the Note when the same becomes due, whether at maturity, upon acceleration or otherwise; or (b) Payor shall default in the payment when due (including any grace period provided therefor) of the principal, or interest on, any other indebtedness with an aggregate principal amount in excess of $50,000 (whether such principal or interest shall become due at scheduled maturity, by required prepayment, by acceleration, by demand or otherwise), or if the Payor shall default in the performance of any other covenant, agreement, term or condition contained in any agreement or instrument under which any such indebtedness is created, secured or guaranteed, if the effect of such default is to cause, or to permit the holder or holders of such indebtedness (or a trustee on behalf of such holder or holders) to cause, such indebtedness to become due prior to its stated maturity; or (c) A final judgment for the payment of money which, together with all other such undischarged judgments, against the Payor exceeds an aggregate of $50,000 and not discharged; or (d) A proceeding shall have been instituted in a court having jurisdiction in the premises seeking a decree or order for relief in respect of the Payor in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Payor or for any substantial part of its property, or for the winding-up or liquidation of its affairs, and such proceeding shall remain undismissed or unstayed and in effect for a period of 60 consecutive days or such court shall enter a decree or order granting the relief sought in such proceeding; or (e) The Payor shall become insolvent or bankrupt, however evidenced, or shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a -2- receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) for any substantial part of its property, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any action in furtherance of any of the foregoing; then and in any such event the outstanding principal of, and interest accrued on, the Note shall be immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived. 4. Unconditional Obligation; Fees, Waivers, Other. 4.1. The obligations to make the payments provided for in this Note are absolute and unconditional and not subject to any defense, set-off, counterclaim, rescission, recoupment or adjustment whatsoever. 4.2. Payor agrees to pay, on demand, all costs and expenses paid or incurred by Payee in seeking to collect this Note, including, without limitation, reasonable attorneys' fees and disbursements paid or incurred by Payee, with interest thereon at the Default Rate until paid in full. 4.3. No forbearance, indulgence, delay or failure to exercise any right or remedy with respect to this Note shall operate as a waiver, nor as an acquiescence in any default, nor shall any single or partial exercise of any right or remedy preclude any other of further exercise thereof or the exercise of any other right or remedy. 4.4. This Note may not be modified or discharged (other than payment of this Note), except by a writing duly executed by the Payor and the Payee. 4.5. The Payor hereby expressly waives demand and presentment for payment, notice of nonpayment, notice of dishonor, protest, notice of protest, bring of suit, and diligence in taking any action to collect amounts called for hereunder, and shall be directly and primarily liable for the payment of all sums owing and to be owing hereon, regardless of and without any notice, diligence, act or omission with respect to the collection of any amount called for hereunder or in connection with any right, lien, interest or property at any and all times which the Payee had or is existing as security for any amount called for hereunder. 5. Miscellaneous. 5.1. This Note and the obligations of the Payor and the rights of the Payee shall be governed by and construed in -3- accordance with the internal substantive laws of the State of New York without giving effect to choice of law principles. 5.2. This Note shall bind the Payor and its successors and assigns. EASY STREET ONLINE, INC. By: /s/ Stephen J. Cole-Hatchard ----------------------------- -4- EX-10.5 11 EXHIBIT 10.5 1997 STOCK OPTION PLAN OF Easy Street Online, Inc. 1. Purpose Easy Street Online, Inc. (the "Company") desires to attract and retain the best available talent and encourage the highest level of performance in order to continue to serve the best interests of the Company, and its stockholders. By affording key personnel the opportunity to acquire proprietary interests in the Company and by providing them incentives to put forth maximum efforts for the success of the business, the 1997 Stock Option Plan of Easy Street Online, Inc. (the "1997 Plan") is expected to contribute to the attainment of those objectives. The word "Subsidiary" or "Subsidiaries" as used herein, shall mean any corporation, fifty percent or more of the voting stock of which is owned by the Company. 2. Scope and Duration Options under the 1997 Plan may be granted in the form of incentive stock options ("Incentive Options") as provided in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or in the form of nonqualified stock options ("Non-Qualified Options"). (Unless otherwise indicated, references in the 1997 Plan to "options" include Incentive Options and Non-Qualified Options.) The maximum aggregate number of shares as to which options may be granted from time to time under the 1997 Plan is 500,000 shares of the Common Stock of the Company ("Common Stock"), which shares may be, in whole or in part, authorized but unissued shares or shares reacquired by the Company. If an option shall expire, terminate or be surrendered for cancellation for any reason without having been exercised in full, the shares represented by the option or portion thereof not so exercised shall (unless the 1997 Plan shall have been terminated) become available for subsequent option grants under the 1997 Plan. As provided in paragraph 13, the 1997 Plan shall become effective on March 1, 1997, and unless terminated sooner pursuant to paragraph 14, the 1997 Plan shall terminate on March 1, 2007, and no option shall be granted hereunder after that date. 3. Administration The 1997 Plan shall be administered by the Board of Directors of the Company, or, at their discretion, by a committee which is appointed by the Board of Directors to perform such function (the "Committee"). The Committee shall consist of not less than two members of the Board of Directors, each of whom shall serve at the pleasure of the Board of Directors and shall be a "disinterested person" as defined in Rule l6b-3 pursuant to the Securities Exchange Act of 1934 (the "Act"). Members of the Committee shall not be eligible to participate in the Plan while a member of the Committee. Vacancies occurring in the membership of the Committee shall be filled by appointment by the Board of Directors. The Board of Directors or the Committee, as the case may be, shall have plenary authority in its discretion, subject to and not inconsistent with the express provisions of the 1997 Plan, to grant options, to determine the purchase price of the Common Stock covered by each option, the term of each option, the persons to whom, and the time or times at which, options shall be granted and the number of shares to be covered by each option; to designate options as Incentive Options or Non-Qualified Options; to interpret the 1997 Plan; to prescribe, amend and rescind rules and regulations relating to the 1997 Plan; to determine the terms and provisions of the option agreements (which need not be identical) entered into in connection with options under the 1997 Plan; and to make all other determinations deemed necessary or advisable for the administration of the 1997 Plan. The Board of Directors or the Committee, as the case may be, may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Board of Directors or the Committee, as the case may be, or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Board of Directors or the Committee, as the case may be, or such person may have under the 1997 Plan. 4. Eligibility; Factors to be Considered in Granting Options Incentive Options shall be limited to persons who are employees of the Company or its present and future Subsidiaries and at the date of grant of any option are in the employ of the Company or its present and future Subsidiaries. In determining the employees to whom Incentive Options shall be granted and the number of shares to be covered by each Incentive Option, the Board of Directors or the Committee, as the case may be, shall take into account the nature of employees' duties, their present and potential contributions to the success of the Company and such other factors as it shall deem relevant in connection with accomplishing the purposes of the 1997 Plan. An employee who has been granted an option or options under the 1997 Plan may be granted an additional option or options, subject, in the case of Incentive Options, to such limitations as may be imposed by the Code on such options. Except as provided below, a Non-Qualified Option may be granted to any person, including, but not limited to, employees, independent agents, consultants and attorneys, who the Board of Directors or the Committee, as the case may be, believes has contributed, or will contribute, to the success of the Company. -2- 5. Option Price The purchase price of the Common Stock covered by each option shall be determined by the Board of Directors or the Committee, as the case may be, but shall not be less than 100% of the Fair Market Value (as defined in paragraph 15 below) of a share of the Common Stock on the date on which the option is granted. Such price shall be subject to adjustment as provided in paragraph 12 below. The Board of Directors or the Committee, as the case may be, shall determine the date on which an option is granted; in the absence of such a determination, the date on which the Board of Directors or the Committee, as the case may be, adopts a resolution granting an option shall be considered the date on which such option is granted. 6. Term of Options The term of each option shall be not more then ten years from the date of grant, as the Board of Directors or the Committee, as the case may be, shall determine, subject to earlier termination as provided in paragraphs 10 and 11 below. 7. Exercise of Options (a) Subject to the provisions of the 1997 Plan and unless otherwise provided in the option agreement, options granted under the 1997 Plan shall become exercisable as determined by the Board of Directors or Committee. In its discretion, the Board of Directors or the Committee, as the case may be, may, in any case or cases, prescribe that options granted under the 1997 Plan become exercisable in installments or provide that an option may be exercisable in full immediately upon the date of its grant. The Board of Directors or the Committee, as the case may be, may, in its sole discretion, also provide that an option granted pursuant to the 1997 Plan shall immediately become exercisable in full upon the happening of any of the following events; (i) the first purchase of shares of Common Stock pursuant to a tender offer or exchange offer (other than an offer by the Company) for all, or any part of, the Common Stock, (ii) the approval by the stockholders of the Company of an agreement for a merger in which the Company will not survive as an independent, publicly owned corporation, a consolidation, or a sale, exchange or other disposition of all or substantially all of the Company's assets, (iii) with respect to an employee, on his 65th birthday, or (iv) with respect to an employee, on the employee's involuntary termination from employment, except as provided in Section 10 herein. In the event of a question or controversy as to whether or not any of the events hereinabove described has taken place, a determination by the Board of Directors or the Committee, as the case may be, that such event has or has not occurred shall be conclusive and binding upon the Company and participants in the 1997 Plan. -3- (b) Any option at any time granted under the 1997 Plan may contain a provision to the effect that the optionee (or any persons entitled to act under Paragraph 11 hereof) may, at any time at which Fair Market Value is in excess of the exercise price and prior to exercising the option, in whole or in part, request that the Company purchase all or any portion of the option as shall then be exercisable at a price equal to the difference between (i) an amount equal to the option price multiplied by the number of shares subject to that portion of the option in respect of which such request shall be made and (ii) an amount equal to such number of shares multiplied by the fair market value of the Company's Common Stock (within the meaning of Section 422 of the Code and the treasury regulations promulgated thereunder) on the date of purchase. The Company shall have no obligation to make any purchase pursuant to such request, but if it elects to do so, such portion of the option as to which the request is made shall be surrendered to the Company. The purchase price for the portion of the option to be so surrendered shall be paid by the Company, at the election of the Board of Directors or the Committee, as the case may be, either in cash or in shares of Common Stock (valued as of the date and in the manner provided in clause (ii) above), or in any combination of cash and Common Stock, which may consist, in whole or in part, of shares of authorized but unissued Common Stock or shares of Common Stock held in the Company's treasury. No fractional share of Common Stock shall be issued or transferred and any fractional share shall be disregarded. Shares covered by that portion of any option purchased by the Company pursuant hereto and surrendered to the Company shall not be available for the granting of further options under the Plan. All determinations to be made by the Company hereunder shall be made by the Board of Directors or the Committee, as the case may be. (c) An option may be exercised, at any time or from time to time (subject, in the case of Incentive Options, to such restrictions as may be imposed by the Code), as to any or all full shares as to which the option has become exercisable until the expiration of the period set forth in Paragraph 6 hereof, by the delivery to the Company, at its principal place of business, of (i) written notice of exercise in the form specified by the Board of Directors or the Committee, as the case may be, specifying the number of shares of Common Stock with respect to which the option is being exercised and signed by the person exercising the option as provided herein, (ii) payment of the purchase price; and (iii) in the case of Non-Qualified Options, payment in cash of all withholding tax obligations imposed on the Company by reason of the exercise of the option. Upon acceptance of such notice, receipt of payment in full, and receipt of payment of all withholding tax obligations, the Company shall cause to be issued a certificate representing the shares of Common Stock purchased. In the event the person exercising the option delivers the items specified in (i) and (ii) of this Subsection (c), but not the item specified in (iii) hereof, if applicable, the option shall still be considered exercised upon acceptance by the Company for the full number of -4- shares of Common Stock specified in the notice of exercise but the actual number of shares issued shall be reduced by the smallest number of whole shares of Common Stock which, when multiplied by the Fair Market Value of the Common Stock as of the date the option is exercised, is sufficient to satisfy the required amount of withholding tax. (d) The purchase price of the shares as to which an option is exercised shall be paid in full at the time of exercise. Payment shall be made in cash, which may be paid by check or other instrument acceptable to the Company; in addition, subject to compliance with applicable laws and regulations and such conditions as the Board of Directors or the Committee, as the case may be, may impose, the Board of Directors or the Committee, as the case may be, in its sole discretion, may on a case-by-case basis elect to accept payment in shares of Common Stock of the Company which are already owned by the option holder, valued at the Fair Market Value thereof (as defined in paragraph 15 below) on the date of exercise; provided, however, that with respect to Incentive Options, no such discretion may be exercised unless the option agreement permits the payment of the purchase price in that manner. (e) Except as provided in paragraphs 10 and 11 below, no option granted to an employee may be exercised at any time by such employee unless such employee is then an employee of the Company or a Subsidiary. 8. Incentive Options (a) With respect to Incentive Options granted, the aggregate Fair Market Value (determined in accordance with the provisions of paragraph 15 at the time the Incentive Option is granted) of the Common Stock or any other stock of the Company or its current or future Subsidiaries with respect to which incentive stock options, as defined in Section 422 of the Code, are exercisable for the first time by any employee during any calendar year (under all incentive stock option plans of the Company and its parent and subsidiary corporation's, as those terms are defined in Section 424 of the Code) shall not exceed $100,000. (b) No Incentive Option may be awarded to any employee who immediately prior to the date of the granting of such Incentive Option owns more than 10% of the combined voting power of all classes of stock of the Company or any of its Subsidiaries unless the exercise price under the Incentive Option is at least 110% of the Fair Market Value and the option expires within 5 years from the date of grant. (c) In the event of amendments to the Code or applicable regulations relating to Incentive Options subsequent to the date hereof, the Company may amend the provisions of the 1997 Plan, and the Company and the employees holding options may agree to amend outstanding option agreements, to conform to such amendments -5- 9. Non-Transferability of Options Options granted under the 1997 Plan shall not be transferable otherwise than by will or the laws of descent and distribution, and options may be exercised during the lifetime of the optionee only by the optionee. No transfer of an option by the optionee by will or by the laws of descent and distribution shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of the will and such other evidence as the Company may deem necessary to establish the validity of the transfer and the acceptance by the transferor or transferees of the terms and conditions of such option. 10. Termination of Employment In the event that the employment of an employee to whom an option has been granted under the 1997 Plan shall be terminated (except as set forth in paragraph 11 below), such option may be, subject to the provisions of the 1997 Plan, exercised (to the extent that the employee was entitled to do so at the termination of his employment) at any time within ninety (90) days after such termination, but not later than the date on which the option terminates; provided, however, that any option which is held by an employee whose employment is terminated for cause or voluntarily without the consent of the Company shall, to the extent not theretofore exercised, automatically terminate as of the date of termination of employment. As used herein, "cause" shall mean conduct amounting to fraud, dishonesty, negligence, or engaging in competition or solicitations in competition with the Company and breaches of any applicable employment agreement between the Company and the optionee. Options granted to employees under the 1997 Plan shall not be affected by any change of duties or position so long as the holder continues to be a regular employee of the Company or any of its current or future Subsidiaries. Any option agreement or any rules and regulations relating to the 1997 Plan may contain such provisions as the Board of Directors or the Committee, as the case may be, shall approve with reference to the determination of the date employment terminates and the effect of leaves of absence. Nothing in the 1997 Plan or in any option granted pursuant to the 1997 Plan shall confer upon any employee any right to continue in the employ of the Company or any of its Subsidiaries or parent or affiliated companies or interfere in any way with the right of the Company or any such Subsidiary or parent or affiliated companies to terminate such employment at any time. -6- 11. Death or Disability of Employee If an employee to whom an option has been granted under the 1997 Plan shall die while employed by the Company or a Subsidiary or within ninety (90) days after the termination of such employment (other than termination for cause or voluntary termination without the consent of the Company), such option may be exercised, to the extent exercisable by the employee on the date of death, by a legatee or legatees of the employee under the employee's last will, or by the employee's personal representative or distributees, at any time within one year after the date of the employee's death, but not later than the date on which the option terminates. In the event that the employment of an employee to whom an option has been granted under the 1997 Plan shall be terminated as the result of a disability, such option may be exercised, to the extent exercisable by the employee on the date of such termination, at any time within one year after the date of such termination, but not later than the date on which the option terminates. 12. Adjustments Upon Changes in Capitalization, Etc. Notwithstanding any other provision of the 1997 Plan, the Board of Directors or the Committee, as the case may be, may, at any time, make or provide for such adjustments to the 1997 Plan, to the number and class of shares issuable thereunder or to any outstanding options as it shall deem appropriate to prevent dilution or enlargement of rights, including adjustments in the event of changes in the outstanding Common Stock by reason of stock dividends, split-ups, recapitalizations, mergers, consolidations, combinations or exchanges of shares, separations, reorganizations, liquidations and the like. In the event of any offer to holders of Common Stock generally relating to the acquisition of their shares, the Board of Directors or the Committee, as the case may be, may make such adjustment as it deems equitable in respect of outstanding options and rights, including in its discretion revision of outstanding options and rights so that they may be exercisable for the consideration payable in the acquisition transaction. Any such determination by the Board of Directors or the Committee, as the case may be, shall be conclusive. Any fractional shares resulting from such adjustments shall be eliminated. 13. Effective Date The 1997 Plan shall become effective on March 1, 1997. 14. Termination and Amendment The Board of Directors of the Company may suspend, terminate, modify or amend the 1997 Plan, provided that any amendment that would increase the aggregate number of shares which may be -7- issued under the 1997 Plan, materially increase the benefits accruing to participants under the 1997 Plan, or materially modify the requirements as to eligibility for participation in the 1997 Plan, shall be subject to the approval of the Company's stockholders, except that any such increase or modification that may result from adjustments authorized by paragraph 12 does not require such approval. No suspension, termination, modification or amendment of the 1997 Plan may, without the consent of the employee to whom an option shall theretofore have been granted, effect the rights of such employee under such option. 15. Miscellaneous As said term is used in the 1997 Plan, the "Fair Market Value" of a share of Common Stock on any day means: (a) if the principal market for the Common Stock is a national securities exchange or the National Association of Securities Dealers Automated Quotations System ("NASDAQ), the closing sales price of the Common Stock on such day as reported by such exchange or market system, or on a consolidated tape reflecting transactions on such exchange or market system, or (b) if the principal market for the Common Stock is not a national securities exchange and the Common Stock is not quoted on NASDAQ, the mean between the highest bid and lowest asked prices for the Common Stock on such day as reported by the National Quotation Bureau, Inc.; provided that if clauses (a) and (b) of this paragraph are both inapplicable, or if no trades have been made or no quotes are available for such day, the Fair Market Value of the Common Stock shall be determined by the Board of Directors or the Committee, as the case may be, shall be conclusive as to the Fair Market Value of the Common Stock. The Board of Directors or the Committee, as the case may be, may require, as a condition to the exercise of any options granted under the 1997 Plan, that to the extent required at the time of exercise, (i) the shares of Common Stock reserved for purposes of the 1997 Plan shall be duly listed, upon official notice of issuance, upon stock exchange(s) on which the Common Stock is listed, (ii) a Registration Statement under the Securities Act of 1933, as amended, with respect to such shares shall be effective, and/or (iii) the person exercising such option deliver to the Company such documents, agreements and investment and other representations as the Board of Directors or the Committee, as the case may be, shall determine to be in the best interests of the Company. During the term of the 1997 Plan, the Board of Directors or the Committee, as the case may be, in its discretion, may offer one or more option holders the opportunity to surrender any or all unexpired options for cancellation or replacement. If any options are so surrendered, the Board of Directors or the Committee, as the case may be, may then grant new Non-Qualified or Incentive Options to such holders for the same or different numbers of shares at higher or lower exercise prices than the surrendered options. Such -8- new options may have a different term and shall be subject to the provisions of the 1997 Plan the same as any other option. Anything herein to the contrary notwithstanding, the Board of Directors or the Committee, as the case may be, may, in their sole discretion, impose more restrictive conditions on the exercise of an option granted pursuant to the 1997 Plan; however, any and all such conditions shall be specified in the option agreement limiting and defining such option. 16. Compliance with SEC Regulations. It is the Company's intent that the 1997 Plan comply in all respects with Rule 16b-3 of the Act and any regulations promulgated thereunder. If any provision of the 1997 Plan is later found not to be in compliance with said Rule, the provisions shall be deemed null and void. All grants and exercises of Incentive Options under the 1997 Plan shall be executed in accordance with the requirements of Section 16 of the Act, as amended, and any regulations promulgated thereunder. -9- EX-10.6 12 EXHIBIT 10.6 TABLE OF CONTENTS BLUE HILL PLAZA STANDARD LEASE Article Page - ------- ---- ARTICLE 1 ................................................................... 1 1.01. Demise .................................................. 1 1.02. Demised Premises ........................................ 1 1.03. Term .................................................... 1 ARTICLE 2 ................................................................... 2 2.01. Definitions ............................................. 2 2.02. Headings ................................................ 4 ARTICLE 3 ................................................................... 4 3.01. Rent .................................................... 4 3.02. Payments Due ............................................ 5 3.03. Rent Control ............................................ 5 3.04. Late Charge ............................................. 5 ARTICLE 4 ................................................................... 