Registration No. 333-
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
Form SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_______________
K2 DESIGN, INC.
(Name of small business issuer in its charter)
Delaware 7389 13-3886065
(State or (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification
incorporation or Classification Code Number)
organization) Number)
80 East 11th Street, Suite 619, New York, New York 10003 (212) 614-0191
(Address and telephone number of principal executive offices and principal
place of business)
DAVID J. CENTNER
K2 DESIGN, INC.
80 EAST 11TH STREET, SUITE 619
NEW YORK, NEW YORK 10003
(212) 614-0191
(Name, address and telephone number of agent for service)
_______________
Copies to:
ROBERT W. BURKE, ESQ. MICHAEL D. DIGIOVANNA
SILLS CUMMIS ZUCKERMAN RADIN PARKER DURYEE ROSOFF & HAFT
TISCHMAN EPSTEIN & GROSS, P.A. 529 Fifth Avenue
One Riverfront Plaza New York, New York 10017
Newark, New Jersey 07102 (212) 599-0500
(201) 643-7000
_______________
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration
Statement.
_______________
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 Securities 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.
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum Amount of
Amount Being Offering Price Per Aggregate Offering Registration
Title of Securities Being Registered Registered Security(1) Price (1) Fee
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Units, each consisting of one share of Common Stock,
$.01 par value per share ("Common Stock"), and one
warrant ("Warrant") (each Warrant to purchase one-
half of one share of Common Stock)(2) . . . . . . 1,150,000 $8.00 $9,200,000 $3,173
Common Stock underlying Units . . . . . . . . . . . . 1,150,000
Warrants underlying Units . . . . . . . . . . . . . . 1,150,000
Common Stock issuable upon exercise of Warrants(3) . 575,000 $10.00 $5,750,000 $1,983
Representative's Warrants(4) . . . . . . . . . . . . 100,000 $.001 $100.00 $1
Units underlying Representative's Warrants
("Representative's Units"), each consisting of one
share of Common Stock and one Warrant (5) . . . . 100,000 $8.80 $880,000 $304
Common Stock underlying Representative's Units(5) . . 100,000
Warrants underlying Representative's Units . . . . . 100,000
Common Stock issuable upon the exercise of Warrants
underlying Representatives's Units(3) . . . . . . 50,000 $10.00 $500,000 $173
Common Stock(6) . . . . . . . . . . . . . . . . . . . 600,002 $8.00 $4,800,016 $1,656
Total Registration Fee . . . . . . . . . . . . . . $7,290
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Includes 150,000 Units issuable pursuant to the Representative's over-
allotment option.
(3) Pursuant to Rule 416 there are also being registered such additional
securities as may be required for issuance pursuant to the anti-
dilution provisions of the Warrants.
(4) To be issued to the Representative or its designees at closing.
(5) Pursuant to Rule 416 there are also being registered such additional
securities as may be required for issuance pursuant to the anti-
dilution provisions of the Representative's Warrants.
(6) These shares are being registered on behalf of certain stockholders of
the Company to satisfy the Company's registration obligations owed to
such stockholders.
_______________
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, as amended, or until this
Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
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K2 DESIGN, INC.
Cross-Reference Sheet
Showing Location in Prospectus of
Information Required by Items in Part I of Form SB-2
Registration Statement
Item Number and Caption Location in Prospectus
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1. Front of Registration Statement and Outside Front
Cover of Prospectus . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus . . . . . . . . . . . . . . . . . . . Inside Front and Outside Back Cover Pages of Prospectus
3. Summary Information and Risk Factors . . . . . . Prospectus Summary; Risk Factors
4. Use of Proceeds . . . . . . . . . . . . . . . . . Use of Proceeds
5. Determination for Offering Price . . . . . . . . Outside Front Cover Page of Prospectus; Underwriting
6. Dilution . . . . . . . . . . . . . . . . . . . . Dilution
7. Selling Security Holders . . . . . . . . . . . . Selling Stockholders and Plan of Distribution
8. Plan of Distribution . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus; Selling
Stockholders and Plan of Distribution; Underwriting
9. Legal Proceedings . . . . . . . . . . . . . . . . Business -- Legal Proceedings
10. Directors, Executive Officers, Promoters and
Control Persons . . . . . . . . . . . . . . . . . Management
11. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . Principal Stockholders
12. Description of Securities . . . . . . . . . . . . Description of Securities
13. Interest of Named Experts and Counsel . . . . . . Legal Matters
14. Disclosure of Commission Position on Description of Securities -- Indemnification of Directors
Indemnification for Securities Act Liabilities . and Officers
15. Organization Within Last Five Years . . . . . . . Certain Transactions
16. Description of Business . . . . . . . . . . . . . The Company; Risk Factors; Business; Certain Transactions
17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis of Results of
Operation . . . . . . . . . . . . . . . . . . . . Operations and Financial Condition
18. Description of Property . . . . . . . . . . . . . Business -- Properties
19. Certain Relationships and Related Transactions . Certain Transactions
20. Market for Common Equity and Related Stockholder Dividend Policy; Shares Eligible for Future Sale;
Matters . . . . . . . . . . . . . . . . . . . . . Description of Securities
21. Executive Compensation . . . . . . . . . . . . . Management -- Executive Compensation; Management --
Employment Agreements
22. Financial Statements . . . . . . . . . . . . . . Financial Statements
23. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . Not Applicable
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SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 22, 1996
PROSPECTUS
1,000,000 Shares of Common Stock
1,000,000 Redeemable Common Stock Purchase Warrants
K2 DESIGN, INC.
_________________
K2 Design, Inc. (the "Company") is offering hereby 1,000,000 shares (the
"Shares") of its common stock (the "Common Stock") and 1,000,000 redeemable
common stock purchase warrants (the "Warrants"). Until the completion of
this offering, the Shares and Warrants may only be purchased together on
the basis of one Share and one Warrant (the "Units"). Subsequent to this
offering, the Shares and Warrants may be traded separately. Two Warrants
will entitle the registered holder thereof to purchase one share of Common
Stock at a price of $ per share (125% of the initial public
offering price of the Common Stock) at any time commencing on the date of
this Prospectus and terminating on , 2001 (five years from the
date of this Prospectus). The Warrants will be redeemable, at a price of
$.05 per Warrant upon not less than 30 days' written notice if the closing
price of the Common Stock has been equal or greater than 140% of the then
exercise price of the Warrants for 20 consecutive trading days ending on
the fifth day prior to the notice of redemption. See "Description of
Securities" for additional terms of the Warrants.
Prior to this offering there has been no public market for the Units,
Common Stock or Warrants. It is currently estimated that the initial
public offering price of the Common Stock will be between $6 and $8 per
share and the Warrants will be $.05 per Warrant. For factors considered in
determining the initial public offering price, see "Underwriting." The
Company has applied to have the Units, Common Stock and Warrants approved
for quotation on The Nasdaq SmallCap(TM) Stock Market under the symbols
"KTWOU," "KTWO" and "KTWOW," respectively.
The Registration Statement of which this Prospectus is a part also
includes 600,002 shares of Common Stock held by certain stockholders of the
Company and none of the proceeds from the sale thereof will be paid to the
Company. See "Selling Stockholders and Plan of Distribution."
___________________
This offering involves a high degree of risk.
See "Risk Factors" commencing on page 5 hereof.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
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 to Underwriting Proceeds to
Public Discounts(1) Company (2)
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Per Share. . . . . . . . $ $ $
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Per Warrant. . . . . . . $ $ $
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Total (3). . . . . . . . $ $ $
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(1) Does not include additional compensation to Donald & Co. Securities
Inc., acting as representative (the "Representative") of the several
underwriters identified elsewhere herein (the "Underwriters"), in the
form of a non-accountable expense allowance of 3% of the gross
proceeds of this offering. The Company has also agreed to sell to the
Representative warrants to purchase up to 100,000 Units at $ per
Unit. exercisable over a period of four years commencing one year
from the date hereof (the "Representative's Warrants") and to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses payable by the Company, including
the Representative's non-accountable expense allowance, of $
($ if the Representative's over-allotment option is exercised
in full), estimated at $ ($ if the
Representative's over-allotment option is exercised in full).
(3) The Company has granted the Underwriters a 30-day option to purchase
up to 150,000 Units upon the same terms and conditions as set forth
below, solely to cover over-allotments, if any. If such over-
<PAGE>
allotment option is exercised in full, the total Price to Public,
Underwriting Discounts and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
________________________
The Units are being offered by the Underwriters subject to receipt
and acceptance by the Underwriters, subject to approval of certain legal
matters by counsel and subject to prior sale. The Underwriters reserve the
right to withdraw, cancel or modify this offering and to reject any order
in whole or in part. It is expected that delivery of certificates will be
made against payment therefor on or about , 1996, at the
office of Donald & Co. Securities Inc., 65 East 55th Street, New York, New
York 10022.
DONALD & CO. SECURITIES INC.
The date of this Prospectus is , 1996
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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 STATEMENT 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 STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
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[PHOTOGRAPHS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS,
COMMON STOCK OR WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference
to the more detailed information and financial statements, including the
notes thereto, appearing elsewhere in this Prospectus. Each prospective
investor is urged to read this Prospectus in its entirety. Unless
otherwise indicated, all financial information and share and per share
information in this Prospectus has been restated to reflect the
recapitalization described in "Certain Transactions -- Formation and
Financings of the Company" and assumes (i) no exercise of outstanding
options to purchase an aggregate of 100,000 shares of Common Stock or
options which may be granted to purchase 125,000 additional shares under
the Company's stock option plan, (ii) no exercise of the Warrants offered
hereby, (iii) no exercise of the Representative's over-allotment option and
(iv) no exercise of the Representative's Warrants. Unless the context
otherwise requires, the "Company" refers to K2 Design, Inc., a Delaware
corporation, its wholly-owned subsidiary and its predecessor entities.
Certain terms used in this Prospectus are defined in the Glossary
beginning on page 49.
THE COMPANY
The Company's primary business is the design and creation of sites
("Web sites") for commercial organizations on that part of the Internet
known as the World Wide Web. The Company has designed and created more
than 35 Web sites, including Web sites for the customers of MCI
Telecommunications Corporation ("MCI"), a subsidiary of MCI Communications
Corporation, and for Prudential Securities, America Online Incorporated and
International Business Machines, Inc., among others. Accordingly,
management believes that the Company is a recognized provider of these
services.
Web sites are increasingly being utilized as a new medium for
advertisement, promotion and technical support of an organization's
products and services. The Company believes Web sites can provide
commercial organizations benefits in addition to those available through
conventional media, including the ability to engage and entertain
consumers, provide in-depth information, reduce selling and operating
costs, expand distribution channels, promote major sporting and
entertainment events and monitor popularity of content and make timely
changes in response to real-time feedback. Web sites also offer businesses
the ability to obtain certain information about visitors to their sites.
To be effective, it is essential that a Web site be more than
attractive and that both the Web site and the information therein be easily
accessible and intuitively organized. As a provider of these services, the
Company must combine creative and technical expertise to meet its
customers' needs. The Company's services add value to Web site projects at
every stage, from concept development through completion. Web sites vary
significantly in their size and complexity, and the scope of services
rendered by the Company in connection with projects has ranged from limited
consulting services to complete creative and technical design and
construction of multi-level sites, including live video and audio feeds
from remote locations. Should a customer so desire, the Company also
offers numerous integrated services in conjunction with Web site projects,
including traditional graphic design services such as logo design for the
Web site or a particular product, brochures, point-of-sale displays and
other collateral marketing materials and print advertisement design and
layout. The Company is also planning to develop two World Wide Web related
software programs, Visitrac and Web Express. Visitrac is intended to
provide detailed information about visitors to a particular Web site and
Web Express is intended to enable an individual or organization to design a
graphically enhanced Web site without incurring substantial design and
development costs. See "Business -- K2's Services."
The Company markets its services directly and seeks to form strategic
marketing relationships with third parties. To date, the Company's only
significant continuing strategic marketing relationship has been and
continues to be with MCI. During 1995, the Company designed and created
one Web site for MCI and five Web sites for MCI's customers on MCI's online
shopping mall, marketplaceMCI. The Company is aware that MCI is presently
redefining its online shopping mall concept and, therefore, marketplaceMCI
may not provide any future business for the Company. Nevertheless, the
Company continues to derive revenues from another Internet initiative of
MCI commenced in February 1996 called "Webworks," pursuant to which MCI
salespersons offer comprehensive Web site services to their customers and
potential customers. In connection with Webworks, MCI co-markets the
Company's services and after pre-screening an interested customer,
introduces that customer to the Company. The Company has been advised that
it is considered by MCI to be a "best of breed" vendor. However, MCI has
no obligation to refer projects to the Company, is expected
-1-
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to refer Webworks projects to others, and utilizes the services of certain
of the Company's competitors for other Web site projects. The Company has
commenced work on two projects generated from Webworks, including one for
the New Jersey Sports and Exposition Authority pursuant to a non-binding
letter of intent for the design and creation of the main Web site for the
Meadowlands Sports Complex.
The Company's has designed and created more than 35 Web sites,
including:
- Together with Ogilvy & Mather Advertising, the design and creation
of a Web site for International Business Machines, Inc. ("IBM")
(http://www.chess.ibm.park.org), to promote a chess match between Gary
Kasparov and an IBM computer that utilizes a computer chip called "Deep
Blue." The Web site incorporated live video of the match, live chat
boards, simultaneous transcription of commentary and the integration of
animation to display the progress of the game. Media reports indicated
that at its peak, the Web site was at that time the most visited Web site
in a one-day period in Internet history, with approximately 5 million hits
(hits are an indicator of the volume of traffic at a Web site).
- The design and creation of a Web site that is Prudential
Securities' Virtual Branch Office (http://www.prusec.com), containing
interactive features such as a wealth accumulation calculator, geographic
branch locator, daily market updates and a financial personality quiz.
- The redesign of the graphics and copy for MCI's marketplaceMCI Web
site (http://www2.pcy.mci.net/marketplace), MCI's online shopping mall.
Morgan Stanley's, "The Internet Report" named the site one of the eight
"coolest Web sites for commerce." During that project, the Company was
engaged to design and create a virtual retail store in the marketplaceMCI
mall for Champs Sporting Goods and thereafter for related businesses,
Footlocker and Lady Footlocker, and other unrelated businesses.
- The design and creation of a Web site for The Joseph Papp Public
Theater that was originally used to publicize its production of "The
Tempest," starring Patrick Stewart (http://www.publictheater.org). The
Company incorporated the theater's intricate (and already well known)
graphic style into the Web site, which was designed to accommodate every
major Web browser. The Web site integrated standard production photographs
from The Tempest with a plot summary of the show, to create a click-to-
enlarge tour of the production. The Web site was launched at the after-
show party following its opening performance. Thereafter, the theater
hired the Company to design and create another Web site to promote its hit
Broadway show, "Bring on Da Noise/Bring on Da Funk," on which, among other
things, was a live, opening night simulcast of scenes from the opening
night party and pre-recorded portions of the show. The site also featured
a three-dimensional VRML walk-through of a theater, digitized portions of
the show's soundtrack, live commentary and electronic mail telegram
capabilities to the cast.
- The creation of product identity, including name and logo, for a
software product developed by America Online Incorporated ("AOL") for
potential on-line content providers, together with a Web site dedicated to
that product (http://www.aol.com/about/devstudio/). AOL needed full
collateral systems as well as multiple online presences to announce and
advertise the tools. The Web site features multi-level informational
architecture, and was replicated as a location on AOL's proprietary on-line
service. The Company also designed and created a variety of collateral
products, including CD-ROMs.
- The design and creation of a Web site for the National Association
of Printers and Lithographers ("NAPL") (http://www.napl.org) that includes
a database application utility that enables users to input certain sales
and operating data and instantly generate a graphical representation of
statistical information comparing their data to the rest of the industry.
The Company was founded in 1993 and initially operated a traditional
graphic design business. In August 1994, the Company shifted its principal
business to Web site design and creation. The Company's principal offices
are presently located at 80 East 11th Street, Suite 619, New York, New York
10003 and its telephone number is (212) 614-0191, although the Company
expects to relocate to the New York Information and Technology Center
during the summer of 1996. The Company's Web site is located at
http://www.k2design.com.
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THE OFFERING
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Securities offered . . . . . . . . . . . . . . . . . . . . . . 1,000,000 Units, each Unit consisting of one share of
Common Stock and one Warrant. Two Warrants entitle the
registered holder thereof to purchase one share of Common
Stock. See "Description of Securities."
Offering Price $ per Unit.
Common Stock outstanding prior
to this offering . . . . . . . . . . . . . . . . . . . . . . . 2,495,482 shares of Common Stock.
Common Stock to be outstanding
after the offering . . . . . . . . . . . . . . . . . . . . . . 3,495,482 shares of Common Stock.
Warrants -- Number to be outstanding
after the offering . . . . . . . . . . . . . . . . . . . . . . 1,000,000 Warrants.
Exercise Price . . . . . . . . . . . . . . . . . . . . $ per share, subject to adjustment in certain cases.
See "Description of Securities."
Exercise Period . . . . . . . . . . . . . . . . . . . . Commencing on the date hereof and expiring five years from
the date hereof.
Redemption . . . . . . . . . . . . . . . . . . . . . . Commencing on the date hereof, the Warrants will be
redeemable in whole or in part at the Company's option at a
price of $.05 per Warrant upon not less than 30 days'
written notice, if the closing price of the Common Stock
has been equal to or greater than 140% of the then exercise
price of the Warrants for 20 consecutive trading days
ending on the fifth day prior to the notice of redemption.
Proposed Nasdaq symbols (1)
Common Stock . . . . . . . . . . . . . . . . . . . . . KTWO
Warrants . . . . . . . . . . . . . . . . . . . . . . . KTWO W
Units . . . . . . . . . . . . . . . . . . . . . . . . . KTWO U
Boston Stock Exchange Listing(1) . . . . . . . . . . . . . . . Application will be made to list the Units, Common Stock
and Warrants on the Boston Stock Exchange. There can be no
assurance that such application will be approved or that
trading, if commenced, will continue.
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of the securities offered hereby involves a high
degree of risk. Prospective investors should consider
carefully certain risks concerning the Company and its
business. See "Risk Factors."
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__________________________________
(1) Quotation on The Nasdaq Small Cap(TM) Stock Market and listing on the
Boston Stock Exchange does not imply that a meaningful, sustained
market for the Common Stock will develop. See "Risk Factors --
Broker-Dealer Sales of Securities of the Company."
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Summary Consolidated Financial Information
The summary financial information presented below is derived from the
consolidated financial statements of the Company and its subsidiary. The
Company was founded in 1993 and entered into its first Web site design and
creation transaction with a customer in 1994. Accordingly, and recognizing
that the Company has engaged in its current primary line of business only
for approximately two years, the Company has a limited operating history
upon which an evaluation of the Company and its prospects can be based.
Management therefore believes that period-to-period comparisons of the
Company's results of operations are not indicative of future results. The
financial information presented below should be read in conjunction with
the financial statements and notes thereto included elsewhere in this
Prospectus. In addition, operating results for the three months ended
March 31, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. See "Risk Factors -- Recent
Operating Losses; Limited Operating History; Early Stage of Development"
and "Risk Factors -- Fluctuations on Operating Results, Cash Requirements
and Margins."
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CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Three Months
Ended
Fiscal Year Ended March 31,
December 31, (Unaudited)
----------------------------- ------------------------------
1994 1995 1995 1996
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Revenues $249,379 $1,196,208 $ 33,639 $ 512,434
Direct Salaries and Costs 215,865 957,027 68,152 499,109
------- --------- ------- ---------
Gross Profit (Loss) 33,514 239,181 (34,513) 13,325
Selling, General and
Administrative Expenses 73,601 200,931 12,449 125,958
Depreciation 13,013 24,485 4,779 9,113
-------- --------- -------- ----------
Income (loss) from operations (53,100) 13,765 (51,741) (121,746)
Interest expense, net -- 869 319 982
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Income (loss) before provision
for income taxes (53,100) 12,896 (52,060) (122,728)
Pro Forma income tax expense (1) - 0 0 0
--------- ----------- --------- -----------
Pro Forma net income (loss) (1) $(53,100) $ 12,896 $(52,060) $ (122,728)
======== ========== ======== ==========
Pro Forma net income (loss) per
equivalent common share (1) $ .01 $ (.06)
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Common Stock and equivalent
common stock outstanding 1,946,373 2,013,040
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March 31, 1996
(Unaudited)
----------------------------------------------------
Actual Pro Forma(2) As Adjusted(3)
--------------- ---------------- ----------------
Working Capital (deficit) . . . . . . . . . . . $(23,472) $ 595,928 $6,185,928
Total assets . . . . . . . . . . . . . . . . . $559,174 $1,178,574 $6,768,574
Stockholders' equity . . . . . . . . . . . . . $ 69,222 $ 688,622 $6,278,622
</TABLE>
________________________
(1) For the period from inception March 1, 1993 through December 31, 1994
the Company operated as a partnership. Effective January 1995 the
Company elected to be taxed as an S Corporation under the provisions
of the Internal Revenue Code of 1986. Effective January 1996, the
Company's S Corporation election was voluntarily revoked, subjecting
the Company to corporate income taxes subsequent to that date. Pro
forma income tax expense, pro forma net income (loss) and pro forma
net income (loss) per equivalent common share represent the Company's
income tax position had the Company been a C Corporation for all
periods presented.
(2) Adjusted to reflect the sale of 400,002 shares of Common Stock in a
private placement subsequent to March 31, 1996.
(3) As further adjusted to reflect the sale of 1,000,000 Units offered by
the Company hereby and the application of the estimated net proceeds
therefrom, assuming an initial public offering price of $7 per Unit.
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RISK FACTORS
An investment in the Company involves a high degree of risk. The
following risk factors should be considered carefully before purchasing the
Units offered hereby.
CASH FLOW DEFICIT; NEED FOR ADDITIONAL FINANCING; LACK OF LIQUIDITY
The Company's current primary focus is on increasing its Web site
design and creation business. As a result, the Company has hired and will
continue to hire additional personnel and has incurred and will continue to
incur substantial expenses related to administration, production, technical
resources, marketing, customer support and infrastructure in order to
enhance and expand its operations. In addition, the Company had an
operating cash flow deficit of $(2,404) in 1995 and of $(172,575) in
the three months ended March 31, 1996, which hampered the Company's ability
to expand. Delays in collecting certain accounts receivable have also
aggravated and could in the future aggravate this situation. The Company
is dependent on the successful completion of this offering for working
capital in order to be competitive, to meet the increasing demands for
service, quality and pricing and for any expansion of its business. While
the Company believes the proceeds of this offering together with available
funds and cash expected to be generated by operations will be sufficient to
finance its operations for at least one year, the Company may nevertheless
require substantial alternative financing in order to satisfy its working
capital needs, which may be unavailable or prohibitively expensive since
the Company's only assets available to secure additional financing are
accounts receivable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RECENT OPERATING LOSSES; LIMITED OPERATING HISTORY; EARLY STAGE OF
DEVELOPMENT
The Company's revenues for the years ended December 31, 1994 and 1995
were $249,379 and $1,196,208, respectively, with a net loss of $(53,100) in
1994 and net income of $11,896 in 1995. The Company's revenues for the
first quarter of 1995 and 1996 were $33,639 and $512,434 with net losses of
$(52,060) and $(122,728), respectively. There can be no assurance that the
Company will be profitable in the future or that revenue growth, if any,
can be sustained. In addition, as of March 31, 1996, the Company had
stockholders' equity of $69,222 and pro forma stockholders' equity of
$688,622, as adjusted to reflect the sale of 400,002 shares of Common Stock
in a private placement subsequent to March 31, 1996.
The prospects of the Company (which has only been engaged in its
primary line of business for approximately two years) must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stage of development, particularly companies in
new and rapidly evolving markets and especially those in Internet and other
computer related markets. There can be no assurance that the Company will
be successful in addressing these risks. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
EVOLVING MARKETING STRATEGY
The Company's marketing efforts have substantially focused on, and
will for the foreseeable future continue to focus on, developing strategic
relationships with other companies, such as advertising agencies and
Internet service provides ("Channel Sources") that seek to augment their
businesses by directly or indirectly offering to their customers Web site
services provided by the Company and other third parties. To try to avoid
any conflict with a Channel Source, the Company does not intend to offer
services to customers referred by a particular Channel Source that could be
provided to those customers by that Channel Source. Since the Company does
not expect to offer its full range of services to these customers, projects
for them may be less profitable than full-service production projects for
other customers.
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Should a Channel Source favor other providers of similar services,
fail to effectively market the Company's services as a result of the
Channel Source's competitive position or otherwise, or not utilize the
Company's services to the extent anticipated by the Company, the Company
may also be adversely affected. To date, the Company's only continuing
significant Channel Source relationship has been and continues to be with MCI.
The inability to recruit, manage or retain additional Channel Sources, or
their inability to market the Company's services effectively or provide
timely and cost-effective customer support and service, could materially
adversely affect the Company's business, operating results or financial
condition. See "Business -- Marketing -- Relationship with MCI."
CONFLICTS OF INTEREST
The Company has been precluded and may be precluded in the future from
pursuing opportunities that require it to provide services to direct
competitors of existing customers or Channel Sources. For example, the
non-binding letter of intent between the Company and the New Jersey Sports
and Exposition Authority (the "NJ Authority") for the design and creation
of the main Web site for the Meadowlands Sports Complex requires the
Company to act in good faith to remain exclusive to the NJ Authority and
events at its facilities and to notify the NJ Authority if the Company is
contacted by another sports or entertainment venue and act accordingly. In
addition, the Company risks alienating or straining relationships with
customers and Channel Sources each time the Company agrees to provide
services to even indirect competitors of existing customers or Channel
Sources. Conflicts of interest may jeopardize the stability of revenues
generated from existing customers and Channel Sources and preclude access
to business prospects, either of which could have a material adverse effect
on the Company's business, financial condition and operating results.
RELATIONSHIP WITH MCI
To date, the Company's only significant continuing Channel Source
relationship has been and continues to be with MCI. During 1995, the
Company designed and created one Web site for MCI and five Web sites for
MCI's customers on MCI's online shopping mall, which collectively accounted
for approximately 15% of the Company's revenues for that year. The Company
is aware that MCI is presently redefining its online shopping mall concept,
marketplaceMCI and, therefore, marketplaceMCI may not provide any future
business for the Company. Nevertheless, the Company continues to derive
revenues from another Internet initiative of MCI commenced in February 1996
called "Webworks," pursuant to which MCI salespersons offer comprehensive
Web site services to their customers and potential customers. In
connection with Webworks, MCI co-markets the Company's services and after
pre-screening an interested customer, introduces that customer to the
Company. However, MCI has no obligation to refer projects to the Company,
is expected to refer Webworks projects to others, and utilizes the services
of certain of the Company's competitors, including CKS Group, Inc., for
other Web site projects. The Company believes that MCI also has an equity
interest in another unrelated provider of Web site services. The Company
is also aware that AT&T and UUNET Technologies, Inc., among others, have
introduced programs directly competing with Webworks. The termination of
either of the Company's relationships with MCI, and especially relating to
Webworks, a material reduction in the use of the Company's services by MCI
or the Company's inability to generate repeat business from MCI would have
a material adverse effect on the Company's business, financial condition
and operating results. See "Business -- Marketing -- Relationship with MCI."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS, CASH REQUIREMENTS AND MARGINS
Quarterly revenues and operating results have fluctuated and will
fluctuate as a result of a variety of factors. These factors, some of
which have affected the Company and some of which are beyond the Company's
control, include the timing of the completion, material reduction or
cancellation of major projects, the loss of a major customer or the
termination of a relationship with a Channel Source, timing of the receipt
of new business, timing of the hiring or loss of personnel, changes in the
pricing strategies and business focus of the Company or its competitors,
capital expenditures, operating expenses and other
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costs relating to the expansion of operations, general economic conditions
and acceptance and use of the Internet. At the present time, the Company
has determined to increase expense levels, which to a large extent are
fixed, based in part on expectations as to future revenues. The Company
will base future expense levels similarly. Revenues and operating results
are difficult to forecast because of these fluctuations and because the
Company lacks historical financial data for a significant number of
periods. The Company may be unable to adjust spending in a timely manner
to compensate for any unexpected revenue shortfall. Any significant
shortfall of demand for the Company's services in relation to the Company's
expectations would have an adverse impact on the Company's business,
operating results and financial condition.