6 4.01. Definitions of Tax and Operating Expenses ............... 6 4.02. Tax Payments ............................................ 8 4.03. Reduction of Comparison Year Taxes ...................... 8 4.04. Reduction of Base Tax ................................... 8 4.05. Tax Payment Pending Protest.............................. 9 4.06. Adjustment of Operating Expense Payments ................ 9 4.07. No Credit ............................................... 10 4.08. Assessment With Other Properties ........................ 10 4.09. Billing ................................................. 10 4.10. Partial Comparison Year ................................. 10 4.11. Tax Protests ............................................ 10 ARTICLE 5 ................................................................... 10 5.01. Services During Non-Regular Business Hours .............. 10 5.02. Cooling Tower ........................................... 11 ARTICLE 6 ................................................................... 11 6.01. Changes to Building ..................................... 11 6.02. Multi-Tenant Floors ..................................... 11 ARTICLE 7 ................................................................... 11 7.01. Completion of Premises .................................. 11 7.02. Tenant's Work ........................................... 12 7.03. Tenant's Construction Related Obligations ............... 12 7.04. Non-Liability of Landlord ............................... 13 ARTICLE 8 ................................................................... 13 8.01. Commencement Date ....................................... 13 8.02. Consequences of Tenant's Possession of Premises or Commencement Date ..................................... 14 8.03. Waiver of Right to Rescind .............................. 14 8.04. Early Commencement of Business .......................... 14 ARTICLE 9 ................................................................... 15 9.01. Permitted Uses .......................................... 15 9.02. Prohibited Uses ......................................... 15 9.03. Physical Protection of Premises ......................... 16 ARTICLE 10 .................................................................. 17 10.01. Buildinq Name ........................................... 17 10.02. Tenant Signs ............................................ 17 10.03. Directory ............................................... 17 ARTICLE 11 ................................................................. 17 11.01. Subrogation ............................................. 17 11.02. Attornment .............................................. 18 11.03. Waiver of Termination Right ............................. 18 12.01. Quiet Enjoyment ......................................... 18 13.01. Prohibition Against Assignment, Etc. .................... 19 ARTICLE 14 .................................................................. 19 14.01. Notice and Compliance With Laws ......................... 20 14.02. Contest ................................................. 20 ARTICLE 15 .................................................................. 20 15.01. Tenant's Requirements ................................... 20 15.02. Blanket Policies ........................................ 21 15.03. Tenant's Compliance ..................................... 21 15.04. Waiver of Subrogation ................................... 22 ARTICLE 16 .................................................................. 22 16.01. Parking ................................................ 22 ARTICLE 17 .................................................................. 23 17.01. Permitted Changes ...................................... 23 17.02. Substantial Changes .................................... 24 17.03. Substantial Changes in Excess of $100,000 .............. 24 17.04. Restricted Changes ..................................... 25 ARTICLE 18 .................................................................. 25 18.01. Tenant's Property ...................................... 25 18.02. Abandonment of Tenant's Property ....................... 25 18.03. Leasehold Improvements ................................. 25 18.04. End of Term ............................................ 26 18.05. Removal by Landlord .................................... 26 ARTICLE 19 .................................................................. 26 19.01. Tenant's Required Repairs .............................. 26 19.02. Windows ................................................ 26 19.03. Damage to Building ..................................... 26 ARTICLE 20 .................................................................. 27 20.01. Landlord's Obligations ................................. 27 20.02. Cleaning ............................................... 27 20.03. Extraordinary Refuse ................................... 27 20.04. Quality of Repairs ..................................... 28 20.05. Required Changes ....................................... 28 ARTICLE 21 .................................................................. 28 21.01. General ................................................ 28 21.02. Rent Inclusion ......................................... 29 21.03. Submetering ............................................ 30 21.04. Direct Meter ........................................... 31 21.05. Landlord's Statements and Bills ........................ 31 21.06. Change of Service ...................................... 31 21.07. Additional Installations ............................... 32 ARTICLE 22 .................................................................. 32 22.01. Access and Repair ...................................... 32 22.02. Tenant's Requirements .................................. 33 22.03. Additional Tenant Requirements ......................... 33 ARTICLE 23 .................................................................. 33 23.01. Elevators .............................................. 33 23.02. Interruption of Services ............................... 33 ARTICLE 24 .................................................................. 34 24.01. Tenant's Access to Demised Premises .................... 34 ARTICLE 25 .................................................................. 34 25.01. Lines Through Demised Premises ......................... 34 25.02. Access to Demised Premises ............................. 35 25.03. Access Upon Emergency .................................. 35 25.04. Access During Twelve Months ............................ 35 ARTICLE 26 .................................................................. 36 26.01. Access for Protection .................................. 36 ARTICLE 27 .................................................................. 36 27.01. Notice to Landlord ..................................... 36 ARTICLE 28 .................................................................. 36 28.01. No Liability of Landlord ............................... 36 28.02. Tenant's Indemnification ............................... 37 28.03. Exculpation ............................................ 37 ARTICLE 29 .................................................................. 37 29.01. Notice and Repair Obligation ........................... 37 29.02. Abatement of Rent ...................................... 38 29.03. Termination Rights ..................................... 38 29.04. Termination Upon Casualty .............................. 39 29.05. Non-Liability of Landlord .............................. 39 29.06. Insurance on Tenant's Property ......................... 39 29.07. Waiver of Statutory Protection ......................... 39 29.08. Uncollectibility of Insurance .......................... 39 ARTICLE 30 .................................................................. 39 30.01. Landlord's Rights to Award ............................. 40 30.02. Full Taking ............................................ 40 30.03. Partial Taking ......................................... 40 30.04. Tenant's Rights to Award ............................... 40 30.05. Reconstruction.......................................... 40 ARTICLE 31 .................................................................. 41 31.01. Surrender .............................................. 41 31.02. Holdover ............................................... 41 ARTICLE 32 .................................................................. 41 32.01. Prior to Term .......................................... 41 32.02. During Term ............................................ 42 32.03. Adequate Assurances .................................... 43 ARTICLE 33 .................................................................. 44 33.01. Re-Entry; Summary Proceedings .......................... 44 33.02. Remedies Cumulative .................................... 44 33.03. Retention of Funds ..................................... 44 ARTICLE 34 .................................................................. 44 34.01. Damages ................................................ 44 34.02. Recovery of Damages .................................... 46 34.03. Additional Damages ..................................... 46 ARTICLE 35 .................................................................. 46 35.01. Waiver of Redemption Rights ............................ 46 35.02. No Designation of Payments ............................. 47 35.03. Waiver of Jury Trial ................................... 47 35.04. Counterclaims .......................................... 47 ARTICLE 36 .................................................................. 47 36.01. Performance of Tenant's Obligations .................... 47 ARTICLE 37 .................................................................. 47 37.01. Consents and Approvals ................................. 47 37.02. Expenses ............................................... 48 ARTICLE 38 .................................................................. 48 38.01. Rules and Regulations .................................. 48 ARTICLE 39 48 39.01. Amendments for Financing ............................... 48 ARTICLE 40 .................................................................. 48 40.01. Notice to Mortgagees and Lessors ....................... 48 ARTICLE 41 .................................................................. 49 41.01. Successors and Assigns ................................. 49 41.02. Partnership Tenant ..................................... 49 ARTICLE 42 .................................................................. 51 42.01. Waivers ................................................ 51 42.02. Surrender; Payments .................................... 51 ARTICLE 43 .................................................................. 51 43.01. Notices ................................................ 52 ARTICLE 44 .................................................................. 52 44.01. Tenant's Estoppel ...................................... 52 44.02. Recording .............................................. 52 ARTICLE 45 .................................................................. 53 45.01. Brokerage .............................................. 53 ARTICLE 46 .................................................................. 53 46.01 Security ............................................... 53 ARTICLE 47 .................................................................. 54 47.01 Entire Agreement ....................................... 54 47.02. Partial Invalidity ..................................... 54 47.03. Applicable Law ......................................... 54 47.04. Lease Submission ....................................... 54 47.05. Asterisks .............................................. 54 47.06. Confidentiality ........................................ 54 47.07. Right to Relocate ...................................... 55 ARTICLE 48 .................................................................. 55 48.01. Option to Terminate .................................... 55 Exhibit A -- Floor and Location Plans Exhibit B -- Estoppel Letter BLUE HILL PLAZA LEASE LEASE, dated June 11 1997, between GLORIOUS SUN ROBERT MARTIN, L.L.C., a New York limited liability company, having its principal p1ace of business at 100 Clearbrook Road, Elmsford, New York 10523, ("Landlord"), and EASY STREET ONLINE, INC. a corporation organized and existing under the laws of the State of New York having its principal place of business at 15 North Mill Street, Nyack, New York ("Tenant") . WHEREAS, Landlord is the owner of the building commonly known as One Blue Hill Plaza, Pearl River, New York 10965, in the Town of Orangetown, County of Rockland, and State of New York (the "Building"); and WHEREAS, Landlord and Tenant desire that a lease be made by Landlord to Tenant of certain space in the Building for the term, for the rent and upon and subject to the covenants, agreements, terms, conditions, limitations, exceptions and reservations herein contained; NOW, THEREFORE, Landlord and Tenant hereby covenant and agree as follows ARTICLE 1 Demise-Premises-Term 1.01. Demise. Landlord hereby demises and leases to Tenant, and Tenant hereby takes and hires from Landlord, the premises hereinafter mentioned for the term hereinafter stated, for the rent hereinafter reserved and upon and subject to the covenants, agreements, terms, conditions, limitations, exceptions and reservations of this lease. 1.02. Demised Premises. The premises hereby demised and leased to Tenant are a portion of the 6th floor of the Building, as shown on the floor and location plans annexed hereto and marked as Exhibit A. The terms "Demised Premises" or "Premises" at any given time shall mean the premises described in this Section, subject to the provisions of this lease. 1.03. Term. The term of this lease and the estate hereby granted (hereinafter collectively called the "term of this lease") shall commence on June 13, 1997 (the "Commencement Date") (as defined in Section 8.01) and shall expire on June 30, 2002 (the "Expiration Date"), or on such earlier date upon which said term may expire or be terminated pursuant to any of the provisions of this lease or pursuant to law. -1- ARTICLE 2 Definitions 2.01 Definitions. For all purposes of this lease, and all agreements supplemental hereto, the terms defined in this Section shall have the meanings specified in this Section unless the context otherwise requires: (a) The Land shall mean all of the land and improvements thereon owned or ground leased by Landlord and comprising the Blue Hill project. The foregoing shall include, in addition, any other parcels of land or improvements or any facility serving the project and made available by easement, agreement or otherwise. Landlord reserves the right to add or sever the ownership or right of use to any portion of the Land at any time, whereupon the portion so added or severed shall be included or excluded, as the case may be, from the Land for purposes of this lease. (b) The Buildings shall mean the Building, the other office building and the additional improvements erected or to be erected by Landlord on the Land, of which Building and the Demised Premises are a part, and all replacements of such Buildings. (c) Real Property shall mean the Land and Buildings (or in the event same shall be submitted to the provisions of Article 9-B of the Real Property Law, the unit (as defined in Section 339-e of the Real Property Law) of which the Premises is a part). (d) The Rentable Area of the Premises, shall be conclusively deemed to be 5,525 square feet and that of the Buildings shall be conclusively deemed to be 1,100,000 square feet. (e) The term mortgage shall include an indenture of mortgage, a deed of trust to a trustee, a pledge or any other instrument creating a lien on or other security interest in the Real Property, and the term mortgagee shall include any such mortgagee, trustee and any other holder of rights under a mortgage. (f) The terms include and including shall each be construed as if followed by the phrase "without being limited to". (g) Landlord shall mean only the owner, or the mortgagee in possession, for the time being of the Building or the condominium unit (or the owner of a lease or sublease of the Building or the condominium unit) of which the Premises form a part, so that in the event of any conveyance, sale or sales of said Building or condominium unit or an assignment, termination or surrender of said lease or sublease or in the event of a lease or sublease of said Building or of the condominium unit, the said Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the purchaser, at any such sale or other transaction described above, or the said lessee or transferee of the Building or of the condominium unit, that the purchaser or the lessee or transferee of the Building or the condominium unit has assumed and agreed to carry out any and all covenants and obligations of Landlord thereafter accruing hereunder. (h) Tenant shall mean and include, at any given time, Tenant herein named and each successor to or assignee of any interest of Tenant herein named under this lease pursuant to the terms of this lease. -2- (i) The obligations of this lease, and words of like import, shall mean the covenants to pay rent and additional rent under this lease and all of the other covenants, agreements, terms, conditions and limitations contained in this lease. (j) Tenant's obligations hereunder and Landlord's obligations hereunder, and words of like import, shall mean the obligations of this lease which are to be performed, observed, or kept by Tenant, or by Landlord, as the case may be. Reference to performance of either party's obligations under this lease shall be construed as "performance, observance and keeping". (k) The term related corporation shall mean a corporation, individual, partnership, or other business entity, which directly or indirectly, controls, is controlled by, or is under common control with, another corporation, individual, partnership, or other business entity. (1) The term successor corporation shall mean a Corporation or other business entity into or with which another corporation or other business entity shall be merged or consolidated or to which all or substantially all of the assets of such other corporation or other business entity shall be transferred. (m) The term laws and requirements of authorities public and words of like import, shall mean laws and ordinances of any or all of the federal, state, city, and county governments and rules, regulations, orders and directives of any or all departments, subdivisions, bureaus, agencies or offices thereof, or of any other governmental, public or quasi-public authorities, having jurisdiction of the Land or Building, and the directions of any public officer pursuant to law. (n) The term requirements of insurance bodies, and words of like import, shall mean rules, regulations, orders and other requirements of the New York Board of Fire Underwriters or the New York Fire Insurance Rating Organization or any other similar body performing the same or similar functions and having jurisdiction or cognizance of the Land, Building or Demised Premises. (o) The words repair and repairs shall be deemed to include restoration, replacement and rebuilding. (p) All references in this lease to numbered Articles and Sections and lettered Exhibits, are references to Articles and Sections of this lease, and Exhibits annexed to (and thereby made part of) this lease, as the case may be, unless expressly otherwise designated in the context. (q) The term unavoidable delays shall mean delays due to strike, lockout or other labor or industrial disturbance (whether or not on the part of employees of either party hereto), civil disturbance, order of any government, court or regulatory body claiming jurisdiction, act of the public enemy, or riot, sabotage, blockage, embargo, failure or inability to secure materials or labor by reason of priority or similar regulation or order of any government or regulatory body, lightning, earthquake, fire, storm, hurricane, flood, washout, explosion, act of God, or any cause whatsoever beyond the reasonable control of either party hereto whether or not similar to any of the causes hereinabove stated, excluding however, the inability of either party to obtain any financing which may be necessary to carry out its obligations. (r) Regular business hours, business days and word of like import shall mean 8:00 A.M. to 6:00 P.M. on all days other than Saturdays, Sundays, and all days observed as holidays by the United States, State of New York or labor unions representing -3- individuals servicing the Building in behalf of Landlord; if there be no such labor unions, such definition shall include holidays designated by Landlord for the benefit of such individuals. (s) The word invitee, relating to either Landlord or Tenant, shall mean any employees, agents, visitors, customers, contractors, licensees, or other parties claiming under, or in the Building by permission or sufferance of, Landlord or Tenant, as the case may be. (t) Tenant's Property shall mean all movable partitions, lighting fixtures, special cabinet work, business and trade fixtures, machinery and equipment, vaults and all other property, whether or not attached to or built into the Premises and which is installed in the Premises by or for the account of Tenant at its expense and can be removed without damage to the Building, and all furniture, furnishings and other articles of personal property owned by Tenant and located in the Premises. (u) A lease year shall mean the 12 month period commencing with the Commencement Date (as defined in Section 8.01), and ending the day preceding the first anniversary of the Commencement Date (except that if the Commencement Date shall occur on a day other than the first day of a calendar month, such period shall commence with the Commencement Date and end with the last day of the 12th full calendar month thereafter) and each 12 month period thereafter, all or parts of which fall within the term of this lease. 2.02. Headings. The Article and Section headings in this lease and the Index annexed to this lease are inserted only as a matter of convenience, and are not to be given any effect whatsoever in construing this lease. ARTICLE 3 Rent 3.01. Rent. The rent reserved under this lease (hereinafter called the "rent"), for the term hereof, shall be and shall consist of: (a) $96,687.50 per annum for the period commencing September 1, 1997 through and including June 30, 1998; $102,212.50 per annum for the period commencing July 1, 1998 through and including June 30, 1999; and $110,500.00 per annum for the period commencing on July 1, 1999 through and including June 30, 2002 (which sum is hereinafter referred to as "fixed rent") which fixed rent shall be payable without notice, in equal monthly installments in advance commencing on September 1, 1997 and on the first day of every calendar month of the term of this lease thereafter, plus* (b) such other sums of money as shall become due and payable hereunder (which other sums are collectively hereinafter referred to as "additional rent"), which additonal rent shall be payable as hereinafter provided, all to be paid to Landlord or its designated agent, at its principal place of business as specified on the first page of this lease, or such other place as Landlord may designate, in lawful money of the United States of America, without abatement, deduction or set-off. All rent shall be paid -4- by currently dated, unendorsed check of Tenant, drawn on a bank or trust company which is a member of the New York Clearing House. Notwithstanding the foregoing, Tenant shall pay Landlord $690.63 per month for the first two months of the term of this lease as Electric Rent.* 3.02. Payments Due. Tenant covenants and agrees to pay the rent and other charges herein reserved promptly, as and when the same shall become due and payable, without notice or demand therefor. If no date shall be set forth herein for the payment of additional rent, then such sum shall be due and payable within ten business days after the date upon which Landlord demands such payment. Landlord acknowledges receipt of the payment of fixed rent for the first full calendar month of the term, by check, subject to collection. 3.03. Rent Control. If at any time during the term of this lease the rent, or any part thereof, shall not be fully collectible by reason of any law and requirement of public authority, Tenant shall enter into such agreement or agreements and take such other action or actions (without additional expense to Tenant) as Landlord may request and as may be legally permissible, to permit Landlord to collect the maximum rents which may from time to time during the continuance of such legal rent restriction be legally permissible (but not in excess of the amounts reserved therefor under this lease). Upon the termination of such legal rent restriction prior to the expiration of the term of this lease (a) the rents shall become and thereafter be payable hereunder in accordance with the amounts reserved in this lease for the period of the term following such termination and (b) Tenant shall pay Landlord, if legally permissible, an amount equal to (i) the rents which would have been paid pursuant to this lease but for such legal rent restriction less (ii) the rents actually paid by Tenant to Landlord during the period such rent restriction was in effect. Tenant hereby appoints Landlord its attorney-in-fact to execute any and all necessary agreements and documents pursuant to this Section. 3.04. Late Charge. If any monies owing by Tenant to Landlord are not paid within 10 days after the date when due and payable pursuant to the provisions of this lease, Tenant shall pay to Landlord, in compensation for the additional administrative, bookkeeping and collection expenses incurred by Landlord by reason of such late payment, a sum calculated by multiplying the amount of money not paid timely by the greater of (a) 13%, or (b) three percentage points in excess of the prime rate, then established by Chemical Bank, N.A. (or its successor), dividing the product by 365 and multiplying the quotient by the number of days between the date such monies were payable and the date such monies are in fact paid. Nothing herein shall be intended to violate any applicable law, code or regulation, and in all instances all such charges shall be automatically reduced to any maximum applicable legal rate or charge. Such compensation shall be without prejudice to any of Landlord's rights and remedies hereunder.* -5- ARTICLE 4 Adjustment of Rent for Changes in Real Estate Taxes and Operating Expenses. 4.01. Definitions of Taxes and Operating Expenses As used herein: (a) "Taxes" shall mean the total amount of real estate taxes and assessments now or hereafter levied, imposed, confirmed or assessed against the Real Property, including, city, county, school and transit taxes, water fees and sewer and refuse disposal charges, or taxes, assessments or charges levied, imposed, confirmed or assessed against, or a lien on, the Real Property by any taxing authority whether general or specific, ordinary or extraordinary, foreseen or unforeseen and whether for public betterments or improvements or otherwise. If, due to any change in the method of taxation, any franchise, capital stock, capital, income, profit, sales, rental, use and occupancy tax or charge shall be levied, assessed, confirmed or imposed upon any owner of the Real Property in lieu of, or in addition to any real estate taxes or assessments upon or with respect to the Real Property, such tax shall be included in the term Taxes. Penalties and interest on Taxes (except to the extent imposed upon timely payments of assessments that may be, and are in fact, paid in installments) and income, franchise, transfer, inheritance and capital stock taxes shall be deemed excluded from Taxes except to the extent provided in the immediately preceding sentence. (b) "Base Tax" shall mean a sum determined by applying the tax rates set forth on tax bills rendered by the taxing authorities for the tax year of each such taxing authority during which this lease is executed to the assessed valuations (after any reduction in said assessment as a result of any tax abatement or other tax relief of any nature whatsoever) of the Real Property for the tax year during which the Commencement Date shall occur. "Tax Year" shall mean the fiscal period for each Tax affecting the property (whether or not a calendar year) as established by each taxing authority. Any and all tax abatements shall be for the benefit of Landlord. (c) "Operating Expenses" or "Expenses" shall mean such costs or expenses (and taxes thereon), as shall be paid or incurred by or in behalf of Landlord in providing services to tenants, and in the operation, cleaning, repair (whether structural or non-structural and whether or not capitalized under generally accepted accounting principles), management, security and maintenance of any and all parts of the Land and Buildings (collectively called "Building Operation") including (i) salaries, wages and bonuses paid to, and the cost of any hospitalization, medical, surgical, union and general welfare benefits (including group life insurance), pension, retirement or life insurance plans and other benefit or similar expenses of, Landlord's employees engaged in Building Operation, (ii) social security, unemployment and other payroll taxes and the cost of providing disability and workers' compensation coverage with respect to said employees, (iii) costs and expenses for fuel or energy purchased or used for the operation of the Buildings' heating, ventilating and air cooling system and equipment, and for light and power (excluding any allocable share thereof paid for by tenants for overtime charges), (iv) the cost of casualty, rent, boiler, machinery, sprinkler, apparatus, liability, fidelity, plate glass and any other insurance, (v) cost of painting, (vi) cost or rental of all cleaning supplies, tools, materials and equipment, (vii) cost of uniforms, work clothes and dry cleaning, (viii) cost of window cleaning, concierge, guard, watchperson or other security personnel, service or system, if any, (ix) management fees or, if no managing agent is employed by Landlord, a sum in lieu thereof which is not in excess of then prevailing rates for management -6- fees payable for comparable properties in comparable locations, (x) charges of independent contractors performing work included within this definition, (xi) stationery, (xii) legal (except those for the preparation of this and other leases), accounting and other professional fees and disbursements incurred in connection with Building Operation, (xiii) water, (xiv) service contracts for the performance of Landlord's obligations, including elevator, electric, heating, air-conditioning and plumbing systems, (xv) maintenance and repair of grounds, including interior and exterior lawns, gardens, shrubbery, trees, planters, containers, statuary, exhibits, displays, walks and other ways and areas and common areas, (xvi) maintenance and repairs to the heating, ventilating and air-conditioning systems, underground pipes, lines, equipment and systems, roof, and all parts of the Real Property, (xvii) removal of snow, ice, trash, garbage and other refuse, (xviii) telephone charges incurred at the Buildings' office, if any, (xix) extermination, (xx) fire protection, (xxi) repairs or replacements incurred by reason of fire or other casualty or condemnation to the extent Landlord is not compensated by insurance or the condemning authority, (xxii) cost of repairs and the cost of replacements made in connection with repairs of cables, fans, pumps, boilers, cooling equipment, wiring and electrical fixtures and metering, control and distribution equipment, component parts of the HVAC, electrical, plumbing, elevator and any life or property protection system (including sprinkler systems), window washing equipment and snow removal equipment, (xxiii) costs for alterations or improvements resulting in or intended to result in a reduction in fuel consumption or Operating Expenses or made by reason of laws and requirements of public authorities, insurance bodies or Landlord's insurers, provided however, that to the extent such costs are capitalized under generally accepted accounting principles, such costs (together with an interest factor equal to the greater of 13% or three percentage points in excess of the prime rate established by Chemical Bank, N.A. (or its successor) at the time of expenditure) shall be amortized over a period of five years, (xxiv) for each Expense Comparison Year (as defined in Section 4.06(a) subsequent to the first Expense Comparison Year, an amount equal to the increase, if any, in the interest payable as a result of any refinancing of the initial first mortgage (encumbering the property of which the Premises are a part) during (or with respect to) such Expense Comparison Year over the interest payable under any such initial first mortgage during (or with respect to) the first Expense Comparison Year; provided however, that if the principal balance of such refinanced mortgage exceeds the principal balance thereof immediately prior to which refinancing, then for purposes of determining the amount of interest payable on such refinanced mortgage, the principal amount of such refinanced mortgage shall be deemed to be equal to the lesser of the principal balance of such refinanced mortgage or the original principal balance of the initial first mortgage, and (xxv) costs and expenses (and taxes thereon) paid or incurred in connection with the operation, cleaning, repair (whether structural or non-structural and whether or not capitalized under generally accepted accounting principles), management, security and maintenance of the limited common elements or common elements of the condominium (if any) of which the Premises is a part. An item of expense properly included in more than one of the aforesaid categories shall not be included more than once in the calculation of Operating Expenses. (d) "Base Operating Expenses" shall mean Operating Expenses for the calendar year during which the lease is executed ("Base Expense Year"). If the Buildings are not fully operational or fully occupied by tenants during such year, then the Operating Expenses for such year shall be calculated by Landlord by projecting actual expenses to such increased amount as would have been incurred if the Buildings had been fully operational and 95% occupied. -7- (e) "Tenant's Proportionate Share" shall mean .50%, provided that if the Premises shall be a portion of a condominium unit the rentable area of which shall be less than 100% of the rentable square feet in the Buildings, then "Tenant's Proportionate Share" shall be a percentage by dividing 5,525 square feet by the total number of square feet of rentable square feet in the unit of which the Premises is a part. 4.02. Tax Payments. (a) If Taxes for any Tax Year during the term ("Tax Comparison Year") shall exceed the Base Tax, Tenant shall pay Landlord, as additional rent for each such Tax Comparison Year, Tenant's Proportionate Share of such excess ("Tax Payment"). At Tenant's request, Landlord shall furnish Tenant with a true copy of all relevant tax bills. (b) Subsequent to Landlord's receipt of the tax bills for each Tax Comparison Year, Landlord shall submit to Tenant a statement showing (i) the Tax Payments due for such Tax Comparison Year, and (ii) the basis of calculations ("Landlord's Tax Statement"). Tenant shal1 (y) pay Landlord the unpaid portion (if any) of the Tax Payment within 30 days after receipt of Landlord's Tax Statement, and (z) on account of the immediately following Tax Comparison Year, pay Landlord commencing as of the first day of the month during which Landlord's Tax Statement is rendered, and on the first day of each month thereafter until a new Landlord's Tax Statement is rendered, 1/12th of the total payment for the current Tax Comparison Year. The monthly payments based on the total payment for the current Tax Comparison Year shall be adjusted from time to time to reflect Landlord's reasonable estimate of increases in Taxes for the immediately following Tax Comparison Year. 4.03. Reduction of Comparison Year Taxes. If Taxes for any Tax Comparison Year, or an installment thereof, shall be reduced before such Taxes or such installment shall be paid, the amount of Landlord's costs and expenses of obtaining such reduction (including appraisers' and consultants' fees) shall be added to and deemed part of Taxes for such Tax Comparison Year. In the event Landlord obtains a refund of Taxes for any Tax Comparison Year for which a Tax Payment has been made by Tenant, Landlord shall credit against Tenant's next succeeding Tax Payment, Tenant's Proportionate Share of the refund (but not more than the Tax Payment that was the subject of the refund) after deducting from such refund the costs and expenses incurred by Landlord in obtaining the refund, including appraisers' and consultants' fees. In the event no Tax Payment shall thereafter be due, Landlord shall pay such refund to Tenant. 4.04. Reduction of Base Tax. If Landlord obtains a reduction in the Base Tax after Tenant shall have made Tax Payments for one or more Tax Comparison Years, the Base Tax shall be reduced (such reduction to include the expenses incurred by Landlord in obtaining such reduction, including appraisers' and consultants' fees), prior Tax Payments shall be recalculated and Tenant shall pay Landlord, for each of such Tax Comparison Years, Tenant's Proportionate Share of the increased amount of Tax Payment for each such Tax Comparison Year. Tenant's payment under this Section 4.04 shall be made within 30 days after Landlord's billing therefor. -8- 4.05. Tax Payment Pending Protest. While proceedings for the reduction in assessed valuations are pending, the computation and payment of Tax Payments shall be based upon the original assessments for the year(s) in question. 4.06. Adjustment of Operating Expense Payments. (a) If Operating Expenses for any calendar year during the term and following the Base Expense Year (each such year being called an "Expense Comparison Year") shall exceed Base Operating Expenses, Tenant shall pay Landlord for each such Expense Comparison Year, Tenant's Proportionate Share of such excess ("Expense Payment"). (If the Buildings are not fully operational or fully occupied by tenants throughout any Expense Comparison Year, then the Operating Expenses for each such year shall be calculated by projecting actual expenses to such increased amount as would have been incurred if the Buildings had been fully operational and occupied). (b) Subsequent to the end of each Expense Comparison Year, Landlord shall submit to Tenant a statement showing (i) the Expense Payments due Landlord for such Expense Comparison Year, and (ii) the basis for such calculation ("Landlord's Statement"). Tenant shall (x) make payment of any unpaid portion of the Expense Payment within 30 days after receipt of Landlord's Statement, and (y) pay to Landlord on account of the then current Expense Comparison Year, within 30 days after receipt of Landlord's Statement an amount equal to the product obtained by multiplying the total payment required for the preceding Expense Comparison Year by a fraction, the denominator of which shall be 12 and the numerator of which shall be the number of months of the current Expense Comparison Year which shall have elapsed prior to the first day of the month immediately following the rendition of Landlord's Statement, and (z) pay Landlord on account of the then current Expense Comparison Year, commencing as of the first day of the month immediately following the rendition of Landlord's Statement and on the first day of each month thereafter until a new Landlord's Statement is rendered, 1/12th of the total payment for the preceding Expense Comparison Year. The monthly payments based on the total payment for the preceding Expense Comparison Year shall be adjusted, from time to time, to reflect Landlord's reasonable estimate of increases in rates and expenses for the current Expense Comparison Year. The payments required to be made under clauses (y) and (z) above shall be subject to adjustment as and when Landlord's Statement for such current Expense Comparison Year is rendered by Landlord. Tenant shall make payments on account of Expense Payments for the first Expense Comparison Year on the basis of estimates prepared by Landlord, payments to be made monthly on the first day of each month during such first Expense Comparison Year. The payments based on such estimates shall be adjusted following the expiration of the first Expense Comparison Year, upon rendition of Landlord's Statement for that year. 4.07. No Credit. If in a Tax Comparison Year the Taxes are less than the Base Tax, and/or if in an Expense Comparison Year, the Operating Expenses are less than the Base Operating Expenses, the Tenant shall not be entitled to receive a credit, by way of a reduction in fixed rent, a refund of all or a portion of prior (or a credit against future) Tax Payments or Expense Payments, or otherwise. -9- 4.08. Assessment With Other Properties. If, at any time, the Real Property is assessed for tax purposes with other property owned by Landlord, the tax ascribable to the Real Property shall be the allocable portion of the Taxes on the entire properties, based upon an informal apportionment by such assessors of the total assessment to such Real Property or if such apportionment is not available, as shall be determined by Landlord. 4.09. Billing. Landlord's failure during the term to prepare and/or deliver any statement or bill required to be delivered to Tenant, or Landlord's failure to make demand for payment of fixed rent or additional rent shall not be deemed a waiver of, or cause Landlord to forfeit or surrender its rights to collect, any rent due. Tenant's liability for all such payments shall continue unabated during the term and shall survive the expiration or sooner termination of the term, notwithstanding Landlord's failure to demand payment for same, failure to bill same, or improper billing thereof. 4.10. Partial Comparison Year. If the Expiration Date or earlier date upon which the term of this lease may expire or terminate shall be on a date other than the last day of a Tax or Expense Comparison Year, Tenant's Tax Payment and Expense Payment for such partial Tax or Expense Comparison Year (as the case may be) shall be appropriately prorated. 4.11. Tax Protests. Tenant shall have no right to institute or participate in any tax certiorari proceedings or other proceedings of a similar nature, it being understood that the commencement, maintenance, settlement, or conduct thereof shall be in the sole discretion of Landlord. ARTICLE 5 Charges for Services During Non-Regular Business Hours 5.01. Services During Non-Regular Business Hours. In the event Tenant conducts business in any portion of the Demised Premises during other than regular business hours, Landlord shall, upon reasonable advance notice, provide those building services as shall enable Tenant to utilize the Premises during such period, provided that Tenant shall pay Landlord's charges therefor, and subject to Landlord's regulations in effect from time to time. 5.02. Cooling Tower. In the event Tenant conducts business in any portion of the Demised Premises during hours other than regular business hours, Landlord shall, upon reasonable advance notice, operate the Building's cooling tower and such other equipment and machinery as -10- shall enable Tenant to cool the Premises. Tenant shall reimburse Landlord for Landlord's cost of such service upon rendition of a bill therefor, at a rate equal to Landlord's actual cost therefor, plus 15%. ARTICLE 6 Construction of the Building 6.01. Changes to Building. Landlord may, at any time, without the same constituting an eviction of Tenant or entitling Tenant to any abatement of rent, and without otherwise incurring liability to Tenant, and without any effect on any of Tenant's obligations under this lease, change the arrangement and/or location of (including the closing off of) public entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets or other parts of the Building, provided that in so doing, Landlord does not deny Tenant reasonable means of access to the Demised Premises for the conduct of Tenant's business. 6.02. Multi-Tenant Floors. Landlord may, without the same constituting an eviction of Tenant or entitling Tenant to any abatement of rent, and without otherwise incurring liability to Tenant, and without any effect on any of Tenant's obligations under this lease, rearrange the space unit divisions and the public corridors on the floor upon which the Demised Premises is located in any manner Landlord may determine, provided only that the Demised Premises shall not (i) be changed in any respect and (ii) have diminished access by public corridor(s) to the elevator(s), fire stair(s) and public toilet(s) serving said floor. ARTICLE 7 Completion of the Demised Premises Mechanics' Liens 7.01. Completion of Premises. Tenant shall accept the Demised Premises "as is", such term shall mean in the same condition and repair in which the prior tenant vacated such space, and Tenant shall be responsible for any demolition and removal of any improvements existing in the Demised Premises in connection with the prior tenant's occupancy, and all other work as may be necessary to convert the Demised Premises to Tenant's requirements. Landlord shall not be responsible for performing any work with respect to such space, whether or not included in the Work Letter. Any work, changes or improvements made to such space shall be performed at Tenant's expense in accordance with the terms of this lease, including Article 17. * 7.02. Tenant's Work. (a) If Tenant shall employ or use any contractor or subcontractor other than Landlord in the performance of any work in connection with Tenant's initial occupancy, which work Tenant shall not commence until after the Commencement Date, all of -11- Tenant's duties and obligations set forth in Article 17 (relating to Tenant's duties and obligations in making Tenant's Changes) shall he applicable to and binding upon Tenant with respect to any such work. (b) If Tenant shall employ or use any contractor other than Landlord in the performance of any work in connection with Tenant's initial occupancy, such work shall be conducted in accordance with all laws and requirements of public authorities and requirements of insurance bodies, in a good and workmanlike manner, and in such manner as not to interfere with or delay the work of Landlord's contractors and subcontractors in the Building, or to impose any additional expense upon Landlord in the construction within, or operation of, the Buildings, and so as to maintain harmonious labor relations in the performance of work in the Buildings. Without limiting the generality of the foregoing, Tenant shall advise Landlord of the names of Tenant's contractors and subcontractors and adopt a work schedule in conformity with the schedule of Landlord's contractors and subcontractors. Tenant agrees that its contractors and subcontractors shall employ people and means to ensure the progress of the work in the Buildings without interruption on account of strikes, work stoppage or other similar cause for delay. At any and all times while Landlord's and Tenant's installations are being performed by Tenant's designated contractor, Landlord shall be entitled to have a representative(s) on the site for the purpose of inspecting same, and for such purpose such representative(s) shall have free and unrestricted access to all parts of the Demised Premises. 7.03. Tenant's Construction Related Obligations. Tenant, at its expense, and with diligence and dispatch, shall procure the cancellation or discharge of all notices of violation arising from or otherwise connected with work performed, or alleged to have been performed, by its contractor(s) and which shall be issued by any public authority having or asserting jurisdiction. Tenant shall defend, indemnify and save harmless Landlord against any and all mechanic's and other liens and financing statements, conditional bills of sale, chattel mortgages or other financing or title retention devices, filed in connection therewith and against all costs, expenses and liabilities (including reasonable attorney's fees) incurred in connection with any such lien, financing statement, conditional bill of sale, chattel mortgage or other financing or title retention devices, or any action or proceeding brought thereon. In connection therewith, Tenant, at its expense, shall procure the satisfaction or discharge of all such liens, financing statements, conditional bills of sale, chattel mortgages and other financing or title retention devices within 15 days after the filing or recording of same. Nothing herein contained, however, shall prevent Tenant from contesting, in good faith and at its own expense, any such notice of violation, lien, financing statement, conditional bill of sale, chattel mortgage, or other financing or title retention devices provided that (i) in case of a notice of violation, Tenant shall comply with the provisions of Section 14.02, and (ii) in case of a lien, financing statement, conditional bill of sale, chattel mortgage, or other financing or title retention device Tenant shall have accomplished the discharge thereof by bonding or otherwise within 15 days after the filing or recording of the same. 7.04. Non-Liability of Landlord. Neither Tenant nor any of its agents, employees, representatives, contractors or subcontractors shall have any power or authority to do any act or thing or to make any contract -12- or agreement which will bind Landlord or which may create or be the foundation for any mechanic's lien or other lien or claim upon or against Landlord or Landlord's interest in the Real Property; and, further, Landlord shall have no responsibility to Tenant or to any architect, engineer, contractor, subcontractor, supplier, material provider, worker or other person, firm or corporation who shall engage, or participate, in the performance of additional work or any installation, alteration or improvement to be performed or made by Tenant under any of the terms of this lease, or otherwise, unless Landlord shall expressly undertake such obligation by an agreement in writing, signed by Landlord, and made between Tenant and Landlord or such other party. ARTICLE 8 Commencement Date-Earlier Possession 8.01. Commencement Date. (a) The term of this lease shall commence as of June 13, 1997 and expire June 30, 2002 or on such earlier date upon which said term may expire or be terminated pursuant to any provision of this lease or law. * (b) Tenant shall accept the Demised Premises "As-Is" as set forth in Article 7.01. * (c) The Floor Plan attached hereto may be revised by Landlord in order to comply with laws and requirements of public authorities and requirements of insurance bodies. If any of such revisions or changes are due to Tenant's use of the Demised Premises, Tenant shall pay for the cost of implementing same. If any common foyers, exit passages mandated by such requirements are used by more than one tenant, the rental value therefore shall be apportioned to Tenant in relation to the Tenant's Rentable Area (as compared to the square footage occupied by all such tenants) and Tenant's fixed rent shall be increased accordingly. * 8.02. Consequences of Tenant's Possession of Premises or Commencement Date. On the Commencement Date or upon such earlier date as Tenant shall take possession of any part or parts of the Demised Premises, Tenant shall be conclusively deemed to have agreed that Landlord, up to the time of such possession or the Commencement Date, as the case may be, has performed all of its obligations hereunder with respect to preparation of such part or parts for Tenant's possession, except for such failures or omissions by Landlord in performing such obligations as Tenant may specify by notice to Landlord not more than 10 days following the taking of such possessions by Tenant or the Commencement Date, as the case may be. Tenant shall not be entitled to any rent abatement on account of any such incomplete work. 8.03. Waiver of Right to Rescind. The parties agree that this Article covers Tenant's rights with respect to the time possession of the Premises is to be delivered to it and constitutes an express provision to the contrary under, and Tenant hereby waives any rights to rescind this lease and/or recover damages which Tenant might otherwise have pursuant to, Section 223(a) of the Real Property Law of the State of New York. -13- 8.04. Ear1y Commencement of Business. If Tenant shall commence the conduct of its business in one or more portions of the Demised Premises prior to the Commencement Date, the rents allocable to such portion or portions shall be payable from the date or dates of such commencement or commencements, and the obligations assumed by Tenant and to be performed during the term of this lease shall commence as of the date or dates of such commencement or commencements, provided that no such partial commencement of business shall be permitted if, in Landlord's judgment, such action would interfere with the completion of its construction and installation obligations. In the event of any such occupancy by Tenant prior to the Commencement Date, Tenant shall not interfere with or delay the work of Landlord's contractors and subcontractors in the Buildings and Landlord shall have no liability to Tenant in the event it, its contractors and subcontractors shall, in the performance of Landlord's construction and installation obligations, interfere with, or interrupt the conduct of, Tenant's business. ARTICLE 9 Use 9.01. Permitted Uses. Tenant may occupy and use the Demised Premises only for executive, administrative, accounting, and general office purposes, and for no other purpose. 9.02. Prohibited Uses. (a) Tenant agrees that neither Tenant nor any subtenant, assignee or occupant of the Demised Premises shall at any time during the term of this lease occupy or use the Demised Premises or permit the same to be used or occupied in any manner except as provided in Section 9.01. The following non-exclusive list of uses shall not be deemed to be "executive, administrative, accounting and general office purposes", and Tenant shall not use, or permit the use of, the Demised Premises or any part thereof, for: (i) the conduct of a public auction of any kind, or of any gaming or gambling activities, or for any political or club activities, whether public or private; (ii) the conduct of a school of any kind or as an employment agency; (iii) the sale, at retail or wholesale, of any products or materials kept in the Demised Premises, by vending machine or otherwise; (iv) manufacturing purposes; (v) the rendition to the public of medical, dental or other diagnostic or therapeutic services; (vi) a restaurant, bar, or the sale of confectionery, tobacco, newspapers, magazines, soda, beverages, sandwiches, ice cream, baked goods or similar items, or the preparation, dispensing or consumption of food and beverages; -14- (vii) the conduct of any business, occupation or activity which, in Landlord's reasonable judgment may (x) impair the reputation of the Buildings, (y) interfere with or disturb the occupancy of other tenants or occupants of the Buildings, or (z) create or foster an unusual risk to the security of the Buildings or of any of their tenants or occupants; (viii) the conduct of any business not engaged in by Tenant at the date of this lease, if the use of the Demised Premises for such business shall conflict with any negative covenants as to use contained in any other lease of space in the Buildings entered into subsequent to the date of this lease but prior to the use of the Demised Premises for such other business, provided that Landlord shall have notified Tenant of the existence of such negative covenants; or (ix) printing and reproduction of materials for sale or for the purpose of rendering services to others. (b) Tenant shall not suffer or permit the Demised Premises or any part thereof to be used in any manner, or anything to be done therein, or suffer or permit anything to be brought into or kept in the Demised Premises, which would in any way (i) violate any laws or Requirements of public authorities (subject to the right to contest such laws or requirements as provided in, and subject to the provisions of, Section 14.02), (ii) cause injury to the Buildings or any part thereof, (iii) constitute a public or private nuisance, (iv) impair the appearance of the exterior of the Buildings, (v) impair the use for normal purposes of any other area of the Buildings by (or occasion physical discomfort to, or interfere with services required to be furnished by Landlord to Tenant or to) any of the other tenants and occupants of the Buildings, or (vi) violate any of Tenant's other obligations under this lease. (c) Tenant shall not cause (or allow any of its contractors, agents or other persons or entities over whom or which it exercises a degree of control to cause) to occur within the Demised Premises, or the Buildings, any discharge, spillage, uncontrolled loss, seepage or filtration of hazardous waste or oil or petroleum liquids or solids, asbestos, pcb, radioactive substances, methane, volatile hydrocarbons, industrial solvents, or any other materials or substances which have in the past caused or constituted, or are in the future found to cause or constitute, a health, safety or environmental hazard. 