The Company's quarterly operating margins may also fluctuate from
period to period depending on the relative mix of lower cost full time
employees versus higher cost independent contractors. Due to the Company's
lack of liquidity, the Company continues to rely more heavily on
independent contractors than it otherwise would (and expects to do so for
the foreseeable future), and to the extent it does so, the Company will
continue to incur these increased operating expenses.
PROJECT PROFIT EXPOSURES; RISK OF CANCELLATION
The Company has generated a substantial portion of its revenues
through project fees on a fixed fee for service basis. In addition, the
Company's non-binding letter of intent with the NJ Authority provides that
the Company's fees for projects pursuant thereto will be paid from the
proceeds of advertising revenues generated by Web sites created for the NJ
Authority. The Company assumes greater financial risk on both fixed-price
contracts and contracts that are dependent upon advertising revenues to pay
the Company's fees than on either time-and-material or cost-reimbursable
contracts. Failure to anticipate technical problems, estimate costs
accurately or control costs during performance of a fixed-price contract,
and failure to generate advertising revenues in connection with contracts
dependent thereon to pay the Company's fees, which may be dependent upon
the ability of the Company's customer, may reduce the Company's profit or
cause a loss. Moreover, projects are generally terminable at will by a
customer and the Company could sustain losses as a result of expenses
incurred prior to termination.
ONE-TIME CUSTOMERS
Since substantially all of the Company's direct customers (and certain
Channel Sources) have retained the Company on a single project basis,
customers from whom the Company generated substantial revenue in one period
have not been a substantial source of revenue in a subsequent period.
During 1995, single customers accounted for approximately 18%, 15% and 12%
of the Company's revenues and during the first quarter of 1996 one customer
accounted for approximately 60% of the Company's revenues. Due to the
Company's limited operating history and the emerging nature of the
Internet, the Company cannot be sure whether its relationships with
customers will continue to be on a one project per customer basis. To the
extent the Company does not generate repeat or ongoing business from its
customers, it will incur the higher sales and marketing expenses associated
with attracting new customers as compared to those in attracting additional
business from existing customers. Moreover, the Company's inability to
generate additional business from any source upon completion of existing
projects would also have a material adverse effect on the Company's
business, financial condition and operating results. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition"
and "Business -- Customers."
UNCERTAIN ADOPTION OF INTERNET AS A MEDIUM OF COMMERCE AND COMMUNICATIONS;
DEPENDENCE ON INTERNET
Demand and market acceptance for recently introduced services and
products like those offered by the Company are subject to a high level of
uncertainty. The use of the Internet in marketing and advertising and
otherwise, particularly by those individuals and enterprises that have
historically relied
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upon traditional means of marketing and advertising, generally requires the
acceptance of a new way of conducting business and exchanging information.
Enterprises that have already invested substantial resources in other means
of conducting business and exchanging information may be particularly
reluctant or slow to adopt a new strategy that may make their existing
resources and infrastructure less useful. There can be no assurance that
the market for the Company's services will develop and if it fails to
develop, develops more slowly than expected or becomes saturated with
competitors, or if the Company's services do not achieve market acceptance,
the Company's business, operating results and financial condition will be
materially adversely affected.
The Company's ability to derive revenues will also depend upon a
robust industry and the infrastructure for providing Internet access and
carrying Internet traffic. The Internet may not prove to be a viable
commercial marketplace because of inadequate development of the necessary
infrastructure or timely development of complementary products, such as
high speed modems. Moreover, other critical issues concerning the
commercial use of the Internet (including security, reliability, cost, ease
of use and access, and quality of service) remain unresolved and may impact
the growth of Internet use. Because global commerce and online exchange
of information on the Internet and other similar open wide area networks
are new and evolving, it is difficult to predict with any assurance whether
the Internet will prove to be and remain a viable commercial marketplace.
If the infrastructure necessary to support the Internet's commercial
viability is not developed, or if the Internet does not become a viable
marketplace, the Company's business, operating results and financial
condition would be materially and adversely affected. See "Business --
Industry Overview."
RISK OF CHANGING TECHNOLOGY
The services the Company offers and the services and products the
Company expects to offer in the future, are impacted by rapidly changing
technology, evolving industry standards, emerging competition and frequent
new service, software and other product introductions. There can be no
assurance that the Company can successfully identify new business
opportunities and develop and bring new services or products to market in a
timely and cost-effective manner, or that services, products or
technologies developed by others will not render the Company's services or
products noncompetitive or obsolete. In addition, there can be no
assurance that services, products or enhancements introduced by the Company
will achieve or sustain market acceptance or be able to effectively address
compatibility, inoperability or other issues raised by technological
changes or new industry standards.
Required technological advances by the Company as the industry evolves
will likely include the ability to incorporate full-motion video, and the
integration of video, voice, data and graphics in Web sites. The Company's
pursuit of these technological advances will also likely require the
Company to seek assistance from third parties. There can be no assurance
that the Company will succeed in incorporating these features in Web sites.
See "Business -- Industry Overview."
INTELLECTUAL PROPERTY RIGHTS; RISK OF INFRINGEMENT; POSSIBLE LITIGATION
The Company believes that its success in its core business of Web site
design and creation is not dependent upon patents, copyrights or trademarks
and the Company does not currently have any registered patents, copyrights
or trademarks. Consequently, the Company relies solely on a combination of
common-law and statutory law to protect its proprietary information and
know-how. The Company also utilizes technology owned by third parties.
There can be no assurance that licenses for any technology developed by
third parties that might be required for the Company's services would be
available on reasonable terms, if at all.
Although the Company does not believe that its services infringe the
proprietary rights of any third parties, there can be no assurance that
third parties will not assert claims based on these services against the
Company in the future or that any of those claims would not be successful.
In addition, many of the Company's competitors rely upon trade secret law.
Litigation may be necessary in the future to
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enforce the Company's intellectual property rights and to protect its
proprietary information, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement
or invalidity. Litigation of this nature, whether or not successful, could
result in substantial costs and diversions of resources, either of which
could have a material adverse effect on the Company's business, financial
condition or operating results. Furthermore, parties making claims against
the Company could secure a judgment awarding substantial damages, as well
as injunctive or other equitable relief which could directly or indirectly
prohibit the Company from providing certain services and products. A
judgment of this nature could have a material adverse effect on the
Company's business, financial condition or results of operations.
RISK OF DEFECTS
Web site services and other services based on software and computing
systems often encounter development and completion delays and the
underlying software may contain undetected errors or failures when
introduced and, in the case of Web sites, when the volume of traffic on a
site increases. In addition, there can be no assurance that errors will
not be found in the software underlying a Web site, resulting in delays in
the completion of a Web site or other project, the commercial release of
particular services or products, the market acceptance thereof, or
unanticipated costs to cure any defect if it is subject to cure, to refund
money paid to the Company or to pay for damages caused by the delay or
defect, any of which could have a material adverse effect on the Company's
business, financial condition or operating results. Moreover, the Company
lacks errors and omissions insurance and business interruption insurance.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL; ABILITY TO
MANAGE GROWTH
The Company's success depends to a significant extent upon its senior
management, David J. Centner, Douglas E. Cleek, Bradley K. Szollose and
Matthew G. de Ganon and their ability to operate effectively, both
independently and as a group. None of the Company's senior management has
any prior executive management experience. The Company has no employment
agreements with any of these individuals but is expected to enter into
employment agreements with each of them prior to the consummation of this
offering. The loss of any of these members of senior management could have
a material adverse effect upon the Company's business, financial condition
and operating results. Although the employment agreements will contain
non-compete and non-disclosure provisions, the Company's ability to benefit
from them is uncertain since such provisions typically must be limited in
geographic scope to be enforceable. Restrictions limited in geographic
scope may not effectively prohibit competition with the Company because of
the global nature of the Internet. If one or more of the Company's
employees resigns from the Company to join a competitor or to form a
competing company, any resulting loss of existing or potential customers or
other unauthorized disclosure or use of the Company's proprietary
information, technical knowledge, practices, procedures or customer lists
could also have a material adverse effect on the Company's business,
financial condition and operating results.
The Company believes that future success will depend in large part
upon its ability to attract and retain additional highly skilled creative,
technical, financial and strategic marketing personnel. Competition for
such personnel, especially creative talent, is intense. The Company hired
a Controller in April 1996, and intends to identify and hire a Chief
Financial Officer after the consummation of this offering. There can be no
assurance the Company will be successful in attracting and retaining such
personnel, and the failure to do so could have a direct and immediate
material adverse effect on the Company's business, financial condition and
operating results. See "Management."
Since the Company shifted its primary business focus to Web site
design and creation, there has been substantial growth in the number of
employees and in increased responsibility for both existing and new
management personnel and strain on the Company's existing management,
administrative, operational, financial and technical resources and
increased demands on its management information systems and controls.
There can be no assurance that the Company will effectively develop and
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implement systems, procedures or controls adequate to support the Company's
operations or that management will be able to achieve the rapid execution
necessary to fully exploit the opportunity for the Company's services. To
manage its business and any growth, the Company must continue to implement
and improve its operational and financial systems and continue to expand,
train and manage its employees. In particular, management believes that
the Company will need to hire additional qualified administrative and
management personnel in the accounting and finance areas to establish and
manage financial control systems. If the Company is unable to manage its
business effectively, the Company's business, operating results and
financial condition will be materially adversely affected.
COMPETITION; NO SUBSTANTIAL BARRIERS TO ENTRY; PRICE EROSION
The markets for the Company's services are highly competitive and are
characterized by pressures to reduce prices, incorporate new capabilities
and accelerate completion schedules. The Company expects competition for
its services to intensify in the future, partly because there are no
substantial barriers to entry into the Company's business. There can be no
assurance that the Company will be able to offset the effects of any
resulting price reductions with an increase in the number of its customers
or projects, higher revenue from enhanced services or products, cost
reductions or otherwise and its failure to do so could have a material
adverse effect on its business, financial condition and operating results.
The Company faces competition from a number of sources, including
potential customers that perform Web site development services in-house.
These sources also include other Web site service boutique firms,
communications, telephone and telecommunications companies such as
Telecommunications Inc., computer hardware and software companies such as
Microsoft Corporation and Adobe Systems Incorporated, established online
services companies, advertising agencies, direct access Internet and
Internet-services and access providers as well as specialized and
integrated marketing communication firms such as CKS Group, Inc. and Eagle
River Interactive, Inc., all of which are entering the Web site design and
creation market in varying degrees and are competing with the Company, and
many of which have announced plans to offer expanded Web site design and
creation services. Many of the Company's competitors or potential
competitors have longer operating histories, longer customer relationships
and significantly greater financial, management, technological,
development, sales, marketing and other resources than the Company. The
Company's ability to retain relationships with Channel Sources and its
existing customers and generate new customers and relationships with
Channel Sources depends to a significant degree on the quality of its
services and its reputation, as compared with the quality of services
provided by and the reputations of the Company's competitors. The Company
also competes on the basis of creative talent, price, reliability of
services and responsiveness. There can be no assurance that the Company
will be able to compete and its inability to do so would have a material
adverse impact on the Company's business, financial condition and operating
results. See "Business -- Competition."
GOVERNMENT REGULATION, LEGAL UNCERTAINTIES AND REGULATORY POLICY RISKS
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses
generally, and there are currently few laws or regulations directly
applicable to Web site service companies. However, due to the increasing
media attention focused on the Internet, it is possible that a number of
laws and regulations may be adopted with respect to the Internet, covering
issues such as user privacy, and pricing and characteristics and quality of
products and services. The adoption of any such laws or regulations may
decrease the growth of the Internet, which could in turn decrease the
demand for the Company's services and products and increase the Company's
cost of doing business or cause the Company to modify its operations, or
otherwise have an adverse effect on the Company's business, operating
results or financial condition. Moreover, the applicability to the
Internet of existing laws governing issues such as property ownership,
libel and personal privacy is uncertain. The Company cannot predict the
impact, if any, that future regulation or regulatory changes may have on
its business. In addition, Web site developers such as the Company face
potential liability for the actions of customers and others using their
services, including liability for infringement of
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intellectual property rights, rights of publicity, defamation, libel and
criminal activity under the laws of the U.S. and foreign jurisdictions.
Moreover, the Company lacks errors and omissions insurance. Any imposition
of liability could have a material adverse effect on the Company.
The Telecommunications Act of 1996 (the "1996 Telecommunications
Act"), which became effective on February 8, 1996, imposes criminal
liability on persons sending or displaying in a manner available to minors
indecent material on an interactive computer service such as the Internet.
The 1996 Telecommunications Act also imposes criminal liability on an
entity knowingly permitting facilities under its control to be used for
those activities. The constitutionality of these provisions is being
challenged in federal court, and the interpretation and enforcement of them
are uncertain. This legislation may decrease demand for Internet access,
chill the development of Internet content, or have other adverse effects on
Web site service providers such as the Company. In addition, in light of
the uncertainty of the interpretation and application of this law, there
can be no assurance that the Company would not have to modify its
operations to comply with the statute. The impact of the 1996
Telecommunications Act on the Company and its business cannot be predicted.
See "Business -- Government Regulation."
NO ASSURANCE OF PUBLIC MARKET; ARBITRARILY DETERMINED OFFERING PRICE
Prior to this offering, there has been no market for the Units, the
Common Stock or the Warrants. Consequently, the offering prices of the
Units, Common Stock and Warrants have been determined arbitrarily by
negotiations between the Company and the Representative and are not
necessarily related to the Company's asset value, net worth or other
established criteria of value. There can be no assurance that a regular
trading market will develop or that if developed, will be sustained. In
the absence of a trading market, an investor may be unable to liquidate its
investment. See "Underwriting."
NO DIVIDENDS
The Company does not intend to declare any dividends on its Common
Stock in the foreseeable future. See "Dividend Policy."
VOTING AGREEMENT, AUTHORIZATION OF PREFERRED STOCK AND OTHER ANTI-TAKEOVER
DEVICES
Following the sale of the Units offered hereby, the directors and
executive officers of the Company will own approximately 54% of the
Company's outstanding Common Stock. As a result of a 10-year Voting
Agreement to be entered into by Messrs. Centner, de Ganon, Cleek and
Szollose prior to the consummation of the offering, Matthew de Ganon will
have voting control over all of these shares, except that these shares will
be required to be voted in favor of the election as directors of Messrs.
Centner, de Ganon, Cleek and Szollose. Consequently, Mr. de Ganon will be
in a position to control all other matters requiring approval by the
stockholders of the Company, including the approval of significant
corporate matters, such as a merger, consolidation or sale of all or
substantially all of the Company's business or assets. In addition, the
Voting Agreement will grant each party thereto a right of first refusal as
to the sale of the others' Common Stock. See "Management -- Voting
Agreement."
The Board of Directors is also authorized to issue shares of preferred
stock and to fix the relative voting, dividend, liquidation, conversion,
redemption and other rights, preferences and limitations thereof without
any further vote or action of the stockholders. The issuance of preferred
stock could adversely affect the voting power or other rights of the
holders of Common Stock. In the event of issuance, the preferred stock
could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change of control of the Company.
Although the Company has no present intention to issue any preferred stock,
there can be no assurance that the Company will not do so in the future.
The Company's certificate of incorporation and by-laws contain other
provisions that may discourage, delay or prevent a change of control of the
Company that a stockholder might consider to be in the
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stockholder's best interest, including those that might result in a premium
over the market price for the Company's securities should a market develop.
See "Description of Securities."
IMMEDIATE SUBSTANTIAL DILUTION
Upon completion of this offering, there will be an immediate and
substantial dilution of the net tangible book value of the Company from the
public offering price. As of March 31, 1996, the Company had a pro forma
net tangible book value (as adjusted to reflect the sale of Common Stock in
a private placement subsequent thereto and the net proceeds therefrom) of
$688,622. After giving effect to the receipt of the net proceeds from this
offering, the pro forma as adjusted net tangible book value as of March 31,
1996 would have been $6,278,622. As a result, the public investors will
suffer an immediate dilution of $5.20 per share which represents
approximately 74% of the initial public offering price of the Common Stock.
The foregoing calculations do not ascribe any value to the Warrants. See
"Dilution."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS
The Warrants will be redeemable in whole or in part at the Company's
option at a price of $.05 per Warrant upon not less than 30 days' written
notice if the closing price of the Common Stock has been equal to or
greater than 140% of the then exercise price of the Warrants for 20
consecutive trading days ending on the fifth day prior to the notice of
redemption. Holders' rights to exercise the Warrants will terminate on the
redemption date thereof, depriving holders of any value except the right to
receive the redemption price of the Warrants. Notice of redemption of the
Warrants could force the holders to exercise the Warrants and to pay the
exercise price at a time when it may be disadvantageous to do so, to sell
the Warrants at the 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 the
redemption. See "Description of Securities -- Warrants."
SHARES ELIGIBLE FOR FUTURE SALE
All of the 2,495,482 shares of Common Stock outstanding as of the date
of this Prospectus are "restricted securities," as that term is defined
under Rule 144 promulgated under the Act. Of those shares, an aggregate of
947,740 shares owned by Messrs. Cleek and Szollose have been held for the
minimum two year period required by Rule 144 and are eligible for public
sale pursuant to Rule 144. The two-year holding period will expire with
respect to 473,870 shares owned by Mr. Centner and 473,870 shares owned by
Mr. de Ganon in January 1997 and July 1997, respectively. Messrs. Centner,
Cleek, Szollose and de Ganon have agreed, however, not to sell any of their
shares of Common Stock until , 1998 (24 months from the date hereof)
without the Representative's prior written consent. The remaining 600,002
shares are included in the Registration Statement of which this Prospectus
is a part but the holders thereof have agreed not to sell these shares
within six months of the date of this Prospectus without the
Representative's prior written consent. The Company has also agreed to
sell to the Representative and its designees warrants to purchase up to
100,000 Units and to register under the Act the securities comprising such
Units as well as the Common Stock underlying the warrants included in such
Units. No prediction can be made as to the effect, if any, that sales of
such Common Stock or its availability for sale will have on the market
prices prevailing from time to time of the securities offered hereby or on
the Company's ability to raise capital. See "Selling Stockholders and Plan
of Distribution," "Shares Eligible for Future Sale" and "Underwriting."
RESTRICTIONS ON EXERCISE OF THE WARRANTS
The sale by the Company of Common Stock on any exercise of the
Warrants must be registered, or exempt from registration, under applicable
federal and state securities laws. The Warrants will not be exercisable if
any required registration or exemption has not been obtained. The Company
may decide
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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 holders of the Warrants
reside. In such a case, the Warrants held by such holders will expire and
have no value if such Warrants cannot be sold. In addition, Warrants will
not be exercisable at any time during which the Company does not have a
current prospectus relating thereto effective under the Act. The
maintenance of a current prospectus could result in substantial expense to
the Company, and there can be no assurance that the Company will be able to
maintain a current effective prospectus. The Warrants may be deprived of
any value if the current prospectus covering the shares underlying the
Warrants is not kept effective or if such underlying shares are not or
cannot be registered in the applicable states. See "Description of
Securities -- Warrants."
BROKER-DEALER SALES OF SECURITIES OF THE COMPANY
The National Association of Securities Dealers, Inc. (the "NASD"),
which administers The Nasdaq SmallCap(TM) Stock Market, requires that in order
to continue to be included in The Nasdaq SmallCap(TM) Stock Market, a company
must maintain $2 million in total assets, a $200,000 market value of the
public float and $1 million in total capital and surplus. In addition,
continued inclusion requires, among other things, two market-makers and a
minimum bid price of $1.00 per share; provided, however, that if a company
falls below such minimum bid price, it will remain eligible for continued
inclusion if the market value of the public float is at least $1 million
and the Company has $2 million in capital and surplus. The Boston Stock
Exchange also has standards that must be maintained for continued listing.
The failure to meet these maintenance criteria in the future may result in
the discontinuance of the inclusion of the Units, the Common Stock and the
Warrants in The Nasdaq SmallCap(TM) Stock Market or the delisting of them from
the Boston Stock Exchange. In such event, trading, if any, in the Units,
the Common Stock and the Warrants may then continue to be conducted in the
non-Nasdaq over-the-counter market in what is commonly referred to as the
"bulletin board." As a result, an investor may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, the
Units, the Common Stock and the Warrants.
In the event that securities issued by the Company cease to be
included in The Nasdaq SmallCap(TM) Stock Market or listed on the Boston Stock
Exchange, sales of such securities will be within the scope of a Securities
and Exchange Commission rule that imposes additional sales practice
requirements on broker-dealers who sell such securities to persons other
than their established customers and institutional accredited investors.
For transactions covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser's
written agreement to the transaction prior to the sale. Consequently, the
rule may affect the ability of broker-dealers to sell the Company's
securities and also may affect the ability of purchasers in this offering
to sell their securities in a secondary market, if such market were to
develop.
-13-
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units offered
hereby are estimated to be $5,590,000, after deducting underwriting
discounts and offering expenses, assuming an initial public offering price
of $7.00 per Unit. The Company expects to use the net proceeds for working
capital and general corporate purposes.
The foregoing represents the Company's best estimate of its use of the
net proceeds of this offering, based upon present planning, industry,
economic and business conditions, and the Company's estimated future
revenues and expenditures. The Company may change its use of proceeds in
response to unanticipated events such as increased expenses, growth or
competition or new attractive opportunities, which may cause the Company to
redirect its priorities and to reallocate a portion of the proceeds or use
portions thereof for other purposes, or to seek additional debt or equity
financing or curtail its business activities. See "Risk Factors --
Fluctuations in Quarterly Operating Results, Cash Requirements and
Margins".
The Company anticipates that the net proceeds of this offering
together with available funds and cash expected to be generated by
operations will be adequate to fund the Company's currently proposed
activities for at least one year. Pending application of the net proceeds
of this offering as described above, the Company intends to invest those
proceeds in short-term, investment grade, interest-bearing instruments.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
-14-
<PAGE>
DILUTION
The difference between the price per share of Common Stock included in
the Units and the adjusted net tangible book value per share of Common
Stock after this offering constitutes the dilution to investors in this
offering. Net tangible book value per share is determined by dividing the
net tangible book value (total assets less intangible assets and total
liabilities) by the number of outstanding shares of Common Stock. The
following discussion and tables allocate no value to the Warrants and the
Common Stock issuable upon exercise thereof.
At March 31, 1996, the Company had a pro forma net tangible book value
of $688,622 or $.28 per share of Common Stock, after giving effect to the
receipt of net proceeds totalling approximately $620,000 subsequent thereto
from the sale of securities in a private placement. After giving effect to
the sale of the Units offered hereby at an assumed offering price of $7.00
per share (less underwriting discounts and estimated expenses of this
offering) and allocating no value to the Warrants included in the Units,
the as adjusted pro forma net tangible book value of the Company at March
31, 1996 would have been $6,278,622 or $1.80 per share of Common Stock,
representing an immediate increase in net tangible book value of $1.52 per
share to existing stockholders and an immediate dilution of $1.20 per share
to new investors or 74%. See "Certain Transactions -- Private Placements."
The following table indicates the per share dilution to be incurred by
the investors in this offering.
Assumed public offering price per Unit . . . . . . . . . . . $7.00
Pro forma net tangible book value per share at
March 31, 1996 . . . . . . . . . . . . . . . . . . . . . .28
Increase per share attributable to new investors. . . . . 1.52
----
As adjusted pro forma net tangible book value per share
after giving effect to this offering . . . . . . . . . . . 1.80
-----
Dilution in net tangible book value per share to new
investors . . . . . . . . . . . . . . . . . . . . . . . . . $5.20
=====
If the Representative's over-allotment option is exercised in full, the
increase per share attributable to new investors, the as adjusted pro forma
net tangible book value per share and the dilution in net tangible book
value per share to new investors would be $1.69, $1.97 and $5.03,
respectively.
-15-
<PAGE>
The following table summarizes the number and percentage of shares of
Common Stock purchased from the Company, the amount and percentage of the
consideration paid, and the average price per share paid by existing
stockholders and by new investors pursuant to this offering.
<TABLE><CAPTION>
Shares Purchased Consideration Paid(1) Average
-------------------- ----------------------- Price Per
Number Percent Amount Percent Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders . . . . . . 2,495,482 71.4% $ 985,000 12.3% $0.39
New Investors . . . . . . . . . . . 1,000,000 28.6% $7,000,000 87.7% $7.00
--------- ----- ---------- ----
Total . . . . . . . . . . . . 3,495,482 100.0% $7,985,000 100.0%
========= ===== ========== =====
</TABLE>
- -------------------------------------
(1) Excludes non-cash consideration consisting of the contribution of all
of the partnerships interests in the general partnership predecessor
of the Company and includes $25,000 of non-cash consideration
consisting of the contribution of a loan due from the Company. See
"Certain Transactions -- Formation and Financing of the Company."
In addition, holders of the Warrants may incur additional dilution on
the exercise thereof.
-16-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company
(a) as of March 31, 1996, (b) as of March 31, 1996, pro forma to give
effect to the receipt of net proceeds of approximately $620,000 from the
sale of 400,002 shares of Common Stock in a private placement in May 1996,
and (c) pro forma as of March 31, 1996 as adjusted to reflect the sale of
the Units offered hereby and the application of the estimated net proceeds
therefrom. This information should be read in conjunction with the
Company's historical financial statements and related notes appearing
elsewhere in this Prospectus.
<TABLE><CAPTION>
March 31, 1996
------------------------------------------------------------
Actual Pro Forma As Adjusted
------------ ---------- -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Current portion of long-term debt $55,708 $55,708 $55,708
Long-term debt, net of current
portion 46,382 46,382 46,382
-------- ------- --------
Total debt 102,090 102,090 102,090
------- ------- -------
Stockholders' equity:
Preferred stock, $.01 par
value per share; 1,000,000
shares authorized; no shares
issued and outstanding 0 0 0
Common stock, $.01 par
value per share, 9,000,000
shares authorized;
2,095,480 shares issued and
outstanding; 2,495,482
shares issued and
outstanding, pro forma; and
3,495,482 shares issued and
outstanding, as adjusted 20,955 24,955 34,955
Additional paid-in capital 170,995 786,395 6,366,395
Retained earnings (deficit) (122,728) (122,728) (122,728)
--------- --------- ----------
Total stockholders' equity 69,222 688,622 6,278,622
--------- --------- ---------
Total Capitalization $171,312 $ 790,712 $ 6,380,712
======== ======== ==========
</TABLE>
-17-
<PAGE>
DIVIDEND POLICY
The Company does not expect to pay dividends in the foreseeable future
as any earnings are expected to be retained to finance the Company's
growth. Declaration of dividends in the future will remain within the
discretion of the Company's Board of Directors, which will review its
dividend policy from time to time.
-18-
<PAGE>
SELECTED FINANCIAL DATA
The following financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included in this
Prospectus. The data insofar as it relates to each of the years 1994 and
1995 have been derived from audited financial statements and notes thereto
appearing elsewhere herein. The data for the three months ended March 31,
1994 and 1995 have been derived from unaudited financial statements which,
in the opinion of management, include all adjustments, consisting of only
normally recurring adjustments, necessary for a fair statement of the
results for unaudited interim periods. The Company was founded in 1993 and
entered into its first Web site design and creation transaction with a
customer in 1994. Accordingly, and recognizing that the Company has
engaged in its current primary line of business only for approximately two
years, the Company has a limited operating history upon which an evaluation
of the Company and its prospects can be based. Management therefore
believes that period-to-period comparisons of the Company's results of
operations are not indicative of future results. In addition, operating
results for the three months for the ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
<TABLE><CAPTION>
Three Months
Ended
Fiscal Year Ended March 31,
December 31, (Unaudited)
------------------------------ -----------------------------
1994 1995 1995 1996
---------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Revenues $249,379 $1,196,208 $ 33,639 $ 512,434
Direct Salaries and Costs 215,865 957,027 68,152 499,109
------- --------- ------- ---------
Gross Profit (Loss) 33,514 239,181 (34,513) 13,325
Selling, General and
Administrative Expenses 73,601 200,931 12,449 125,958
Depreciation 13,013 24,485 4,779 9,113
-------- --------- -------- ----------
Income (loss) from operations (53,100) 13,765 (51,741) (121,746)
Interest expense, net -- 869 319 982
---------- ---------- -------- ----------
Income (loss) before provision
for income taxes (53,100) 12,896 (52,060) (122,728)
Pro Forma income tax expense (1) - 0 0 0
--------- ----------- --------- -----------
Pro Forma net income (loss) (1) $(53,100) $ 12,896 $(52,060) $ (122,728)
======== ========== ======== ==========
Pro Forma net income (loss) per
equivalent common share (1) $ .01 $ (.06)
=========== ============
Common Stock and equivalent
common stock outstanding 1,946,373 2,013,040
=========== =========
March 31, 1996
(Unaudited)
-----------------------------------------------------
Actual Pro Forma(2) As Adjusted(3)
------------ ---------------- -----------------
Working Capital (deficit) . . . . . . . . . . . $(23,472) $ 595,928 $6,185,928
Total assets . . . . . . . . . . . . . . . . . $559,174 $1,178,574 $6,768,574
Stockholders' equity . . . . . . . . . . . . . $ 69,222 $ 688,622 $6,278,622
</TABLE>
________________________
(1) For the period from inception March 1, 1993 through December 31, 1994
the Company operated as a partnership. Effective January 1995 the
Company elected to be taxed as an S Corporation under the provisions
of the Internal Revenue Code of 1986. Effective January 1996, the
Company's S Corporation election was voluntarily revoked, subjecting
the Company to corporate income taxes subsequent to that date. Pro
forma income tax expense, pro forma net income (loss) and pro forma
net income (loss) per equivalent common share represent the Company's
income tax position had the Company been a C Corporation for all
periods presented.
(2) Adjusted to reflect the sale of 400,002 shares of Common Stock in a
private placement subsequent to March 31, 1996.
(3) As further adjusted to reflect the sale of 1,000,000 Units offered by
the Company hereby and the application of the estimated net proceeds
therefrom, assuming an initial public offering price of $7 per Unit.
-19-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presentation of management's discussion and analysis of
the Company's financial condition and results of operations should be read
in conjunction with the Company's Consolidated Financial Statements,
accompanying notes thereto and other financial information appearing
elsewhere in this Prospectus.
OVERVIEW
The Company was founded in 1993 as a general partnership and initially
operated a traditional graphic design business. In March 1994, the Company
was hired to design a graphical user interface for Sierra Magazine Online,
a proprietary online service and in August 1994 for NetManage Inc., the
first company to perform a secure online transaction on the Internet, at
which time the Company shifted its principal business to Web site design
and creation. In January 1995, the Company was reorganized as a New York
corporation that elected to be treated as an S corporation for tax
purposes. In January 1996 the Company was reorganized as a Delaware
holding company and the New York corporation became a wholly-owned
operating subsidiary thereof and thus ceased to be an S corporation for tax
purposes. For financial reporting purposes, the Company's Consolidated
Financial Statements include the Company and its wholly-owned subsidiary.
Since the Company has engaged in its current primary line of business
only for approximately two years, the Company has a limited operating
history upon which an evaluation of the Company and its prospects can be
based. Management therefore believes that period-to-period comparisons of
the Company's results of operations are not indicative of future results.
In addition, operating results for the three months ended March 31, 1996
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996. See "Risk Factors -- Recent Operating
Losses; Limited Operating History; Early Stage of Development" and "Risk
Factors -- Fluctuations in Quarterly Operating Results, Cash Requirements
and Margins."
RESULTS OF OPERATIONS
General
Web site design and creation projects for which the Company has been
engaged have generally been completed within six to eight weeks, although
certain past, current and future projects have taken and are expected to
take longer to complete. Revenues are recognized on the completed contract
method on an individual project basis. Provisions for any estimated losses
on uncompleted projects are made in the period in which such losses are
determinable. A substantial portion of the Company's revenues have been
generated on a fixed fee for service basis. See "Risk Factors -- Project
Profit Exposure; Risk of Cancellation."
The Company has increased and is currently increasing its expense
levels to accommodate the anticipated growth in its business, including
substantially increasing the number of employees, relocating its offices
and investing in equipment. The Company's failure to expand its business
in an efficient manner could have a material adverse effect on the
Company's business, operating results and financial condition. In
addition, there can be no assurance that the Company's revenues will
continue to grow at a rate that will support its increasing expense levels.
See "Risk Factors -- Uncertain Adoption of Internet as a Medium of
Commerce and Communications; Dependence on Internet," "Risk Factors -- Risk
of Changing Technology," "Risk Factors -- Evolving Marketing Strategy,"
"Risk Factors -- Conflicts of Interest," "Risk Factors -- One-Time Customers"
and "Risk Factors -- Relationship with MCI" for a discussion of other
uncertainties that may adversely affect the Company's business, operating
results and financial condition.
-20-
<PAGE>
The Company has also generated a substantial portion of its revenues
through project fees on a fixed fee for service basis. In addition, the
Company's non-binding letter of intent with the New Jersey Sports and
Exposition Authority (the "NJ Authority") provides that the Company's fees
for projects pursuant thereto will be paid from the proceeds of advertising
revenues generated by Web sites created for the NJ Authority. The Company
assumes greater financial risk both on fixed-price contracts and contracts
dependent upon advertising revenues to pay the Company's fees than on
either time-and-material or cost-reimbursable contracts. Failure to
anticipate technical problems, estimate costs accurately or control costs
during performance of a fixed-price contract, and failure to generate
adverting revenues in connection with contracts dependent thereon to pay
the Company's fees, which may be dependent upon the ability of the
Company's customer, may reduce the Company's profit or cause a loss. A
material shift away from a predominance of fixed-fee based projects to more
time-and-materials projects, however, could also have an adverse effect on
the Company's operating profit margin. See "Risk Factors -- Project Profit
Exposures; Risk of Cancellation."
Revenues
Revenues for the years ended December 31, 1995 and 1994 were
$1,196,208 and $249,379, respectively, and revenues for the three months
ended March 31, 1996 (the "1996 Quarter") and March 31, 1995 (the "1995
Quarter") were $512,434 and $33,639, respectively. In fiscal 1994 and in
the 1995 Quarter, substantially all of the Company's revenues were
generated by traditional graphic design services. The Company did not
generate a significant portion of its revenue from its Web site services
until later in fiscal 1995, during which year approximately 80% of revenues
were generated from Web site design and creation services. During the 1996
Quarter substantially all of the Company's revenues were generated from Web
site design and creation services. The Company expects that the ratio of
revenues derived from Web site services as compared to revenues derived
from traditional graphic design services will continue to increase, since
the Company expects to continue to focus its resources on promoting its Web
site services and to limit its traditional graphic design services to those
provided in conjunction with Web site services.
Direct Salaries and Costs
Direct salaries and costs include all direct labor costs and other
direct costs related to project performance, such as independent
contractors, freelance labor, supplies, and printing and equipment costs.
The Company's direct salaries and costs for the year ended December 31,
1995 were $957,027, and consisted primarily of approximately $405,000 paid
to freelance artists and other independent contractors (approximately half
of which was paid to a vendor of complex computer programming services
required for special features on Web sites), and secondarily of
approximately $300,000 paid as direct salaries.
The Company's direct salaries and costs for the year ended December
31, 1994 were $215,865 and consisted primarily of approximately $110,000 of
printing and film processing costs and of approximately $80,000 paid as
direct salaries.
The Company's direct salaries and costs for the 1996 Quarter were
$499,109 and consisted primarily of approximately $260,000 paid to
freelance artists and other independent contractors (approximately $150,000
of which was paid to a vendor of complex computer programming services) and
approximately $210,000 was paid as direct salaries. In the 1995 Quarter,
the Company's direct salaries and costs were $68,152 and consisted of payments
for complex computer programming services, freelance artists and other
outside labor, printing and film processing costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended
December 31, 1995 were approximately $200,000 and primarily consisted of
professional fees, occupancy costs, travel, office expenses and supplies
and marketing and advertising, among other things. Selling, general and
administrative expenses for the year ended December 31, 1994 were
approximately $75,000 and primarily consisted of occupancy costs, office
expenses and supplies and travel. Selling, general and administrative
expenses for the 1996 Quarter were $125,958 and primarily consisted of the
same types of expenses as those incurred during fiscal 1995. During the
1995 Quarter, selling, general and administrative expenses were $12,449 and
primarily consisted of professional fees, occupancy costs and office
expenses.
-21-
<PAGE>
Depreciation
Depreciation expense of $24,485 and $13,013 in the years ended
December 31, 1995 and 1994, respectively, and of $9,113 and $4,779 in the
1996 Quarter and the 1995 Quarter respectively, consisted of depreciation
of equipment and leasehold improvements. The Company expects that
depreciation expense in 1996 will increase significantly as a result of
depreciation of the Company's equipment and leasehold improvements
anticipated in connection with the relocation of its offices. See
"Business -- Properties."
Income Taxes
The Company operated as a partnership during the year ended December
31, 1994. As a result, the partners were individually liable for federal
and state income taxes on the Company's taxable income. Effective January
1995, the Company elected to be treated as an S Corporation for federal
income tax purposes. As a result, the shareholders were individually
liable for federal income tax on the Company's taxable income. In January
1996, the Company began to be treated as a C corporation for federal and
state income tax purposes. The Company is also liable for New York state
and city income taxes. See "Certain Transactions -- Formation and Financing
of the Company."
SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED)
The following table presents unaudited quarterly financial information
for the period from January 1, 1995 to March 31, 1996. The information has
been derived from the Company's unaudited Consolidated Financial
Statements. The unaudited quarterly financial statements have been
prepared on the same basis as the audited Consolidated Financial Statements
and include all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation
of such information when read in conjunction with the Company's audited
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this document. These results are not indicative of results for any future
period. See "Risk Factors -- Fluctuations in Quarterly Operating Results,
Cash Requirements and Margins."
<TABLE><CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER DECEMBER MARCH 31,
1995 1995 30,1995 31,1995 1996
----------- -------------- ---------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . $33,639 $383,423 $301,481 $477,665 $512,434
------- -------- -------- -------- --------
Operating Expenses:
Direct salaries
and costs . . . . . 68,152 274,309 268,074 346,492 499,109
Selling, general and
administrative
expenses . . . . . . 12,449 72,294 53,090 63,098 125,958
Depreciation . . . . 4,779 10,147 4,779 4,780 9,113
-------- --------- --------- --------- ----------
Total operating
expenses . . . . . . . 85,380 356,750 325,943 414,370 634,180
-------- -------- -------- -------- ---------
Operating income
(loss) . . . . . . . . $(51,741) $ 26,673 $ (24,462) $ 63,295 $(121,746)
========= ======== ========== ======== ==========
</TABLE>
Quarterly revenues and operating results have fluctuated and will
fluctuate as a result of a variety of factors. These factors, some of
which have affected the Company and some of which are beyond the Company's
control, include the timing of the completion, material reduction or
cancellation of major projects, the loss of a major customer or the
termination of a relationship with a Channel Source, timing of the receipt
of new business, timing of the hiring or loss of personnel, changes in the
pricing strategies and business focus of the Company or its competitors,
capital expenditures, operating expenses and other costs relating to the
expansion of operations, general economic conditions and acceptance and use
of the Internet. At the present time, the Company has determined to
increase expense levels, which to a large extent are fixed, based in part
on expectations as to future revenues and will base future expense levels
similarly. Revenues and operating results are difficult to forecast
because of these fluctuations and because the Company lacks historical
financial data for a significant number of periods. The Company may be
unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall.
-22-
<PAGE>
Any significant shortfall of demand for the Company's services in relation
to the Company's expectations would have an adverse impact on the Company's
business, operating results and financial condition.
The Company's quarterly operating margins may also fluctuate from
period to period depending on the relative mix of lower cost full time
employees versus higher cost independent contractors. Due to the Company's
lack of liquidity, the Company continues to rely more heavily on
independent contractors than it otherwise would (and expects to do so for
the foreseeable future), and to the extent it does so, the Company will
continue to incur these increased operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current primary focus is on increasing its Web site
business and the Company continues to hire additional personnel and to
increase expenses related to administration, production, technical
resources, marketing, customer support and infrastructure to enhance and
expand its operations. In addition, the Company had an operating cash flow
deficit of $(2,404) in 1995 and of $(172,575) in the 1996 Quarter, which
hampered the Company's ability to expand. Delays in collecting certain
accounts receivable have aggravated and could in the future aggravate this
situation. The Company is dependent on the successful completion of this
offering for working capital in order to be competitive, to meet the
increasing demands for service, quality and pricing and for any expansion
of its business. While the Company believes the proceeds of this offering
together with cash expected to be generated by operations will be
sufficient to finance its operations for at least one year, the Company may
nevertheless require substantial alternative financing in order to satisfy
its working capital needs, which may be unavailable or prohibitively
expensive since the Company's only assets available to secure additional
financing are accounts receivable. Accordingly, the Company may not have
the funds to relieve its liquidity problems or to finance any expansion of
its business.
Net cash used in the Company's operating activities of $(2,404) in the
year ended December 31, 1995 and ($172,575) in the 1996 Quarter related
primarily to a substantial increase in accounts receivable as a result of
an increase in revenue, partially offset by an increase in accounts
payable. Net cash provided by operating activities was $45,160 in the year
ended December 31, 1994 and related primarily to accrued compensation that
offset the Company's $(53,100) net loss during that year.
During 1995, the Company obtained a bank loan and a line of credit
from two banks totalling $35,000. The $25,000 bank loan bears interest at
a fluctuating rate of the bank's prime rate plus two percent and is due in
October 1996. The $10,000 line of credit bears interest at the bank's
prime rate plus three percent and each draw is repayable in 36 equal
monthly installments of principal, plus interest. In addition the Company
financed the purchase of certain equipment through capital leases. The
principal balance of such leases was $37,297 at December 31, 1995 and is
payable in varying installments through the year 2000.
In 1996, the Company raised gross proceeds of $950,000 in connection
with two private placements. Any sale of additional equity or convertible
debt securities will result in additional dilution to the Company's
shareholders. See "Certain Transactions -- Private Placements."
-23-
<PAGE>
BUSINESS
GENERAL
Since the Company's business is technical, readers of this Prospectus
are encouraged to refer to "Glossary" beginning on page 49 for a definition
of certain terms used herein.
The Company's primary business is the design and creation of sites
("Web sites") for commercial organizations on that part of the Internet
known as the World Wide Web. The Company has designed and created more
than 35 Web sites, including Web sites for the customers of MCI
Telecommunications Corporation ("MCI"), a subsidiary of MCI Communications
Corporation, and for Prudential Securities, America Online Incorporated and
International Business Machines, Inc., among others. Accordingly,
management believes that the Company is a recognized provider of these
services.
Web sites are increasingly being utilized as a new medium for
advertisement, promotion and technical support of an organization's
products and services. The Company believes Web sites can provide
commercial organizations benefits in addition to those available through
conventional media, including the ability to engage and entertain
consumers, provide in-depth information, reduce selling and operating
costs, expand distribution channels, promote major sporting and
entertainment events and monitor popularity of content and make timely
changes in response to real-time feedback. Web sites also offer businesses
the ability to obtain certain information about visitors to their sites.
INDUSTRY OVERVIEW
The Internet and the World Wide Web
The Internet is a global collection of thousands of computer networks
interconnected to enable commercial organizations, educational
institutions, government agencies and individuals to communicate
electronically, access and share information and conduct business. The
Internet was historically used by a limited number of academic
institutions, defense contractors and governmental agencies. Recently, use
of the Internet by commercial organizations and individuals has increased
significantly, in part as the result of cultural and business changes,
technological advances, including increases in microprocessor speed, and
the development of easy-to-use graphical user interfaces. "Graphical user
interfaces" in the context of the Internet are the graphics and text that
appear on a computer screen.
Much of the recent growth in Internet use by businesses and
individuals has been driven by the emergence of a network of servers and
information available on the Internet called the World Wide Web. The Web
is not only rich in content and format, containing magazines, news feeds
and corporate, product, educational, research, and political information,
it also enables users to engage in activities, including providing customer
service, conducting electronic commerce and banking, making reservations,
playing games and participating in discussion groups.
Web Sites
A Web site is a collection of one or more electronic documents or "Web
pages," which may contain textual, audio and video information, that are
published in a common format. Each Web site could contain from one to
hundreds of Web pages. Users can view Web pages by using widely available
software called "Web browsers" such as the Netscape Navigator or the
Microsoft Internet Explorer. Users specify which Web sites they wish to
view with their Web browser by entering a site's unique electronic Web
address, known as its Universal Resource Locator ("URL"). Alternatively,
users can navigate the Web by making use of the hypertext link capabilities
of Web documents. Hypertext links are active areas on a Web page which
when selected by a user automatically cause the browser to display a
specific page which can be located anywhere else on the Web, thus enabling
users to move from one Web page to another without having to know the
underlying address or URL of either document.
The rapid deployment of the Web has introduced fundamental and
structural changes in the way information can be produced, distributed,
gathered and consumed, lowering the cost of publishing information and
extending its potential reach. Businesses from many industries are
publishing product and company information or advertising materials and
collecting customer feedback and demographic information interactively.
The structure of Web documents allows an organization to publish
significant quantities of information while simultaneously allowing each
user to view selectively only those elements of the information which are
of particular interest. This feature makes possible the dynamic tailoring
-24-
<PAGE>
information delivery to each user's interest in a cost effective and timely
fashion. The Web, by facilitating the publishing and exchange of
information, is dramatically increasing the amount of information available
to users.
Web sites are increasingly being utilized as a new medium for
advertisement, promotion and technical support of an organization's
products and services. The Company believes Web sites can provide
organizations one or more of the following benefits in addition to those
available through conventional media:
Engage and entertain consumers
Web sites can capture and maintain the attention of the target
audience in a way that is not easily achievable with conventional media.
Web sites can be designed to capture a consumer's attention by
incorporating a variety of entertaining motifs, such as games, storylines
and interaction with fictional characters. Web sites also can be designed
to retain the audience's attention by analyzing user responses, determining
user interests and providing dynamically tailored content. Businesses can
encourage repeated consumer interaction by continuously updating online
information.
Provide in-depth information
Web sites can offer a wealth of information not easily conveyed
through traditional methods and can provide users with the ability to
control the amount and nature of the information they receive.
Reduce costs
Businesses may seek to reduce selling and operating costs in a variety
of ways with Web sites. For example, a consumer can be introduced to,
gather information regarding, and, in some cases, purchase a company's
products directly through a Web site without the use of salespersons or
other intermediaries.
Expand distribution channels; event promotion
Web sites may enable businesses to open new distribution channels and
reach new audiences. A retailer may seek to create an international
presence through the World Wide Web or a business may seek to promote a
major sporting or entertainment event.
Quantify results
With the use of Web sites, businesses can monitor the popularity of
content and make timely changes in response to real-time feedback. For
example, a company can estimate the volume of traffic on a Web site, gather
information about the visitors to that site and monitor their level of
interest in the company's products and services.
K2 SERVICES
The Company follows a three-step creative and production process:
design, implementation, and testing. In the design phase the Company
conducts a needs assessment briefing with the customer in order to
determine project objectives and functional specifications of the product
and then creates a flow chart describing general concepts on a page by page
basis. The creative approach is then developed incorporating design, copy,
programming and the navigational system, focused on creating a user
friendly Web site. During the implementation phase, all artwork and copy
are developed and digitized. The content is then produced utilizing
various authoring tools and programming languages. Product testing on all
anticipated computer configurations takes place at various stages of the
implementation process. The Company's Web site services also include
assistance in the demographic and marketing analysis relating to the Web
site and its intended purpose and strategic planning for the business use
of the Web site, including identifying other Web sites from which hypertext
links could increase traffic on the customer's Web site and placing those
links on the customer's Web site. The Company also offers special features
on Web sites, such as key-word searching and audio.
To be effective, it is essential that a Web site be more than
attractive and that both the Web site and the information therein be easily
accessible and intuitively organized. As a provider of these
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services, the Company must combine creative and technical expertise to meet
its customers' needs. The Company's services add value to Web site
projects at every stage, from concept development through completion. Web
sites vary significantly in their size and complexity and the scope of
services rendered by the Company in connection with projects has ranged
from limited consulting services to complete creative and technical design
and construction of multi-level sites, including live video and audio feeds
from remote locations. Should a customer so desire, the Company also
offers numerous integrated services in conjunction with Web site projects,
including traditional graphic design services such as logo design for the
Web site or a particular product, brochures, point-of-sale displays and
other collateral marketing materials and print advertisement design and
layout. The Company is also planning to develop two World Wide Web related
software programs, Visitrac and Web Express. Visitrac is intended to
provide detailed information about visitors to a particular Web site and
Web Express is intended to enable an individual or organization to design a
graphically enhanced Web site without incurring substantial design and
development costs. See "Business -- K2's Services."
The Company recently began to offer media placement services intended
to increase traffic on Web sites, principally by identifying, negotiating
for and purchasing hypertext links from other heavily trafficked Web sites.
The Company believes that if businesses increasingly embrace the Internet
as an advertising vehicle, their participation will subsidize in part the
creation and expansion of the information and resources available on the
Web which in turn is expected to stimulate an increase in the utilization
of the Web by businesses. The Company believes that advertisers will seek
to advertise on Web sites that offer a high volume of traffic and feature
flexible advertisement programs capable of reaching targeted audiences.
However, the Internet as an advertising medium is still evolving and,
consequently, advertisers seek demonstration of its effectiveness to
justify its use. Due to the limited information and experience regarding
Web advertising and a general unfamiliarity with the concept of interactive
advertising, advertisers require assistance with the design and placement
of advertisements on the Internet.
Because of the proliferation of new and sophisticated tools and
technologies, the Company believes that many businesses are unsure about
whether to use Web sites and how best to utilize them. The Company
believes that its potential customers will demand creative and technical
expertise and attention to the customers' business objectives from
providers of Web site services in order to realize one or more of the
benefits described above.
Creative Expertise
The Company believes that, in addition to the creative elements
required in traditional graphic design, superior Web sites require easy-to-
use and intuitive interfaces, seamlessly integrated technologies and an
engaging look and feel. Management believes that the Company's creative
developers are fully capable across the spectrum of expertise required to
meet customers' creative needs. In order to maintain high levels of
creativity and quality, the Company intends to recruit the best talent
available. However, competition for creative personnel is especially
intense and there can be no assurance that the Company will attract or
retain adequate creative talent to accomplish these goals. See "Risk
Factors -- Dependence on Key Personnel; Need for Additional Personnel;
Ability to Manage Growth."
Technological Expertise
The Company believes the creative application of leading technologies
is also crucial to the success of its business. During the three months
ended March 31, 1996, the Company hired three full-time computer
programmers skilled in various computer operating systems, tools and
languages, including Basic, FORTRAN, UNIX, Perl, Java, VRML, VDO and Real
Audio, among others. These programmers are responsible for providing
complex computer programming for special features on Web sites as well as
periodically assessing new technologies in order to identify and deploy,
directly and through independent contractors, those that are most promising
for enhancing the Company's business. Although, the Company had previously
relied on a single unaffiliated contractor to provide complex computer
programming services for special features on Web sites, the Company expects
its staff programmers to provide most of these services in the future. To
the extent additional complex programming is required the Company believes
that alternative providers of these services are available from the
contractor that provided these services in the past as well as from others,
on terms no less favorable to the Company than it enjoyed with such
contractor.
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Focus on Customers' Business Objectives
The Company has made understanding customers' business challenges a
primary focus in guiding the design of Web sites to address those chal-
lenges. The Company often works with customers' management to determine
how best to integrate Web sites into the customers' business goals.
COMPLETED PROJECTS
The Company has designed and created more than 35 Web sites,
including:
- Together with Ogilvy & Mather Advertising, the design and creation
of a Web site for International Business Machines, Inc. ("IBM")
(http://www.chess.ibm.park.org), to promote a chess match between Gary
Kasparov and an IBM computer that utilizes a computer chip called "Deep
Blue." The Web site incorporated live video of the match, live chat
boards, simultaneous transcription of commentary and the integration of
animation to display the progress of the game. Media reports indicated
that at its peak, the Web site was at that time the most visited Web site
in a one-day period in Internet history, with approximately 5 million hits
(hits are an indicator of the volume of traffic at a Web site).
- The design and creation of a Web site that is Prudential
Securities' Virtual Branch Office (http://www.prusec.com), containing
interactive features such as a wealth accumulation calculator, geographic
branch locator, daily market updates and a financial personality quiz.
- The redesign of the graphics and copy for MCI's marketplaceMCI Web
site (http://www2.pcy.mci.net/marketplace). MCI's online shopping mall.
Morgan Stanley's, "The Internet Report" named the site one of the eight
"coolest Web sites for commerce." During that project, the Company was
engaged to design and create a virtual retail store in the marketplaceMCI
mall for Champs Sporting Goods and thereafter for related businesses,
Footlocker and Lady Footlocker, and other unrelated businesses.
- The design and creation of a Web site for The Joseph Papp Public
Theater that was originally used to publicize its production of "The
Tempest," starring Patrick Stewart (http://www.publictheater.org). The
Company incorporated the theater's intricate (and already well known)
graphic style into the Web site, which was designed to accommodate every
major Web browser. The Web site integrated standard production photographs
from The Tempest with a plot summary of the show, to create a click-to-
enlarge tour of the production. The Web site was launched at the after-
show party following its opening performance. Thereafter, the theater
hired the Company to design and create another Web site to promote its hit
Broadway show, "Bring on Da Noise/Bring on Da Funk," on which, among other
things, was a live, opening night simulcast of scenes from the opening
night party and pre-recorded portions of the show. The site also featured
a three-dimensional VRML walk-through of a theater, digitized portions of
the show's soundtrack, live commentary and electronic mail telegram
capabilities to the cast.
- The creation of product identity, including name and logo, for a
software product developed by America Online Incorporated ("AOL") for
potential on-line content providers, together with a Web site dedicated to
that product (http://www.aol.com/about/devstudio/). AOL needed full
collateral systems as well as multiple online presences to announce and
advertise the tools. The Web site features multi-level informational
architecture, and was replicated as a location on AOL's proprietary on-line
service. The Company also designed and created a variety of collateral
products, including CD-ROMs.
- The design and creation of a Web site for the National Association
of Printers and Lithographers ("NAPL") (http://www.napl.org) that includes
a database application utility that enables users to input certain sales
and operating data and instantly generate a graphical representation of
statistical information comparing their data to the rest of the industry.
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K2 STRATEGY
Capitalize on Accomplishments and Market Opportunities
The Company believes that the proliferation of the Internet will
continue to provide substantial opportunities to the Company and that its
successfully completed projects will continue to enhance its marketing
efforts.
Leverage Development Efforts
In the course of developing customized Web sites for certain
customers, the Company may gain technical know-how that can be applied in
other efforts. This knowledge is preserved by the Company in order to
facilitate access by the entire production staff, potentially reducing
future development costs.
Deploy Leading Technologies
The Company's objective is to apply both proven and emerging
technologies as they become available in order to maximize the
effectiveness of its Web site services. The Company plans to form non-
exclusive relationships with key technology providers in an effort to gain
access to, and influence the features of, their technologies in
development.
Channel Marketing
The Company will continue to focus on developing strategic
relationships with Channel Sources that seek to augment their businesses by
making available Web site design and creation services provided by the
Company and other third parties. To date, the Company's only significant
continuing Channel Source relationship has been and continues to be with
MCI. See "-- Marketing -- Channel Sources."
MARKETING
General
The Company markets its services directly and seeks to form strategic
marketing relationships with third parties. The Company has three
employees dedicated to sales and marketing and each of the Company's
executive officers spends a portion of his time marketing the Company's
services. The Company also seeks to attract new customers through other
methods, including referrals from existing customers, and the Company
intends to commence advertising its services in certain trade and business
publications by September 1996.