9.03. Physical Protection of Premises. (a) Tenant shall not place (nor require the placement of) a load upon any floor of the Demised Premises exceeding 75 lbs. per square foot (live and dead), nor shall Tenant place (or require the placement of) a load upon any ceiling in the Demised Premises exceeding 5 lbs. per square foot. All data processing and other business machines and equipment and all other mechanical equipment installed and used by Tenant in the Demised Premises shall be so equipped, installed and maintained by Tenant, at its expense, as to prevent noise, vibration or electrical or other interference from being transmitted from the Demised Premises to any other area of the Buildings. Tenant shall not move any safe, heavy machinery or heavy equipment into or out of the Buildings without employing persons properly licensed, if required by laws and requirements of public authorities. (b) Tenant shall not discharge or permit to be discharged any materials into waste lines, vents, or flues of the Buildings which might cause damage thereto. The water and wash closets and -15- other plumbing fixtures in or serving the Demised Premises shall not be used for any purposes other than those for which they shall have been designed or constructed, and no sweepings, rubbish or rags shall be deposited therein. ARTICLE 10 Building Name-Signs-Directory 10.01. Building Name. Landlord shall have the right, from time to time, to change the name and/or address of the Buildings. 10.02. Tenant Landlord agrees that Tenant may, at its own expense, install and maintain any signs which Tenant may deem appropriate inside the Demised Premises, except that any such signs which are visible from the outside of the Buildings or Demised Premises shall be subject to Landlord's approval. Tenant agrees that it will maintain all such signs at its sole cost and expense and will comply with all laws and requirements of public authorities with respect thereto. Upon the termination or expiration of the term of this lease, Tenant shall, at its sole cost and expense, remove all such signs and repair any damage caused by such removal. 10.03. Directory. Landlord shall, upon Tenant's request and upon payment of Landlord's charge therefor, list on the Building's directory ("Directory") the names of the Tenant, any other party occupying any part of the Demised Premises in accordance with the terms hereof, and their officers or employees, provided the number of names so listed does not exceed Tenant's Proportionate Share of the Directory's capacity. The listing of any party's name other than that of Tenant shall neither grant such party any right or interest in this lease and/or the Demised Premises nor constitute Landlord's consent to any assignment or sublease to, or occupancy by, such party. Such listing may be terminated by Landlord at any time, without prior notice. ARTICLE 11 Subordination 11.01. Subordination. (a) This lease is subject and subordinate to all ground or underlying leases and to all mortgages which may now or hereafter affect such leases or the Real Property, and to all renewals, modifications, consolidations, replacements and extensions of any such underlying instruments. This clause shall be self-operative and no further instrument of subordination shall be needed by any ground or underlying lessee or mortgagee affecting any lease or the Real Property. In confirmation of such subordination, Tenant shall promptly execute any certificate that Landlord (or the lessor under any such lease or the holder of any such mortgage or any of their respective successors in interest) may request. If Tenant fails to execute, acknowledge or deliver any such instrument within ten days after request therefor, Tenant -16- hereby irrevocably constitutes and appoints Landlord as Tenant's attorney-in-fact, coupled with an interest, to execute and deliver any such instrument for and in behalf of Tenant. (b) Notwithstanding the provisions of Section 11.01(a), subject to the provisions herein set forth, and at the election of the holder of any current or future mortgage encumbering all or a portion of the premises of which the Demised Premises are a part, such mortgage shall be subordinate to this lease with the same force and effect as if this lease had been executed, delivered and recorded prior to the execution, delivery and recording of the said mortgage, except however that the said subordination of the mortgage to the lease shall not affect nor be applicable to and does expressly exclude: (i) the prior right, claim or lien of the said mortgage in, to and upon any award or other compensation heretofore or hereafter to be made for any taking by eminent domain of any part of the mortgaged premises, and to the right of disposition thereof in accordance with the provisions of the said mortgage; (ii) the prior right, claim and lien of the said mortgage in, to and upon any proceeds payable under all policies of fire and rent insurance upon the said mortgaged premises and as to the right of disposition thereof in accordance with the terms of the said mortgage; and (iii) any lien, right, power or interest, if any, which may have arisen or intervened in the period between the recording of the said mortgage and the execution of this lease, or any lien or judgment which may arise at any time under the terms of this lease. Although this clause shall be self-operative upon the election of any such mortgagee, in confirmation hereof, Tenant shall execute promptly any certificate that Landlord or such mortgagee may request, and the last sentence of Section 11.01(a) shall apply to this Section 11.01(b) (with appropriate changes in points of detail). 11.02. Attornment. In the event any proceedings are brought for the foreclosure of, or in the event of an exercise of the-power of sale under, any mortgage made by Landlord covering the premises of which the Demised Premises are a part, Tenant shall attorn to and acknowledge the purchaser or purchasers upon any foreclosure or sale and recognize such purchaser or purchasers as the Landlord under this lease. 11.03. Waiver of Termination Right. Tenant waives the benefit of the provisions of any statue or rule of law now or hereafter in effect which may give or purport to give Tenant, any right of election to terminate this lease or to surrender possession of the Demised Premises in the event a superior lease or superior mortgage is terminated or foreclosed, as the case may be. -17- ARTICLE 12 Quiet Enjoyment 12.01. Quiet Enjoyment. Landlord covenants and agrees that so long as Tenant pays the fixed rent and additional rent due hereunder and performs all of Tenant's other obligations hereunder, Tenant shall peaceably and quietly have, hold and enjoy the Demised Premises without hindrance or molestation by Landlord, subject, nevertheless, to the terms, covenants and conditions of this lease. The covenant herein set forth shall bind and be enforceable against Landlord or any successor to Landlord's interest, subject to the terms hereof, only so long as Landlord or any successor to Landlord's interest is in possession and is collecting rent from Tenant. ARTICLE 13 Assignment-Mortgaging-Subletting 13.01. Prohibition Against Assignment, Etc. (a) Tenant covenants and agrees that neither this lease, nor the term and estate hereby granted, nor any part hereof or thereof shall be assigned, mortgaged, pledged, or otherwise transferred (whether voluntarily or involuntarily, by operation of law or otherwise) to, and that neither the Demised Premises, nor any part thereof, shall be sublet to, or offered or advertised for subletting to, or be used or occupied by or permitted to be used or occupied by, anyone other than Tenant. (b) Unless Tenant is an entity the securities of which are registered under appropriate statutory authority and listed and traded on a national securities exchange, the transfer of any portion of the capital stock of Tenant or the issuance, of additional capital stock of Tenant the result of which, in either event, shall be the transfer of control of Tenant to any person or entity not controlling Tenant on the date of this lease shall be deemed an assignment of this lease within the meaning of this Section, and shall not be valid and binding upon Landlord. (c) If Tenant is controlled (directly or indirectly) by a corporation or other business entity, ("Parent"), the securities of which are not registered under appropriate statutory authority and not listed and traded on a national securities exchange or NASDAQ, the transfer of any portion of the capital stock of such Parent or the issuance of additional capital stock of such Parent the result of which, in either event, shall be the transfer of control of such Parent to any person or entity not controlling such Parent on the date of this lease shall be deemed an assignment of this lease within the meaning of this Section, and shall not be valid and binding upon Landlord.* (d) Any transfer by operation of law or otherwise, of Tenant's interest in this lease, shall be deemed an assignment of this lease within the meaning of this Section and shall not be valid and binding upon Landlord. (e) If this lease shall be assigned, whether or not in violation of the provisions of this lease, Landlord may (but need not) collect rent from the assignee. If the Demised Premises or any part thereof be sublet or occupied by anyone other than Tenant, Landlord may (but need not), after default by Tenant and expiration of Tenant's time to cure such default, collect rent from the subtenant or occupant. In either event, Landlord may apply the net amount collected to the rents herein reserved, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, subtenant or occupant as Tenant hereunder, or a release of Tenant from the further performance by Tenant of Tenant's obligations under this Lease. -18- ARTICLE 14 Compliance with Laws 14.01. Notice and Compliance With Laws. Tenant shall give prompt notice to Landlord of any written notice it receives of the violation of any law or requirement of public authority affecting the Demised Premises or the Buildings, and (subject to Section 14.02) at its expense shall comply with all laws and requirements of public authorities which shall, with respect to the Demised Premises or the use or occupancy thereof, or the abatement of any nuisance, impose any violation, order or duty on Landlord or Tenant, arising from (i) Tenant's use of Demised Premises, (ii) breach of any of Tenant's obligations hereunder, (iii) the manner of conduct of any business of Tenant or operation of its installations, equipment or other property in the Demised Premises, or (iv) any cause or condition created by or at the instance of Tenant or its invitees. 14.02. Contest. Tenant may, at its expense (and if necessary, in the name of but without expense to Landlord), contest, by appropriate proceedings prosecuted diligently and in good faith, the validity or applicability to the Demised Premises, of any law or requirement of public authority, and Landlord shall cooperate with Tenant, in such proceedings, provided that: (a) Tenant shall defend, indemnify and hold harmless Landlord against all liability, loss or damage which Landlord shall suffer by reason of such contest (and any non-compliance in connection therewith), including reasonable attorneys' fees and other expenses incurred by Landlord, and shall furnish such bond or other security as may be required pursuant to the requirements of any mortgage affecting the Real Property or Demised Premises; and (b) Tenant shall keep Landlord advised as to the status of such proceedings. Tenant need not comply with any law or requirement of public authority so long as Tenant shall be so contesting the validity or applicability thereof to the Demised Premises in accordance with this Section, provided that (v) noncompliance shall not constitute a crime or an offense on the part of Landlord or any shareholder, member, partner, agent or officer of Landlord punishable by fine or imprisonment, (w) neither Landlord nor any shareholder, member, partner, agent or officer of Landlord shall be subjected to civil complaint, (x) no part of the Buildings shall be in danger of being condemned or vacated by reason of noncompliance or otherwise by reason of such contest, (y) such noncompliance shall not cause either a violation of the Certificate(s) of Occupancy for the Buildings or of any licenses or permits issued for the Buildings or a violation to be noted or issued against the Buildings, and (z) title to the Demised Premises, the Real Property and/or the Buildings is not adversely affected by reason of such contest. -19- ARTICLE 15 Insurance 15.01. Tenant's Requirements. Tenant covenants to provide prior to entry upon the Demised Premises and to keep in full force and effect during the period prior to the commencement of the term during which Tenant shall enter upon and occupy any portion of the Demised Premises for any purpose, and throughout the term of this lease, at its own cost, and with responsible, insurance companies of recognized standing, authorized to do business in the State of New York and approved by Landlord, (i) public liability and property damage insurance, written on an occurrence basis, to afford protection in an amount not less than $2,500,000 combined single limit for personal injury, death and property damage arising out of any one occurrence, protecting Landlord and Tenant against any and all claims for personal injury, death or property damage occurring in, upon or adjacent to the Demised Premises and any part thereof, or arising from, related to, or in any way connected with the conduct and operation of Tenant's use, or occupancy, of the Demised Premises, which insurance shall name Landlord (and, at Landlord's request, Landlord's mortgagees) as additional insureds, (ii) workers' compensation insurance covering all persons employed by Tenant or its contractors in connection with any work performed by or for Tenant, and (iii) plate glass insurance covering exterior plate glass in the Demised Premises, if any. All of Tenant's insurance shall be in form satisfactory to Landlord and shall provide that it shall not be subject to cancellation, termination or change except after at least 30 days' prior written notice to Landlord. All such policies or duly executed certificates for the same (in both instances with satisfactory evidence of the payment of the premium therefor) shall be deposited with Landlord not less than 30 days prior to the day such insurance is required to be in force and upon renewals of said policies not less than 30 days prior to the expiration of the term of such coverage. Landlord shall have the right at any time and from time to time during the term hereof on not less than 30 days notice to Tenant to require that Tenant increase the amount and/or types of coverage required to be maintained under this Article to the amounts and/or types of coverage then generally required of tenants in first class office buildings the New York City metropolitan area. The minimum limits of liability insurance required pursuant to clause (i) of this Section shall in no way limit or diminish Tenant's liability under Section 28.02 hereof. 15.02. Blanket Policies. The insurance required to be provided by Tenant hereunder may be effected by "umbrella" policies. Any such policy or policies shall, as to the Premises, otherwise comply as to endorsements and coverage, with the provisions of this Article. 15.03. Tenant's Compliance. Tenant shall not commit or permit any violation of the casualty and rent insurance policies carried by Landlord, or do or permit anything to be done, or keep or permit anything to be kept, in the Demised Premises, which, in case of any of the foregoing (i) could result, in termination of any of such policies, (ii) could adversely affect Landlord's right of recovery under any such policies, or (iii) would result in reputable and independent insurance companies refusing to insure the Building or property of Landlord therein in amounts reasonably satisfactory to Landlord and its mortgagees, in compliance with the requirements of insurance bodies. If any such action by Tenant, or any failure by Tenant either to comply with the requirements of insurance bodies with respect to the Demised Premises or to perform any of Tenant's obligations hereunder, or any use of the Demised Premises by -20- Tenant (whether or not permitted under Article 9) shall result in the cancellation of any such insurance or an increase in the rate of premiums payable with respect to such policies carried by landlord, Tenant shall indemnify and hold Landlord harmless against any loss which would have been covered by such insurance and reimburse Landlord for the resulting additional premiums which shall thereafter be paid by Landlord. Tenant shall make such reimbursement within 30 days after the receipt of notice from Landlord that such additional premiums have been paid by Landlord, without limiting Landlord's rights under Articles 32, 33 and 34. 15.04. Waiver of Subrogation. Tenant shall procure an appropriate clause in, or endorsement on, each of its policies for fire or extended coverage insurance covering the Demised Premises or the Building or personal property, fixtures or equipment located thereon or therein, pursuant to which the insurance company waives subrogation or consents to a waiver of right of recovery against Landlord, and Tenant hereby agrees that it will not make any claim against or seek to recover from Landlord for any loss or damage to its property or the property of others covered by such fire or extended coverage insurance. To the extent that Tenant shall be a self-insurer with respect to Tenant's Property, Tenant shall and hereby does waive its right of recovery, if any, against Landlord, its agents and employees, for loss, damage or destruction of Tenant's Property. ARTICLE 16 Parking 16.01. Parking. (a) Throughout the term, so long as Tenant shall have performed all of the agreements on Tenant's part to be performed, Landlord shall make available to Tenant the following number of parking spaces, on a non-exclusive basis: two (2) spaces for executive cars marked for Tenant's exclusive use. fifteen (15) spaces for employee cars, which shall be located within the parking lots surrounding the Buildings, unless otherwise provided for herein. If Tenant or its invitees use more than the specified number of spaces set forth above then after five days notice from Landlord, Tenant shall, at the option of Landlord, either (i) pay Landlord's then current charge per month for each additional space used for each month during which such excess use takes place (even if for less than the full month) (as of the date of this lease, Landlord's current monthly charge is $40.00 per space), or (ii) cease and desist immediately from using said additional spaces. If Landlord selects the first of such options, Landlord may revoke such choice on 30 days notice. (b) As necessary, Landlord shall (between 7:00 a.m. and 10:00 p.m. on business days), light, clean, remove snow from and otherwise maintain, the parking area. Tenant shall be responsible for repairing damage to the parking areas caused by Tenant or its invitees. Landlord shall not be obligated to remove snow unless the accumulation exceeds three inches. In no event shall Landlord be obligated to remove snow from areas obstructed by parked vehicles at the time Landlord's equipment is servicing such areas. (c) Tenant shall require its invitees to park only in areas designated by Landlord, and not to obstruct the parking areas of -21- other tenants. Tenant shall, upon request, furnish to Landlord the license numbers of the automobiles operated by Tenant, its executives and other employees. Landlord may use any lawful means to enforce the parking regulations established pursuant to Article 38, including, but not limited to, the towing away of improperly parked or unauthorized cars and pasting of warning notices on car windows and windshields. (d) Landlord may temporarily close any parking area in order to make repairs or changes, to prevent the acquisition of public rights, or to discourage unauthorized parking. Landlord may do such other acts in and to such areas as, in its judgment, may be desirable to improve same. (e) The parking areas for trucks and delivery vehicles in front of loading areas (if any) adjacent to the Buildings are not to be used by Tenant or its invitees, as parking spaces, unless otherwise directed by Landlord. Such loading areas are provided solely for the loading and unloading of Tenant's goods and no vehicles may be parked in such areas longer than necessary, in Landlord's reasonable judgment, for the efficient discharge of such purposes. In no event shall access to any loading area be blocked for more than 15 minutes. (f) Neither Tenant nor its invitees shall park automobiles, trucks or other motor vehicles overnight within the parking areas. ARTICLE 17 Tenant's Changes 17.01. Permitted Changes. After completion of the initial preparation of the Demised Premises as provided for in Article 7, Tenant may, at any time and from time to time during the term of this lease, at its expense, make or have made such other alterations, additions, installations, substitutions, improvements and decorations (hereinafter collectively called "changes" and, as applied to changes provided for in this Article, "Tenant's Changes") in and to the Demised Premises, but not structural alterations additions or changes, as Tenant may reasonably consider necessary for the conduct of its business in the Demised Premises, provided that: (a) the outside appearance of the Building, or the strength of the Building or of any of its exterior walls, supporting beams, columns, floor slabs, foundations or elevator systems is not adversely affected; (b) no Tenant's Changes shall operate to reduce the Rentable Area of the Demised Premises or the value of the Buildings, (c) no Tenant's Changes shall adversely affect (or increase the cost of) any service required to be furnished by Landlord to the Demised Premises or to any other portion of the Buildings; (d) in performing the work involved in making such changes, Tenant shall be bound by and observe all applicable conditions and provisions contained in Sections 7.02(b), 7.03 and 7.04 as if such changes were included in the initial preparation of the Demised Premises; (e) in the case of any Tenant's Changes, other than decorations, Tenant shall give notice to Landlord, including general plans and specifications (if any) for such Tenant's -22- Changes, at least 20 days before the work of making such Tenant's Changes shall commence; (f) if the reasonably anticipated cost of any Tenant's Change or series or group of proposed Tenant's Changes intended to be made at or about the same time shall be $50,000 or more ("Substantial Change"), or if any Tenant's Change shall include a change which under the provisions of the applicable governmental Building Code then in effect requires an alteration permit, Tenant, prior to commencement of such change, shall obtain consent thereto from Landlord; Landlord agrees that its consent shall not be unreasonably withheld, but Tenant agrees that any such consent may be upon condition that upon the expiration or earlier termination of this lease, Tenant shall restore the Demised Premises to the condition in which it would be if the change in respect of which the consent is required had not been made; it is agreed that Landlord shall be deemed to be acting reasonably in refusing to give any such consent if the making of such change would constitute a default under a mortgage encumbering the Land or Building; (g) if because of the nature of any Tenant's Change, compliance with any provisions of a mortgage encumbering the Land or Building is required, Tenant at its own expense, shall comply therewith; and (h) in connection with any Tenant's Changes, Tenant shall, at its own cost and expense, obtain such permits and certificates as shall be required under the applicable governmental Building Code then in effect, and all other permits and certificates of any other governmental authority having jurisdiction over the Building; and (i) at Landlord's option, Tenant shall employ Landlord or an affiliate of Landlord to perform Tenant's Changes, provided Landlord or its affiliates price for such Tenant's Changes is competitive with other licensed (and union if applicable) contractors for similar work in similar buildings in Rockland County. 17.02. Substantial Changes. Each Substantial Change shall be made under the supervision of an architect or engineer selected (and paid) by Tenant and approved by Landlord, which approval shall not be unreasonably withheld. Each Substantial Change shall be made in accordance with detailed plans and specifications prepared by an architect or engineer designated (and paid) by Tenant and approved by Landlord, such approval not to be unreasonably withheld. Copies of all such plans and specifications shall be delivered by Tenant to Landlord, and shall be subject to the advance approval of Landlord, which approval shall not be unreasonably withheld. If any plans and/or specifications are prepared in connection with any Tenant's Change, Tenant shall furnish copies thereof to Landlord. 17.03. Substantial Changes in Excess of $100,000. If the estimated cost of any proposed Tenant's Change shall be $100,000 or more or if the estimated aggregate cost of any series or group of proposed Tenant's Changes intended to be made at or about the same time shall be $100,000 or more, Tenant shall, at its sole cost and expense and before commencing same, furnish to Landlord (and the holder of any mortgage affecting the Land or Building, if therein required) (i) a surety company bond, issued by a surety company approved by Landlord, which approval shall not -23- be unreasonably withheld (and the holder of any such mortgage where required), in an amount at least equal to the estimated cost of such change, or the estimated collective cost of such group of permitted changes, as the case may be, or (ii) other security satisfactory to Landlord (and the holder of any such mortgage where required), in each case guaranteeing to Landlord (and the holder of any such mortgage where required) the fully paid completion of the proposed change, or proposed permitted changes, as the case may be, within a reasonable time, free and clear of all liens, encumbrances, chattel mortgages, conditional bills of sale and other claims and charges, and in accordance with any plans and specifications therefor approved by Landlord (and the Holder of any such mortgage where required). 