Channel Sources
The Company's marketing efforts to date have substantially focused on,
and will continue to focus on, developing strategic relationships with
other companies, such as advertising agencies and Internet service
providers ("Channel Sources") that seek to augment their businesses by
making available Web site design and creation services provided by the
Company and other third parties. The Company therefore targets advertising
agencies that do not offer Web site related services, providers of other
Internet services (e.g., access, connectivity and Web site hosting) and
other businesses whose customers are likely to require the services that
the Company provides. See "Risk Factors -- Evolving Marketing Strategy."
Relationship with MCI
To date, the Company's only significant continuing Channel Source
relationship has been and continues to be with MCI. In 1995, sales to MCI
and to referrals from MCI, were approximately $180,000 in the aggregate and
accounted for approximately 15% of the Company's revenues, making MCI the
Company's second largest source of revenues. All revenues derived from MCI
in 1995 related to an MCI Internet initiative known as marketplaceMCI, an
online shopping mall. In October 1995, the Company completed the redesign
of the graphics and provided copy for MCI's marketplaceMCI Web site and
thereafter designed and created five Web sites for MCI's customers (three
of which were for businesses under common control, which in the aggregate
accounted for approximately 80% of referral revenues derived from MCI
during 1995). The Company is aware that MCI is presently redefining its
online shopping mall concept and, therefore, may not provide any future
business for the Company.
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<PAGE>
Nevertheless, the Company continues to derive revenues from another
Internet initiative of MCI commenced in February 1996 called "Webworks,"
pursuant to which MCI salespersons offer comprehensive Web site services to
their customers and potential customers. In connection with Webworks, MCI
co-markets the Company's services and after pre-screening an interested
customer, introduces that customer to the Company. If the customer retains
the Company, the MCI salesperson receives a commission ranging from two to
four percent of the gross revenues derived by the Company from that
project. Executives of the Company have participated in presentations made
to MCI salespersons in the northeastern United States regarding the
mechanics of the program and the Company's role in the program and the
Company has been advised that it is considered by MCI to be a "best of
breed" vendor. The Company has commenced work on two projects generated
from Webworks, including one for the New Jersey Sports and Exposition
Authority pursuant to a non-binding letter of intent for the design and
creation of the main Web site for the Meadowlands Sports Complex. See
"Risk Factors -- Relationship with MCI."
Expand Scope of Services and Geographic Sales Offices
The Company seeks to expand both the breadth and depth of its Web site
services abilities. The Company seeks to achieve these objectives both by
continuing to expand the scope of the services that it currently offers and
adding new sales offices in cities where clients have recognized the need
for the Company's services while performing the services in the New York
office. The Company plans to open a sales office in Dusseldorf, Germany.
The Company may also acquire products, technologies or businesses that may
expand the scope of services offered by the Company and geographic
locations of the Company.
CUSTOMERS
Since substantially all of the Company's direct customers (and certain
Channel Sources) have retained the Company on a single project basis,
customers from whom the Company generated substantial revenue in one period
have not been a substantial source of revenue in a subsequent period. Due
to the Company's limited operating history and the emerging nature of the
Internet, the Company cannot be sure whether its relationships with
customers will continue to be on a one project per customer basis. The
Company's three largest sources of revenues during 1995 were J. Walter
Thompson (relating to one project for the benefit of Bell Atlantic) MCI and
Prudential Securities, which accounted for approximately 18%, 15% and 12%,
respectively, of the Company's revenues during that year. During the 1996
Quarter, IBM accounted for approximately 60% of the Company's revenues.
Since the Company believes that J. Walter Thompson no longer provides
substantial services to Bell Atlantic and since the Company is not actively
pursuing additional referrals from J. Walter Thompson, the Company does not
expect to generate additional revenues from J. Walter Thompson in the
foreseeable future, if at all. Moreover, the Company is aware that J.
Walter Thompson uses providers of Web site services substantially similar
to those provided by the Company and also has an equity interest in a
provider of Web site services. Similarly, since Prudential Securities and
IBM each hired the Company for a specific project, each of which has been
completed, the Company does not expect to generate ongoing revenues from
Prudential Securities or IBM in the foreseeable future. See "Risk Factors
- -- Fluctuations in Quarterly Operating Results, Cash Requirements and
Margins" and "Management's Discussion and Analysis of Results of Operations
and Financial Condition."
As of May 1, 1996, the Company has completed more than 35 Web site
design and creation projects, each generating gross revenue ranging from
$1,500 to more than $300,000, in addition to several consulting engagements
and interactive projects other than on the World Wide Web. The Company is
also currently engaged to design and create 18 additional Web site
projects. Since the Company has a limited operating history and has
completed only approximately 35 projects in connection with which the scope
of its services varied greatly, and since the market for the Company's
services is new and rapidly evolving, management does not believe that any
project that it has completed is necessarily typical of its past experience
or indicative of the future, including with respect to the nature and
purpose of the relationship or project, the scope of services provided by
the Company in connection therewith or the fee payable to the Company.
Because the Company's projects are generally completed in a relatively
short period of time, the Company has not experienced significant backlog.
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FUTURE SOFTWARE DEVELOPMENT PROJECTS
The Company is also planning to develop two World Wide Web related
software programs, Visitrac and Web Express. Visitrac is intended to
provide detailed information about visitors to a particular Web site and
Web Express is intended to enable an individual or organization to design a
graphically enhanced Web site without incurring substantial design and
development costs. There can be no assurance that either of these programs
will be developed or if developed, successfully commercialized.
GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses
generally, and there are currently few laws or regulations directly
applicable to Web site service companies. However, due to the increasing
media attention focused on the Internet, it is possible that a number of
laws and regulations may be adopted with respect to the Internet, covering
issues such as user privacy, and pricing and characteristics and quality of
products and services. The adoption of any such laws or regulations may
decrease the growth of the Internet, which could in turn decrease the
demand for the Company's services and products and increase the Company's
cost of doing business or cause the Company to modify its operations, or
otherwise have an adverse effect on the Company's business, operating
results or financial condition. Moreover, the applicability to the
Internet of existing laws governing issues such as property ownership,
libel and personal privacy is uncertain. The Company cannot predict the
impact, if any, that future regulation or regulatory changes may have on
its business. In addition, Web site developers such as the Company face
potential liability for the actions of customers and others using their
services, including liability for infringement of intellectual property
rights, rights of publicity, defamation, libel and criminal activity under
the laws of the U.S. and foreign jurisdictions. Moreover, the Company
lacks errors and omissions insurance. Any imposition of liability could
have a material adverse effect on the Company.
The Telecommunications Act of 1996 (the "1996 Telecommunications
Act"), which became effective on February 8, 1996, imposes criminal
liability on persons sending or displaying in a manner available to minors
indecent material on an interactive computer service such as the Internet.
The 1996 Telecommunications Act also imposes criminal liability on an
entity knowingly permitting facilities under its control to be used for
those activities. The constitutionality of these provisions is being
challenged in federal court, and the interpretation and enforcement of them
are uncertain. This legislation may decrease demand for Internet access,
chill the development of Internet content, or have other adverse effects on
Web site service providers such as the Company. In addition, in light of
the uncertainty of the interpretation and application of this law, there
can be no assurance that the Company would not have to modify its
operations to comply with the statute. The impact of the 1996
Telecommunications Act on the Company and its business cannot be predicted.
COMPETITION
The markets for the Company's services are highly competitive and are
characterized by pressures to reduce prices, incorporate new capabilities
and accelerate completion schedules. The Company expects competition for
its services to intensify in the future, partly because there are no
substantial barriers to entry into the Company's business. There can be no
assurance that the Company will be able to offset the effects of any
resulting price reductions with an increase in the number of its customers
or projects, higher revenue from enhanced services or products, cost
reductions or otherwise and its failure to do so could have a material
adverse effect on its Company's business, financial condition and operating
results.
The Company faces competition from a number of sources, including
potential customers that perform Web site development services in-house.
These sources also include other Web site service boutique firms,
communications, telephone and telecommunications companies such as
Telecommunications Inc., computer hardware and software companies such as
Microsoft Corporation and Adobe Systems Incorporated, established online
services companies, advertising agencies, direct access Internet and
Internet-services and access providers as well as specialized and
integrated marketing communication firms such as CKS Group, Inc. and Eagle
River Interactive, Inc., all of which are entering the Web site design and
creation market in varying degrees and are competing with the Company, and
many of which have announced plans to offer expanded Web site design and
creation services. Many of the Company's competitors or potential
competitors have longer operating histories, longer customer relationships
and significantly greater financial, management, technological,
development, sales, marketing and other resources than the Company. The
Company's ability to retain
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relationships with Channel Sources and its existing customers and generate
new customers and relationships with Channel Sources depends to a
significant degree on the quality of its services and its reputation, as
compared with the quality of services provided by and the reputations of
the Company's competitors. The Company also competes on the basis of
creative reputation, price, reliability of services and responsiveness.
There can be no assurance that the Company will be able to compete and its
inability to do so would have a material adverse impact on the Company's
business, financial condition and operating results.
EMPLOYEES
As of May 21, 1996, the Company has 29 employees, of which 27 are
full-time employees and the remaining two are part-time employees. Full-
time employees include five salespeople, four account managers and eight
production personnel, in addition to executive management and support
staff.
PROPERTIES
The Company's offices occupy approximately 2,000 square feet in an
office building at 80 East 11th Street, New York, New York, subject to a
month-to-month tenancy with monthly rent of approximately $3,200 excluding
utilities. The Company has given notice to terminate its tenancy to the
landlord of that property and has entered into a five year lease that is
expected to commence in June 1996 (as soon as the landlord has completed
certain agreed upon work and installations on the premises) to occupy
approximately 5,800 square feet of an office building known as The New York
Information and Technology Center, 55 Broad Street, New York, New York at
an annual rent ranging from $86,955 to $98,549, payable in equal monthly
installments, plus the Company's allocable share of certain real property
taxes and building operating expenses in excess of fixed levels as provided
in the lease.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings as of the
date of this Prospectus.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and directors, and their ages as of May 1,
1996, are as follows:
Name Age Position
---- --- --------
David J. Centner 30 Chairman of the Board, Chief Executive
Officer, Chief Financial Officer and
Director
Matthew G. de Ganon 33 Vice Chairman, Chief Operating Officer
and Director
Douglas E. Cleek 33 Executive Vice President--Chief Creative
Officer and Director
Bradley K. Szollose 33 Executive Vice President--Marketing,
Treasurer, Secretary and Director
David J. Centner joined the Company in July 1994. Mr. Centner has
been the Company's Chairman of the Board of Directors, Chief Executive
Officer and Chief Financial Officer since March 1995. From August 1989 to
July 1994, Mr. Centner operated a business that offered computer
consulting, custom application programming and computer personnel placement
services for such clients as Merrill Lynch, Bankers Trust, Chase Manhattan
Bank, Chemical Bank and American Express. Mr. Centner has a Bachelors of
Science degree in Entrepreneurial Management from the Wharton School of
Business.
Matthew G. de Ganon has been the Company's Vice Chairman, Chief
Operating Officer and a Director since he joined the Company in July 1995.
For the two years prior to joining the Company, Mr. de Ganon operated a
business that created CD-ROM products and offered consulting services
regarding the use of electronic delivery of publications to publishers of
newsletter and directories. Mr. de Ganon is co-author of the essay
"Overcoming Future Shock on the Superhighway: Suggestions for Providers
and Technocrats" published and presented in the 1994 National Online
Conference Proceedings. From August 1992 to July 1993, Mr. de Ganon was
the Vice President of New Media of a small software developer and value
added reseller. Mr. de Ganon's work focused on UNIX based 4GL accounting
software customization for corporate clients. From May 1991 to July 1992,
Mr. de Ganon was an Executive Assistant - Casting Administration for the
Motion Picture Group of Universal Studios, Inc. Prior to that, Mr. de
Ganon was a franchised theatrical agent with the Stone Manners Agency in
Los Angeles, California from August 1987 to May 1991.
Douglas E. Cleek, who co-founded the Company in 1993, has been the
Company's Executive Vice President - Chief Creative Officer and a Director
of the Company since it was reorganized as a corporation in January 1995.
From 1993 until then, Mr. Cleek was a general partner of the Company. For
more than five years prior thereto, Mr. Cleek was an Art Director for
William Allen & Co. and its successor, A.J. Bart & Sons, graphic design
firms specializing in graphic promotional materials for the hospitality
industry.
Bradley K. Szollose, who co-founded the Company in 1993, has been the
Company's Executive Vice President - Marketing, Treasurer, Secretary and a
Director of the Company since it was reorganized as a corporation in
January 1995. From 1993 until then, Mr. Szollose was a general partner of
the Company. For more than five years prior thereto, Mr. Szollose was a
freelance Art Director for the Caribiner Group, producers of corporate
theater and related promotional/entertainment events, where he managed a
team of artists and photographers to coordinate film shooting and art
preparation under the direction of senior designers.
In addition, two non-employee directors will be elected to the Board
prior to the completion of this offering.
Directors are elected annually at the Company's annual stockholders'
meeting. Each director of the Company serves until his successor is
elected and qualified or until his earlier death, resignation, removal or
disqualification. The officers are elected annually by the directors. The
Board of Directors plans to establish compensation and audit option
committees upon completion of this offering. The compensation committee
will consist of ___________, _______________ and _____________, and will
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make recommendations to the Board concerning salaries and incentive
compensation for employees and consultants of the Company. The audit
committee will consist of _____________, ___________ and ___________ and
will make recommendations to the Board regarding the selection of
independent auditors and review and evaluate the Company's internal
controls.
The Company currently does not compensate its directors for acting in
that capacity. In addition, non-employee directors are entitled to receive
stock options under the stock option plan described below. To date, no
director of the Company has been compensated for serving in such capacity.
EXECUTIVE COMPENSATION
For fiscal 1995, David J. Centner, Chairman and Chief Executive
Officer of the Company, received total compensation of approximately
$30,000, and no executive officer earned in excess of $100,000. No
additional cash or other compensation was paid to executive officers of the
Company during such fiscal year except for perquisites and benefits, which
for each such offices were less than 10% of his annual salary.
VOTING AGREEMENT
As a result of a Voting Agreement to be entered into by Messrs.
Centner, de Ganon, Cleek and Szollose prior to the consummation of this
offering, Matthew de Ganon will have voting control over all of the Common
Stock owned by all of them, except that such shares must always be voted in
favor of the election as directors of each of them. In addition, the
Voting Agreement will grant each party thereto a right of first refusal as
to the sale of the others' Common Stock. The Voting Agreement will expire
on the 10th anniversary of this offering and may be extended for an
additional 10-year period if a majority of the parties approve such an
extension. See "Risk Factors -- Voting Agreement, Authorization of
Preferred Stock and Other Anti-Takeover Devices."
EMPLOYMENT AGREEMENTS
Employment contracts with David J. Centner, Matthew G. de Ganon,
Bradley K. Szollose and Douglas E. Cleek, which will be effective upon
consummation of this offering, are being negotiated.
1996 STOCK OPTION PLAN
The Company has adopted its 1996 Stock Option Plan (the "Plan"),
pursuant to which designated employees, including officers and directors of
the Company will be entitled to receive stock options. Options to purchase
an aggregate of 225,000 shares of Common Stock are available for grant
under the Plan.
Options to purchase an aggregate of 75,000 shares of Common Stock have
been granted to executive officers of the Company. In January 1996,
Messrs. Centner, de Ganon, Szollose and Cleek were each granted options to
acquire (i) 6,250 shares of Common Stock at an exercise price of $1.75 per
share, (ii) 6,250 shares of Common Stock at an exercise price of $3.50 per
share and (iii) 6,250 shares of Common Stock at an exercise price of $6.75
per share.
In addition, an option to purchase an aggregate of 25,000 shares of
Common Stock at an exercise price of $1.75 per share has been granted to a
consultant to the Company.
All of these options vest in five equal annual installments commencing
in January 1996.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of shares of the Common Stock as of the date of this
Prospectus by (i) each person known by the Company to own beneficially 5%
or more of the outstanding shares of Common Stock, (ii) each director of
the Company, and (iii) all directors and executive officers of the Company
as a group.
<TABLE><CAPTION>
Number of
Shares Percent Beneficially
Beneficially Owned
Owned Before --------------------------
and After Before After
Name and Address of Beneficial Owner (1) Offering Offering Offering
---------------------------------------- ----------------- -------- ---------
<S> <C> <C> <C>
David J. Centner . . . . . . . . . . . . . . . . . 477,620(2)(3) 19.1 13.6
Matthew G. de Ganon . . . . . . . . . . . . . . . 477,620(2)(3) 19.1 13.6
Douglas E. Cleek . . . . . . . . . . . . . . . . . 477,620(2)(3) 19.1 13.6
Bradley K. Szollose . . . . . . . . . . . . . . . 477,620(2)(3) 19.1 13.6
All Directors and executive officers as a
group (four persons) . . . . . . . . . . . . . . . 1,910,480(4)
</TABLE>
______________________
(1) The address of each beneficial owner is that of the Company's
principal executive offices.
(2) Includes 3,750 shares of Common Stock underlying presently exercisable
stock options and excludes 15,000 shares of Common Stock underlying
stock options that are not presently exercisable. See "Management --
1996 Stock Option Plan."
(3) Pursuant to a Voting Agreement, the voting control over all of these
shares will be vested in Matthew de Ganon, except that these shares
must always be voted in favor of the election as directors of Messrs.
Centner, de Ganon, Cleek and Szollose. See "Management -- Voting
Agreement."
(4) Includes 15,000 shares of Common Stock underlying presently
exercisable stock options and excludes 60,000 shares of Common Stock
underlying stock options that are not presently exercisable. See
"Management -- 1996 Stock Option Plan."
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SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
Up to 600,002 shares of Common Stock may be offered by 39 Selling
Stockholders who acquired those shares in private placements. The Company
has agreed to bear all expenses (other than underwriting or selling
commissions or any fees and disbursements of counsel to such Selling
Stockholders) in connection with the registration of their securities. See
"Certain Transactions -- Private Placements."
The following table sets forth certain information with respect to
holders for whom the Company is registering these shares. None of the
holders has held any position or office or has had a material relationship
with the Company or any of its affiliates within the past three years,
other than Harvey Berlent who is a consultant to the Company. Except as
set forth herein, the Company believes that none of the holders listed
below owns any other securities of the Company. The Company will not
receive any of the proceeds from the sale of these shares.
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<TABLE><CAPTION>
Percent of Class Beneficially Owned
Shares of --------------------------------------
Name Common Stock Before Offering After Offering
---- ------------ --------------- ----------------
<S> <C> <C> <C>
Anaconda Capital, L.P. 40,000 1.60 1.14
Charles Abramowitz 6,871 * *
Gerald R. Appel 14,700 * *
Harvey N. Berlent(1) 14,000 * *
Michael Cantor 42,857 1.72 1.23
Cooperative Holding Corporation 14,286 * *
Domaco Venture Capital Fund 14,000 * *
Gregory D. Dwyer 5,000 * *
Andrew J. Finkelstein 4,000 * *
Frog Hollow Partners/2 15,000 * *
R. Ghosh 12,000 * *
Harry F. Goldberg 7,143 * *
Ward Hunt 9,429 * *
Leo Holding, Inc. 2,857 * *
Daniel E. Koshland Jr. 28,571 1.14 *
Milton Koffman 14,286 * *
E. Kohler 120,000 4.81 3.43
Joseph Lombardi 8,571 * *
Alan J. Rubin 7,143 * *
Anthony Salvo 7,286 * *
Michael F. Sassi 7,143 * *
George Sayour Family Foundation Inc. 7,000 * *
Paul Sayour 7,000 * *
Richard Serbin and Kathe Serbin JTWROS 14,286 * *
Ronald Setzkorn and Christina Setzkorn
JTWROS 14,286 * *
Eugene Silverman 7,143 * *
William Smith 28,571 1.14 *
Starfin International 14,286 * *
Anthony P. Towell 14,286 * *
Rainwater Enterprises, LTD - Defined
Benefit Pension Plan 6,000 * *
Richard L. Tuch 5,000 * *
Carlton E. Turner 4,000 * *
Bao Thu Nguyen Vo 7,500 * *
Barron S. Wall, Inc. 17,143 * *
Henry G. Warner 8,000 * *
Robert Westerheide 14,286 * *
Anthony Yodice 14,286 * *
Adam D. Young 7,500 * *
Mark Young 14,286 * *
-------
Total 600,002
=======
</TABLE>
_________________________
* Less than one percent.
(1) Excludes options to purchase 25,000 shares of Common Stock for $1.75
per share.
The sale of the aforementioned shares by the Selling Stockholders may
be effected from time to time in transactions (which may include block
transactions) in the over-the-counter market, in negotiated transactions,
through the writing of options on the Common Stock, or a combination of
such methods of sale, at fixed prices which may be changed, at market
prices prevailing at the time of sale, or at negotiated prices. The
Selling Stockholders may effect such transactions by selling their Common
Stock directly to purchasers or to or through broker-dealers which may act
as agents or principals. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Selling
Stockholders and/or the purchasers of Common Stock from them for which such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). The Selling Stockholders and any broker-dealers
that act in connection with the sale of such holders' Common Stock might be
deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act.
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The Selling Stockholders have agreed that they will not sell any of
the Common Stock owned by them and registered herein for a period of six
months from the date hereof, without the prior written consent of the
Representative.
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CERTAIN TRANSACTIONS
FORMATION AND FINANCING OF THE COMPANY
The Company was founded in 1993 by Messrs. Cleek and Szollose as a
general partnership. The aggregate capital accounts of Messrs. Cleek and
Szollose at December 31, 1993 were $13,231. During 1994, Messrs. Cleek and
Szollose were paid an aggregate of $38,552 in partnership draws and the
Company also sustained a net loss of $(53,100), resulting in partners'
deficiency of $(78,421) at year end. Since the Company was a partnership
during that year, the Company's net loss for that period is reportable on
the personal tax returns of Messrs. Cleek and Szollose in proportion to
their relative partnership interests.
In January 1995, the Company was reorganized as a New York corporation
that elected to be treated as an S corporation for tax purposes which
issued an aggregate of 100 shares of Common Stock. In connection with that
reorganization, Messrs. Cleek and Szollose contributed all of their
partnership interests in the predecessor partnership to the newly formed
corporation in exchange for 37.5 shares each of its common stock and Mr.
Centner contributed $10,000 for 25 shares of its common stock.
In July 1995, Messrs. Szollose and Cleek each contributed back to the
Company 12.5 shares of Common Stock and the Company sold 25 shares of
Common Stock to Matthew de Ganon in exchange for his contribution to the
Company of a loan due to him by the Company of $25,000.
In January 1996, the New York corporation became a wholly-owned
subsidiary of a newly formed Delaware corporation as a result of the
exchange by each of Messrs. Centner, de Ganon, Cleek and Szollose of their
respective 25 shares of common stock of the New York corporation for
473,870 shares of Common Stock of the Delaware corporation.
PRIVATE PLACEMENTS
In February 1996 (the "First Private Placement") and May 1996 (the
"Second Private Placement") the Company sold an aggregate of 600,002 shares
of Common Stock for total gross proceeds of $950,000. In the First Private
Placement, the Company sold 200,000 shares of Common Stock for $1.25 each
and in the Second Private Placement the Company sold 400,002 shares of
Common Stock for $1.75 each. The investors in these offerings were granted
piggyback registration rights for all of their shares.
PERSONAL GUARANTEES
Messrs. Centner, de Ganon, Cleek and Szollose have each personally
guaranteed a $25,000 line of credit that the Company maintains with a bank
and one or more of them have also personally guaranteed several of the
Company's equipment leases. It is expected that upon consummation of this
offering the guarantees of the bank line of credit will be terminated.
BUSINESS TRANSACTIONS WITH AFFILIATES
Prior to joining the Company, Matthew de Ganon operated a business
that created CD-ROM products and offered consulting services regarding the
use of electronic delivery of publications to publishers of news letter and
directories. During 1995, Mr. de Ganon performed consulting services for
the Company for which he earned approximately $34,000, of which he was paid
in cash approximately $9,000. In July 1995, Mr. de Ganon contributed to
the Company his right to receive the remaining $25,000 in exchange for his
25% interest in the Company.
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DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 9,000,000
shares of Common Stock, par value $.01 per share, and 1,000,000 shares of
preferred stock, par value $.01 per share.
UNITS
The Company is offering for sale 1,000,000 Units (excluding the
Representative's over-allotment option) at an offering price of $ per
Unit. Each Unit consists of one share of Common Stock and one Warrant.
COMMON STOCK
Each holder of Common Stock is entitled to one vote per share in the
election of the Company's directors and all other matters submitted to a
vote of stockholders and to share ratably in all assets available for
distribution to holders of record of Common Stock upon liquidation or
dissolution. There are no cumulative voting rights with respect to the
election of the Company's directors. The holders of Common Stock have no
pre-emptive or other subscription rights. The Company's outstanding Common
Stock is fully paid, validly issued and non-assessable. The Company does
not intend to pay any dividends on its Common Stock in the foreseeable
future. See "Dividend Policy."
WARRANTS
Each Unit will include one Warrant which will be issued pursuant to a
Warrant Agreement between the Company and Continental Stock Transfer &
Trust Company as warrant agent. The following statements are qualified in
their entirety by reference to the Warrant Agreement, which is included as
an exhibit to the Registration Statement of which this Prospectus is a
part. Two Warrants will entitle the holder thereof to purchase one share
of Common Stock at a price of $ per share (125% of the initial public
offering price of the Common Stock) at any time commencing on the date of
this Prospectus and terminating five years thereafter. The Warrants will
be redeemable at the Company's option, upon not less than 30 days' written
notice to the holders at a price of $.05 per warrant if the closing price
of the Common Stock has been equal to or greater than 140% of the then
exercise price of the Warrants for 20 consecutive trading days ending on
the fifth day prior to the notice of redemption. During such 30 day
period, the holders shall have the right to exercise such Warrants. The
right to purchase Common Stock upon exercise of the Warrants will be
forfeited unless the Warrants are exercised prior to the date specified in
the notice of redemption. See "Risk Factors -- Potential Adverse Effect of
Redemption of Warrants."
The Warrants will not confer upon the holders thereof any voting, pre-
emptive or other rights as stockholders of the Company.
The exercise price of the Warrants and/or the amount of shares of
Common Stock or other securities and property to be obtained upon the
exercise of the Warrants are subject to adjustment only under certain
circumstances, including stock-splits, stock dividends, any subdivision,
combination or recapitalization of the Common Stock, or the sale of all or
substantially all of the Company's assets or the merger or consolidation of
the Company with or into another corporation in which the Company is not
the surviving corporation.
The Warrants may be exercised upon the surrender of the Warrant
certificate therefor, duly endorsed by the holder thereof, at the office of
the Company (or the warrant agent in respect of Warrants registered under
the Act), on or prior to the expiration date thereof accompanied by payment
of the full exercise price for the Warrants to be exercised by certified or
bank cashier's check payable to the order of the Company. Upon receipt by
the Company (or the warrant agent), of duly executed certificates and
payment of the requisite exercise price, the Company (or the warrant
agent), shall issue and deliver certificates representing the number of
shares of Common Stock so purchased to the exercising warrantholder. If
less than all of the Warrants evidenced by a Warrant certificate are so
exercised, a new Warrant certificate representing the remaining Warrants
will be issued and delivered to such warrantholder.
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Warrants may not be exercised for fractional shares. If, however, a
warrantholder exercises all of his Warrants, the Company will pay to such
warrantholder an amount in cash based upon the then market value of the
fractional interest of the Common Stock on the last trading date prior to
the date of exercise of the Warrants in lieu of issuing any fractional
shares.
No Warrant will be exercisable unless at the time of exercise the
Common Stock to be purchased has been registered, or is exempt from
registration, under applicable federal and state securities laws. The
Company will use its best efforts to have all shares so registered or
exempted and to maintain a current prospectus relating thereto until the
expiration of the Warrants, although there can be no assurance that it will
be able to do so. See "Risk Factors -- Restrictions on Exercise of the
Warrants."