17.04. Restricted Changes. Except as provided in this Article, Tenant shall not have any right to make any changes in the Demised Premises without the prior consent of Landlord. ARTICLE 18 Tenant's Property 18.01. Tenant's Property. Tenant's Property shall be and shall remain the property of Tenant, may be removed by it at any time during the term of this lease so long as Tenant shall not be in default hereunder and shall be in possession of the Demised Premises. Tenant shall repair or pay the cost of repairing any damage to the Demised Premises or to the Buildings resulting from such removal. 18.02. Abandonment of Tenant's Property. Any of Tenant's Property which shall remain in the Demised Premises following the expiration or earlier termination of the term of this lease and the removal of Tenant from the Demised Premises, may, at the option of Landlord, be deemed to have been abandoned and ether may be retained by Landlord as its property or be disposed of by Landlord at Tenant's expense, without accountability to Tenant, in such manner as Landlord may see fit, subject to the reimbursement provisions of Section 18.05. Tenant's failure to remove any of Tenant's Property from the Demised Premises after the expiration or earlier termination of the term of this lease shall not be construed to create a holding over by Tenant. 18.03. Leasehold Improvements. All leasehold improvements at any time constructed or installed in the Demised Premises, except as hereinafter otherwise provided, shall remain in the Demised Premises upon the expiration or sooner termination of the term of this lease. All leasehold improvements which Tenant is required to remove under the following sentence, shall be removed by Tenant without damage to the Demised Premises and Buildings and in the event any damage is caused by such removal, the damage shall be repaired by Tenant at Tenant's expense. If any alteration which shall require the Landlord's consent or approval is an item which is not a customary leasehold improvement, such as (for illustrative purposes only) a -24- raised computer floor, supplemental HVAC system, private elevator, vault, internal stairway or private lavatory, then unless Landlord shall give written notice to Tenant to the contrary at the time it grants consent or approval for the alteration, Landlord will require removal of said alteration by Tenant at the expiration or sooner termination of the term of this lease. 18.04. End of Term. Upon the expiration or sooner termination of the term of this lease, Tenant shall quit and surrender possession of the Premises, broom clean and dry, in good order and condition, ordinary wear and tear excepted, and Tenant shall remove Tenant's Property from the Premises and repair any damage caused by such removal. All leasehold improvements which Tenant is required to remove shall be removed by Tenant, and any damage caused by such removal shall be repaired by Tenant at Tenant's expense. 18.05. Removal by Landlord. In the event Tenant fails to (i) remove any item of Tenant's Property or any leasehold improvement or alteration it is required to remove, or (ii) repair damage caused by such removal, then Landlord may effect such removal and repair, and Tenant shall pay Landlord's costs for such removal and repair, such obligation to survive the expiration or sooner termination of the term of this lease. ARTICLE 19 Tenant's Repairs 19.01. Tenant's Required Repairs. Tenant shall, at its own expense, take good care of the Demised Premises, and shall be responsible for replacement of all fluorescent tubes, starters and light bulbs installed in the Demised Premises. Tenant, at its expense shall make all repairs, including structural repairs, in the Demised Premises and the Buildings as shall be required by reason of the negligence or other improper conduct of Tenant or its invitees. In addition to the foregoing, Tenant shall, at Tenant's expense, keep in good order and condition all installations, alterations and additions in the Demised Premises comprising Tenant's Property (including Tenant's pneumatic tubes, conveyors, mail chutes and air-conditioning equipment installed by or at the expense of Tenant) and make all repairs thereto, ordinary or extraordinary, structural or otherwise, foreseen or unforeseen, as from time to time may be necessary, whether or not such repairs are or shall be made necessary by reason of fault or neglect on the part of Tenant 19.02. Windows. Tenant shall not clean the exterior side of any window in the Demised Premises or require, permit or allow it to be cleaned, from the outside, in violation of any law or requirement of public authority. 19.03. Damage to Building. -25- All damage to the Buildings caused by Tenant in moving property into or out of the Building or in installing or removing furniture, equipment or fixtures shall promptly be repaired by Tenant at its expense. If Tenant permits consumption of food in the Demised Premises, Tenant, at its expense, shall employ the regular services of an exterminator to keep the Demised Premises and Buildings free of vermin occasioned by such consumption. ARTICLE 20 Landlord's Repairs, Maintenance, Cleaning 20.01. Landlord's Obligations. Landlord, at its expense, shall keep and maintain the Building and its fixtures, appurtenances, systems and facilities, in working order, condition and repair and shall make all repairs, structural and otherwise, interior and exterior, as and when needed in or about the Demised Premises, except for items installed by or for Tenant at Tenant's expense and except for those repairs for which Tenant is expressly responsible pursuant to any other provisions of this lease. 20.02. Cleaning. (a) Provided that Tenant shall keep the Demised Premises in good order, Landlord shall cause the Demised Premises to be cleaned in accordance with the provisions of the Cleaning Specifications annexed hereto and made part hereof. Tenant shall provide Landlord with unrestricted access to the interior of all windows within the Demised Premises, as a condition precedent to Landlord's obligation to clean same. (b) Tenant shall pay to Landlord, within 30 days after demand, the costs and expenses incurred by Landlord as a result of (i) cleaning performed by or for the account of Landlord in the Demised Premises, the Buildings or on the Land, necessitated by (v) misuse or neglect on the part of Tenant or its invitees, use of any portion of the Demised Premises for preparation, serving or consumption of food or beverages, reproducing operations, private lavatories or other special purposes requiring greater or more difficult cleaning work than that normally associated with office areas, (x) interior glass surfaces, (y) non-building standard materials or finishes installed by Tenant or at its request, or (z) increases in frequency or scope of any of the items set forth in the Cleaning Specifications as shall have been requested by Tenant and provided by Landlord, and (ii) removal from the Demised Premises, the Buildings or Land of (y) so much of any refuse and rubbish of Tenant as shall exceed that normally accumulated daily in the routine or ordinary business office occupancy or (z) all of the refuse and rubbish of Tenant's machines and eating facilities requiring special handling. Tenant shall provide Landlord, its contractors and their employees with free access to the Demised Premises during hours other than regular business hours, together with the use of Tenant's lights, electricity and water, all as may be required for the purpose of cleaning the Demised Premises. 20.03. Extraordinary Refuse. Extraordinary waste (such as crates, cartons, boxes and used furniture and equipment) shall be removed from the Buildings by -26- Landlord, at Tenant's cost and expense. At no time shall Tenant place any waste of any kind in any public area. Anything placed in a public area by Tenant shall be deemed abandoned and of no value to Tenant, and Landlord may have same removed and disposed of, and the cost thereof shall be paid by Tenant to Landlord, within 30 days after submission of a statement therefor, without limiting Landlord's rights under Articles 32, 33 and 34. 20.04. Quality of Repairs. All repairs to be made by Tenant pursuant to this lease shall be of first-class quality and workmanship. If Tenant shall fail to commence any required repairs within a reasonable time, or in any event within ten days after service of a notice by Landlord requesting such repairs, or after commencing such repairs shall fail to complete them with reasonable diligence, Landlord may (but shall not be obliged to) make or complete such repairs at the expense of Tenant. 20.05. Required Changes. If at any time during the term of this lease there is imposed upon Landlord by any governmental authority having jurisdiction, any obligation or requirement to perform any structural or non-structural alteration, change or improvement (collectively, "changes") to the Buildings which changes are not required to be performed by Tenant pursuant to any provision of this lease, Tenant shall pay to Landlord, as additional rent, Tenant's Proportionate Share of all costs and expenses incurred by Landlord in performing such changes. Such payment by Tenant shall be due to Landlord within 30 days after rendition of a bill therefor, accompanied by a statement setting forth the changes performed by Landlord. ARTICLE 21 Electricity 21.01. General. (a) Electricity shall be supplied to the Demised Premises during the term in accordance with the provisions of paragraph 21.02 of this Article. However, at any time and from time to time during the term hereof, provided it is then permissible under the provisions of laws and requirements of public authorities, Landlord shall have the option to have electricity supplied to the Demised Premises in accordance with either paragraph 21.03 or 21.04 of this Article. (b) For the purposes of this Article: (i) The term "Electric Rate" shall mean the greater of either: (a) the Service Classification pursuant to which Landlord purchases electricity from the utility company servicing the Building, or (b) the Service Classification pursuant to which Tenant would purchase electricity directly from the utility company servicing the Building, provided, however, at no time shall the amount payable by Tenant for electricity be less than Landlord's Cost per Kilowatt and Cost -27- per Kilowatt Hour (as such terms are hereinafter defined), and provided further that in any event, the Electric Rate shall include all applicable surcharges, and demand, energy, fuel adjustment and time of day charges (if any), taxes and other sums payable in respect thereof. (ii) The term "Cost per Kilowatt Hour" shall mean the total cost for electricity incurred by Landlord to service the Building during a particular time period (including all applicable surcharges, and energy, fuel adjustment and time of day charges (if any), taxes and other sums payable in respect thereof) divided by the total kilowatt hours purchased by Landlord during such period. (iii) The term "Cost per Kilowatt" shall mean the total cost for demand incurred by Landlord to service the Building during a particular time period (including all applicable surcharges, demand, and time of day charges (if any), taxes and other sums payable in respect to thereof) divided by the total kilowatts purchased by Landlord during such period. 21.02. Rent Inclusion. Landlord shall redistribute or furnish electricity to the Demised Premises on a "rent inclusion" basis in such reasonable quantities as may be required by Tenant to service Tenant's ordinary office equipment installed in the Demised Premises as of the Commencement Date. Tenant shall pay to Landlord, on account, the annual sum of $1.50 per square foot of Rentable Area, which sum is included in the fixed rent as set forth in Article 3.01(a) ("Electric Rent"). At any time during the term, Landlord, at Tenant's sole cost and expense, may cause an independent electrical engineer or electrical consulting firm selected by Landlord (hereinafter referred to as the "Engineer") to make a survey of Tenant's electrical equipment located in the Demised Premises, and the use thereof, to determine if the full value of electricity furnished to the Demised Premises exceeds the Electric Rent. If the value of such electricity (applying the Electric Rate to Tenant's usage) exceeds the Electric Rent, Landlord shall furnish a copy of said survey to Tenant and Landlord shall adjust the Electric Rent and fixed rent in accordance with the survey and the Electric Rate, or Cost per Kilowatt and cost per Kilowatt Hour in effect on the date hereof, as adjusted in accordance with Section 21.02 (iii) below. (ii) if, on the Commencement Date or at any time during the term, Tenant desires to install in the Demised Premises equipment which would not be considered ordinary office equipment, including, but not limited to, items such as supplemental air-conditioning systems, or other heat or cooling intensive electrically operated equipment, Tenant shall submit to Landlord a list indicating the specific type of additional equipment, and the number, type and model of each item of equipment to be installed, as well as the manufacturer's electrical rating associated with same. If Landlord consents to the installation of such additional equipment, Landlord, at Tenant's cost and expense, subsequent to or simultaneously with the installation thereof, may either (a) cause the Engineer to make a survey of such additional equipment in accordance with the provisions of Section 21.02(i) hereof, or (b) at Tenant's cost, install a submeter to record Tenant's consumption of and demand for electricity within the Demised Premises and in that event the provisions of Section 21.03 below shall apply.* (iii) If, at any time or times after the execution of this lease, the electric rate as published by the electric utility company servicing the Demised Premises ("Electric Schedule") shall -28- be increased or decreased, then commencing with the Commencement Date and from time to time thereafter, the fixed rent and the Electric Rent shall be increased or decreased, as the case may be, by the percentage increase or decrease in the Electric Schedule. Notwithstanding anything herein to the contrary, under no circumstances shall the Electric Rent be less than the amount set forth in Section 21.02(i) hereof. 21.03. Submetering. (i) Landlord may supply electricity to service the Demised Premises on a submetered basis, and Tenant in such event shall pay to Landlord, as additional rent, the sum of (y) an amount determined by applying the Electric Rate or, at Landlord's election, the Cost per Kilowatt Hour and Cost per Kilowatt, to Tenant's consumption of and demand for electricity within the Demised Premises as recorded on the submeter or submeters servicing the Demised Premises, and (z) Landlord's administrative charge of 12% of the amount referred to in clause (y) above, if and to the extent same is permitted by laws and requirements of public authorities (such combined sum being hereinafter called "Submeter Electric Rent"). Except as set forth in the foregoing clause (z), Landlord will not charge Tenant more than the Electric Rate or, at Landlord's election, the Cost per Kilowatt and Cost per Kilowatt Hour for the electricity provided pursuant to this paragraph. If, pursuant to paragraph (a) hereof, Landlord shall have elected to supply electricity to the Demised Premises in accordance with this paragraph, the fixed rent shall be decreased by the Electric Rent. At Landlord's request, Tenant agrees to execute a supplementary agreement modifying this lease to reflect the changes in the fixed rent resulting from such election. (ii) Where more than one submeter measures the electric service to Tenant, the electric service rendered through each submeter shall be computed and billed separately in accordance with the provisions hereinabove set forth. (iii) Tenant shall pay to Landlord, on account of the Submeter Electric Rent payable pursuant to this Section 21.03, the annual sum of $1.50 per square foot of Rentable Area ("Estimated Submeter Electric Rent"), subject to the adjustments on the first day of each and every calendar month of the term (except that if the first day of the term is other than the first day of a calendar month, the first monthly installment, prorated to the end of said calendar month, shall be payable on the first day of the first full calendar month). (iv) From time to time during the term, the Estimated Submeter Electric Rent may be adjusted by Landlord on the basis of either Landlord's reasonable estimate of Tenant's electric consumption and demand (if at any time the submeter(s) servicing the Demised Premises are inoperative) or Tenant's actual consumption of and demand for electricity as recorded on the submeter(s) servicing the Demised Premises, and, in either event, the Electric Rate or Cost per Kilowatt and Cost per Kilowatt Hour then in effect. (V) Subsequent to the end of each calendar year during the term of this lease, or more frequently if Landlord shall elect, Landlord shall submit to Tenant a statement of the Electric Submeter Rent for such year or shorter period together with the components thereof, as set forth in clause (i) of this Section 21.03 ("Submetered Electric Statement"). To the extent that the Estimated Submeter Electric Rent paid by Tenant for the period covered by the Submetered Electric Statement shall be less than the Submeter Electric Rent as set forth on such Submeter Electric Statement, Tenant shall pay Landlord the difference within 30 days -29- after receipt of the Submeter Electric Statement. If the Estimated Submeter Electric Rent paid by Tenant for the period covered by the Submeter Electric Statement shall be greater than the Submeter Electric Rent as set forth on the Submeter Electric Statement, such difference shall be credited against the next required payment(s) of Estimated Submeter Electric Rent. If no Estimated Submeter Electric Rent payment(s) shall thereafter be due, Landlord shall pay such difference to Tenant. (vi) For any period during which the submeter(s) servicing the premises are inoperative, the Submeter Electric Rent shall be determined by Landlord, based upon its reasonable estimate of Tenant's actual consumption of and demand for electricity, and the Electric Rate or Cost per Kilowatt and Cost per Kilowatt Hour then in effect. 21.04. Direct Meter. If Landlord discontinues furnishing electricity to the Demised Premises pursuant to Sections 21.02 or 21.03, Tenant shall make its own arrangements to obtain electricity directly from the utility company furnishing electricity to the Building. The cost of such service shall be paid by Tenant directly to such utility company. Landlord shall permit its electric feeders, risers and wiring serving the Demised Premises to be used by Tenant, to the extent available, safe and capable of being used for such purpose. All meters and all additional panel boards, feeders, risers, wiring and other conductors and equipment which may be required to enable Tenant to obtain electricity of substantially the same quality and character, shall be installed by Landlord at Tenant's cost and expense. 21.05. Landlord's Statements and Bills. (a) Bills for electricity supplied pursuant to Sections 21.02 and 21.03 shall be rendered to Tenant at such times as Landlord may elect. Tenant's payments for electricity supplied in accordance with Sections 21.02 and 21.03 shall be due and payable within 30 days after delivery of a statement therefor, by Landlord to Tenant. If such bills are not paid within 30 days after the same are rendered, Landlord may, without further notice, discontinue the service of electricity to the Demised Premises without releasing Tenant from any liability under this lease and without Landlord or Landlord's agents incurring any liability for any damage or loss sustained by Tenant as the result of such discontinuance. If any tax is imposed upon Landlord's receipts from the sale of electricity to Tenant by laws and requirements of public authorities, Tenant agrees that, unless prohibited by such laws and requirements of public authorities, Tenant's Proportionate Share of such taxes shall be included in the bills of, and paid by Tenant to Landlord, as additional rent. (b) Landlord's failure during the term to prepare and deliver any statements or bills under this Article, or Landlord's failure to make a demand under this Article, shall not in any way be deemed to be a waiver of, or cause Landlord to forfeit or surrender, its rights to collect any amount of additional rent which may become due pursuant to this Article. Tenant's liability for any amounts due under this Article shall survive the expiration or sooner termination of the term. (c) Tenant's failure or refusal, for any reason, to utilize the electrical energy provided by Landlord, shall not entitle Tenant to any abatement or diminution of fixed rent or additional rent, or otherwise relieve Tenant from any of its obligations under this lease. -30- 21.06. Change of Service. If either the quantity or character of the electrical service is changed by the utility company supplying electrical service to the Building or is no longer available or suitable for Tenant's requirements, or if there shall be a change, interruption or termination of electrical service due to a failure or defect on the part of the utility company, no such change, unavailability, unsuitability, failure or defect shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any payment from Landlord for any loss, damage or expense, or to abatement or diminution of fixed rent or additional rent, or otherwise relieve Tenant from any of its obligations under this lease, or impose any obligation upon Landlord or its agents. Landlord will use reasonable efforts to insure that there is no interruption in electrical service to Tenant, but in no event shall Landlord be responsible for any failures of the utility providing such service or the negligence or other acts of third parties causing any such interruption. 21.07. Additional Installations. (a) Tenant, shall not make any electrical installations, alterations, additions or changes to the electrical equipment or appliances in the Demised Premises without prior written consent of Landlord in each such instance. Tenant shall comply with the rules and regulations applicable to the service, equipment, wiring and requirement of Landlord and of the utility company supplying electricity to the Building. Tenant agrees that its use of electricity in the Demised Premises will not exceed the capacity of existing feeders to the Building or the risers or wiring installations therein and Tenant shall not use any electrical equipment which, in Landlord's judgment, will overload such installations or interfere with the use thereof by other tenants in the Building. If, in Landlord's judgment, Tenant's electrical requirements necessitate installation of an additional riser, risers or other proper and necessary equipment or services, including additional ventilating or air-conditioning, the same shall be provided or installed by Landlord at Tenant's expense, which shall be chargeable and collectible as additional rent and paid within 10 days after the rendition to Tenant of a bill therefor. (b) If, after Landlord's initial installation work, (i) Tenant shall request the installation of additional risers, feeders or other equipment or service to supply its electrical requirements and Landlord shall determine that the same are necessary and will not cause damage or injury to the Building or the Demised Premises or 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 of the Building, or (ii) Landlord shall determine that the installation of additional risers, feeders or other equipment or service to supply Tenant's electrical requirements is necessary, then and in either of such events Landlord shall cause such installations to be made, at Tenant's sole cost and expense and Tenant shall pay Landlord for such installations, as additional rent, within 30 days after submission of a statement therefor. -31- ARTICLE 22 Heat, Ventilation and Air-Conditioning 22.01. Access and Repair. Landlord shall have free and unrestricted access to any and all heating, air-conditioning and ventilating equipment in the Demised Premises. The cost of maintaining said systems shall, except to the extent set forth in this Section and in Section 22.02, be deemed an Operating Expense. Any damage caused to the heating, air-conditioning and ventilating equipment, appliances or appurtenances as a result of the negligence of, or careless operation of the same by Tenant or its invitees, shall be repaired by Landlord and the cost and expense thereof shall be paid by Tenant, as additional rent, within 30 days after submission of a statement therefor, without limiting Landlord's rights under Articles 32, 33 and 34. Landlord shall have no maintenance or repair obligation as to heating, ventilating or air conditioning equipment installed by, or at the expense or direction of, Tenant. 22.02. Tenant's Requirements. Landlord will not be responsible for the failure of the air-conditioning system to meet its maximum performance specifications prior to the proper balancing of the systems, or, if such failure results from the occupancy of the Demised Premises by more than an average of 1 person for each 150 square feet of Tenant's Rentable Area or if Tenant installs and operates machines and appliances the installed electrical load of which when combined with the load of all lighting fixtures exceeds 4 watts per square foot of Tenant's Rentable Area in any one room or other area. If the use of the Demised Premises in a manner exceeding the aforementioned occupancy and electrical load criteria, or the rearrangement, or partitioning after the initial preparation, of the Demised Premises, results in the interference with the normal operation of the air-conditioning in the Demised Premises, and as a result thereof changes in the air-condition system servicing the Demised Premises are needed, such changes shall be made by Landlord, at Tenant's request and at Tenant's expense, and shall be paid within 30 days after submission of a statement therefor. 