PREFERRED STOCK
The Board of Directors may issue, without further action of the
stockholders of the Company, preferred stock in one or more series and fix
the rights and preferences thereof, including the dividend rights, dividend
rates, conversion rights, voting rights, terms and redemption (including
sinking fund provisions), redemption price or prices, liquidation
preferences and the number of shares constituting any series.
The rights of the holders of Common Stock, including voting rights,
will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. Any
issuance of preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority of outstanding voting
stock of the Company. The Company has no current plans to issue any shares
of preferred stock.
TRANSFER AGENT AND WARRANT AGENT
The Transfer Agent and Warrant Agent for the Common Stock and Warrants
is Continental Stock Transfer & Trust Company.
CERTAIN ANTI-TAKEOVER EFFECTS
In addition to the provisions of a Voting Agreement among Messrs.
Centner, de Ganon, Cleek and Szollose, the provisions of the Company's
certificate of incorporation ("Certificate") and by-laws ("Bylaws")
summarized in the succeeding paragraphs may be deemed to have anti-takeover
effects and may delay, defer or prevent a tender offer or takeover attempt
that a stockholder might consider to be in such stockholder's best
interest, including those attempts that might result in a premium over the
market price for the Company's securities. See "Risk Factors -- Voting
Agreement, Authorization of Preferred Stock and Other Anti-Takeover
Devices" and "Management -- Voting Agreement."
REMOVAL OF DIRECTORS AND FILLING VACANCIES
The Certificate and Bylaws provide that a director may be removed by
stockholders only for cause with the approval of the holders of a majority
of the total voting power of all outstanding securities of the Company then
entitled to vote generally in the election of directors, voting together as
a single class, subject to the rights of the holders of any class of
preferred stock then outstanding to remove additional directors elected by
such holders under specified circumstances.
The Certificate and Bylaws provide that, subject to any rights of
holders of any class of preferred stock then outstanding, all vacancies on
the Board of Directors, including those resulting from an increase in the
number of directors, may be filled solely by a majority of the remaining
directors, even if they do not constitute a quorum. When one or more
directors resign from the Board of Directors effective at a future date, a
majority of directors then in office, including the directors who are to
resign, may vote on filling the vacancy.
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<PAGE>
Advance Notice Requirements for Stockholder Proposals and Director
Nominations
The Bylaws establish advance notice procedures with regard to
stockholder proposals and the nomination, other than by or at the direction
of the Board of Directors or a committee thereof, of candidates for
election as directors. These procedures provide that the notice of
stockholder proposals and stockholder nominations for the election of
directors at any meeting of stockholders must be in writing and be received
by the Secretary of the Company not less than 60 nor more than 90 days
prior to the meeting (or if less than 70 days' notice or prior public
disclosure of the date of the meeting is given, the notice of stockholder
proposals or nominations must be in writing and received by the Secretary
no later than the close of business on the tenth day following the day on
which notice of the meeting was mailed or public disclosure thereof was
made, whichever occurs first). The Company may reject a stockholder
proposal or nomination that is not made in accordance with such procedures.
LIMITATIONS ON STOCKHOLDER ACTION BY WRITTEN CONSENT AND LIMITATIONS ON
CALLING STOCKHOLDER MEETINGS
The Certificate and Bylaws prohibit stockholder action by written
consent in lieu of a meeting and provide that stockholder action can be
taken only at an annual or special meeting of stockholders. The
Certificate and Bylaws provide that, subject to the rights of holders of
any series of Preferred Stock to elect additional directors under specified
circumstances, special meetings of stockholders can be called only by the
Board of Directors, the Chairman of the Board of Directors or the Vice
Chairman of the Board of Directors of the Company or at the request in
writing of the holders of not less than 20 percent of all the shares
entitled to vote at the meeting.
AMENDMENT OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
BYLAWS
The Certificate provides that the affirmative vote of the holders of
at least 80% of the total voting power of all outstanding securities of the
Company then entitled to vote generally in the election of directors,
voting together as a single class, is required to amend certain provisions
of the Certificate, including those provisions relating to the number,
election and term of directors; the removal of directors and the filling of
vacancies; the prohibition of stockholder action without a meeting;
prohibition on cumulative voting by stockholders; indemnification of
directors, officers and others; and the super majority voting requirements
in the Certificate. The Certificate further provides that the Bylaws may
be amended by the Board of Directors or by an affirmative vote of the
holders of not less than 66 2/3% of the total voting power of all outstanding
securities of the Company then entitled to vote generally in the election
of directors, voting together as a single class. These voting requirements
will have the effect of making more difficult any amendment by
stockholders, even if a majority of the Company's stockholders believes
that such amendment would be in their best interests. However, the Company
intends to amend these provisions to provide that amendments to the
Certificate and Bylaws may be made by the affirmative vote of the holders
of not less than 51% of the total voting power of all outstanding
securities of the Company then entitled to vote.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Subject to certain exclusions summarized below, Section 203 of the
Delaware General Corporation Law ("Section 203") prohibits any Interested
Stockholder from engaging in a "business combination" with a Delaware
corporation for three years following the date such person became an
Interested Stockholder. Interested Stockholder generally includes (i) any
person who is the beneficial owner of 15% or more of the outstanding voting
stock of the corporation and (ii) any person who is an affiliate or
associate of the corporation and who held 15% or more of the outstanding
voting stock of the corporation at any time within three years before the
date on which such person's status as an Interested Stockholder is
determined. Subject to certain exceptions a "business combination"
includes, among other things (i) any merger or consolidation involving the
corporation, (ii) the sale, lease, exchange, mortgage, pledge, transfer or
other disposition of assets having an aggregate market value equal to 10%
or more of either the aggregate market value of all assets of the
corporation determined on a consolidated basis or the aggregate market
value of all the outstanding stock of the corporation, (iii) any
transaction that results in the issuance or transfer by the corporation of
any stock of the corporation to the Interested Stockholder, except pursuant
to a transaction that effects a pro rata distribution to all stockholders
of the corporation, (iv) any transaction involving the corporation that has
the effect of increasing the proportionate share of the stock of any class
or series, or securities convertible into the stock of any class
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or series, of the corporation that is owned directly or indirectly by the
Interested Stockholder, and (v) any receipt by the Interested Stockholder
of the benefit (except proportionately as a stockholder) or any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
Section 203 does not apply to a business combination if (i) before a
person became an Interested Stockholder, the board of directors of the
corporation approved the transaction in which the Interested Stockholder
became an Interested Stockholder or the business combination, (ii) upon
consummation of the transaction that resulted in the person becoming an
Interested Stockholder, the Interested Stockholder owned at least 85% of
the voting stock of the corporation outstanding at the time the transaction
commences (other than certain excluded shares), or (iii) following a
transaction in which the person became an Interested Stockholder, the
business combination is (a) approved by the board of directors of the
corporation and (b) authorized at a regular or special meeting of
stockholders (and not by written consent) by the affirmative vote of the
holders of at least two-thirds of the outstanding voting stock of the
corporation not owned by the Interested Stockholder.
LIMITATION OF LIABILITY OF DIRECTORS
The Certificate provides that a director will not be personally liable
for monetary damages to the Company or its stockholders for breach of
fiduciary duty as a director, except to the extent such exemption for
liability or limitation thereof is not permitted under the Delaware General
Corporation Law (i.e., liability (i) for any breach of the director's duty
of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for paying a dividend or approving a stock
repurchase in violation of Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an
improper personal benefit).
While the Certificate provides directors with protection from awards
for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the Certificate will have no effect on
the availability of equitable remedies, such as an injunction or rescission
based on a director's breach of such director's duty of care. The
provisions of the Certificate described above apply to an officer of the
Company only if such person is also a director of the Company and is acting
in his or her capacity as director, and do not apply to officers of the
Company who are not also directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate provides that each person (and the heirs, executors,
or administrators of such person) who was or is a party or is threatened to
be made a party to, or is involved in any threatened pending or completed
action, suit or proceeding, whether civil, criminal, administrative, or
investigative, by reason of the fact that such person is or was a director
or officer of the Company or is or was serving at the request of the
Company as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, will be indemnified and held harmless
by the Company to the fullest extent permitted by the Delaware General
Corporation Law. The Certificate further provides that the right to
indemnification includes the right to be paid by the Company for expenses
incurred in connection with any such proceeding in advance of its final
disposition to the fullest extent permitted by the Delaware General
Corporation Law, and that the right to indemnification conferred thereunder
is a contract right.
The Certificate further provides that the Company may, by action of
its Board of Directors, provide indemnification to such of the employees
and agents of the Company and such other persons serving at the request of
the Company as employees or agents of another corporation, partnership,
joint venture, trust or other enterprise to such extent and to such effect
as is permitted by the Delaware General Corporation Law and the Board of
Directors.
Pursuant to the Certificate, the Company has the power to purchase and
maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the Company, or is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
any expense, liability or loss incurred by such person in any such capacity
or arising out of his or her status as such, whether or not the Company
would have the power to indemnify such person against such liability under
the Delaware General Corporation Law.
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The Certificate provides that (i) the rights and authority described
above are not exclusive of any other right that any person otherwise may
have or acquire and (ii) no amendment, modification or repeal of the
Certificate, or adoption of any additional provision of the Certificate or
the Bylaws or, to the fullest extent permitted by the Delaware General
Corporation Law, any amendment, modification or repeal of law will
eliminate or reduce the effect of the provisions in the Certificate
limiting liability or indemnifying certain persons or adversely affect any
right or protection then existing thereunder in respect of any acts or
omissions occurring prior to such amendments, modification, repeal or
adoption.
Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering (and assuming no exercise of the
Representative's over-allotment option), the Company will have outstanding
3,495,482 shares of Common Stock (excluding the shares of Common Stock
issuable upon exercise of the Warrants and underlying the Representative's
Warrants). Of such shares, the 1,000,000 shares sold in this offering
together with the Warrants (plus any additional shares sold upon the
Representative's exercise of its over-allotment option) will be freely
tradeable without restriction or further registration under the Act, except
for any shares held by an "affiliate" of the Company, as that term is
defined under the Act and the Regulations promulgated thereunder, which
will be subject to the resale limitations of Rule 144 promulgated under the
Act ("Rule 144"). In addition, 1,895,480 shares that will be outstanding
upon consummation of this offering have been issued and sold by the Company
in reliance on one or more exemptions from the registration requirements of
the Act and will be "restricted securities" within the meaning of Rule 144
("Restricted Shares") and, therefore, may be publicly sold only if
subsequently registered under the Act or pursuant to Rule 144 or Rule 701
promulgated under the Act ("Rule 701"). Of those shares, 947,740 have been
held for the minimum two year period required by Rule 144 and are eligible
for public sale pursuant to Rule 144. The two-year holding period will
expire with respect to half of the remaining 947,740 shares in January 1997
and with respect to the remainder in July 1997. Notwithstanding the
foregoing, the Restricted Shares are subject to the lock-up agreements
described below. The Registration Statement also includes (i)
600,002 shares on behalf of certain stockholders and (ii) 500,000 shares
of Common Stock underlying the Warrants offered hereby (plus up to an
additional 225,000 shares depending upon the extent to which the
Representative's over-allotment option is exercised) all of which will be
similarly freely tradeable.
In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated with those of others), including any
person who may be deemed an "affiliate" of the Company, as that term is
defined in Rule 144, would be entitled to sell in brokers' transactions or
directly to market makers within any three-month period a number of
Restricted Shares that does not exceed the greater of (i) 1% of the class
of such shares then outstanding (34,955 shares of Common Stock based on the
number of shares to be outstanding after consummation of this offering) or
(ii) the average weekly trading volume of the class of such shares in the
over-the-counter market during the four calendar weeks preceding the date
on which notice of such sale is filed with the Commission, provided that
certain current public information concerning the Company is then
available, the seller complies with certain manner of sale provisions and
notice requirements, and that at least two years have elapsed since the
Restricted Shares were fully paid for and acquired by any person from the
Company or an affiliate of the Company. A person (or persons whose shares
are aggregated with those of others) who is not an affiliate of the Company
at any time during the three months preceding any sale by such person,
would be entitled to sell such shares, under Rule 144(k), without regard to
the limitations described above, provided that at least three years have
elapsed since the Restricted Shares were fully paid for and acquired by any
person form the Company or an affiliate of the Company. The above is a
summary of Rule 144 and is not intended to be a complete description
thereof or of the rights of the parties to sell shares of Common Stock
thereunder.
Upon consummation of this offering, there will be outstanding options
to purchase 100,000 shares of Common Stock, which vest on various dates
commencing January 1996. Upon exercise of these options, all of such
shares will be eligible for sale to the public in the open market under
Rule 701 (assuming 90 days have elapsed after the effective date of this
Prospectus). See "Management -- 1996 Stock Option Plan."
In general, under Rule 701 as currently in effect, absent contractual
restrictions on transfer, any employee, officer, director, consultant or
advisor of the Company who purchases shares from the Company pursuant to a
written compensatory stock option or other benefit plan or written contract
relating to compensation is eligible to resell such shares 90 days after
the effective date of this offering in reliance upon Rule 144, but without
compliance with certain restrictions contained in Rule 144. Shares
acquired pursuant to Rule 701 may be sold by non-affiliates without regard
to the holding period, volume limitations, information or notice
requirements of Rule 144, and by affiliates without regard to the holding
period requirement.
Including the outstanding options to purchase 100,000 shares of Common
Stock, the Company has reserved for issuance an aggregate of 225,000 shares
of Common Stock pursuant to its 1996 Stock Option Plan which the Company
may elect to register on a Form S-8 Registration Statement under the Act.
Shares covered by such a registration statement would be eligible for sale
in the public market after
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the effective date thereof, subject to Rule 144 limitations applicable to
affiliates and subject to the lock-up agreements described below. See
"Management -- 1996 Stock Option Plan."
The Company is unable to estimate the amount, timing or nature of
future sales of outstanding Common Stock. Prior to this offering, there
has been no market for the Common Stock and no predictions can be made of
the effect, if any, that market sales of shares or the availability of
shares for sale will have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of the Common Stock in the
public market may have an adverse effect on the market price thereof, and
could impair the Company's ability to raise capital through the sale of its
equity securities. See "Risk Factors -- No Assurance of Public Market;
Arbitrarily Determined Offering Price."
LOCK-UP AGREEMENTS
Messrs. Centner, Cleek, de Ganon and Szollose own an aggregate of
1,895,480 shares of Common Stock and options to purchase an additional
75,000 shares of Common Stock and have agreed not to directly or indirectly
sell, assign, transfer, encumber, contract to sell, grant an option to
purchase or otherwise dispose of any shares of Common Stock or any other
security convertible into or exchangeable for shares of Common Stock which
they beneficially own for a period of 24 months after the date of this
Prospectus without the prior written consent of the Representative. In
addition, the purchasers of Common Stock in the Private Placements have
agreed not to directly or indirectly sell, assign, transfer, encumber,
contract to sell, grant an option to purchase or otherwise dispose of any
of that Common Stock for a period of six months after the date of this
Prospectus without the prior written consent of the Representative, which
consent will not be unreasonably withheld.
-45-
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Donald & Co. Securities Inc. is
acting as representative (the "Representative"), have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to
purchase from the Company a total of 1,000,000 Units. The number of Units
which each Underwriter has agreed to purchase is set forth opposite its
name:
Underwriter Number
of Units
Donald & Co. Securities Inc. . . . . . . . . . . . . . .
----------
Total
==========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to approval of certain legal matters by counsel to
the Underwriters and various other conditions precedent, and that the
Underwriters are obligated to purchase all of the Units offered by this
Prospectus (other than Units covered by the over allotment option described
below), if any are purchased.
The Company has been advised by the Representative that the
Underwriters propose to offer the Units to the public at the initial
offering price set forth on the cover page of this Prospectus and to
certain dealers (who may include Underwriters) at that price less a
concession not in excess of $_____ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $____ per share
to certain other dealers. After the initial public offering, the offering
price and other selling terms may be changed by the Representative.
The Representative has informed the Company that the Underwriters do
not intend to confirm sales to accounts over which they exercise
discretionary authority.
The Company has granted to the Representative an option, exercisable
during the 30-day period after the date of this Prospectus, to purchase
from the Company at the offering price, less underwriting discounts and the
non-accountable expense allowance, up to an aggregate of 150,000 additional
Units for the sole purpose of covering over-allotments, if any.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liability under the Securities Act.
The Company has also agreed to pay to the Representative an expense
allowance on a nonaccountable basis equal to 3% of the gross proceeds
derived from the sale of the Units underwritten (including the sale of any
Units subject to the Representative's overallotment option), $______ of
which has been paid to date.
The Company has granted the Representative for a period of three years
from the date hereof the right to have the Representative's designee
present at all meetings of the Company's Board of Directors and each of its
committees. Such designee will be entitled to the same notices and
communications sent by the Company to its directors and to attend
directors' and committees' meetings, but will not be entitled to vote
thereat. Such designee will also be entitled to receive the same
compensation payable to directors as members of the Board and its
committees and all reasonable expenses in attending such meetings. The
Representative has not named such designee as of the date of this
Prospectus.
The Company has granted the Representative a three year right of first
refusal to act as underwriter or placement agent on any subsequent public
or private offerings of equity or debt securities (excluding sales to
employees pursuant to the Company's stock option plan, traditional
commercial financing and bank financing) of the Company or any subsidiary
or successor of the Company.
In connection with this offering, the Company has agreed to sell to
the Representative, for nominal consideration, the right to purchase up to
an aggregate of 100,000 Units (the "Representative's Warrants"). The
Representative's Warrants are exercisable initially at $____ per share (the
"Exercise Price") for a period of four years commencing one year from the
date hereof. The Representative's
-46-
<PAGE>
Warrants contain anti-dilution provisions providing for adjustment of the
Exercise Price upon the occurrence of certain events, including any
recapitalization, reclassification, stock dividend, stock split, stock
combination or similar transaction. In addition, the Representative's
Warrants grant to the holders thereof certain "piggy back" and demand
registration rights for periods of six and four years, respectively,
commencing one year from the date of this Prospectus with respect to the
registration under the Securities Act of the securities directly and
indirectly issuable upon exercise of the Representative's Warrants.
Prior to this offering there has been no public market for any of the
Company's securities. Accordingly, the initial public offering price of
the Units offered hereby was determined by negotiation between the Company
and the Representative. Factors considered in determining such price, in
addition to prevailing market conditions, included the history of and the
prospects for the industry in which the Company competes, an assessment of
the Company's management, the prospects of the Company, its capital
structure and such other factors as were deemed relevant.
In addition, subject to the rules of the National Association of
Securities Dealers, Inc. ("NASD"), the Company has agreed to appoint the
Representative as warrant solicitation agent 13 months after the date of
this Prospectus, for which it will be entitled to a 5% fee upon exercise of
the Warrants contained in the Units solicited by the Representative. No
solicitation fee shall be paid in connection with the exercise of the
Representative's Warrants or the warrants included in the Representative's
Warrants. In accordance with the NASD Notice to Members 81-83, no fee
shall be paid: (i) upon exercise where the market price of the underlying
Common Stock is lower than the exercise price; (ii) for the exercise of
Warrants held in any discretionary account; (iii) upon the exercise of the
Warrants where disclosure of compensation arrangements has not been made in
documents provided to customers both as part of the original offering and
at the time of exercise; or (iv) upon the exercise of the Warrants in
unsolicited transactions. Unless granted an exemption by the Commission
from its rule 10b-6, the Representative's and any soliciting broker-dealers
will be prohibited from engaging in any market making activities or
solicited brokerage activities with regard to the Company's securities for
the period from two or nine days, whichever is applicable, prior to any
solicitation of the exercise of Warrants until the later of the termination
of such solicitation activity or the termination (by waiver or otherwise)
of any right that the Representative and soliciting broker-dealers may have
to receive a fee for the exercise of Warrants following such solicitation.
As a result, the Representative and soliciting broker-dealers may be unable
to continue to provide a market for the Company's securities during certain
periods while the Warrants are exercisable. If the Representative has
engaged in any of the activities prohibited by Rule 10b-6 during the
periods described above, the Representative undertakes to waive
unconditionally its right to receive a commission on the exercise of such
Warrants.
The Company has agreed that, upon consummation of this offering, it
will enter into a two year financial consulting agreement with the
Representative pursuant to which the Representative will provide the
Company with investment banking and financial consulting services at a fee
of $60,000; $30,000 payable upon consummation of this offering and $2,500
per month for the first twelve months subsequent to the consummation of
this offering. Such services will include consulting with the Company's
management with respect to, among other matters, stockholder relations,
corporate expansion and long term financial planning.
LEGAL MATTERS
The legality of the securities comprising the Units offered hereby
will be passed upon for the Company by Sills Cummis Zuckerman Radin
Tischman Epstein & Gross, P.A., Newark, New Jersey. Parker Duryee Rosoff &
Haft, New York, New York has acted as counsel for the Underwriters in
connection with this offering.
EXPERTS
The audited financial statements included in this Prospectus and
Registration Statement have been audited by Arthur Andersen LLP,
independent certified public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
-47-
<PAGE>
AVAILABLE 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 Act with respect to the securities offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules filed therewith,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the securities offered hereby, reference is hereby made to such
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any
contract or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being deemed to be qualified in its entirety by such reference.
The Registration Statement, including all exhibits and schedules thereto,
may be inspected without charge at the principal office of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices
of the Commission located at 7 World Trade Center, New York, New York 10048
and 500 West Madison Street, Chicago, Illinois 60661-2511, and copies of
all or any part thereof may be obtained from such offices, upon the payment
of proscribed fees.
The Company is not currently a reporting company under the Securities
Exchange Act of 1934, as amended. The Company intends to furnish its
stockholders with annual reports containing audited financial statements
together with an opinion on such statements expressed by independent public
accountants and quarterly reports for the first three quarters of each
fiscal year containing certain unaudited condensed consolidated financial
information.
-48-
<PAGE>
GLOSSARY
GUI: Graphic user interface. A means of communicating
with a computer by manipulating icons and windows
rather than using text commands.
html: Hypertext markup language. The computer language
in which electronic information is published on
the Web.
http: Hypertext transfer protocol. The standard
communications protocol used on the Web to
retrieve information on the Web. Hypertext
transfer protocol makes browsing possible; the
user clicks on hypertext links in a Web document
and moves within that document or to another
document that may be located on a different
computer.
hypertext links: Data in a Web site that links to other data within
that Web site or to other unrelated Web sites,
allowing movement through information on the Web
non-sequentially.
Internet: An open global network of interconnected
commercial, educational and government computer
networks that allows any interconnected computer
to communicate with any other interconnected
computer utilizing a common communications
protocol, TCP/IP.
Protocol: A formal description of message formats and the
rules two or more machines must follow in order to
exchange such messages.
Server: Software that allows a computer to offer a service
to another computer. Other computers contact the
server program by means of matching client
software. In addition, such term means the
computer on which server software runs.
TCP/IP: Transmission Control Protocol/Internet Protocol.
A compilation of network and transport-level
protocols that allow computers with different
architectures and operating system software to
communicate with other computers on the Internet.
World Wide Web or,
the Web: The world wide network of computer servers that
uses a special communications protocol (i.e.,
http) that links different servers throughout the
Internet and enables non-technical users to access
graphic information, including video, photographs,
audio and text therein contained.
-49-
<PAGE>
K2 DESIGN, INC.
--------------
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995
---------------------------------------------------------
TOGETHER WITH
-------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To K2 Design, Inc.:
We have audited the accompanying consolidated balance sheet of K2 Design, Inc.
(a Delaware corporation) and subsidiary as of December 31, 1995, and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for the years ended December 31, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of K2 Design, Inc. and subsidiary
as of December 31, 1995, and the results of their operations and their cash
flows for the years ended December 31, 1995 and 1994, in conformity with
generally accepted accounting principles.
Roseland, New Jersey
March 22, 1996 (except
for Note 8 as to which
the date is May 9, 1996)
F-2
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE><CAPTION>
December 31, March 31,
ASSETS 1995 1996
------ ------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $17,756 $52,268
Accounts receivable (net of allowance for doubtful
accounts of $10,000) 133,694 318,105
Prepaid and deferred expenses 0 49,725
-------- --------
Total current assets 151,450 420,098
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net (Note 3) 67,603 104,671
RESTRICTED CASH 0 30,000
OTHER ASSETS 4,405 4,405
-------- --------
Total assets $223,458 $559,174
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of debt and capital lease obligations (Note 4) $45,770 $55,708
Accounts payable 94,940 222,342
Accrued professional fees 22,000 23,931
Accrued compensation 23,952 51,431
Accrued taxes 3,727 15,394
Other accrued expenses 8,210 22,434
Customer advances (Note 2) 29,857 52,330
-------- --------
Total current liabilities 228,456 443,570
LONG-TERM LINE OF CREDIT AND CAPITAL LEASE
OBLIGATIONS (Note 4) 26,527 46,382
-------- --------
Total liabilities 254,983 489,952
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)
STOCKHOLDERS' EQUITY (DEFICIT) (Note 8):
Preferred stock, $.01 par value, 1,000,000 shares authorized;
0 shares issued and outstanding 0 0
Common stock, $.01 par value, 9,000,000 shares authorized;
1,895,480 and 2,095,480 shares issued and outstanding,
respectively 18,955 20,955
Additional paid-in capital (62,376) 170,995
Retained earnings (deficit) 11,896 (122,728)
-------- --------
Total stockholders' equity (deficit) (31,525) 69,222
-------- --------
Total liabilities and stockholders' equity (deficit) $223,458 $559,174
-------- --------
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
</TABLE>
F-3
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE><CAPTION>
Years Ended Three Months Ended
December 31 March 31
---------------------------------------------------
1994 1995 1995 1996
-------- ----------- ------------ -----------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES $249,379 $1,196,208 $33,639 $512,434
DIRECT SALARIES AND COSTS 215,865 957,027 68,152 499,109
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 73,601 200,931 12,449 125,958
DEPRECIATION 13,013 24,485 4,779 9,113
---------- --------- ---------- ----------
Income (loss) from operations (53,100) 13,765 (51,741) (121,746)
INTEREST EXPENSE, net 0 869 319 982
---------- --------- ---------- ----------
Income (loss) before provision
for income taxes (53,100) 12,896 (52,060) (122,728)
PROVISION FOR INCOME TAXES 0 1,000 0 0
---------- --------- ---------- ----------
Net income (loss) ($53,100) $11,896 ($52,060) ($122,728)
========== ========= ========== ==========
PRO FORMA NET INCOME (LOSS) DATA
(UNAUDITED) (Notes 2 and 6):
Income (loss) before provision for
income taxes, as reported (53,100) 12,896 (52,060) (122,728)
Pro forma income tax provision (actual
for period subsequent to January 16, 1996) 0 0 0 0
---------- --------- ---------- ----------
Pro forma net income (loss ) ($53,100) $12,896 ($52,060) ($122,728)
========== ========= ========== ==========
PRO FORMA NET INCOME (LOSS) PER
COMMON SHARE OUTSTANDING $.01 ($.06)
========= ==========
PRO FORMA COMMON SHARES
OUTSTANDING 1,946,373 2,013,040
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
<PAGE>
<TABLE><CAPTION>
K2 DESIGN, INC. AND SUBSIDIARY
------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------
Common Stock
---------------------- Additional Retained
Number Partner's Paid-in Earnings
of Shares Amount Capital Capital (Deficit) Total
--------- ------ --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total
BALANCE, December 31, 1993 0 $0 $13,231 $0 $0 $13,231
Partner draws 0 0 (38,552) 0 0 (38,552)
Net loss 0 0 (53,100) 0 0 (53,100)
BALANCE, December 31, 1994 0 0 (78,421) 0 0 (78,421)
Termination of partnership
and capital contribution
to S Corporation 75 0 78,421 (78,421) 0 0
Issuance of common stock 25 0 0 10,000 0 10,000
Capital contribution 0 0 0 25,000 0 25,000
Corporate recapitalization
(Note 7) 1,895,380 18,955 0 (18,955) 0 0
Net income 0 0 0 0 11,896 11,896
BALANCE, December 31, 1995 1,895,480 18,955 0 (62,376) 11,896 (31,525)
Termination of S Corporation 0 0 0 11,896 (11,896) 0
Issuance of common stock 200,000 2,000 0 221,475 0 223,475
Net loss 0 0 0 0 (122,728) (122,728)
BALANCE, March 31, 1996
(unaudited) 2,095,480 $20,955 $0 $170,995 ($122,728) $69,222
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE><CAPTION>
Years Ended Three Months Ended
December 31 March 31
---------------------------------------------------
1994 1995 1995 1996
-------- ----------- ------------ -----------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($53,100) $11,896 ($52,060) ($122,728)
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation 13,013 24,485 4,779 9,113
Changes in-
Accounts receivable (18,983) (114,711) (8,905) (184,411)
Prepaid and deferred expenses 0 0 0 (49,725)
Restricted cash 0 0 0 (30,000)
Other assets 0 (2,530) (500) 0
Accounts payable 21,730 73,210 10,300 127,402
Accrued professional fees 2,500 19,500 2,375 1,931
Accrued compensation 80,000 (56,048) 8,095 27,479
Accrued taxes 0 3,727 0 11,667
Other accrued expenses 0 8,210 0 14,224
Customer advances 0 29,857 30,360 22,473
-------- --------- -------- ---------
Net cash (used in) provided by
operating activities 45,160 (2,404) (5,556) (172,575)
-------- --------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES --
Purchase of equipment (1,184) (17,553) (3,185) (7,246)
-------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 0 10,000 10,000 223,475
Capital contribution 0 25,000 0 0
Partner draws (38,552) 0 0 0
Principal payments on capital lease obligations (4,233) (35,613) (4,585) (8,150)
Proceeds from note payable 0 25,000 0 0
Proceeds from line of credit 0 10,000 0 0
Payments on line of credit 0 0 0 (992)
-------- --------- -------- ---------
Net cash provided by (used in)
financing activities (42,785) 34,387 5,415 214,333
-------- --------- -------- ---------
Net increase (decrease) in cash 1,191 14,430 (3,326) 34,512
CASH, beginning of period 2,135 3,326 3,326 17,756
-------- --------- -------- ---------
CASH, end of period $3,326 $17,756 $0 $52,268
======== ========= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for-
Interest $0 $869 $319 $684
State income taxes 0 1,074 0 10,505
======== ========= ======== =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1995 AND 1994
--------------------------
(1) ORGANIZATION AND BUSINESS:
-------------------------
K2 Design, Inc. and subsidiary ("K2" or the "Company") commenced operations
on March 1, 1993 as a partnership. In January 1995 the Partnership
contributed its capital into a newly formed corporation and elected S
Corporation status. Effective January, 1996, the Company was reorganized as
a Delaware holding C Corporation having a wholly-owned operating subsidiary
in New York.