22.03. Additional Tenant Requirements. Tenant shall keep all windows closed and lower and close window coverings when necessary because of the sun's position. Tenant agrees to cooperate fully with Landlord and to comply with all regulations and requirements Landlord may establish for the proper functioning and protection of the heating, air-conditioning and ventilating systems. ARTICLE 23 Landlord's Other Services 23.01. Elevators. Landlord shall provide Tenant, in common with other tenants in the Building, passenger elevator service. If Landlord shall be obliged to repair, maintain or replace such elevators by reason of the negligence or other improper conduct of Tenant or its invitees, such work shall be performed at Tenant's expense; Tenant shall pay for such work, within 30 days after submission of a statement therefor, without limiting Landlord's rights under Articles 32, 33 and 34. -32- 23.02. Interruption of Services. Landlord reserves the right, without any liability to Tenant, to interrupt, curtail, suspend or stop any of Landlord's services to Tenant or the Demised Premises (including heat, ventilation, elevators, and water and such other services as may hereafter be undertaken by Landlord for Tenant) at such times as may be necessary, and for so long as may be reasonably required, by reason of the making of repairs or changes which Landlord is retired by this lease to make or in good faith deems necessary. In each such case Landlord shall exercise reasonable diligence to effect restoration of service and shall give Tenant reasonable notice, when practicable, of the commencement and anticipated duration of such interruption, curtailment, suspension or stoppage of any of Landlord's services. Before commencing any work require in connection with the foregoing, or any other work or repairs in the Demised Premises which would interfere with Tenant's use thereof, Landlord shall endeavor to notify Tenant of the need or and nature of the work and repairs and the manner in which and the length of time for which such work or the making of such repairs will affect the Demised Premises. Such notice with respect to the making of emergency repairs shall, if time permits, be given by telephone or in person to such representative of Tenant at the Demised Premises as Tenant may have designated to receive such notice. Except in the event of an emergency, Tenant may require Landlord to perform such work or make such repairs after Tenant's business hours if they would otherwise create a material interference with Tenant's use of the Demised Premises and can properly be accomplished at such time provided however, that if Landlord shall thereby incur any additional expense by reason of overtime work, Tenant shall reimburse Landlord for the amount thereof within 30 days after submission of a statement therefor. ARTICLE 24 Tenant's Access 24.01. Tenant's Access to Demised Premises. During the term of this lease Tenant may conduct its business in the Demised Premises on such days and hours as it may determine, and Tenant and its invitees at all times shall have access to the Demised Premises by means of doorways, passageways, corridors, stairways, elevators, entrances and service entrances in the Building selected by Landlord and affording access to the Demised Premises. Notwithstanding the foregoing, Landlord may, during times other than regular business hours and regular business days, limit or restrict access to the Building and Demised Premises to all persons other than Tenant and employees and invitees specifically designated to Landlord by Tenant. Rules and procedures to be followed in order to gain access to the Building and Demised Premises may, from time to time, be established and amended by Landlord, and shall be complied with by Tenant, its employees and invitees. ARTICLE 25 Landlord's Access 25.01. Lines Throuqh Demised Premises. Tenant shall permit Landlord to install, use and maintain -33- additional utility and other pipes, ducts, lines, flues and conduit in the Demised Premises, provided: (a) such installations shall be so located as to cause the least possible interference with the Tenant's use of the Demised Premises and the conduct of its operations therein, materially shall not unreasonably damage the appearance or materially reduce the floor area of the Demised Premises or affect Tenant's layout, in each case consistent with requirements of any laws and requirements of public authorities and insurance bodies if such installation is required by the aforesaid public authorities or insurance bodies; (b) the installation shall be performed at such times and in such manner as to create the least practicable interference with Tenant's use of the Demised Premises and the conduct of its operations therein; and (c) Landlord shall repair and restore all damage caused by such installations. Where access doors are required for mechanical equipment in or adjacent to the Demised Premises, Landlord shall furnish and install such access doors and confine their location, wherever practicable, to closets, coat rooms, toilet rooms, corridors and kitchen or pantry rooms. Landlord and Tenant will cooperate with each other in the location of Landlord's and Tenant's facilities requiring such access doors. 25.02. Access to Demised Premises. Landlord and/or Landlord's agents shall have the right, upon request made to Tenant, or to a designated representative of Tenant at the Demised Premises, to enter and pass through the Demised Premises or any part or parts thereof during business hours (i) to examine the Demised Premises and to show them to the lessors of underlying or ground leases or mortgagees and to prospective purchasers, mortgagees or lessees of the Real Property, and (ii) for the purpose of performing such maintenance and making such repairs or changes in or to the Demised Premises or in or to the Building or its facilities as may be provided for or permitted by this lease or deemed necessary by Landlord for the benefit of the Demised Premises or other portions of the Building or as may be mutually agreed upon by the parties or as Landlord may be required to make by laws and requirements of public authorities. Landlord shall be allowed to take all materials into and upon the Demised Premises that may be required for such repairs, changes or maintenance, without being deemed thereby to evict Tenant from the whole or any part of the Demised Premises. Landlord's rights under this Section shall be exercised in such manner (not involving any overtime expenses, unless Tenant shall agree to reimburse Landlord for such expenses as additional rent) as to create the least practicable interference with Tenant's normal conduct of its business in the Demised Premises. 25.03. Access Upon Emergency. Landlord shall also have the right to enter on and pass through the Demised Premises, or any part thereof, at such times as such entry shall be required by emergency circumstances affecting the Demised Premises or the Building. In such event, if practicable, Landlord or its agents shall be accompanied by a designated representative of Tenant or a member of the police, fire, water or other municipal department concerned or of a recognized protection company or of a public utility which is concerned. -34- 25.04. Access During Twelve Months. During the period of 12 months prior to the Expiration Date, Landlord may exhibit the Demised Premises to prospective tenants, during regular business hours, upon prior notification to Tenant. ARTICLE 26 Shoring 26.01. Access for Protection. If an excavation or other substructure work shall be undertaken or authorized upon land adjacent to the Building or beneath the Building, Tenant, without liability on the part of Landlord, shall afford to the person causing or authorized to cause such excavation or other substructure work license to enter upon the Demised Premises for the purpose of doing such work as such person shall deem to be reasonably necessary to protect or preserve any of the walls or structures of the Building or surrounding lands from injury or damage and to support the same by proper foundations, pinning and/or underpinning, provided that such entry (except in the event of an emergency) shall be accomplished in the presence of a representative of Tenant, who shall be designated by Tenant promptly upon Landlord's request. The said license to enter the Demised Premises shall be granted by Tenant without any claim for damages or indemnity against Landlord, and Tenant shall not be entitled to any diminution of rent on account therefor. ARTICLE 27 Notice of Accidents, Fire, Damage and Defects 27.01. Notice to Landlord. Tenant shall give prompt notice to Landlord of any of the following of which Tenant shall have knowledge: (i) any accident in or about the Demised Premises or the Building for which Landlord might be liable, (ii) all fires in the Demised Premises, and (iii) all damage to, or defects in, the Demised Premises (including the fixtures, equipment and appurtenances constituting part thereof), or in any parts or appurtenances of the Building's sanitary, electrical, heating, ventilating, air-conditioning, elevator and other systems located in or passing through the Demised Premises or any part thereof. ARTICLE 28 Landlord Not Liable, Indemnity and Exculpation 28.01. No Liability of Landlord. Except for the negligence of Landlord, its agents or employees, Landlord and its agents shall not be liable for any damage to property of Tenant or others entrusted to employees of the Buildings, nor for the loss of or damage to any property of Tenant by theft or otherwise. Except for the negligence of Landlord, its agents or employees, Landlord and its agents shall -35- not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain or snow which may leak from any part of the Buildings or from the pipes, appliances or plumbing works of the same, or from any other place, or from dampness or any other cause of whatsoever nature; nor shall Landlord or its agents be liable for any such damage caused by other tenants or persons in, upon or about said Buildings, or caused by operations in construction of any public or quasi-public work; nor shall Landlord be liable for any latent defect in the Buildings or Premises. If at any time any windows of the Demised Premises are temporarily or permanently closed, or bricked up for any reason whatsoever, Landlord shall not be liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensation therefor nor abatement of rent nor shall the same release Tenant from its obligations hereunder nor constitute an eviction. 28.02. Tenant's Indemnification. Tenant shall defend, indemnify and save harmless Landlord and its agents and employees against and from all liabilities, obligations, damages, penalties, claims, costs, charges and expenses, including reasonable attorneys' fees, which may be imposed upon or incurred by or asserted against Landlord and/or its agents or employees by reason of any of the following occurring during the term, or during any period of time prior to the Commencement Date that Tenant may have acquired or been given access to or possession of all or any part of the Demised Premises: (i) any work or thing done in, on or about the Demised Premises or any part thereof by or at the instance of Tenant, or any of its invitees, (ii) any negligent or otherwise wrongful act or omission on the part of Tenant or any of its invitees, (iii) any accident, injury or damage to any person or property occurring in, on or about the Demised Premises or any part thereof, or vault, passageway or space adjacent thereto caused by the negligence of Tenant or any of its invitees, and (iv) any failure on the part of Tenant to perform or comply with any of the covenants, agreements, terms, provisions, conditions or limitations contained in this lease on its part to be performed or complied with. In case any action or proceeding is brought against Landlord by reason of any such claim, Tenant upon notice from Landlord shall, at Tenant's expense, resist or defend such action or proceeding by counsel approved by Landlord, which approval Landlord shall not unreasonably withhold. Counsel selected by Tenant's insurance companies shall be deemed approved by Landlord. 28.03. Exculpation, Tenant shall look solely to the estate and interest of Landlord, its successors and assigns, in the Building for the collection of any judgment (or other judicial process) recovered against Landlord based upon the breach by Landlord of any of the terms, conditions or covenants of this lease on the part of Landlord to be performed, and no other property or assets of Landlord shall be subject to levy, execution or other enforcement procedures for the satisfaction of Tenant's remedies under or with respect to either this lease, the relationship of landlord and tenant hereunder, or Tenant's use and occupancy of the Demised Premises. -36- ARTICLE 29 Destruction or Damage 29.01. Notice and Repair Obligation Tenant sha11 give prompt notice to Landlord in case of fire or other casualty in or about the Demised Premises. If the Demised Premises and/or access thereto shall be partially or totally damaged or destroyed by fire or other casualty, then, Landlord shall, subject to its rights as set forth in Section 29.03, repair the damage and restore and rebuild the Demised Premises and/or access thereto as nearly as may be reasonably practical to its condition and character immediately prior to such damage or destruction, with reasonable diligence after notice to it of the damage or destruction, which repair and restoration shall be limited to the extent of insurance proceeds received, subject to unavoidable delays and delays in the adjustment of insurance claims. In no event shall Landlord be required to repair or replace Tenant's furnishings, decorations and other moveable items in the Premises, or personal property of any type belonging to Tenant. Unless Landlord shall terminate this lease in accordance with Section 29.03, Tenant shall cooperate with Landlord's restoration by removing from the Premises as promptly as possible, all of Tenant's salvageable inventory and movable equipments, furniture and other property. 29.02. Abatement of Rent. If the Demised Premises and/or access thereto shall be partially or totally damaged or destroyed by fire or other casualty not attributable to the fault, negligence or misuse of the Demised Premises or the Buildings by the Tenant or its invitees, the rents payable hereunder shall be abated to the extent that the Demised Premises shall have been rendered untenantable, from the date of such damage or destruction to the date the damage shall be substantially repaired. Should Tenant reoccupy a portion of the Demised Premises during the period that the repair is in progress and prior to the date that the same are made completely tenantable, rents allocable to such portion shall be payable by Tenant from the date of such occupancy to the date the Demised Premises are made tenantable. 29.03. Termination Rights. In case the Demised Premises shall be rendered wholly unusable by reason of fire or other casualty or if the Building shall be so damaged by fire or other casualty that substantial renovation, reconstruction or demolition of the Building shall, in Landlord's opinion, be required (whether or not the Demised Premises shall leave been damaged by such fire or other casualty), or in the event Landlord's mortgagee(s) shall make claim to the proceeds of the casualty insurance maintained by Landlord, then Landlord may, at its option, terminate this lease and the term and estate hereby granted, by notifying Tenant of such termination, within 120 days after the date of such damage; such termination date shall be not more than 60 days after the giving of such notice. If at any time prior to Landlord giving Tenant the aforesaid notice of termination or commencing the repair and restoration pursuant to Section 29.01, the holder of a mortgage or the lessor of a superior lease or any person claiming under or through the holder of such mortgage or the lessor of such lease takes possession of the Building through foreclosure or otherwise, such holder or lessor shall have a further period of 60 days from the date of taking possession to terminate this lease by appropriate notice to Tenant. Nothing contained in this Section shall relieve Tenant from any liability to Landlord in connection with any damage to the Demised Premises or the Buildings by fire -37- or other casualty if Tenant shall be legally liable in such respect. 29.04. Termination Upon Casualty. In the event of the termination of this lease pursuant to the provisions of this Article, this lease shall expire as fully and completely on the date fixed in such notice of termination as if that were the date definitely fixed for the expiration of this lease, and Tenant shall forthwith quit, surrender and vacate the Premises without prejudice, however, to Landlord's rights and remedies against Tenant under the lease provisions in effect prior to such termination. Any rent owing shall be paid up to such date, and any payments of rent made by Tenant which were on account of any period subsequent to such date shall be returned to Tenant 29.05. Non-Liability of Landlord. No damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Demised Premises or of the Buildings pursuant to this Article. Landlord shall use its best efforts to effect such repair or restoration promptly and in such manner as not to interfere unreasonably with Tenant's use and occupancy. 29.06. Insurance on Tenant's Property. Landlord will not carry insurance of any kind on Tenant's Property or on any work in excess of building standard work and shall not be obligated to repair any damage thereto or replace the same. For purposes of this Article the term casualty damage, to the extent Landlord is responsible under this Article, shall not be deemed to include damage caused by vandalism, unknown cause or other act not normally covered under fire and extended coverage insurance policies applicable to office buildings in the New York City metropolitan area. 29.07. Waiver of Statutory Protection. The provisions of this Article shall be considered an express agreement governing any case of damage or destruction of the Demised Premises by fire or other casualty, and Section 227 of the Real Property Law, providing for such a contingency in the absence of an express agreement, and any other law of like import, now or hereafter in force, shall have no application in such case. 29.08. Uncollectibility of Insurance. Notwithstanding any of the foregoing provisions of this Article, if Landlord or the lessor of any underlying lease or the holder of any mortgage shall be unable to collect all of the insurance proceeds (including rent insurance proceeds) applicable to damage or destruction of the Demised Premises or the Buildings by fire or other cause, by reason of some action or inaction on the part of Tenant, or any of its invitees, then without prejudice to any other remedies which may be available against Tenant, the abatement of Tenant's rent provided for in Section 29.02 shall not be effective to the extent of the uncollected insurance proceeds. -38- ARTICLE 30 Condemnation 30.01. Landlord's Rights to Award. In the event that the Real Property or any part thereof, shall be taken in condemnation proceedings or by the exercise or any right of eminent domain or by agreement between any superior lessors and lessees and/or Landlord on the one hand and any governmental authority authorized to exercise such right on the other hand (collectively a "taking"), Landlord shall be entitled to collect from the condemnor the entire award or awards that may be made in any such proceeding without deduction therefrom for any estate hereby vested in or owned by Tenant. Tenant hereby expressly assigns to Landlord all of its right, title and interest in or to every such award and also agrees to execute any and all further documents that may be required in order to facilitate the collection thereof by Landlord. 30.02. Full Taking. If title to the whole or substantially all of the Real Property shall be subject to a taking, this lease shall terminate and expire on the date of such taking and the fixed rent and additional rent provided to be paid by Tenant shall be apportioned and paid to the date of such taking. 30.03. Partial Taking. If substantially all of the Real Property is not so taken and if only a part of the Demised Premises shall be so taken, this lease nevertheless shall continue in full force and effect, except that either party may elect to terminate this lease, if that portion of the Demised Premises then occupied by Tenant shall be reduced by more than 25%, by notice of such election to the other party given not later than 30 days after (i) notice of such taking is given by the condemning authority, or (ii) the date of such taking, whichever occurs later. Upon the giving of such notice this lease shall terminate on the date of service of such notice and the fixed rent and additional rent due and to become due, shall be prorated and adjusted as of the date of the taking. If both parties fail to give such notice upon such partial taking, and this lease continues in force as to any part of the Demised Premises not taken, (x) the rents apportioned to the part taken shall be prorated and adjusted as of the date of taking and from such date the fixed rent and additional rent shall be reduced to the amount apportioned to the remainder of the Demised Premises, (y) the number of parking spaces allocated to Tenant pursuant to Section 16.01 shall be proportionately reduced and (z) the Tenant's Proportionate Share shall be recomputed to reflect the number of square feet of Tenant's Rentable Area remaining in the Demised Premises in relation to the Rentable Area remaining in the Real Property. 30.04. Tenant's Rights to Award. Tenant shall not be entitled to appear, claim, prove or receive any award in the proceedings relating to any taking -39- 30.05. Reconstruction. In the event of any taking which does not result in a termination of this lease, Landlord, at its expense, shall proceed with reasonable diligence to repair the remaining part of the Building and the Demised Premises to substantially the same condition as it was in immediately prior to such taking to the extent that the same may be feasible, so as to constitute a tenantable Building and Demised Premises, provided that Landlord's liability under this Section shall be limited to the amount received by Landlord as an award arising out of such taking, and Landlord shall have no liability or responsibility to repair Tenant's Property. ARTICLE 31 Surrender and Holdover 31.01. Surrender. On the Expiration Date, or upon any earlier termination of the term of this lease, Tenant shall quit and surrender the Demised Premises to Landlord in good order, condition and repair, except for ordinary wear and tear, damage or destruction by fire or other casualty or the elements, and Tenant shall remove all of Tenant's Property therefrom except as otherwise expressly provided in this lease. 31.02. Holdover. Tenant acknowledges that possession of the Demised Premises must be surrendered to Landlord at the expiration or sooner termination of the term of this lease. Tenant agrees it shall indemnify and save Landlord harmless against all liabilities, obligations, damages, penalties, claims, costs, charges and expenses, including reasonable attorneys' fees, resulting from delay by Tenant in so surrendering the Demised Premises, including any claims made by any succeeding tenant founded on such delay. The parties recognize and agree that the damage to Landlord resulting from any failure by Tenant to surrender possession of the Demised Premises on a timely basis as aforesaid will be extremely substantial, will exceed the amount of fixed rent and additional rent theretofore payable hereunder and will be impossible of accurate measurement. Tenant, therefore, agrees that if possession of the Demised Premises is not surrendered to Landlord on the date of expiration or sooner termination of the term of this lease, then Tenant agrees to pay to Landlord as liquidated damages for each month and for any portion of a month during which Tenant holds over in the Demised Premises after expiration or termination of the term of this lease, a sum equal to 200% of the average fixed rent and additional rent which was payable per month under this lease during the last three months of the term hereof. Such liquidated damages shall not limit Tenant's indemnification obligation with respect to claims made by any succeeding tenant founded upon Tenant's failure or refusal to surrender the Premises to Landlord at the expiration or sooner termination of the term of this lease. Nothing contained herein shall be deemed to authorize Tenant to remain in occupancy of the Demised Premises after the expiration or termination of the term of this lease. -40- ARTICLE 32 Conditions of Limitation 32.01. Prior to Term. If at or before the commencement of the term of this lease: (a) Tenant (or any guarantor of Tenant's obligations under this lease) shall file a petition commencing a voluntary case under the Bankruptcy Code (Title 11 of the United States Code), as now or hereafter in effect, or under similar law, or file a petition in bankruptcy or for reorganization or for an arrangement pursuant to any state insolvency law or any similar state law; (b) An involuntary case against Tenant (or any guarantor of Tenant's obligations under this lease) as debtor is commenced by a petition under the Bankruptcy Code (Title 11 of the United States Code), as now or hereafter in effect, or under similar law, or a petition or answer proposing the adjudication of Tenant (or any guarantor of Tenant's obligations under this lease) as a bankrupt or its reorganization pursuant to any state insolvency law or any similar state law shall be filed in any court and shall not be dismissed, discharged or denied within 60 days after the filing thereof, or if Tenant (or any guarantor of Tenant's obligations under this lease) shall consent or acquiesce in the filing thereof; (c) A custodian, receiver, United States Trustee, trustee or liquidator of Tenant or of all or substantially all of Tenant's property (or any guarantor of Tenant's obligations under this lease) or of the Demised Premises shall be appointed in any proceedings brought by Tenant; or if any such custodian, receiver, United States Trustee, trustee or liquidator shall be appointed in any proceedings brought against Tenant and shall not be discharged within 60 days after such appointment or if Tenant shall consent to or acquiesce in such appointment; or (d) If Tenant shall generally not pay Tenant's debts (or the guarantor of Tenant's obligations under this lease shall generally not pay its debts) as such debts become due, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally, as they become due; this agreement shall be deemed canceled and terminated, in which event neither Tenant nor any person claiming through or under Tenant or by virtue of any statute or of an order of any court shall be entitled to possession of the Demised Premises, but Tenant shall remain liable for damages as provided in Article 34. 32.02. During Term. (a) If any of the events set forth in Section 32.01 occurs during the term of this lease, such term, at the option of Landlord, exercised within a reasonable time after notice of the happening of any one or more of such events, shall terminate on such date as Landlord shall specify by notice to Tenant, with the same effect as if the date of termination were the Expiration Date, but Tenant shall remain liable for damages as provided in Article 34. (b) The term of this lease is subject to the further limitation that: -41- (i) Whenever Tenant shall default in the payment of any installment of rent or any other charge payable by Tenant to Landlord, on any day upon which the same is due, and such default shall continue for five days after Landlord shall have given to Tenant a notice specifying such default; (ii) Whenever Tenant shall do, or permit to be done, whether by action or inaction, anything contrary to any of Tenant's obligations hereunder, and if such situation shall continue and shall not be remedied by Tenant within 30 days after Landlord shall have given to Tenant a notice specifying the same, or, in the case of a situation which cannot with due diligence be cured within a period of 30 days, if Tenant shall not (y) within said 30-day period advise Landlord of Tenant's intention duly to institute all steps necessary to remedy such situation, and (z) duly institute within said 30-day period, and thereafter diligently prosecute to completion, all steps necessary to remedy the same; (iii) Whenever Tenant shall desert and abandon the Demised Premises (whether the keys be surrendered or not and whether the rent be paid or not); (iv) Whenever Tenant shall default in the timely payment of rent for two consecutive months or for a total of four months in any period of 12 months, notwithstanding the possibility that each of such defaults shall have been cured within the time period set forth in subparagraph (i); or (v) Whenever Tenant shall default in the performance of any non-rental obligation imposed upon it hereunder more than two times in any period of six months or more than three times in any period of 12 months, notwithstanding the possibility that each of such defaults shall have been cured within the time period set forth in subparagraph (ii); then in any of said cases set forth in the foregoing subparagraphs (i) through (v), Landlord may give to Tenant a notice of intention to end the term of this lease at the expiration of five days from the date of service of such notice of intention, and upon the expiration of said five days the term and estate hereby granted, whether or not the term shall theretofore have commenced, shall expire and terminate with the same effects as if the date of termination were the Expiration Date, but Tenant shall remain liable for damages as provided in Article 34. 