K2 is a full service interactive communications, design and technology
company, engaged primarily in the business of designing and creating Web
sites on the Internet. The Company also provides various other information
delivery services. The Company initially operated a traditional graphic
design business upon its founding in 1993, but shifted its principal
business to Web site creation and design at the beginning of 1995. The
Company's customers are primarily U.S.-based corporations operating in a
wide variety of industries.
The accompanying unaudited financial statements as of March 31, 1996 and
for the three months ended March 31, 1996 and 1995 have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and note disclosures
normally included in financial statements prepared in conformity with
generally accepted accounting principles have been condensed or omitted. In
the opinion of the Company, all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and changes in cash flows for the periods presented
have been made. These financial statements should be read in conjunction
with the financial statements and notes as of December 31, 1995 and for the
years ended December, 31, 1995 and 1994.
(2) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
----------------------
Use of Estimates in the
Preparation of Financial Statements-
- ------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-7
<PAGE>
Revenue Recognition-
- --------------------
Web site creation and design contracts are generally completed within six
to eight weeks. Revenue is recognized on the completed contract method on
an individual contract basis. Contract costs include all direct labor costs
and other direct costs related to contract performance, such as freelance
labor, supplies, printing, and equipment costs. Provisions for any
estimated losses on uncompleted contracts are made in the period in which
such losses are determinable.
A substantial portion of the Company's revenues has been generated on a fixed
fee for service basis.
Equipment and Leasehold Improvements-
- -------------------------------------
Equipment and leasehold improvements are carried at cost and depreciated
using the straight-line method over their estimated useful lives. Leasehold
improvements are amortized over the shorter of their estimated useful lives
or the term of the underlying lease.
Estimated useful lives by class of assets are as follows-
Computers and equipment 3 years
Furniture and fixtures 5 years
Leasehold improvements Life of lease
Assets purchased with capital leases are depreciated over their estimated
useful lives.
Fair Value of Financial Instruments-
- ------------------------------------
The carrying amounts of the Company's cash, accounts receivable, accounts
payable and debt approximate fair market value based upon the relatively
short-term nature of these financial instruments.
Concentration of Credit-
- ------------------------
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade accounts
receivable. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from
its customers. The Company's sales to its largest customer for the year
ended December 31, 1994 constituted 44% of revenue. The Company's sales to
its three largest customers constituted approximately 18%, 15% and 12% for
the year ended December 31, 1995. The Company's sales to its largest
customer constituted approximately $313,000 for the three months ended
March 31, 1996 (unaudited). The Company had accounts receivable from these
customers amounting to $66,571 and $144,582 at December 31, 1995 and March
31, 1996 (unaudited), respectively.
F-8
<PAGE>
Income Taxes-
- -------------
As discussed in Note 1, the Company operated as a Partnership during the
year ended December 31, 1994. As a result, the partners were individually
liable for federal and state income taxes on the Company's taxable income.
Effective January 1995, the Company elected to be treated as an S
Corporation for Federal income tax purposes. As a result, the shareholders
are individually liable for Federal income tax on the Company's taxable
income. The Company was subject to New York State and City income taxes.
Effective January 16, 1996, the Company was reorganized as a Delaware
holding C Corporation having a wholly-owned subsidiary in New York.
The Company provides state income tax in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Deferred taxes were not significant
for the year ended December 31, 1995 and the three months ended March 31,
1996.
Pro Forma Net Income (Loss) Per Common Share-
- ---------------------------------------------
Pro forma net income (loss) per common share has been computed by dividing
pro forma net income (loss) by the pro forma number of common shares
outstanding. As required by the Securities and Exchange Commission rules,
all warrants, options and shares issued within one year of the public
offering at less than the public offering price (see Note 8) are assumed to
be outstanding for each year presented for purposes of the per share
calculation.
Stock Based Compensation-
- -------------------------
The Financial Accounting Standards Board has issued a new standard,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires
that an entity account for employee stock compensation under a fair value
based method. However, SFAS 123 also allows an entity to continue to
measure compensation cost for employee stock-based compensation using the
intrinsic value based method of accounting prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("Opinion 25"). Entities
electing to remain with the accounting under Opinion 25 are required to
make pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting under SFAS 123 had been applied. The
Company will adopt the disclosure requirement of SFAS 123 during 1996.
F-9
<PAGE>
(3) EQUIPMENT AND
LEASEHOLD IMPROVEMENTS:
-----------------------
Equipment and leasehold improvements, at cost, including capital leases
(Note 5), summarized by major categories, consist of the following-
December 31, March 31,
1995 1996
--------------- -------------
(unaudited)
Computers and equipment $86,588 $125,523
Furniture and fixtures 6,098 6,098
Leasehold improvements 6,193 13,439
--------- --------
98,879 145,060
Less- Accumulated depreciation 31,276 40,389
--------- --------
Equipment and leasehold
improvements, net $67,603 $104,671
========= ========
(4) NOTE PAYABLE, LINE OF CREDIT
AND CAPITAL LEASE OBLIGATIONS:
------------------------------
December 31, March 31,
1995 1996
--------------- -------------
(Unaudited)
Note payable to Republic National Bank
dated October 10, 1995, bearing interest
at prime + 2%, due October 10, 1996 $25,000 $25,000
Chemical Bank $10,000 line of credit
dated November 1, 1995, bearing interest
at prime + 3% payable in 36 equal monthly
installments 10,000 9,008
Capital lease obligations (Note 5) 37,297 68,082
--------- --------
72,297 102,090
Less- Current maturities 45,770 55,708
--------- --------
$26,527 $46,382
========= ========
The note payable to Republic National Bank is personally guaranteed by the
stockholders of the Company. The interest rates on the note payable and line of
credit at December 31, 1995 were 10.75% and 11.75%, respectively.
Future principal payments on debt at December 31, 1995 are as follows-
1996 $45,770
1997 14,531
1998 9,990
1999 1,719
2000 287
-------
$72,297
=======
F-10
<PAGE>
Interest expense for the years ended December 31, 1994 and 1995 and the three
months ended March 31, 1995 and 1996 (unaudited) amounted to $0 and $939, $319
and $982, respectively.
(5) CAPITAL LEASE OBLIGATIONS:
--------------------------
The Company is a lessee in noncancelable leasing agreements for certain
computers and equipment. Future minimum lease payments are as follows-
December 31, March 31,
1995 1996
------------ ----------
(unaudited)
1996 $22,972 $28,118
1997 15,284 31,457
1998 9,174 25,347
1999 2,493 5,426
2000 415 415
------- -------
Total minimum lease payments 50,338 90,763
Less- Imputed interest (13,041) (22,681)
------- -------
Capital lease obligation $37,297 $68,082
======= =======
(6) PRO FORMA INCOME TAXES (Unaudited):
As described in Note 2, the Company previously elected "S" corporation status
under the provisions of the Internal Revenue Code. In January, 1996 the Company
reorganized as a Delaware Holding C Corporation in contemplation of the initial
public offering.
The following unaudited pro forma information has been determined based upon the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS 109). This information reflects income tax expense that
the Company would have incurred had it been subject to Federal and state income
taxes. The Company would not have a Federal and state income tax provision
because of net operating loss carryforwards for all periods presented.
The pro forma income tax provision (benefit) differs from the amounts computed
by applying the Federal statutory rate of 34% to (loss) income before taxes as
follows-
December 31 March 31
---------------------- ---------------------
1994 1995 1995 1996
---------------------- ---------------------
(unaudited)
Tax provision (benefit) at
the statutory rate ($18,054) $4,385 ($17,700) ($41,728)
State income taxes, net
of Federal benefit (3,186) 774 (3,124) (7,364)
Operating loss carryforward 21,240 (5,159) 20,824 49,092
------ ------ ------ ------
$0 $0 $0 $0
====== ====== ====== ======
F-11
<PAGE>
(7) COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company is located at 80 East 11th Street, New York, New York. The
Company's lease expires on February 29, 1996, after which time the Company
plans to renew its lease from month to month at the present rate until such
time as the Company moves to its new space, expected to occur by May 31,
1996 (Note 8). At December 31, 1995, future minimum rental payments for the
year ending December 31, 1996 is $6,450.
Rental expense charged to selling, general and administrative expenses for
the years ended December 31, 1994 and 1995 and the three months ended March
31, 1995 and 1996 (unaudited) amounted to $8,859, $29,150, $4,800 and
$10,150, respectively.
(8) SUBSEQUENT EVENTS:
------------------
Corporate Reorganization-
- -------------------------
Effective January, 1996, the Company was reorganized as a Delaware holding
C corporation having a wholly owned operating subsidiary incorporated in
New York. The reorganized corporation is authorized to issue 9,000,000
shares of common stock, par value $.01 per share, and 1,000,000 shares of
Preferred Stock, par value $.01 per share. The 100 shares of common stock
of the predecessor corporation that were issued and outstanding at the date
of reorganization were exchanged for 1,895,480 shares of common stock in
the reorganized corporation. The accompanying financial statements have
been adjusted to reflect the above reorganization.
In addition, as a result of termination of the S Corporation in January
1996, the retained earnings as of that date were transferred to additional
paid in capital. At March 31, 1996 the accompanying consolidated balance
sheet and consolidated statements of stockholders' equity (deficit) has
been adjusted to reflect this termination.
1996 Stock Option Plan-
- -----------------------
Effective January 16, 1996, the Company adopted the 1996 Stock Option Plan
(the "Plan"), pursuant to which designated employees, including officers
and directors of the Company and certain outside consultants, will be
entitled to receive nonqualified stock options and qualified stock
incentive compensation. An aggregate of 225,000 shares of common stock are
available for grant under the Plan and have been reserved for this purpose.
The Plan expires on January 1, 2006. Under the terms of the Plan, the
minimum exercise price of options granted cannot be less than 100% of the
fair market value of the common stock of the Company on the option grant
date. Options granted under the Plan expire ten years after the option
grant date. For incentive stock options granted to such persons who would
be deemed to have in excess of a 10% ownership interest in the Company, the
option price shall not be less than 110% of such fair market value for all
options granted, and the options expire five years after the option grant
date. Options granted are exercisable in five equal annual installments
commencing on the option grant date.
F-12
<PAGE>
Options to purchase an aggregate of 75,000 shares of Common Stock were
granted to the four executive officers of the Company. Specifically, each
were granted options to acquire (i) 6,250 shares of Common Stock at an
exercise price of $1.75 per share, (ii) 6,250 shares of Common Stock at an
exercise price of $3.50 per share and (iii) 6,250 shares of Common Stock at
an exercise price of $6.75 per share.In addition, an option to purchase an
aggregate of 25,000 shares of Common Stock at an exercise price of $1.75
per share has been granted to a consultant to the Company.
Private Placements-
- -------------------
Effective February 29, 1996, the Company consummated a private placement
offering in which it sold 200,000 shares of its common stock at $1.25 per
share. Effective May 9, 1996, the Company consummated a second private
placement offering in which it sold 400,002 shares of its common stock at
$1.75 per share. The Company intends to utilize the net proceeds from these
offerings of approximately $845,000 for the payment of expenses in
connection with the Proposed Public Offering, and for working capital and
general corporate purposes.
Proposed Public Offering-
- -------------------------
The Company has entered into a letter of intent (the "Letter of Intent")
with the Placement Agent relating to the Proposed Public Offering, pursuant
to which the Placement Agent would offer 1,000,000 units of the Company's
securities to the public (the "Public Units"), each consisting of one share
of Common Stock and one warrant to purchase one share of Common Stock
having an expected exercise price equal to 110% of the public offering
price of the Common Stock included in the Public Units. As of March 31,
1996, the Company had deferred certain direct costs totaling approximately
$22,500 incurred in connection with its anticipated offering. Such costs
will be netted against the proceeds of the offering. See "Risk Factors" in
the registration statement.
Lease Agreement-
- ----------------
The Company has entered into a five year lease agreement to expire on April
30, 2001, for new office space at 55 Broad Street, New York, New York. At
December 31, 1995, future minimum rental payments anticipated under this
lease are as follows-
1996 $63,381
1997 95,071
1998 95,071
1999 95,071
2000 95,071
2001 31,690
F-13
<PAGE>
No dealer, salesman 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 1,000,000 Shares
not constitute an offer to sell or of
a solicitation of an offer to buy Common Stock
any securities offered hereby by
anyone in any jurisdiction in which
such offer or solicitation is not
authorized or in which the person 1,000,000 Redeemable Common Stock
making such offer or solicitation Purchase Warrants
is not qualified to do so or to
anyone to whom it is unlawful to
make such offer or solicitation.
Neither the delivery of this
Prospectus nor any sale made
hereunder shall, under any
circumstances, create any
implication that there has been no K2 DESIGN, INC.
change in the affairs of the
Company since the date hereof or
that the information contained
herein is correct as of any date
subsequent to the date hereof.
------------------
__________ PROSPECTUS
------------------
Table of Contents
Page
----
Prospectus Summary . . 1
Risk Factors . . . . . 5
Use of Proceeds . . . . 14
Dilution . . . . . . . 15 DONALD & CO. SECURITIES INC.
Capitalization . . . . 17
Dividend Policy . . . . 18
Selected Financial Data . 19
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations . . . . 20
Business . . . . . . . 24
Management . . . . . . 32
Principal Stockholders 34
Selling Stockholders
and Plan of
Distribution . . . . 35
Certain Transactions . 38
Description of Securities 39
Shares Eligible for
Future Sale . . . . . 44
Underwriting . . . . . 46
Legal Matters . . . . 47
Experts . . . . . . . . 47
Available Information . 48
Glossary . . . . . . . 49
Index to Financial Statement F-1
Until , 1996 (25 days
after the date of this Prospectus),
all dealers effecting transactions
in the registered securities,
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.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24.Indemnification of Directors and Officers
Subsection (a) of Section 145 of the General Corporation Law of the State
of Delaware empowers a corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that he is or was a director,
officer, employee 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,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that
such person acted in any of the capacities set forth above, against
expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation, except that no
indemnification may be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in
which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of chancery or such other court
shall deem proper.
Section 145 further provides that to the extent a director or officer
of a corporation has been successful on the merits or otherwise in the
defense of any action, suit or proceeding referred to in subsections (a)
and (b) of Section 145, or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith; that
indemnification provided for by Section 145 shall not be deemed exclusive
of any other rights to which the indemnified party may be entitled; that
indemnification provided for by Section 145 shall, unless otherwise
provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of such person's heirs, executors and administrators, and empowers
the corporation to purchase and maintain insurance on behalf of a director
or officer of the corporation 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 liabilities under Section 145.
Section 102(b)(7) of the General Corporation Law of the State of
Delaware provides that a certificate of incorporation may contain a
provision eliminating or limiting the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director provided that such 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 or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit.
II-1
<PAGE>
Article SEVENTH of the Company's Certificate of Incorporation states
that:
(a) A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except to the extent such exemption
from liability or limitation thereof is not permitted under the
Delaware General Corporation Law.
(b)(1) Each person (and the heirs, executors or administrators of
such person) who was or is a party or is threatened to be made a party
to, or is involved in any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a
director or officer of the Corporation or is or was serving at the
request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise,
shall be indemnified and held harmless by the Corporation to the
fullest extent permitted by the Delaware General Corporation Law. The
right to indemnification conferred in this Article Seventh shall also
include the right to be paid by the Corporation the expenses incurred
in connection with any such proceeding in advance of its final
disposition to the fullest extent permitted by the Delaware General
Corporation Law. The right to indemnification conferred in this
Article Seventh shall be a contract right.
(2) The Corporation may, by action of its board of directors,
provide indemnification to such of the employees and agents of the
Corporation and such other persons serving at the request of the
Corporation as employees or agents of another corporation,
partnership, joint venture, trust or other enterprise to such extent
and to such effect as is permitted by the Delaware General Corporation
Law and the board of directors shall determine to be appropriate.
(c) The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer,
employee 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 against any expense, liability or loss incurred by such
person 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 Delaware General Corporation Law.
(d) The rights and authority conferred in this Article Seventh
shall not be exclusive of any other right which any person may
otherwise have or hereafter acquire.
(e) No amendment, modification or repeal of this Article Seventh,
nor the adoption of any provision of this certificate of incorporation
or the bylaws of the Corporation, nor, to the fullest extent permitted
by the Delaware General Corporation Law, any amendment, modification
or repeal of law shall eliminate or reduce the effect of this Article
Seventh or adversely affect any right or protection then existing
hereunder in respect of any acts of omissions occurring prior to such
amendment, modification, repeal or adoption.
The Company also plans to provide liability insurance for its
directors and officers which is expected to provide for coverage against
loss from claims made against directors and officers in their capacity as
such, including liabilities under the Securities Act of 1933, as amended.
The Underwriting Agreement, the form of which is attached as Exhibit
1.1 hereto, contains provisions for indemnification by the Underwriter of
the Registrant and its officers, directors and controlling stockholders
against certain liabilities under the Act.
Item 25. Other Expenses of Issuance and Distribution
Expenses of the Registrant in connection with the issuance and
distribution of the securities being registered, other than underwriting
discounts and commissions, are estimated to be as follows:
II-2
<PAGE>
SEC registration fee . . . . . . . . . . . . . . . $7,290
NASD filing fee . . . . . . . . . . . . . . . . . *
NASDAQ listing fee . . . . . . . . . . . . . . . . *
Boston Stock Exchange Listing Fee . . . . . . . . *
State Securities Laws (Blue Sky) fees and expenses *
Printing and engraving expenses . . . . . . . . . *
Legal fees and expenses . . . . . . . . . . . . . *
Accounting fees and expenses . . . . . . . . . . . *
Transfer Agent and registrar . . . . . . . . . . *
Premiums for directors and officers insurance . . *
Non-accountable expense allowance . . . . . . . . *
Miscellaneous . . . . . . . . . . . . . . . . . . *
=======
TOTAL . . . . . . . . . . . . . . . . . $ *
=======
* To be filed by amendment.
The registrant will bear all expenses shown above.
Item 26. Recent Sales of Unregistered Securities
The Registrant was formed in January 1996 by the then-existing
stockholders of K2 Design, Inc., a New York corporation (the
"Predecessor"). In connection with the formation of the Registrant, such
stockholders each exchanged all of their shares of the Predecessor's common
stock, which constituted all of the outstanding capital stock of the
Predecessor, for 473,870 shares of the Registrant's common stock, 1,895,480
such shares in the aggregate. This exchange was not a sale as defined by
Section 2(3) of the Act and was, accordingly, exempt from the registration
requirements of the Act.
In March 1996, the Company consummated a private placement in which it
sold 200,000 shares of Common Stock for an aggregate of $250,000 and in May
1996, the Company consummated a second private placement in which it sold
an additional 400,002 shares of Common Stock for an aggregate of $700,000.
Only accredited investors purchased Common Stock in these private
placements.
With respect to the private placements, Donald & Co. Securities Inc.
acted as Placement Agent and received $47,000 in commissions and $9,500 in
non-accountable expenses. In connection with these sales, the Registrant
relied on Regulation D and Rule 506 thereunder.Item 27. Exhibits
Exhibit
Number Description
------ -----------
1.1 -- Form of Underwriting Agreement
3.1 -- Certificate of Incorporation of the Registrant
3.2 -- By-Laws of the Registrant
4.1 -- Form of Common Stock Certificate*
4.2 -- Form of Warrant Certificate*
4.3 -- Form of Representative's Warrant Agreement*
4.4 -- Form of Warrant Agreement by and between and
the Registrant*
4.5 -- Form of Preferred Stock Certificate*
II-3
<PAGE>
Exhibit
Description
-----------
Number
------
4.6 -- Voting Agreement among Messrs. Centner, de
Ganon, Cleek and Szollose*
5.1 -- Opinion of Sills Cummis Zuckerman Radin
Tischman Epstein & Gross, P.A.*
10.1 -- 1996 Stock Option Plan and Rules Relating
thereto
10.2 -- Consulting Agreement with Harry Berlent*
10.3 -- Employment Agreements with David J. Centner*
10.4 -- Employment Agreement with Matthew de Ganon*
10.5 -- Employment Agreement with Bradley K. Szollose*
10.6 -- Employment Agreement with Douglas E. Cleek*
10.7 -- Agreement of Lease
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Sills Cummis Zuckerman Radin
Tischman Epstein & Gross, P.A. (contained in
Exhibit 5.1)*
24.1 -- Powers of Attorney to sign Registration
Statement (set forth on page II-6)
* To be filed by amendment.
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
to 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 Act;
(ii) reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and
(iii) include any additional or changed material information on
the plan of distribution.
to, for determining liability under the Act, treat each post-effective
amendment as a new registration statement of the securities offered, and
the offering of the securities at the time to be the initial bona fide
offering and
to file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering and
that, insofar as indemnification for liabilities arising under the 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 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
II-4
<PAGE>
the Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person of the
Registrant in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue and
to provide the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser, and
that for determining liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance on Rule 430A and contained in a form of prospectus
filed by the Registrant under Rule 424(b)(1), or (4) or 497(h) under the
Act as part of this registration statement as of the time the Commission
declared it effective.
II-5
<PAGE>
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 of filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in
the City of New York, State of New York, on May 22, 1996.
K2 DESIGN, INC.
By: /s/ David J. Centner
-------------------------------------
David J. Centner, Chairman
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David J. Centner, Matthew G. de
Ganon and each of them, his true and lawful attorneys-in-fact and agents
with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, 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 and agents and each of
them, full power and authority to do and perform each and every act and
thing requisite or 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, or any
of them, or their, his or her substitute or substitutes 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 was signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/s/ David J. Centner Chairman (principal May 22, 1996
--------------------------- executive officer),
David J. Centner Chief Financial Officer
(principal financial and
accounting officer) and
Director
/s/ Matthew G. de Ganon Director May 22, 1996
---------------------------
Matthew G. de Ganon
/s/ Bradley K. Szollose Director May 22, 1996
---------------------------
Bradley K. Szollose
/s/ Douglas E. Cleek Director May 22, 1996
---------------------------
Douglas E. Cleek
II-6
<PAGE>
EXHIBIT INDEX
<TABLE><CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement
3.1 -- Certificate of Incorporation of the Registrant
3.2 -- By-Laws of the Registrant
4.1 -- Form of Common Stock Certificate*
4.2 -- Form of Warrant Certificate*
4.3 -- Form of Representative's Warrant Agreement*
4.4 -- Form of Warrant Agreement by and between and
the Registrant*
4.5 -- Form of Preferred Stock Certificate*
4.6 -- Voting Agreement among Messrs. Centner, de
Ganon, Cleek and Szollose*
5.1 -- Opinion of Sills Cummis Zuckerman Radin
Tischman Epstein & Gross, P.A.*
10.1 -- 1996 Stock Option Plan and Rules Relating
thereto
10.2 -- Consulting Agreement with Harry Berlent*
10.3 -- Employment Agreements with David J. Centner*
10.4 -- Employment Agreement with Matthew de Ganon*
10.5 -- Employment Agreement with Bradley K. Szollose*
10.6 -- Employment Agreement with Douglas E. Cleek*
10.7 -- Agreement of Lease
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Sills Cummis Zuckerman Radin
Tischman Epstein & Gross, P.A. (contained in
Exhibit 5.1)*
24.1 -- Powers of Attorney to sign Registration
Statement (set forth on page II-6)
- -----------------
* To be filed by amendment.
</TABLE>
Exhibit 1.1
K2 Design, Inc.
1,000,000 Shares of Common Stock
1,000,000 Redeemable Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
_____ __, 1996
Donald & Co. Securities Inc.
As Representative of the Underwriters
named in Schedule I hereto
65 East 55th Street
New York, New York 10022
Dear Sirs:
K2 Design, Inc., a Delaware corporation (the "Company"), hereby confirms
its agreement with Donald & Co. Securities Inc. (being referred to herein
variously as "you" or the "Representative") and the other underwriters named in
Schedule I hereto (the "Representative" and the other underwriters being
collectively called the "Underwriters") as follows:
1. Introductory. The Company proposes to issue and sell to the
------------
Underwriters 1,000,000 shares of Common Stock, $0.01 par value, of the Company
(the "Common Stock") and 1,000,000 Redeemable Common Stock Purchase Warrants
(the "Redeemable Warrants") of the Company, together on the basis of one share
of Common Stock and one Redeemable Warrant (the "Firm Units"). Subsequent to the
sale and issuance of the shares of Common Stock and the Redeemable Warrants in
accordance with the terms of this Agreement, the shares of Common Stock and the
Redeemable Warrants will be immediately separately transferable. Two Redeemable
Warrants entitles the holder of such warrants to exercise the Redeemable
Warrants
<PAGE>
for one (1) share of Common Stock at an initial exercise price of $_______ per
share (125% of the initial exercise price of the Common Stock) commencing on the
Effective Date (as hereinafter defined) and ending at 5:00 p.m., New York time,
on ________, 2001 (five (5) years after the Effective Date). In addition,
solely for the purpose of covering over-allotments, the Company proposes to
grant to the Representative an option to purchase from it up to an additional
150,000 shares of Common Stock ("Additional Stock") and 150,000 Redeemable
Warrants, together on the basis of one share of Common Stock and one Redeemable
Warrant (the "Additional Units" collectively with the Firm Units, the "Units").
The Common Stock to be sold by the Company, excluding the Additional Stock, is
herein called the "Stock". The Units and the components thereof are more fully
described in the Prospectus referred to below.
2.Representations and Warranties of the Company. The Company represents
-----------------------------------------------
and warrants to the Underwriters:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement, and amendments thereto, on Form
SB-2 (File No. 333-___), including any related preliminary prospectus
("Preliminary Prospectus"), for the registration of the Stock, the Redeemable
Warrants, the Additional Stock and the Additional Redeemable Warrants under the
Securities Act of 1933, as amended (the "Act"). The Company will not, before the
registration statement becomes effective (the "Effective Date"), file any other
amendment to said registration statement to which you shall reasonably object in
writing after being furnished with a copy thereof. Copies of such registration
statement and all amendments thereto, and all forms of the related Preliminary
Prospectus contained therein, previously filed by the Company with the
Commission, have heretofore been delivered to you. Except as the context may
otherwise require, such registration statement, as amended, on file with the
Commission at the time the registration statement becomes effective (including
the prospectus, financial statements, exhibits and all other documents filed as
a part thereof and all information deemed to be a part thereof as of such time
pursuant to paragraph (b) of Rule 430A of the General Rules and Regulations of
the Commission under the Act (the "Regulations")) is herein called the
"Registration Statement". The prospectus in the form filed with the Commission
pursuant to Rule 424(b) of the Regulations is herein called the "Prospectus".
(b) Neither the Commission nor any "Blue Sky" or securities authority
of any jurisdiction has issued an order preventing or suspending the use of any
Preliminary Prospectus relating to the proposed offering of the Units and
Additional Units or has instituted proceedings for that purpose. Each
Preliminary Prospectus, at the time of filing thereof, contained all material
statements which are required to be stated therein in accordance with the Act
and the Regulations, and conformed in all material respects with the
requirements of the Act and the Regulations and did not include 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 the light of the
circumstances under which they were made, not misleading. The Registration
Statement at the time it becomes effective and the Prospectus at the time it is
filed with the Commission pursuant to Rule 424(b)
<PAGE>
and on the Closing Date (and the Additional Closing Date, if any, determined as
hereinafter provided in Section 3) will contain all material 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 the Registration Statement and the Prospectus
will not, on such dates, include 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 no representations or warranties are made with
respect to statements or omissions made in reliance upon and in conformity with
written information furnished to the Company with respect to the Underwriters by
or on behalf of such Underwriters expressly for use in the Registration
Statement or Prospectus or any amendment or supplement thereto.
(c) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
[________________], a subsidiary of the Company (the "Subsidiary"), has been
duly organized and is validly existing as a corporation in good standing under
the laws of the State of New York. The Company owns, directly or indirectly,
all of the capital stock of the Subsidiary. All such shares of stock so owned
are validly issued and outstanding, fully paid and nonassessable and are owned
free and clear of any liens, encumbrances or other restrictions. The Company
and the Subsidiary are duly qualified and in good standing as foreign
corporations in all jurisdictions where the character or location of their
properties (owned or leased) or the nature of their business makes such
qualification necessary, except where the failure so to qualify would not have a
material adverse effect on the business, properties, results of operations,
condition (financial or otherwise), affairs or prospects (a "Material Adverse
Effect") of the Company and the Subsidiary, taken as a whole. The Company and
the Subsidiary have all requisite corporate power and authority, and all
necessary authorizations, approvals, orders, licenses, certificates and permits
of and from all governmental regulatory officials and bodies, to own their
respective properties and conduct their respective businesses as described in
the Prospectus, and the Company has all such power, authority, authorizations,
approvals, orders, licenses, certificates and permits to enter into this
Agreement and to carry out the provisions and conditions hereof. The Company and
the Subsidiary own, or possess adequate rights to use, all patents, trademarks,
service marks and other rights necessary for the conduct of their business as
described in the Prospectus and neither the Company, the Subsidiary nor any
officer or director of the Company or the Subsidiary has received any notice of
conflict with the asserted rights of others in any respect which would have a
Material Adverse Effect upon the Company or the Subsidiary, and none knows any
basis therefor. The Company has no subsidiaries other than the Subsidiary.
(d) The Company and the Subsidiary have either good and marketable
title in fee simple to, or valid and enforceable leasehold estates in, all items
of real property and personal property which are stated in the Prospectus to be
owned or leased by them, in each case free and clear of all liens, encumbrances,
claims, security interests, subleases and defects, other than those referred to
in the Prospectus and those which do not have a Material Adverse Effect upon the
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<PAGE>
Company and the Subsidiary, taken as a whole. The Company has the right to
operate all of its facilities in their present locations and the operation of
such facilities does not violate in any material respect the provisions of any
lease with respect thereto which the Company or any third party is a party.
(e) There is no litigation or governmental proceeding pending or, to
the knowledge of the Company or the Subsidiary, threatened against, or involving
the properties or business of, the Company, nor are there any actions, suits or
proceedings related to environmental matters or related to discrimination on the
basis of age, sex, religion or race and no labor disturbance by the employees of
the Company or the Subsidiary exist, which could have a Material Adverse Effect
upon the Company and the Subsidiary, taken as a whole, except as referred to in
the Prospectus.
(f) All contracts, agreements, documents and other instruments
required to be filed as exhibits to the Registration Statement have been filed
with the Commission as exhibits thereto.
(g) The consolidated financial statements together with the related
notes of the Company and the Subsidiary included in the Registration Statement
and Prospectus present fairly the consolidated financial position and the
consolidated results of operations of the Company and the Subsidiary and at the
respective dates and for the respective periods to which they apply; and such
financial statements have been prepared in conformity with generally accepted
accounting principles, consistently applied throughout the periods involved.
The consolidated capitalization of the Company, as set forth under the caption
"Capitalization" in the Prospectus, was as so described on the date of which it
is set forth therein.
(h) Arthur Andersen LLP, whose reports are filed with the Commission
as a part of the Registration Statement, are independent accountants as required
by the Act and the Regulations.
(i) Except for the shares of capital stock of the Subsidiary, neither
the Company nor the Subsidiary owns, directly or indirectly, any shares of stock
or any other securities of any corporation nor does the Company or the
Subsidiary have any equity interest in any firm, partnership, joint venture,
association or other entity, except as referred to in the Prospectus.
(j) There has been no material adverse change in the business,
properties, results of operations, condition (financial or otherwise), affairs
or prospects of the Company and the Subsidiary, taken as a whole, from that on
the latest dates as of which such business, properties, results of operations,
condition (financial or otherwise), affairs or prospects are set forth in the
Registration Statement and the Prospectus except as referred to therein; and the
outstanding debt, the property and the business of the Company and the
Subsidiary conform in
4
<PAGE>
all material respects to the descriptions thereof contained in the Registration
Statement and the Prospectus.
(k) No default exists, and no event has occurred which with notice or
lapse of time, or both, would constitute a default, in the due performance and
observance of any term, covenant or condition of any indenture, mortgage, deed
of trust, note, bank loan or credit agreement or any other agreement or
instrument to which the Company or the Subsidiary is a party or by which either
of them or any of their property may be bound or affected, which default would
have a Material Adverse Effect upon the Company or the Subsidiary.
(l) Neither the Company nor the Subsidiary is in breach of any term
or provision of its Certificate of Incorporation, by-laws or other charter
documents and, to the best of the Company's knowledge, in violation of any
franchise, license, permit, judgment, decree, order, statute, rule or
regulation, which violation is a Material Adverse Effect upon the Company or the
Subsdiary. Neither the Company nor the Subsdiary, to the best of the Company's
knowledge, is in violation of any laws, ordinances, governmental rules or
regulations to which either of them is subject, which violation is a Material
Adverse Effect upon the Company or the Subsdiary. The Company has not failed to
obtain any licenses, permits, franchises or other governmental authorizations
materially necessary to the ownership of its property or to the conduct of its
business.
(m) Neither the execution and delivery of this Agreement, the
Redeemable Warrant Agreement, the Representative's Warrant Agreement (as defined
in Section 3(h) hereof) and the Financial Consulting Agreement, and the
consummation of the transactions herein or therein contemplated, nor compliance
with the terms and provisions hereof or thereof will conflict with, or result in
a breach of any of the terms, provisions or conditions of the Certificate of
Incorporation, by-laws or other charter documents of the Company or the
Subsidiary. The execution and delivery of this Agreement, the Redeemable
Warrant Agreement, the Representative's Warrant Agreement and the Financial
Consulting Agreement, the consummation of the transactions herein or therein
contemplated, and compliance with the terms and provisions hereof or thereof
will not conflict with, or result in a breach of, or constitute a default under
any of the terms, provisions or conditions of any agreement or instrument to
which the Company or the Subsidiary is a party or by which either of them or any
of their properties is bound, except where such conflict, breach or default
would not have a Material Adverse Effect upon the Company or the Subsidiary, or
violate any franchise, license, permit, judgment, decree, order, statute, rule
or regulation of any government, governmental authority or court having
jurisdiction over the Company or the Subsidiary.
(n) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement, the
Redeemable Warrant Agreement, the Representative's Warrant Agreement and the
Financial Consulting Agreement, and this Agreement, the Redeemable Warrant
Agreement, the Representative's Warrant Agreement, and
5
<PAGE>
the Financial Consulting Agreement, have been duly authorized, executed and
delivered by the Company and constitute legal, valid and binding agreements of
the Company and are enforceable against the Company in accordance with their
respective terms except as enforceability may be limited by bankruptcy,
insolvency, reorganization or other similar laws affecting creditors' rights
generally, and except insofar as the enforceability of the indemnification and
contribution terms may be limited by applicable law or public policy.
(o) All of the issued shares of Common Stock are duly and validly
issued and outstanding, fully paid and nonassessable; the Stock and the
Additional Stock, when issued and delivered in accordance with this Agreement,
will be duly and validly issued and outstanding, fully paid and nonassessable
and free of preemptive rights. The Company's capital stock conforms in all
material respects to all statements in relation thereto contained in the
Registration Statement and Prospectus.
(p) The Redeemable Warrants, the Additional Redeemable Warrants and
the warrants that will be issued pursuant to the terms of the Representative's
Warrant Agreement (the "Representative's Warrants") have been duly and validly
authorized by the Company and upon delivery to you in accordance with this
Agreement, the Redeemable Warrant Agreement and the Representative's Warrant
Agreement, as the case may be, will be duly issued and legal, valid and binding
obligations of the Company enforceable against the Company in accordance with
their terms except as enforceability may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting creditors' rights generally.
(q) The Common Stock underlying the Redeemable Warrants (the
"Redeemable Warrant Stock"), the Additional Redeemable Warrants (the "Additional
Redeemable Warrant Stock") and the Representative's Warrants (the
"Representative's Warrant Stock") has been duly authorized and reserved for
issuance upon the representative's exercise of the Redeemable Warrants, the
Additional Redeemable Warrants and the Representative's Warrants, and, when
issued upon payment of the exercise price therefor, will be validly issued,
fully paid and nonassessable shares of Common Stock.
(r) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as may otherwise
be indicated or contemplated herein or therein, the neither Company nor the
Subsidiary has (i) issued any securities except securities issued under the
Company's employee benefit plans and as provided herein or in the Registration
Statement, or incurred any liability or obligation, direct or contingent, for
borrowed money, (ii) entered into any material transaction not in the ordinary
course of business, (iii) entered into any transaction with an affiliate of the
Company other than the Subsidiary, or (iv) declared or paid any dividend on its
shares of Common Stock, except dividends paid to the Company by the Subsidiary.
6
<PAGE>
(s) The Company has obtained from all of its directors, officers and
stockholders who beneficially own five percent (5%) or more of the Company's
outstanding Common Stock as of the date hereof their written agreement that (i)
for a period of two (2) years from the date of the Prospectus, they will not,
without your prior written consent, sell, contract to sell, or grant any option
for the sale of or otherwise dispose of, directly or indirectly, any shares of
Common Stock of the Company (or any securities convertible into or exercisable
for such shares of Common Stock) owned by them, (ii) that for a period of four
(4) years from the date of the Prospectus, they will utilize the facilities of
the Representative to effectuate any public sale of the Company's securities
made in accordance with the provisions of Rule 144 promulgated under the Act,
provided that the compensation and fees for such transction shall not be greater
than the Representative's customary compensation and fees for similar
transactions and (iii) that for a period of four (4) years from the date of the
Prospectus, they will not sell, contract to sell or grant any option for the
sale of or otherwise dispose of, any shares of Common Stock of the Company (or
any securities convertible into or exercisable for such shares of Common Stock)
owned by them in an amount greater than the volume limitations of Rule 144(e)
promulgated under the Act.
(t) No consent, authorization or approval is required to be obtained
by the Company from any Federal, state or local governmental agency or body in
order to consummate the transactions contemplated herein or in the Registration
Statement, other than such consents, authorizations or approvals as have been
obtained.
(u) Except as provided in the Registration Statement, no person holds
a right to require or participate in the registration under the Act of any
securities of the Company to be effected by the Registration Statement, which
right has not been duly waived by the holder thereof as of the date hereof. The
Company does not have outstanding, and at the Closing Date and the Additional
Closing Date, if any, will not have outstanding, any options to purchase, or any
rights or warrants to subscribe for, or any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares of
its Common Stock or any such warrants, convertible securities or obligations,
except as referred to in the Prospectus.
(v) The Company has timely filed all Federal, state, and local tax
returns which are required to be filed and has paid all taxes shown on such
returns and all assessments received by it to the extent that the same have
become due.
(w) To the knowledge and belief of the Company's officers and
directors (such officers and directors having made reasonable investigation with
respect thereto), neither the Company, the Subsidiary nor any officer, director
or employee of the Company or the Subsidiary has made any payment of funds of
the Company or the Subsidiary or purchased any property with Company or
Subsidiary funds in a manner prohibited by law, and no funds of the Company or
property purchased with Company or Subsidiary funds have been set aside to be
used for any payment prohibited by law.
7
<PAGE>
(x) Except as set forth in the Registration Statement and Prospectus,
the Company does not know of any claims for services in the nature of a finders
fee, brokerage fee or otherwise with respect to this offering for which the
Company or the Subsidiary or you may be responsible.
(y) The Company has obtained from such key executives as are
designated by the Representative (the "Key Employees") new or modified
employment agreements upon terms agreeable to the Company and the
Representative, including, without limitation, the term, compensation,
arrangement and restrictive covenants. The Company has obtained key man life
insurance upon the lives of the Key Employees in face amounts mutually agreeable
to the Company and the Representative.
(z) Application for quotation of the Common Stock on the Nasdaq
SmallCap Market has been approved, subject to notice of issuance.
3. Purchase, Sale and Delivery of the Stock and Additional Stock.
-------------------------------------------------------------
(a) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth, the Company
agrees to sell, severally and not jointly, to the Underwriters, and the
Underwriters, severally and not jointly, agree to purchase from the Company, at
an aggregate purchase price of $__.__ per Unit, the number of shares of Stock
and Redeemable Warrants set forth opposite their respective names in Schedule I.
(b) Payment for the Stock and Redeemable Warrants shall be made by
certified or official bank check in New York Clearing House funds or similar
next day funds, payable to the order of the Company at the offices of Donald &
Co. Securities Inc., 65 East 55th Street, New York, New York or such other place
as shall be agreed upon between us. Such delivery and payment shall be made at
10:00 A.M., New York time, on the fifth business day following the Effective
Date; provided, however, that such date may be extended for not more than an
additional five business days by the Representative or in accordance with the
provisions of Section 9(c) hereof. The hour and date of such delivery and
payment are herein called the "Closing Date".
(c) Certificates for the Stock shall be registered in such name or
names and in such authorized denominations as you may request in writing at
least two full business days prior to the Closing Date. The Company will permit
you to examine and package said certificates at least one full business day
prior to the Closing Date.
(d) In addition, on the basis of the representations and warranties
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants to the Underwriters the option to purchase all or a
portion of the Additional Stock and Additional
8
<PAGE>
Redeemable Warrants as may be necessary to cover over-allotments at the same
purchase price per share to be paid by the Underwriters to the Company for the
Stock and Additional Redeemable Warrants as determined in this Section 3. This
option may be exercised only to cover over-allotments in the sale of shares of
Stock and Additional Redeemable Warrants by the Underwriters. This option may
be exercised at any time on or before the thirtieth day following the effective
date of the Registration Statement by written notice by the Representative to
the Company. Such notice shall set forth the aggregate number of shares of
Additional Stock and Additional Redeemable Warrants as to which the option is
being exercised, the name or names in which the shares of Additional Stock,
Additional Redeemable Warrants and Additional Redeemable Warrants are to be
registered, the denominations in which the Additional Stock and Additional
Redeemable Warrants are to be issued, and the date and time, as reasonably
determined by you, when the Additional Stock and Additional Redeemable Warrants
is to be delivered (such date and time being herein sometimes referred to as the
"Additional Closing Date"); provided, however, that the Additional Closing Date
shall not be earlier than the Closing Date nor earlier than the second business
day after the date on which the option shall have been exercised nor later than
the eighth business day after the day on which the option shall have been
exercised.
(e) Payment for the Additional Stock and Additional Redeemable
Warrants shall be made by certified or official bank checks in New York Clearing
House funds or similar next day funds, payable to the order of the Company at
the offices of Donald & Co. Securities Inc., 65 East 55th Street, New York, New
York, or such other place as shall be agreed upon between us.
(f) Certificates for the Additional Stock and Additional Redeemable
Warrants shall be registered in such name or names and in such authorized
denominations as you may request in writing at least two full business days
prior to the Additional Closing Date. The Company will permit you to examine
and package said certificates for delivery at least one full business day prior
to the Additional Closing Date.
(g) The Company shall not be obligated to sell or deliver any shares
of Stock, Redeemable Warrants, Additional Stock or Additional Redeemable
Warrants, except upon tender of payment by the Representative for all the Stock,
Redeemable Warrants, Additional Stock or Additional Redeemable Warrants, as the
case may be, agreed to be purchased from it hereunder.
(h) On the Closing Date, the Company shall issue and sell to the
Representative, at a purchase price of $0.001 per Warrant, the Representative's
Warrants. The Representative's Warrants shall be exercisable for a period of
four (4) years commencing one (1) year from the Effective Date at an initial
exercise price equal to one hundred twenty percent (120%) of the initial public
offering price of the Stock. The Representative's Warrants shall be issued
pursuant to the terms and provisions of the Representative's Warrant Agreement
substantially in the form of the Representative's Warrant Agreement filed as
Exhibit 4.3 to the Registration Statement (the "Representative's Warrant
Agreement").
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<PAGE>
4.Offering. You are to make a public offering of the Stock and Redeemable
--------
Warrants as soon, on or after the effective date of the Registration Statement,
as you deem it advisable so to do. The Stock and Redeemable Warrants are to be
initially offered to the public at the initial public offering price set forth
on the cover page of the Prospectus (such price being herein called the "public
offering price"). You may from time to time increase or decrease the public
offering price after the initial public offering to such extent as you may
determine.
5. Covenants of the Company.
------------------------
The Company covenants that it will:
(a) Use its best efforts to cause the Registration Statement to
become effective and will notify you immediately, and confirm the notice in
writing, (i) when the Registration Statement, or any post-effective amendment
thereto, shall have become effective, (ii) of the issuance by the Commission of
any stop order or of the initiation or the threatening of any proceedings for
that purpose, and (iii) of the receipt of any comments by the Commission. The
Company will prepare and timely file with the Commission under Rule 424(b) of
the Regulations a Prospectus containing information previously omitted on the
Effective Date in reliance of Rule 430A of the Regulations. The Company will
use its best efforts to prevent the issuance of any stop order or any order
preventing or suspending the use of the Registration Statement or Prospectus
and, if such order is issued, to obtain the lifting thereof as promptly as
possible.
(b) During the time when a prospectus is required to be delivered
under the Act, comply so far as it is able with all requirements imposed upon it
by the Act, as now and hereafter amended, and by the Regulations, as from time
to time in force, so far as necessary to permit the continuance of sales or of
dealings in the Stock, the Redeemable Warrants, the Additional Stock and the
Additional Redeemable Warrants in accordance with the provisions hereof and the
Prospectus. If at any time when a prospectus relating to the Stock, the
Redeemable Warrants, the Additional Stock or the Additional Redeemable Warrants
is required to be delivered under the Act any event shall have occurred as a
result of which, in the reasonable opinion of counsel for the Company or your
counsel, the Registration Statement or Prospectus as then amended or
supplemented includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or it is necessary at any time to amend or supplement the
Registration Statement or Prospectus to comply with the Act, the Company will
notify you promptly and prepare and file with the Commission an appropriate
amendment or supplement (in form reasonably satisfactory to you).
(c) Deliver to you such number of copies of each Preliminary
Prospectus as you may reasonably request and, deliver to you two signed copies
of the Registration Statement, including exhibits, and all post-effective
amendments thereto and such number of copies of the
10
<PAGE>
Prospectus, the Registration Statement and amendments and supplements thereto,
if any, without exhibits, as you may reasonably request for the purposes
contemplated by the Act.
(d) Endeavor in good faith, in cooperation with you, at or prior to
the time the Registration Statement becomes effective, to qualify the Stock, the
Redeemable Warrants, the Additional Stock and the Additional Redeemable Warrants
for offering or sale of the Stock and the Additional Stock of such jurisdictions
as you may reasonably designate; provided that no such qualification shall be
required in any jurisdiction where, as a result thereof, the Company would be
subject to service of general process or would be required to become qualified
to do business as a foreign corporation doing business in such jurisdiction. In
each jurisdiction where the qualification of the Stock, the Redeemable Warrants,
the Additional Stock and the Additional Redeemable Warrants shall be effected,
the Company will, unless you agree that such action is not at the time necessary
or advisable, file and make such statements or reports at such times as are or
may be reasonably required by the laws of such jurisdiction.
(e) Make generally available to its security holders as soon as
practicable, but not later than the last day of the fifteenth full calendar
month following the effective date of the Registration Statement, an earnings
statement (which need not be certified by independent auditors unless required
by the Act or the Regulations, but which shall satisfy the provisions of Section
ll(a) of the Act) covering a period of at least twelve months beginning after
the effective date of the Registration Statement,
(f) For a period of 90 days after the date of the Prospectus, not
issue, sell, contract to sell, grant an option for the sale of or otherwise
dispose of, directly or indirectly, any shares of Common Stock of the Company
(or any shares of securities convertible into or exercisable for such Common
Stock) other than the Stock, the Redeemable Warrants, the Additional Stock and
the Additional Redeemable Warrants being sold by the Company and securities
issued pursuant to the Company's employee benefit plans or as otherwise referred
to in the Prospectus, without your prior written consent.
(g) For a period of five years from the effective date of the
Registration Statement, furnish you the following:
(i) as soon as practicable after they have been filed with the
Commission, two copies of each annual, quarterly and current report on Form
10-K, Form 10-Q or Form 8-K (to the extent the Company shall be required to
file such reports pursuant to the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder (collectively the
"Exchange Act") and, as soon as practicable after they have been sent by
the Company to its security holders, two copies of any communications sent
by it to its public security holders generally;
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<PAGE>
(ii) as soon as practicable, two copies of every press release
and every material news items and article in respect of the Company or its
affairs which was released by the Company; and
(iii) such additional non-confidential documents and
information with respect to the Company and its affairs as you may from
time to time reasonably request.
(h) Apply the net proceeds from the offering received by the Company
in the manner set forth under "Use of Proceeds" in the Prospectus and comply
with Rule 463 under the Act.
(i) Furnish to you as early as practicable prior to the Closing Date
and Additional Closing Date, as the case may be, but no later than two full
business days prior thereto, a copy of the latest available unaudited interim
financial statements of the Company, if any, which have been reviewed by the
Company's independent auditors, as stated in their letters to be furnished
pursuant to Section 7(f) hereof.
(j) Not file any amendment or supplement to the Registration
Statement or Prospectus after the effective date of the Registration Statement
to which you shall reasonably object in writing after being furnished a copy
thereof.
(k) If any action or proceeding shall be brought by you in order to
enforce any right or remedy under this Agreement, the Company hereby consents
to, and agrees that it will submit to, the jurisdiction of the courts of the
State of New York and of any Federal court sitting in the United States District
Court for the Southern District of New York. The Company agrees that process in
any such action or proceeding may be served in that manner provided by New York
law for service on foreign corporations.
(l) Comply with all registration, filing and reporting requirements
of the Exchange Act which may from time to time be applicable to the Company.
(m) Make all filings required, including registration under the
Exchange Act, to obtain and keep the listing of its Common Stock in The Nasdaq
SmallCap Market, and effect and maintain such listing for the Common Stock for
at least five (5) years from the date of this Agreement.
(n) Use its best efforts to be included in Standard & Poors
Corporations Manual and Moody's Investors Services, Inc. Manual as soon as
- ------------------- --------------------------
possible following the Closing Date and to continue to be included in both of
such Manuals for at least five (5) years from the effective date of the
Registration Statement.
12
<PAGE>
(o) Not later than three months following the date of this Agreement,
cause to be delivered to you and to your counsel, Parker Duryee Rosoff & Haft,
four (4) bound volumes containing therein all filings, including exhibits, and
correspondence to and from the Commission, the National association of
Securities Dealers, Inc, ("NASD") and all states or other jurisdictions
concerning the offering of the Stock, underwriting documents and closing
documents, plus any other relevant material.
(p) For a period of three (3) years from the Closing Date, engage
your designee as an advisor (the "Advisor") to the Company's Board of Directors.
The Advisor shall attend meetings of the Board and each of its committees and
receive no more or less compensation as is equal to the entitlement of the
Directors including, without limitation, all compensation payable to Directors
as members of the committees of the Board or in connection with any other Board
activities; provided, however, that the Company may require as a condition
precedent that any such Advisor shall agree to hold in confidence and trust and
to act in a fiduciary manner with respect to all information, including, but not
limited to, trade secrets, so received during such meetings and may require that
such Advisor sign a confidentiality agreement with the Company; and, provided,
further, that the Company reserves the right not to provide information and to
exclude such Advisor from any meeting or portion thereof if attendance at such
meeting by such Advisor or dissemination of any information at such meeting to
such Advisor would compromise or adversely affect the attorney-client privilege
between the Company and its counsel, or would, in the good faith judgment of the
Board of Directors, result in a conflict of interest situation. The Company
shall use its reasonable efforts to promptly bring to the attention of such
Advisor any agenda item that, in the good faith judgment of the Board of
Directors, would result in such a trade secret, privileged matter or conflict of
interest and the Board of Directors may exclude such Advisor (or alternatively,
the Advisor shall be entitled to exclude himself or herself) from any
deliberation or discussion of the Board of Directors concerning such trade
secret (if the Advisor has not executed a confidentiality agreement), privileged
matter or conflict of interest matter and as a recipient in the dissemination of
any such information. If such Advisor in his or her good faith judgment
believes that an item to be discussed by the Board of Directors would result in
any conflict of interest, such Advisor shall promptly bring such conflict to the
attention of the Chairman of the Board. In no event shall any provision of this
paragraph waive any obligation of confidentiality to the Company owed by any
such Advisor or the Representative. In addition, the Advisor shall be entitled
to receive reimbursement for all reasonable costs incurred in attending such
meetings including, but not limited to, food, lodging, and transportation; such
costs to be subject to approval of the Company which will not be unreasonably
withheld.
(q) For a period of three (3) years from the Closing Date, there will
be no less than four (4) formal, "in person" or "telephonic" meetings, of the
Company's Board of Directors in each such year at which meetings the Advisor
shall be permitted to attend or participate, as the case may be in accordance
with the provisions of Section 5(p); said meetings shall be held quarterly each
year and ten (10) days' advance notice of such meetings shall be given to the
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Advisor. The Advisor shall receive notice of special meetings of the Board of
Directors at the same time and manner as the members of the Board.
(r) Indemnify and hold the Representative and the Advisor harmless,
to the full extent allowed by applicable laws, against any and all claims,
actions, awards and judgments arising solely out of the attendance and
participation of the Advisor at any meeting described in Section 5(p) of this
Agreement. In the event the Company maintains a liability insurance policy
affording coverage for the acts of its officers and directors, the Company
agrees, if possible, to include the Representative and the Advisor as an insured
under such policy.
(s) Establish and maintain during the period that the Common Stock is
listed on The Nasdaq SmallCap Market an independent audit committee of the
Company's Board of Directors.