32.03. Adequate Assurances. Without limiting an of the provisions of Articles 32, 33 or 34, if pursuant to the Bankruptcy Code of 1978, as the same may be amended, Tenant is permitted to assign this lease in disregard of the obligations contained in Article 13 hereof, Tenant agrees that adequate assurance of future performance by the assignee permitted under the Code shall mean the deposit of cash security with Landlord in an amount equal to the sum of one year's fixed rent then reserved hereunder plus an amount equal to all additional rent payable under this lease for the calendar year preceding the year in which such assignment is intended to become effective, which deposit shall be held by Landlord, for the balance of the term of this lease as security for the full and faithful performance of all of the obligations under this lease on the part of Tenant yet to be performed. If Tenant receives or is to receive any valuable consideration for such an assignment of this lease, such consideration after deducting therefrom (i) the brokerage commissions, if any, and other expenses reasonably incurred by Tenant for such assignment and (ii) any portion of such consideration reasonably designated by the assigned as paid -42- for the purchase of Tenant's property in the Demised Premises, shall be the sole and exclusive property of Landlord and shall be paid over to Landlord directly by such assignee. ARTICLE 33 Re-Entry by Landlord 33.01. Re-Entry; Summary Proceedings. If Tenant shall default in the payment of any installment of rent or any other charge payable by Tenant to Landlord, and if such default shall continue for five days, or if the term of this lease shall be terminated as in Article 32 provided, Landlord or Landlord's agents and employees may immediately or at any time thereafter re-enter the Demised Premises, or any part thereof, either by summary dispossess proceedings or by any suitable action or proceeding at law, or by force or otherwise, without being liable to indictment, prosecution or damages therefor, and may repossess the same, and may remove any persons therefrom, to the end that Landlord may have, hold and enjoy the Demised Premises. The word "re-enter", as herein used, is not restricted to its technical legal meaning. In the event of any termination of this lease under the provisions of Article 32 or if Landlord shall re-enter the Demised Premises under the provisions of this Article or in the event of the termination of this lease, or of re-entry, by or under any summary dispossess or other proceeding or action under any provision of law by reason of default hereunder on the part of Tenant, Tenant shall thereupon pay to Landlord the rent and any other charge payable by Tenant to Landlord up to the time of such termination or re-entry, as the case may be, and shall also pay to Landlord damages as provided in Article 34. 33.02. Remedies Cumulative. The special remedies to which Landlord may resort hereunder are cumulative and are not intended to be exclusive of any other remedies or means of redress to which Landlord may lawfully be entitled at any time, and Landlord may invoke any remedy allowed at law or in equity as if specific remedies were not provided for herein. 33.03. Retention of Funds. If the term of this lease shall be terminated under the provisions of Article 32, or if Landlord shall re-enter the Demised Premises under the provisions of this Article, or in the event of the termination of this lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Landlord shall be entitled to retain all moneys, if any, paid by Tenant to Landlord, whether as advance rent, security or otherwise, but such moneys shall be credited by Landlord against any rent or other charge due from Tenant at the time of such termination or re-entry or, at Landlord's option, against any damages payable by Tenant under Article 34 or pursuant to law. -43- ARTICLE 34 Damages 34.01 Damages Tenant covenants and agrees that if the term of this lease shall be terminated under the provisions of Article 32, or if Landlord shall re-enter the Demised Premises under the provisions of Article 33, or in the event of the termination of the term of this lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Tenant shall pay to Landlord as damages, at the election of Landlord, either: (a) a sum which at the time of such termination or at the time of such re-entry by Landlord, as the case may be, represents the then value of the excess, if any, of: (i) the aggregate of the rent payable hereunder which would have been payable by Tenant (conclusively presuming the additional rent to be the same as was payable for the year immediately preceding such termination or re-entry) for the period commencing with the date of such termination or re-entry, as the case may be, and ending with the Expiration Date had the term of this lease not been so terminated or had Landlord not so re-entered the Demised Premises, over (ii) the aggregate rental value of the Demised Premises for the same period; both discounted to the date of such termination or re-entry, as the case may be, at the rate of 10% per annum compounded quarterly; or (b) sums equal to the rent payable hereunder which would have been payable by Tenant had the term of this lease not been terminated, or had Landlord not re-entered the Demised Premises, payable upon the due dates therefor specified herein following such termination or such re-entry and until the Expiration Date; Landlord may re-let the Demised Premises or any part or parts thereof either in the name of Landlord or otherwise, for a term or terms, which may at Landlord's option be less than or exceed the period which would otherwise have constituted the balance of the term of this lease; Landlord may grant concessions of free rent and Landlord, at its option, may make such alterations and decorations in the Demised Premises as Landlord considers advisable and necessary for the purpose of re-letting the Demised Premises, and the granting of such concessions and/or making of such alterations and decorations shall not operate or be construed to release Tenant from liability hereunder as a foresaid provided however, that if Landlord shall re-let the Demised Premises during said period, Landlord shall credit Tenant with the net rents received by, Landlord from such re-letting, such net rents to be determined by first deducting from the gross rents as and when received by Landlord from such re-letting, the expenses incurred or paid by Landlord in terminating the term of this lease and in re-entering the Demised Premises and in securing possession thereof, as well as the expenses of re-letting, including altering and preparing the Demised Premises for new tenants, brokers' commissions, attorneys' fees and all other expenses properly chargeable against the Demised Premises and the rental therefrom it being understood that any such re-letting may be for a period shorter or longer than the remaining term of this lease. In no event shall Tenant be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord hereunder, or shall Tenant be entitled in any suit for the collection of damages pursuant to this Article to a credit in respect of any net rents from a re-letting, except to the extent that such net rents are received by Landlord. If the Demised Premises or any part thereof should be re-let in combination with other space, then proper apportionment on a square foot basis shall be made of the rent received from such re-letting and of the -44- expenses of re-letting. In the event of a default by Tenant in its obligations under this lease, beyond applicable grace periods, if any, in addition to Landlord's other rights and remedies, there shall be immediately payable by Tenant to Landlord, as additional rent, the amount of all of the following which are incurred, granted or assumed by Landlord in connection with the lease: all rent concessions, free rent, rent credits, contributions or payments by Landlord with respect to work or improvements performed in the Demised Premises, and/or obligations expenses and liabilities of Tenant assumed or paid for by Landlord in consideration of Tenant's entering into this lease. If the Demised Premises or any part thereof be relet by Landlord for the unexpired portion of the Term, or an part thereof, before presentation of proof of such damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall, prima facie, be the fair and reasonable rental value for Demised Premises, or part thereof, so relet during the term of the reletting. Landlord shall not be liable in any way whatsoever for its failure or refusal to relet the Demised Premises or any part thereof, or if the Demised Premises or any part thereof are relet, for its failure to collect the rent under such reletting, and no such refusal or failure to relet or failure to collect rent shall release or affect Tenant's liability for damages or otherwise under this lease. 34.02. Recovery of Damages. Suit or suits for the recovery of such damages, or any installments thereof, may be brought by Landlord from time to time at its election, and nothing contained herein shall be deemed to require Landlord to postpone suit until the date when the term of this lease would have expired if it had not been terminated under the provisions of Article 32, or under any provision of law, or had Landlord not re-entered the Demised Premises. 34.03. Additional Damages. Nothing herein contained shall be construed as limiting or precluding the recovery by Landlord against Tenant of any sums or damages, in addition to the damages particularly provided above, to which Landlord may lawfully be entitled by reason of any default hereunder on the part of Tenant. ARTICLE 35 Waivers 35.01. Waiver of Redemption Rights. Tenant, for Tenant, and on behalf of any and all persons claiming through or under Tenant, including creditors of all kinds, does hereby waive and surrender all right and privilege which they or any of them might have under or by reason of any present or future law, to redeem the Demised Premises or to have a continuance of this lease for the term hereby demised after being dispossessed or ejected therefrom by process of law or under the terms of this lease or after the termination of the term of this lease as herein provided. Tenant also waives the provisions of any law now or hereafter in effect relating to notice and delay in levy of execution in case of an eviction or dispossess of a tenant -45- for non-payment of rent. 35.02. No Designation of Payments. Tenant waives Tenant's right, if any, to designate the items against which any payments made by Tenant are to be credited, and Tenant agrees that Landlord may apply any payments made by Tenant to any items it sees fit, irrespective of and notwithstanding any designation or request by Tenant as to the items against which any such payments shall be credited. 35.03. Waiver of Jury Trial. Landlord and Tenant waive trial by jury in any action, proceeding or counterclaim brought by either against the other on any matter whatsoever arising out of or in any way connected with this lease, the relationship of landlord and tenant, Tenant's use or occupancy of the Demised Premises, any claim of injury or damage, or any emergency statutory or any other statutory remedy. 35.04. Counterclaims. Tenant shall not interpose any counterclaim of any kind in any summary proceeding commenced by Landlord for nonpayment of rent. ARTICLE 36 Unperformed Covenants 36.01. Performance of Tenant's Obligations. If Tenant shall default in the performance of any of Tenant's obligations hereunder, Landlord, without thereby waiving such default, may at Landlord's option, after reasonable notice to Tenant, perform the same for the account of Tenant. If Landlord makes any expenditures or incurs any obligations for the payment of money, including attorneys' fees in instituting, prosecuting or defending any action or proceeding by reason of any default of Tenant hereunder, such sums paid or obligations incurred, with interest at the maximum legal rate thereon, shall be deemed to be additional rent hereunder and shall be paid by Tenant to Landlord upon rendition of any bill or statement to Tenant therefore. ARTICLE 37 Consents and Approvals 33.01. Consents and Approvals. Whenever in this lease it is provided that Landlord shall not unreasonably withhold or delay consent or approval or shall exercise its judgment reasonably (such consent or approval and such exercise of judgment being collectively referred to as "consent"), if Landlord shall delay or refuse such consent, Tenant in no event shall be entitled to make, nor shall Tenant make, any claim, and Tenant hereby waives any claim, for money damages (nor shall Tenant claim any money damage by way of setoff, counterclaim or defense) based upon any claim or assertion by Tenant that Landlord unreasonably withheld or unreasonably delayed its -46- consent. Tenant's sole remedy shall be an action or proceeding for specific performance, injunction or declaratory judgment to enforce any such provision, but any such equitable remedy which can be cured by the expenditure of money may be enforced personally against Landlord only to the extent of its interest in the Building. Failure on the part of Tenant to seek such relief within 30 days after the date upon which Landlord has withheld its consent shall preclude any right to dispute the reasonableness of such withholding of consent. 37.02. Expenses. If Tenant shall request the consent or approval of Landlord to the making of any alterations or to any other thing, and Landlord shall seek and pay a separate fee for the expert opinion of Landlord's counsel, architect, engineer or other representative or agent as to the form or substance thereof, Tenant shall pay to Landlord, as additional rent, within 30 days after demand, all costs and expenses of Landlord incurred in connection therewith, including, in case of any alteration, costs and expenses of Landlord in reviewing plans and specifications. ARTICLE 38 Rules and Regulations 38.01. Rules and Regulations. Tenant and Tenant's invitees shall observe and comply with the Rules and Regulations attached hereto and made part hereof, and such other and further Rules and Regulations as Landlord or Landlord's agents may from time to time adopt. Notice of any additional Rules and Regulations shall be given to Tenant. Nothing in this lease shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations or the terms, covenants or conditions in any other lease, against any other tenant or occupant of the Buildings, and Landlord shall not be liable to Tenant for violation of the same by any other tenant or such other tenant's licensees. In the event of a conflict between the Rules and Regulations and the provisions of this lease, the provisions of this lease shall prevail. ARTICLE 39 Amendments for Financing 39.01. Amendments for Financing. If, in connection with obtaining financing for the Real Property, a banking, insurance or other recognized institutional lender shall request modifications in this lease as a condition to such financing, Tenant will not withhold, delay or defer its consent thereto, provided that such modifications do not increase the monetary obligations of Tenant hereunder. ARTICLE 40 Notice to Mortgagees and Underlying Lessors -47- 40.01. Notice to Mortgagees and Lessors. Upon the occurrence of any act or omission on the part of Landlord which would give Tenant the right, either immediately or after the lapse of a period of time, to terminate this lease or the term hereof or to claim a partial or total eviction, Tenant shall not exercise such right until (i) it has given notice of the occurrence of such act or omission to holders of any mortgages which at the time shall be liens on the leasehold estate under any ground lease or the Real Property, and the lessors under all underlying leases, if the names and addresses of such holders and lessors shall previously have been furnished to Tenant, and (ii) a period of time has elapsed after such notice as shall equal the greater of (y) twice the length of time to which Landlord would be entitled under this lease or otherwise, after similar notice, to remedy such act or omission, or (z) the same time to which Landlord would be so entitled, plus the time reasonably required to enable the holder of such mortgage or lease to become legally entitled (through receivership or otherwise) to remedy such act or omission. ARTICLE 41 Parties Bound; Partnership Tenant 41.01. Successors and Assigns. The covenants, agreements, terms, provisions and conditions of this lease shall bind and benefit the successors and assigns of the parties hereto with the same effect as if mentioned in each instance where a party hereto is named or referred to, except that no violation of the provisions of Article 13 shall operate to vest any rights under this lease in any successor or assignee of Tenant. Notwithstanding the foregoing, it is understood and agreed that (i) the covenants and obligations on the part of Landlord under this lease shall not be binding upon Landlord herein named with respect to any period subsequent to the transfer of its interest in the Real Property as owner or lessee thereof, (ii) in the event of such transfer said covenants and obligations shall thereafter be binding upon each transferee of the interest, of Landlord herein named as such owner or lessee of the Real Property, but only with respect to the period ending with a subsequent transfer of such interest, (iii) a lease of the entire interest of Landlord hereunder shall be deemed a transfer within the meaning of this Article, and (iv) the provisions of this Article shall not be construed as modifying the conditions of limitation contained in Article 32. 41.02. Partnership Tenant. If Tenant's interest in this lease shall at any time be held by a partnership, or by two or more persons or entities individually (any such partnership and such persons and entities are referred to in this Section as "Partnership Tenant"), the following provisions shall apply to such Partnership Tenant: (a) the liability of each of the parties comprising Partnership Tenant shall be joint and several; (b) each of the parties comprising Partnership Tenant consents in advance to, and agrees to be bound by, any (i) written instrument which may thereafter be executed, changing, modifying or discharging this lease, in whole or in part, or surrendering all or any part of the Demised Premises to Landlord, and (ii) notices, demands, requests or other communications which may thereafter be given, by Partnership -48- Tenant or any of the parties comprising Partnership Tenant; (c) any bills, statements, notices, demands, requests or other communications given or rendered to Partnership Tenant, or to any of the parties comprising Partnership Tenant, shall be deemed given or rendered to Partnership Tenant and to all such parties and shall be binding upon Partnership Tenant and all such parties; (d) if Partnership Tenant shall admit new partners, all of such new partners shall by their admission to Partnership Tenant, be deemed to have assumed performance of all of the terms, covenants and conditions of this lease on Tenant's part to be observed and performed; and (e) Partnership Tenant shall give prompt notice to Landlord of the admission of each new partner, and upon demand of Landlord, shall cause each new partner to execute and deliver to Landlord an agreement in form satisfactory to Landlord, wherein each new partner shall assume performance of all of the terms, covenants and conditions of this lease on Tenant's part to be observed and performed (but neither Landlord's failure to request any such agreement nor the failure of any such partner to execute or deliver any such agreement to Landlord shall vitiate the provisions of this subparagraph). (f) Anything herein to the contrary notwithstanding, if Tenant is a limited or general partnership (or is comprised of two (2) or more persons, individually or as co-partners), the change or conversion of Tenant to a limited liability company, (ii) a limited liability partnership, or (iii) any other entity which possesses the characteristics of limited liability (any such limited liability company, limited liability partnership, or entity is collectively referred to as a "Successor Entity") shall be prohibited unless the prior written consent of Landlord is obtained, which consent may be withheld in Landlord's sole discretion. (g) Notwithstanding the foregoing in Paragraph (f), Landlord agrees not to unreasonably withhold or delay such consent provided that: (1) The Successor Entity succeeds to all or substantially all of Tenant's business and assets; 2) The Successor Entity shall have a net worth ("Net Worth"), determined in accordance with generally accepted accounting principles, consistently applied, of not less than the greater of the Net Worth of Tenant on (i) the date of execution of the Lease, or (ii) the day immediately preceding the proposed effective date of such conversion; (3) Tenant is not in default of any of the terms, covenants or conditions of this lease on the proposed effective date of such conversion; (4) Tenant shall cause each partner of Tenant to execute and deliver to Landlord an agreement, in form and substance satisfactory to Landlord, wherein each such partner agrees to remain personally liable for all of the terms, covenants, and conditions of the Lease that are to be observed and performed by the Successor Entity; and (5) Tenant shall reimburse Landlord within ten (10) days following demand by Landlord for any and all reasonable costs and expenses that may be incurred by -49- Landlord in connection with said conversion of Tenant to a Successor Entity, including, without limitation, any attorney's fees and disbursements. Landlord shall release from liability hereunder, as to obligations thereafter accruing, retiring partners and the estates of deceased partners, provided that the aggregate assets of the remaining partners of a Partnership Tenant shall be sufficient in Landlord's sole judgment to meet Tenant's obligations hereunder. The provisions of this Section shall not be deemed to constitute a consent, by Landlord, to the assignment of any interest in this lease by Tenant. ARTICLE 42 No Other Waivers or Modifications 42.01. Waivers. The failure of Landlord to insist in any one or more instances upon the strict performance or observance of any one or more of the obligations of this lease, or to exercise any election herein contained, shall not be construed as a waiver or relinquishment for the future of the performance of such one or more obligations of this lease or of the right to exercise such election, but the same shall continue and remain in full force and effect with respect to any subsequent breach, act or omission. No executory agreement hereafter made between Landlord and Tenant shall be effective to change, modify, waive, release, discharge, terminate or effect an abandonment of this lease or the Premises, in whole or in part, unless such executory agreement is in writing and is signed by the party against whom enforcement of the change, modification, waiver, release, discharge or termination or effectuation of the abandonment is sought. 42.02. Surrender; Payments. Without limiting the generality of the foregoing provisions of this Article: (a) No agreement to accept a surrender of all or any part of the Demised Premises shall be valid unless in writing, signed by Landlord. The delivery of keys to the Demised Premises to an employee of Landlord or of its agent shall not operate as a termination of the term of this lease or a surrender of the Demised Premises. (b) The receipt by Landlord, or the payment by Tenant, of rent or any other payment by Tenant with knowledge of breach of any obligation of this lease shall not be deemed a waiver of such breach. (c) No payment by Tenant or receipt by Landlord of a lesser amount than the correct amount of any rent or other charge due hereunder shall be deemed to be other than a payment on account; nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other remedy in this lease or at law provided. -50- ARTICLE 43 Notices 43.01. Notices. Except for rent bills, any notice, approval, consent, bill, statement or other communication required or permitted to be given, rendered or made by either party to the other, pursuant to this lease or pursuant to any applicable law or requirement of public authority, shall be in writing (shall be sent in duplicate to Landlord) and shall be delivered by registered or certified mail or nationally recognized overnight carrier (e.g., Federal Express), addressed to the other party at the address hereinabove set forth (in the case of notice to Landlord, a second copy is to be delivered, in the same manner, to Robert Martin Company, 100 Clearbrook Road, Elmsford, New York 10523, Attn: Executive Vice-President and Associate General Counsel, and a third copy is to be delivered in the same manner to Glorious Sun Robert Martin, L.L.C., 501 Seventh Avenue, New York, New York 10018, Attn: Mr. Paul Chan) and shall be deemed to have been given, rendered, made or (in the case of any communication required by the provisions of this lease to have been received before any period prescribed herein for the taking of any action or the creation of any rights shall commence) received, on the second business day following the day so mailed if mailed in Westchester County and the third business day following the day so mailed if mailed outside of Westchester County. Any notices, approvals, consents, bills, statements or other communication given pursuant to this Article by either party may be given by such, party, their agents or attorneys. Either party may, by notice as aforesaid, designate a different address or addresses for notices, bills, statements or other communications intended for it. ARTICLE 44 Estoppel Certificate-Recording 44.01. Tenant's Estoppel. Tenant agrees, at any time and from time to time, upon ten days prior notice from Landlord, to execute, acknowledge and deliver to Landlord and any other person designated by Landlord, a statement in writing stating (i) that this lease is unmodified and in full force and effect (or if there have been modifications, that the lease is in full force and effect as modified and stating the modifications), (ii) the dates to which the fixed rent, additional rent and other charges, if any have been paid by Tenant, (iii) whether or not Landlord is in default in the performance of any covenant, agreement or condition contained in this lease and, if so, specifying in detail each such default, (iv) whether or not there are then existing any set-offs or defenses against the enforcement of any of the agreements, terms, covenants or conditions hereof upon the part of Tenant to be performed or complied with and, if so, specifying the same, and (v) the address to which notices to Tenant should be sent. If requested by Landlord, the form of statement shall be, at Landlord's election, as set forth on Exhibit B, annexed hereto and made part hereof. Any such statement delivered pursuant hereto may be relied upon by the holder of any interest in the Real Property, any prospective purchaser of the Real Property, any mortgagee or prospective mortgagee of the Real Property or of Landlord's interest, or any prospective assignee of any such mortgage. -51- 44.02 Recording. This lease shall not be recorded. At the request of Landlord, Tenant shall promptly execute, acknowledge and deliver to Landlord a memorandum in form satisfactory to Landlord with respect to this lease, and any amendment of or other agreement supplementary to this lease, sufficient for recording. ARTICLE 45 Brokerage 45.01. Brokerage. Tenant covenants, warrants and represents that, in the negotiation of this lease, it dealt with no broker or any other person who could legally claim to be entitled to receive a brokerage commission or finder's or consultant's fee with respect to this transaction, except Cali Realty, L.P., which commission Landlord shall pay per a separate agreement. Tenant shall indemnify and hold Landlord harmless from and against any and all losses, costs, damages, expenses, claims and liabilities (including court costs and attorneys' fees and disbursements) arising out of any inaccuracy or alleged inaccuracy of the above representation. ARTICLE 46 SECURITY 46.01. Security. Tenant has deposited with Landlord a sum of money (by check, subject to collection) equal to $16,114.58, as security for the full and faithful performance and observance by Tenant of the terms, provisions and conditions of this lease. If Tenant defaults in respect of any of the terms, provisions and conditions of this lease, including but not limited to, the payment of rent and additional rent, Landlord may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any rent and additional rent, or any other sum as to which Tenant is in default, or for any sum which Landlord may expend or may be required to expend by reason of Tenant's default in respect of any of the terms, covenants and conditions of this lease, including but not limited to, any damages or deficiency in the reletting of the Premises, whether such damages or deficiency accrued before or after summary proceedings or other re-entry by Landlord. In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this lease, the security shall be returned to Tenant after the date fixed as the Expiration Date and after delivery of possession of the entire Premises to Landlord. If Landlord applies or retains any part of the security so deposited, Tenant, upon demand, shall deposit with Landlord the amount so applied or retained, so that Landlord shall have the full deposit on hand at all times during the term of this lease. In the event of a sale of the Land and Building or condominium unit of which the Premises may be a part or leasing, conveyance or transfer of the Building or condominium unit of which the Premises form a part, Landlord shall have the right to transfer the security to the vendee, lessee or transferee and Landlord shall thereupon be released by Tenant from all liability for the return of such security; and Tenant agrees to look to the new Landlord solely for the return of -52- said security; and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the security to a new Landlord. Tenant further covenants that it will not assign or encumber or attempt to assign or encumber the monies deposited herein as security and that neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance.* The security amount set forth above shall be increased to $18,4.16.67 as of July 1, 1998. Tenant shall deposit with Landlord such additional security in the amount of $2,302.09 on or before July 1, 1998.* ARTICLE 47 Miscellaneous 47.01. Entire Agreement. This lease contains the entire agreement between Landlord and Tenant relating to the leasing of the Premises. Tenant expressly acknowledges and agrees that Landlord has not made and is not making, and, in executing and delivering this lease Tenant is not relying upon, any warranties, representations, promises or statements, extent that the same may be expressly set forth in this lease. 47.02. Partial Invalidity. If any term or provision of this lease, or the application thereof to any person or circumstance, shall, to any extent, be invalid or unenforceable, the remainder of this lease, or the application of such term or provision to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this lease shall be valid and enforceable to the fullest extent permitted by law. 47.03. Applicable Law. This lease shall be deemed to have been made in Rockland County, and shall be construed according to, and governed by, the laws of the State of New York. 47.04. Lease Submission. This lease is submitted to Tenant for signature, with the understanding that it shall not bind Landlord unless and until it has been executed by Landlord and delivered to Tenant or Tenant's attorney or agent. 47.05. Asterisks. The asterisks set forth at various locations in this lease are set forth for Landlord's internal administrative purposes, and are not intended to refer to any other language or to be used for interpretive purposes. 47.06. Confidentiality. -53- Tenant agrees not to disclose the terms, covenants, conditions or other facts with respect to this lease, to any person, business entity, association, newspaper, periodical or other entity, except pursuant to a valid business purpose. This non-disclosure and confidentiality agreement shall be binding upon Tenant without limitation as to time, and a breach of this Section shall constitute a material breach of Tenant's obligations under this lease.* 47.07. Right to Relocate. Landlord may, at its option, before or after the Commencement Date, elect by notice to Tenant to substitute for the Demised Premises other office space in the Buildings (herein called the "Substitute Premises") designated by Landlord, provided that the Substitute Premises contains at least the same Rentable Area as the Demised Premises and has a configuration substantially similar to that of the Demised Premises. Landlord's notice shall be accompanied by a plan of the Substitute Premises, and such notice or the plan shall set forth the Rentable Area of the Substitute Premises. Tenant shall vacate and surrender the Demised Premises and shall occupy the Substitute Premises promptly (and, in any event, not Later than 15 days) after Landlord has substantially completed the work to be performed by Landlord in the Substitute Premises pursuant to this Section. Tenant shall pay the same fixed rent and additional rent under Articles 3 and 4 with respect to the Substitute Premises as were payable with respect to the Demised Premises, without regard to the Rentable Area of the Substitute Premises. Tenant shall not be entitled to any compensation for any inconvenience or interference with Tenant's business, nor to any abatement or reduction of fixed rent or additional rent, but Landlord shall, at Landlord's expense, do the following: (i) furnish and install in the Substitute Premises improvements and appurtenances at least equal in kind and quality to those contained in the Demised Premises at the time such notice of substitution is given by Landlord, (ii) provide to Tenant personnel to perform under Tenant's direction the moving of Tenant's Property from the Demised Premises to the Substitute Premises, (iii) promptly reimburse Tenant for Tenant's actual and reasonable out-of-pocket costs incurred by Tenant in connection with the relocation of any telephone or other communications equipment from the Demised Premises to the Substitute Premises, and (iv) promptly reimburse Tenant for any other actual and reasonable out-of-pocket costs incurred by Tenant in connection with Tenant's move from the Demised Premises to the Substitute Premises provided such costs are approved by Landlord in advance. Tenant agrees to cooperate with Landlord so as to facilitate the prompt completion by Landlord of its obligations under this Section and the prompt surrender by Tenant of the Demised Premises. Without limiting the generality of the preceding sentence, Tenant agrees (i) to provide to Landlord promptly any approvals or instructions, and any plans and specifications or any other information reasonably requested by Landlord and (ii) to promptly perform in the Substitute Premises any work to be performed by Tenant to prepare the same for Tenant's occupancy. From and after the date that Tenant shall actually vacate and surrender the Demised Premises to Landlord, this Lease (i) shall no longer apply to the Demised Premises, except with respect to obligations which accrued on or prior to such surrender date; and (ii) shall apply to the Substitute Premises as if the Substitute Premises had been the space originally demised under this Lease. -54- ARTICLE 48 48.01. Option to Terminate Tenant shall have the right to elect to terminate this lease effective no later than December 31, 1997 ("Termination Date") provided Tenant (i) has not been able to complete an initial public offering, (ii) is not in default of any of its obligations under this lease and (iii) has given Owner notice of its election no later than 60 days prior to the Termination Date (time being of the essence in the giving of such notice).(1) * IN WITNESS WHEREOF, Landlord and Tenant have duly executed this lease as of the day and year first above written. GLORIOUS SUN ROBERT MARTIN, L.L.C. By: RM Blue Hill, LLC, Member By:/s/ ----------------------------- Member/Manager EASY STREET ONLINE, INC. By:/s/ Stephen J. Cole-Hatchard ----------------------------- President (1) In consideration for terminating this lease, within the first six months hereof Landlord shall retain the $16,114.58 currently being held by Landlord pursuant to Article 46. -55- WORK LETTER (SECTION 7.01) WORK SCHEDULE OF LANDLORD'S RESPONSIBILITY Premises will be delivered in broom clean condition finished substantially "as is" except as set forth under Additional Work Specifications hereinbelow, and the floor plan attached hereto. Office Area: Walls, doors, ceilings and floors shall be as currently installed. All alterations, additions or deletions called for in the Additional Work Specifications or in the floor plan attached hereto shall be furnished and prepared to the standards now existing on the premises. Convenience wall outlets, lighting switches, and lighting fixtures shall be as installed. Supplementary or replacement lamping by Tenant. Tenant shall not overload electric circuits. Standard duplex convenience outlets, ceiling lighting, lighting switches, heating and air conditioning equipment shall be wired and operative. Any wiring distribution other than for the above may be used by Tenant to the extent serviceable but is not warranted by Owner as to operating condition. All selections or designations to be made by Tenant are to be made within five (5) business days after request by Landlord. If Tenant has not made such designations or selections within said period, the Landlord shall be authorized to do so on behalf of Tenant. -56- CLEANING SPECIFICATIONS (SECTION 20.02) 1. General (a) All flooring to be swept and/or dust mopped on each business day. (b) All carpeting areas and rugs vacuumed twice weekly. (c) All stairways to be swept each business day. (d) Empty and wipe wastepaper baskets and ashtrays each business day. (e) Cigarette urns to be cleaned each business day and sand replaced when necessary. (f) Floors, walls and interior surfaces of lobby, elevators and public corridors to be maintained as required. (g) Dust furniture and window sills as required. (h) Water coolers to be wiped each business day. (i) Entrance lobby glass to be washed or wiped each business day. 2. Lavatories Daily (Business Days) (a) All flooring to be swept and washed using disinfectant in water. (b) All basins, bowls, urinals and toilet seats to be washed. (c) All mirrors to be washed. (d) Paper towel and sanitary disposal receptacles to be emptied and cleaned. (e) Toilet tissue holders and soap and paper towel dispensers to be filled. 3. Windows (a) Three times per year clean all exterior windows on the inside only, provided that window sills are free of articles and access to the windows is not obstructed. (b) Two times per year clean all exterior windows, on the outside. 4. Venetian Blinds Venetian blinds to be dusted annually. 5. Ledges and moldings Ledges and moldings to be high dusted semi-annually as required. 6. Lighting Fixtures Interior and exterior of lighting fixtures to be dusted annually as required. -57- Rules and Regulations (Section 38.01) 1. Any moving of furniture or equipment into or out of the Demised Premises must be done by Tenant at its own cost and expense, on business days after 6:00 P.M., or on Saturday subject, however, to the prior written consent of Landlord. If such move requires use of an elevator, such move shall not be in excess of such elevator's carrying load capacity. 2. The sidewalks, entrances, passages, lobby, elevators, vestibules, stairways, corridors or halls shall not be obstructed or encumbered by Tenant or used for any purpose other than ingress and egress to and from the Demised Premises and Tenant shall not permit any of its invitees to congregate in any of said areas. No door mat shall be placed or left in any public hall or outside any entry door of the Demised Premises. 3. No awnings or other projections shall be attached to the outside walls of the Building. No curtains, blinds, shades, or screens shall be attached to or hung in, or used in connection with, any window or door of the Demised Premises, without the prior consent of Landlord. Such curtains, blinds, shades or screens must be of a quality, type, design and color, and attached in the manner, approved by Landlord. 4. No sign, insignia, advertisements, object, notice or other lettering shall be exhibited, inscribed, painted or affixed by any tenant on any part of the outside or inside of the Demised Premises or the Buildings without the prior written consent of Landlord. In the event of the violation of the foregoing by Tenant, Landlord may remove the same without any liability, and may charge the expense incurred in such removal to Tenant. Interior signs and lettering on doors and directory tablets shall, if and when approved by Landlord, be inscribed, painted or affixed by Landlord at the expense of Tenant, and shall be of a size, color and style acceptable to Landlord. 5. The sashes, sash doors, skylights, windows and doors that reflect or admit light and air into the halls, passageways or other public places in the Buildings shall not be covered or obstructed by Tenant, nor shall any bottles, parcels, or other articles be placed on window sills. 6. No showcases or other articles shall be put in front of or affixed to any part of the exterior of the Buildings, nor placed in the halls, corridors or vestibules by Tenant. 7. Tenant shall not discharge or permit to be discharged any materials which may cause damage into waste lines, vents or flues of the Buildings. The water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were designed or constructed, and no sweepings, rubbish, rags, corrosives, acids or other substances shall be thrown or deposited therein. All damages resulting from any misuse of the fixtures shall be borne by the tenant who, or whose invitees, shall have caused the same. 8. Tenant shall not mark, paint, drill into, or in any way deface any part of the Demised Premises or the Buildings. No boring, cutting or stringing of wires shall be permitted, except with the prior consent of Landlord, and as Landlord may direct. Tenant shall not lay linoleum, or other similar floor covering, so that the same shall come in direct contact with the floor of the Demised Premises, and, if linoleum or other similar floor covering is desired to be used, an interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water, the use of cement and other similar adhesive material being expressly prohibited. -58- 9. No bicycles, vehicles, animals, fish or birds of any kind shall be brought into or kept in or about the Demised Premises. 10. No noise, including, but not limited to, music or the playing of musical instruments, recordings, radio or television which, in Landlord's judgment, might disturb other tenants in the Buildings, shall be made or permitted by Tenant. Nothing shall be done or permitted in the Demised Premises by Tenant which would impair or interfere with the use or enjoyment by any other tenant of any other space in the Buildings. Tenant shall not throw anything out of the doors, windows of skylights or down the passageways. 11. Neither Tenant nor its invitees shall bring or keep upon the Demised Premises any explosive fluid, chemical or substance, nor any inflammable or combustible objects or materials. 12. Additional locks or bolts of any kind which shall not be operable by the grand master key(s) for the Buildings shall not be placed upon any of the doors or windows by Tenant, nor shall any changes be made in locks or the mechanism thereof which shall make such locks inoperable by said grand master key(s). Tenant shall, upon the termination of its tenancy, turn over to Landlord all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, Tenant and in the event of the loss of any keys furnished by Landlord, Tenant shall pay to Landlord the cost thereof. 13. All removals from the Demised Premises or the Buildings, or the moving or carrying in or out of any safes, freight, furniture, packages, boxes, crates or any other object or matter of any description must take place during such hours and in such elevators as Landlord or its agent may determine from time to time. All deliveries of any nature whatsoever to the Buildings or the Demised Premises must be made only through Building entrances specified for such deliveries by Landlord. Landlord reserves the right to inspect all objects and matter to be brought into the Buildings and to exclude from the Buildings all objects and matter which violate any of these Rules and Regulations or the Lease. Landlord may require any person leaving the Buildings with any package or other object or matter, to submit a pass, listing such package or object or matter, from the tenant from whose premises the package or other object or matter is being removed, but the establishment and enforcement of such requirement shall not impose any responsibility on Landlord for the protection of any tenant against the removal of property from the premises of such tenant. Landlord shall, in no way, be liable to Tenant for damages or loss arising from the admission, exclusion or ejection of any person to or from the Demised Premises or the Buildings under the provisions of this Rule 13 or Rule 17 hereof. 14. Tenant shall not occupy or permit any portion of the Demised Premises to be occupied as an office for a public stenographer or public typist, or for the possession, storage, manufacture, or sale of beer, wine or liquor, narcotics, drugs, tobacco in any form, or as a barber, beauty or manicure shop, or as an employment bureau. Tenant shall not engage or pay any employees on the Demised Premises, except those actually working for Tenant on the Demised Premises, nor advertise for laborers giving an address at the Demised Premises. Tenant shall not use the Demised Premises or any part thereof, or permit the Demised Premises or any part thereof to be used, for manufacturing, or for sale at auction of merchandise, goods or property of any kind. 15. Tenant shall not obtain, purchase or accept for use in the Demised Premises ice, drinking water, food, beverage, towel, barbering, boot blacking, cleaning, floor polishing or other similar services from any persons not authorized by Landlord in -59- writing to furnish such services, provided always that the charges for such services by persons authorized by Landlord shall not be excessive. Such services shall be furnished only at such hours, in such places within the Demised Premises, and under such regulations as may be fixed by Landlord. Tenant shall not purchase or contract for waxing, rug shampooing, venetian blind washing, furniture polishing, lamp servicing, cleaning of electric fixtures, removal of garbage or towel service in the Demised Premises except from contractors, companies or persons so approved by the Landlord. 16. Landlord shall have the right to prohibit any advertising or identifying sign by Tenant which in Landlord's judgment tends to impair the reputation of the Buildings or their desirability as buildings for offices, and upon notice from Landlord, Tenant shall refrain from or discontinue such advertising or identifying sign. 17. Landlord reserves the right (although it is specifically understood that Landlord shall not be obligated under any circumstances) to exclude from the Building during hours other than regular business hours and days all persons who do not present a pass to the Building signed by Landlord. All persons entering and/or leaving the Building during hours other than regular business hours and days may be required to sign a register. Landlord will furnish passes to persons for whom any tenant requests same in writing. Tenant shall be responsible for all persons for whom Tenant requests such pass and shall be liable to Landlord for all acts or omissions of such persons. Landlord's providing of services during other than regular business hours and days shall not be interpreted to mean that the Buildings are in operation during such after-hours; and, in lieu of possible darkness, lack of activity and lack of such services during such after-hours, Tenant may wish to take measures regarding security of its invitees using the Demised Premises during other than regular business hours and days. 18. Tenant, before closing and leaving the Demised Premises at any time, shall see that the lights are turned off. All entrance doors in the Demised Premises shall be left locked by Tenant when the Demised Premises are not in use. Entrance doors shall not be left open at any time. 19. Unless Landlord shall furnish electrical energy hereunder as a service included in the rent, Tenant shall, at Tenant's expense, provide artificial light and electrical energy for the employees of Landlord and/or Landlord's contractors while doing janitorial service or other cleaning in the Demised Premises and while making repairs or alterations in the Demised Premises. 20. The Demised Premises shall not be used for lodging or sleeping or for any immoral or illegal purpose. 21. The requirements of Tenant will be attended to only upon application at the office of the Buildings. Employees of Landlord shall not perform any work or do anything outside of their regular duties, unless under special instructions from Landlord. 22. Canvassing, soliciting and peddling in the Buildings are prohibited and Tenant shall cooperate to prevent the same. 23. There shall not be used in any space, or in any lobbies, corridors public halls or other public areas of the Buildings, in the moving or delivery or receipt of safes, freights, furniture, packages, boxes, crates, paper office material, or any other object or thing, any hand trucks except those equipped with rubber tires, side guards, and such other safeguards as Landlord shall require. No move or delivery of any object or thing of whatever nature, other than light-weight objects hand-carried by not more than one person, shall be made without at least 24 hours prior -60- notice by Tenant to Landlord and without Tenant, prior, to any such move or delivery, laying (without affixation or attachment to any part of the floor or floor covering) adequate masonite or plywood sheets covering all lobby, corridor, public hall and other public area floors of the Buildings (whether carpeted or terrazzo) over which such move or delivery shall take place. 24. Tenant shall not cause or permit any odors of cooking or other processes or any unusual or objectionable odors to emanate from the Demised Premises which would annoy other tenants or create a public or private nuisance. No cooking shall be done in the Demised Premises except as is expressly permitted in the lease. 25. Tenant shall cooperate with Landlord in obtaining maximum effectiveness of the cooling system by lowering and closing venetian blinds and/or drapes and curtains when the sun's rays fall directly on the windows of the Demised Premises. 26. Landlord reserves the right to rescind, alter or waive any rule or regulation at any time prescribed for the Buildings, when, in its judgment, it deems it necessary or desirable for the reputation, safety, care or appearance of the Buildings, or the preservation of good order therein, or the operation or maintenance of the Buildings or the equipment thereof, or the comfort of tenants or others in the Buildings. No recision, alteration or waiver of any rule or regulation in favor of one tenant shall operate as a recision, alteration or waiver in favor of any other tenant. 27. Tenant, its employees, agents, licensees, contractors and subtenants shall not litter any public areas of the Real Property (including the walkways and parking areas located thereon). 28. Landlord shall not unreasonably withhold its consent to the installation, maintenance and operation by Tenant in the Demised Premises of data processing machines, office duplicating machines, teletype machines and other business machines and machinery customarily used in offices in the ordinary course of business, provided however, that Tenant shall comply with all other obligations of this lease that may be applicable to or result from such installation, maintenance or operation. 29. Landlord shall not unreasonably withhold or delay from Tenant any approval provided for in the Rules and Regulations. -61- EXHIBIT "B" STATEMENT OF TENANT IN RE: Date: Re: Address: Your Appl. # Gentlemen: It is our understanding that you have committed to place a mortgage upon the subject premises and as a condition precedent thereof have required this certification by the undersigned. The undersigned, as Lessee, under that certain lease dated ___________, made with ________________________ as Lessor, hereby ratifies the said lease and certifies that: 1. the undersigned has entered into occupancy of the premises described in said lease on ___________________; 2. the undersigned is presently open and conducting business with the public in the premises; 3. the minimum rental in the annual amount of $____________ was payable from the date of occupancy; 4. that said lease is in full force and effect and has not been assigned, modified, supplemented or amended in any way (except by agreement(s) dated _____________), and neither party thereto is in default thereunder; 5. that the same represents the entire agreement between the parties as to this leasing; 6. that the term of said lease expires on _________________; 7. that all conditions under said lease to be performed by the Lessor have been satisfied, including but without limitations all co-tenancy requirements thereunder; 8. all required contributions by Lessor to Lessee on account of Lessor's improvements have been received; 9. on this date there are no existing defenses or offsets which the undersigned has against the enforcement of said lease by the Lessor; 10. that no rental has been paid in advance and no security, (or in the amount of $_____________) has been deposited with Lessor; 11. that rental for ______________, 19__, has been paid. Very truly yours, _____________________(Tenant) By:_________________________ (Title) -62- EX-10.8 13 EXHIBIT 10.8 =============================================================================== $60,000 August 14 1997 ............ ............................... Frontline Communications Corporation after date, for value received, we promise ........................................... to pay to the order of Stephen J. Cole-Hatchard ........................................................ Sixty Thousand and 00/100______________________________________________Dollars at 315 Route 210, Stony Point, New York, 10980 ............................................................................... with interest at 9.25 per cent. This note is one of a series of 2 notes of even date herewith, aggregating $126,800 It is understood and agreed that in the event of the non-payment of any one of said series and such default continue for a period of 10 days, then at the option of the holder of any of the said notes, all or any part of the remaining unpaid notes shall forthwith become due and payable. The failure to assert this right shall not be deemed a waiver thereof. No 2 Due May 1, 1999 or upon closing Frontline Communications Corporation of the Company's Initial Public Offering Nicko Feinberg VICE-PRES. Peter Morris TREAS. No. 2000N Corp Serial Notes--Julian Bloomberg, Inc. Initial Public Offering =============================================================================== EX-23 14 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Frontline Communications, Corp. Pearl River, New York We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated July 27, 1997, relating to the combined financial statements of Frontline Communications Corp., which is contained in that Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ BDO Seidman, LLP - --------------------- BDO Seidman Valhalla, New York August 21, 1997 EX-27 15 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM SB-2 AT MAY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 5-MOS DEC-31-1997 MAY-31-1997 371,793 0 9,439 0 0 409,610 94,668 20,592 485,538 492,564 0 0 0 16,600 (23,626) 485,538 0 110,566 67,707 67,707 291,180 0 3,174 (251,495) 0 (251,495) 0 0 0 (251,495) (.14) (.14)
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