(t) For a period of three (3) years from the Closing Date, grant the
Representative a right of first refusal to act as underwriter or placement agent
on any subsequent public or private offerings of equity or debt securities
(excluding sales to employees pursuant to the Company's stock option plan,
traditional commercial financing or bank financing) of the Company or any
subsidiary or successor of the Company, or by the Company, its subsidiaries,
their affiliates or their respective officers, directors, or principal
stockholders.
(u) On the Closing Date, enter into a two (2) year financial
consulting agreement with the Representative (the "Financial Consulting
Agreement") pursuant to which the Representative will provide the Company with
investment banking and financial consulting services at a fee of $60,000;
$30,000 payable on the Closing Date and $2,500 per month for the first twelve
months subsequent to the Closing Date.
6. Payment of Expenses.
-------------------
(a) The Company hereby agrees to pay, whether or not the transactions
contemplated hereunder are consummated, all expenses (other than fees of your
counsel, except as provided in (iii) below) in connection with (i) the
preparation, printing, filing and mailing of the Registration Statement and the
Prospectus, including the cost of all copies thereof and of the Preliminary
Prospectus and of the Prospectus and any amendments or supplements thereto
supplied to you in quantities as hereinabove stated, (ii) the issuance, transfer
and delivery of the Stock, the Redeemable Warrants, the Additional Stock and the
Additional Redeemable Warrants, including any transfer or other taxes payable
thereon, (iii) the qualification of the Stock, the Redeemable Warrants, the
Additional Stock and the Additional Redeemable Warrants, under state or foreign
securities or Blue Sky laws, including the costs of printing and mailing the
"Blue Sky Survey" and the reasonable fees of counsel to the Underwriters counsel
(which amount shall not exceed $35,000 without the consent of the Company), of
which $7,500 has been paid prior to the date hereof, and disbursements in
connection therewith, (iv) filing fees payable to the NASD, (v)
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in arranging and holding due diligence meetings with prospective underwriters
and selected dealers, (vi) travel and lodging incurred by the Representative and
its counsel in connection with meetings outside of New York City (which amount
shall not exceed $5,000), (vi) tombstone advertising, and (vii) the preparation,
production and delivery of plaques and bound volumes.
(b) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 6, it will pay to the
Representative a non-accountable expense allowance equal to three percent (3%)
of the gross proceeds received by the Company from the sale of Stock, Redeemable
Warrants, Additional Stock and Additional Redeemable Warrants, of which $25,000
has been paid to date and the Company will pay the balance on the Closing Date
and any additional balance on the Additional Closing Date by certified or bank
cashier's check or, at the election of the Representative, by deduction from the
proceeds of the offering contemplated herein.
7. Conditions of Your Obligations. The obligation of the several
------------------------------
Underwriters hereunder to purchase and pay for the Stock, the Redeemable
Warrants, the Additional Stock and the Additional Redeemable Warrants, as
provided herein, shall be subject to the continuing accuracy in all material
respects of the representations and warranties of the Company as of the date
hereof and as of the Closing Date (or the Additional Closing Dare, as the case
may be), to the performance by the Company in all material respects of its
obligations hereunder and to the following conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M., New York City time, on the date of this Agreement or such later
date and time as shall be consented to in writing by you and, at the Closing
Date and Additional Closing Date, no stop order suspending the effectiveness of
the Registration Statement, as amended from time to time, shall have been issued
or proceeding therefor initiated or threatened by the Commission;
(b) At the Closing Date and the Additional Closing Date, as the case
may be, you shall have received the favorable opinion of Sills Cummis Zuckerman
Radin Tishman Epstein & Gross, P.A., counsel for the Company, dated the Closing
Date or the Additional Closing Date, as the case may be, addressed to the
Underwriters and in form and scope reasonably satisfactory to counsel of the
Underwriters, to the effect that:
(i) each of the Company and the Subsidiary (A) is a corporation
duly organized and validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation and (B) has
full corporate power and authority and all necessary authorizations,
approvals, orders, licenses, certificates and permits of and from all
governmental regulatory officials and bodies to own its properties and
to conduct its business as now being conducted as described in the
Prospectus;
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(ii) each of the Company and the Subsidiary is duly qualified as
a foreign corporation and in good standing in each jurisdiction in
which its ownership or leasing of property or the conduct of its
business requires such qualification, except where the failure to be
so qualified would not have a Material Adverse Effect upon the Company
and the Subsidiary, taken as a whole;
(iii) the Company owns of record, directly or indirectly, all
of the capital stock of the Subsidiary; all such shares of stock so
owned are validly issued and outstanding, fully paid and nonassessable
and are owned free and clear of any liens, encumbrances or other
claims or restrictions whatsoever;
(iv) the Company had authorized and outstanding capital stock as
set forth in the Prospectus; all the issued shares of Common Stock of
the Company have been duly and validly authorized and issued and are
fully paid and nonassessable and all the issued shares of Common Stock
of the Company and the Stock and the Additional Stock are not subject
to any preemptive rights; the Stock, the Additional Stock and the
other capital stock of the Company and the Redeemable Warrants and the
Additional Redeemable Warrants conform as to legal matters to the
description thereof contained under the caption "Description of
Capital Stock" in the Prospectus;
(v) the Redeemable Warrant Stock, the Additional Redeemable
Warrant Stock and the Representative's Warrant Stock have been duly
authorized and reserved for issuance and, when issued and delivered in
accordance with the terms of the Redeeamble Warrant Agreement and the
Representative's Warrant Agreement, as the case may be, will be duly
and validly issued, fully paid and nonassessable.
(vi) the Company has conveyed to the Underwriters good and valid
title to the Stock, Redeemable Warrants, Additional Stock and
Additional Redeemable Warrants, as the case may be, being sold
hereunder, free and clear of any liens, encumbrances, security
interests and claims whatsoever; the Stock, Redeemable Warrants,
Additional Stock and Additional Redeemable Warrants, as the case may
be, shall be validly issued and fully paid and nonassessable when
issued and paid for in accordance with the terms of this Agreement,
and the certificates evidencing the Stock, the Redeemable Warrants,
Additional Stock and the Additional Redeemable Warrants are in due and
proper form;
(vii) this Agreement, the Redeemable Warrant Agreement, the
Representative's Warrant Agreement and the Financial Consulting
Agreement have been duly and validly authorized, executed and
delivered by the Company and each is a valid and binding agreement of
the Company enforceable in accordance with
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its terms, except insofar as indemnification and contribution
provisions may be limited by applicable law (including, but not
limited to, Federal or state securities laws) or equitable principles,
and except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally or by general equitable principles;
(viii) to the knowledge of such counsel, there are no
contracts or other documents which are required to be filed as
exhibits to the Registration Statement, as it may then be amended or
supplemented, or required to be described in the Registration
Statement or Prospectus as it may then be amended or supplemented that
are not filed or described as required;
(ix) there are no legal or governmental proceedings pending
or, to the knowledge of such counsel, threatened against the Company
or the Subsidiary, and no statutes or regulations applicable to the
Company or the Subsidiary, of a character that are required to be
disclosed in the Registration Statement and Prospectus, which have not
been so disclosed and properly described therein;
(x) the statements in the Registration Statement and Prospectus,
insofar as they are descriptions of contracts, agreements or other
documents, or refer to statements of law or legal conclusions, are
accurate in all material respects and present fairly the information
required to be shown with respect to such contracts, agreements or
other documents;
(xi) the execution and delivery of this Agreement, the
Redeemable Warrant Agreement, the Representative's Warrant Agreement
and the Financial Consulting Agreement, the consummation of the
transactions contemplated in this Agreement, the Redeemable Warrant
Agreement, the Representative's Warrant Agreement and the Financial
Consulting Agreement, and compliance with the terms of this Agreement,
the Redeemable Warrant Agreement, the Representative's Warrant
Agreement and the Financial Consulting Agreement do not and will not
(A) conflict with or result in a breach of any of the terms or
provisions of, or constitute a default (or an event which with notice
or lapse of time or both would constitute a default or acceleration)
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or the
Subsidiary pursuant to the terms of any agreement or instrument known
to such counsel and to which the Company or the Subsidiary is a party
or by which the Company or the Subsidiary may be bound or to which any
of the properties or assets of the Company or the Subsidiary is
subject, or any statute or any order, rule or regulation applicable to
the Company or the Subsidiary of any court or of any Federal, state or
other regulatory authority or other governmental body having
jurisdiction over the Company or the Subsidiary (provided, however,
that such
17
<PAGE>
counsel may render such opinion on state (other than New York),
regulatory or other governmental bodies, to such counsel's knowledge)
or (B) result in any violation of provisions of the Certificate of
Incorporation, by-laws or other charter documents of the Company or
the Subsidiary;
(xii) no consent, approval, authorization or order of any
court or governmental agency or body is required in connection with
the consummation of the transactions contemplated by this Agreement,
the Redeemable Warrant Agreement, the Representative's Warrant
Agreement and the Financial Consulting Agreement, except such as have
been obtained or made or as may be required under the Act or state
securities or Blue Sky laws;
(xiii) (A) neither the Company nor the Subsidiary is in violation
of any term or provision of its Certificate of Incorporation, by-laws
or other charter documents; (B) to such counsel's knowledge, neither
the Company nor the Subsidiary is presently in breach of, or in
default (nor has an event occurred which with notice, lapse of time or
both would constitute such a default or acceleration) under any
indenture, mortgage, deed of trust, note, bank loan or credit
agreement or (in any respect that is material in light of the
financial condition of the Company and the Subsidiary, taken as a
whole) any other agreement or instrument to which the Company or the
Subsidiary is a party or by which either of them or any of their
property may be bound or affected, or to such counsel's knowledge, in
violation of any franchise, license, permit, judgment, decree, order,
statute, rule or regulation, which violation would have a Material
Adverse Effect upon the Company or the Subsidiary; and (C) to such
counsel's knowledge, neither the Company nor the Subsidiary has
received notice of conflict with the asserted rights of others in
respect of patents, trademarks, service marks and rights necessary for
the conduct of its business;
(xiv) the Company has the right to operate all of its facilities
in their present locations and the operation of its facilities in such
locations as described in the Prospectus does not violate the
provisions of any lease with respect thereto to which the Company is a
party;
(xv) the Registration Statement and the Prospectus and any
amendments or supplements thereto (other than the financial statements
and other financial and statistical data included therein, as to which
no opinion need
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<PAGE>
be rendered) comply as to form in all material respects with the
requirements of the Act and the Regulations and nothing has come to
the attention of such counsel which would lead them to believe that
the Registration Statement or the Prospectus, as amended or
supplemented, if amended or supplemented (other than the financial
statements and other financial and statistical data included therein
as to which no opinion need be rendered) contains any untrue statement
of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they are made, not misleading; and
(xvi) the Registration Statement is effective under the Act, and
to the best of such counsels knowledge, no proceedings for a stop
order are pending or threatened under the Act;
In rendering the opinions set forth above, such counsel may rely upon
certificates of officers of the Company and of public officials as to matters of
fact. In giving the foregoing opinions, such counsel may rely on such other
counsel as it deems advisable; provided that such counsel shall state that, in
such counsel's opinion, you are justified in relying on such opinions of such
other counsel. Copies of all such opinions and certificates shall be furnished
to your counsel on the Closing Date or the Additional Closing Date, as the case
may be.
(c) On or prior to the Closing Date and the Additional Closing Date,
as the case may be, you shall have been furnished such documents, certificates
and opinions as you may reasonably require for the purpose of enabling you to
review the matters referred to in subsection (b) of this Section 7, and in order
to evidence the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained.
(d) Prior to the Closing Date and the Additional Closing Date, as the
case may be, (i) there shall have been no material adverse change in the
business, properties, results of operations, condition (financial or otherwise),
affairs or prospects, of the Company and the Subsidiary from that as of the
latest date as of which such condition is set forth in the Registration
Statement and Prospectus; (ii) there shall have been no transaction, not in the
ordinary course of business, entered into by the Company or the Subsidiary, from
the latest date as of which the financial condition of the Company and the
Subsidiary is set forth in the Registration Statement and Prospectus, other than
transactions referred to or contemplated therein or to which you have given your
written consent; (iii) neither the Company nor the Subsidiary shall be in
default (nor shall an event have occurred which, with notice, or lapse of time
or both would constitute a default or acceleration) under any provision of, any
agreement, understanding or instrument relating to any indebtedness; (iv) no
material amount of the consolidated assets of the Company and the Subsidiary
shall have been pledged or mortgaged, except as set forth in the Registration
Statement and Prospectus; and (v) no action, suit or proceeding, at law or in
equity, shall have been pending or, to the knowledge of the Company, threatened
against the Company or the Subsidiary or affecting any of their properties or
business before or by any court or federal, state or other jurisdictional
commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding would materially adversely affect the business,
operations, prospects or consolidated financial condition or income of the
Company and the Subsidiary except as set forth in the Registration Statement and
Prospectus.
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<PAGE>
(e) At the Closing Date and Additional Closing Date, as the case may
be, you shall have received a certificate of the President and the principal
financial or accounting officer of the Company, dated the Closing Date and
Additional Closing Date, as the case may be, (i) to the effect that the
conditions set forth in subsections (a) and (d) above have been satisfied and
(ii) as to the accuracy, as of the Closing Date and Additional Closing Date, as
the case may be, of the representations and warranties of the Company set forth
in Section 2 hereof.
(f) At the time this Agreement is executed and at the Closing Date
and Additional Closing Date, as the case may be, you shall have received a
letter, addressed to you in form and substance satisfactory to you in all
respects (including the non-material nature of the changes or decreases, if any,
referred in to clause (iii) below), from Arthur Andersen LLP, dated as of the
date of this Agreement and as of the Closing Date and Additional Closing Date,
as the case may be:
(i) confirming that they are independent accountants with
respect to the Company and its consolidated Subsidiary within the
meaning of the Act and the applicable published Regulations;
(ii) stating that in their opinion, the financial statements of
the Company and its consolidated Subsidiary included in the
Registration Statement examined by them comply as to form in all
material respects with the applicable accounting requirements of the
Act and the published Regulations;
(iii) stating that, on the basis of procedures (but not an
audit in accordance with generally accepted auditing standards), which
included a reading of the latest available unaudited interim financial
statements of the Company and its consolidated Subsidiary (with an
indication of the date of the latest available unaudited interim
financial statements), a reading of the latest available minutes of
the stockholders and boards of directors of the Company and its
consolidated Subsidiary and committees of such boards and inquiries to
certain officers and other employees of the Company and its
consolidated Subsidiary responsible for financial and accounting
matters and other specified procedures and inquiries, nothing has come
to their attention that would cause them to believe that (A) the
unaudited financial statements of the Company and its consolidated
Subsidiary included in the Registration Statement (i) do not comply as
to form in all material respects with the applicable accounting
requirements of the Act and Regulations, or (ii) were not fairly
presented in conformity with generally accepted accounting principles
on a basis substantially consistent with that of the audited financial
statements included in the Registration Statement; (B) at the date of
the latest available interim financial statements and at a specified
date not more than five business days prior to the date of such
letter, there was any change in long-term debt or capital stock of the
Company and its consolidated Subsidiary, as compared
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<PAGE>
with the amounts shown in the March 31, 1996 balance sheet of the
Company and its consolidated Subsidiary included in the Registration
Statement and Prospectus, other than as set forth in or contemplated
by the Registration Statement and Prospectus, or, if there was any
change, setting forth the amount of such change; or (C) during the
period from March 31, 1996 to a specified date not more than five days
prior to the date of such letter, there was any decrease in revenues
or any increase in operating loss, net loss or pro forma net loss per
share of the Company, as compared with the corresponding period in the
preceding year, other than as set forth in or contemplated by the
Registration Statement and Prospectus, or, if there was any decrease
or increase, respectively, setting forth the amount of such decrease
or increase; and
(iv) stating that they have compared specific dollar
amounts, numbers of shares, percentages of dollar amounts and shares
and other information pertaining to the Company set forth in the
Prospectus, which have been specified by you prior to the date of this
Agreement, to the extent that such amounts, numbers, percentages and
other 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.
(g) All proceedings taken in connection with the sale of the Stock,
the Redeemable Warrants, the Additional Stock and the Additional Redeemable
Warrants as herein contemplated shall have been satisfactory in form and
substance to you and your counsel.
(h) The Company shall have furnished to the Representative such
further certificates and documents confirming the representations and warranties
contained herein, the performance of covenants prior to the Closing Date and the
Additional Closing Date, as the case may be, and related matters as the
Representative may reasonably have requested; and you shall have received from
counsel to the Underwriters, a favorable opinion, dated as of the Closing Date
and the Additional Closing Date, as the case may be, with respect to such of the
matters set forth under subsection (b) of this Section 7, and with respect to
such other related matters, as you may reasonable require.
(i) There shall have been duly tendered to you certificates
representing all the Stock and the Additional Stock, as the case may be, agreed
to be sold by the Company on the Closing Date and the Additional Closing Date,
as the case may be.
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(j) No order suspending the sale of Stock or the Additional Stock, as
the case may be, in any jurisdiction designated by you pursuant to subsection
(d) of Section 5 hereof, shall have been issued on the Closing Date or the
Additional Closing Date, as the case may be, and no proceedings for that purpose
shall have been instituted or to your knowledge or that of the Company shall be
contemplated,
Any certificate signed by any duly authorized officer of the Company
in such capacity and delivered to you or your counsel shall be deemed a
representation and warranty by the Company to you as to the statements made
therein. If any condition to your obligations hereunder to be fulfilled prior
to or at the Closing Date or the Additional Closing Date, as the case may be, is
not so fulfilled, you may terminate this Agreement or, if you so elect, waive
any such conditions which have not been fulfilled or extend the time for their
fulfillment.
8. Indemnification.
----------------
(a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless each of the Underwriters and each person, if any,
who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against any and all loss, liability, claim,
damage and expense whatsoever (including, but not limited to any and all expense
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever)("collectively,
"Damages") arising out of or based upon (i) the inaccuracy or breach of any
representation or warranty of the Company or the breach of any covenant made by
the Company in this Agreement or (ii) any untrue statement or alleged untrue
statement of a material fact contained (x) in any Preliminary Prospectus, the
Registration Statement or the Prospectus (as from time to time amended and
supplemented) or (y) in any application or other document (in this Section 8,
collectively called "Application") executed by or on behalf of the Company or
based upon written information furnished by or on behalf of the Company filed in
any jurisdiction in order to qualify the Stock or the Additional Stock under the
Blue Sky or securities laws thereof or filed with the Commission or any
securities exchange, such as the Nasdaq SmallCap Market, or (iii) the omission
or alleged omission therefrom of a material fact required to be stated therein
or necessary to make the statements therein not misleading; unless such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to the Underwriters by or on
behalf of any Underwriter expressly for use in the Preliminary Prospectus, the
Registration Statement or Prospectus, or any amendment or supplement thereof, or
in any Application or in any communication to the Commission, as the case may
be. With respect to any Damages arising out of or based upon any untrue
statement or alleged untrue statement made in, or omission or alleged omission
from, any Preliminary Prospectus, the indemnity agreement contained in this
Section 8(a) with respect to such Preliminary Prospectus shall not inure to the
benefit of the Underwriters (or the benefit of any person controlling any
Underwriter), if the Prospectus (or the Prospectus as amended or
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supplemented if the Company shall have made any amendments thereof or
supplements thereto which shall have been furnished to you prior to the time of
confirmation of such sale) does not contain such statement, alleged statement,
omission or alleged omission, a sufficient number of copies of such Prospectus
were provided to the Underwriters and a copy of such Prospectus shall not have
been sent or given to the person asserting such Damages at or prior to the
written confirmation of such sale to such person.
(b) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act for all Damages with
respect to statements or omissions, or alleged statements or omissions, if any,
made in any Preliminary Prospectus, Registration Statement or Prospectus or any
amendment or supplement thereto or any Application in reliance upon, and in
conformity with, written information furnished to the Company with respect to
the Underwriters by or on behalf of any Underwriter for use in any Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment or
supplement thereto or in any application, as the case may be.
(c) If any action is brought against an indemnified party under
subsection (a) or (b) above (the "Indemnified Party") in respect of which
indemnity may be sought against the indemnifying party under subsection (a) or
(b) above (the "Indemnifying Party"), such Indemnifying Party shall promptly
notify in writing the party or parties against whom indemnification is to be
sought of the institution of such action and the Indemnifying Parties shall
assume the defense of such action, including the employment of counsel
(reasonably satisfactory to such Indemnified Party) and payment of expenses.
Such Indemnified Party shall have the right to employ it or their own counsel in
any such case, but the fees and expenses of such counsel shall be at the expense
of such Indemnified Party unless the employment of such counsel shall have been
authorized in writing by the Indemnifying Parties in connection with the defense
of such action or the Indemnifying Parties shall not have employed counsel to
have charge of the defense of such action or such Indemnified Party or parties
shall have reasonably concluded that there may be defenses available to the
Indemnifying Parties which are different or additional to those available to the
Indemnifying Parties (in which case the Indemnifying Parties shall not have the
right to direct the defense of such action on behalf of the Indemnified Party or
Parties), in any of which events such fees and expenses shall be borne by the
Indemnifying Parties. Anything in this paragraph to the contrary
notwithstanding, the Indemnifying Party shall not be liable for any settlement
of any such claim or action effected without its written consent. The
Indemnifying Party agrees promptly to notify the Indemnified Party of the
commencement of any litigation or proceedings against the Indemnifying Party or
any of its officers or directors in connection with the issue and sale of the
Stock and the Additional Stock or in connection with such Preliminary
Prospectus, Registration Statement or Prospectus, or any amendment or supplement
thereto, or any such Application.
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(d) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an Indemnified Party in respect of
any losses, claims, damages or liabilities (or actions in respect thereof)
referred to therein, then each Indemnifying Party shall contribute to the amount
paid or payable to such Indemnified Party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other from the offering of the Stock and
Additional Stock. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the Indemnified
Party failed to give the notice required above in this Section 8, then each
Indemnifying Party shall contribute to such amount paid or payable by such
Indemnified Party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company on the one hand or the Underwriters on the other and the parties
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this subsection
(d) were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this subsection (d). The amount paid or payable by an Indemnified Party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this subsection (d) shall be deemed to include any
legal or other expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) the Underwriters
shall not be required to contribute any amount in excess of the amount by which
the total price at which the Stock and Additional Stock underwritten by the
Underwriters and distributed to the public were offered to the public exceeds
the amount of any damages which the Underwriters have otherwise been required to
pay by reason of such untrue statement or omission and (ii) no person guilty of
fraudulent misrepresentation (within the meaning of Section 11 of the Act) shall
be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
9. Default by an Underwriter.
-------------------------
(a) If any Underwriter or Underwriters shall default in its or their
obligations to purchase the Stock hereunder, and if the number of shares of
Stock with respect to which such
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default relates does not exceed in the aggregate 10% of the number of shares of
Stock which all Underwriters have agreed to purchase hereunder, then such Stock
to which the default relates shall be purchased by the nondefaulting
Underwriters in proportion to their respective commitments hereunder.
(b) In the event that such default relates to more than 10% of the
number of shares of Stock, you may in your discretion arrange for yourself or
for another party or parties to purchase such Stock to which such default
relates on the terms contained herein. If within one (1) business day after
such default relating to more than 10% of the number of shares of Stock, you do
not arrange for the purchase of such Stock, then the Company shall be entitled
to a further period of one (1) business day within which to procure another
party or parties satisfactory to you to purchase said Stock on such terms. In
the event that neither you nor the Company arrange for the purchase of the Stock
to which a default relates as provided in this Section 9, this Agreement may be
terminated by you or the Company (except as provided in Section 6 and Section
8(a) hereof) or the several Underwriters, but nothing herein shall relieve a
defaulting Underwriter of its liability, if any, to the other several
Underwriters and to the Company for damages occasioned by its default hereunder.
(c) In the event that the Stock to which the default relates is to be
purchased by the non-defaulting Underwriters, or is to be purchased by another
party or parties as aforesaid, you or the Company shall have the right to
postpone the Closing Date for a reasonable period but not in any event exceeding
five (5) business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus or in any other
documents and arrangements, and the Company agrees to file promptly any
amendment to the Registration Statement or the Prospectus which in the opinion
of counsel for the Underwriters may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any party substituted
under this Section 9 with like effect as if it had originally been a party to
this Agreement with respect to such Stock.
10. Representations and Agreements to Survive Delivery. Except as the
--------------------------------------------------
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements at the Closing Date and the Additional Closing Date, and such
representations, warranties and agreements of you and the Company, including the
indemnity and contribution agreements contained in Section 8 hereof, shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of you or any controlling person, or by or on behalf of the
Company or any controlling person, and shall survive termination of this
Agreement and/or delivery of the Stock and the Additional Stock to you.
25
<PAGE>
11. Effective Date of This Agreement and Termination Thereof.
--------------------------------------------------------
(a) This Agreement shall become effective at 9:30 A.M., New York
Time, on the first full business day following the day on which the Registration
Statement becomes effective or at the time of the initial public offering by you
of the Stock, whichever is earlier. The time of the initial public offering,
for the purpose of this Section 11, shall mean the time, after the Registration
Statement becomes effective, of the release by you for publication of the first
newspaper advertisement which is subsequently published relating to the Stock or
the time, after the Registration Statement becomes effective, when the Stock is
first released by you for offering by the Underwriters or dealers by letter or
telegram, whichever shall first occur. You or the Company may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as noted below, by giving the notice indicated below in Section
11(d) before the time this Agreement becomes effective.
(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date or the Additional closing Date, as the case may be,
if, after the date of this Agreement, any domestic or international event or act
or occurrence has materially disrupted or, in the exercise of your reasonable
judgment, will in the immediate future materially disrupt, securities markets in
the United States; or trading on the New York Stock Exchange shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required on the New
York Stock Exchange by the New York Stock Exchange or by order of the Commission
or any other governmental authority having jurisdiction; or the United States
shall have become involved in a war or major hostilities; or a banking
moratorium has been declared by a New York or Federal authority; or the Company
shall have sustained a material loss by fire, flood, accident, hurricane,
earthquake, theft, sabotage or other calamity or malicious act which, whether or
not said loss shall have been insured, will, in your opinion, interfere
materially and adversely with the conduct of the business and operations of the
Company; or there shall have been such material adverse change in the condition
or prospects of the Company or the market for its and similar securities as in
your judgment would make it inadvisable to proceed with the offering, sale and
delivery of the Stock or Additional Stock, as the case may be.
(c) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section 11, the Company shall be
notified promptly by you by telephone or telegram, confirmed by letter. If the
Company elects to prevent this Agreement from becoming effective, you shall be
notified promptly by the Company by telephone or telegram, confirmed by letter.
(d) Anything in this Agreement to the contrary notwithstanding if
this Agreement shall not become effective by reason of an election of the
Company pursuant to this Section 11, or if this Agreement shall not be carried
out within the time specified herein by reason of any failure on the part of the
Company to perform any undertaking or satisfy any condition of
26
<PAGE>
this Agreement by it to be performed or satisfied, the sole liability of the
Company to you, in addition to the obligations assumed by the Company pursuant
to Section 6 hereof, will be to reimburse you for such reasonable out-of-pocket
expenses (including the fees and disbursements of your counsel) as shall have
been incurred in connection with this Agreement and the proposed purchase of the
Stock and Additional Stock, and upon demand the Company will pay the full amount
thereof to you. If this Agreement shall not become effective by reason of an
election by you pursuant to this Section 11 or if this Agreement shall be
terminated or otherwise not carried out within the time specified herein for any
reason other than the failure on the part of the Company to perform any
undertaking or satisfy any condition of this Agreement by it or them to be
performed or satisfied, the Company shall have no liability to you other than
for obligations assumed by the Company pursuant to Section 6 hereof; provided,
however, that you may retain any sums heretofore paid to you by the Company as
provided in Section 3 hereof to the extent that such sums are for your
accountable out-of-pocket expenses (including the fees and disbursements of your
counsel) as shall have been incurred in connection with this Agreement and the
proposed purchase of the Stock and Additional Stock.
Notwithstanding any election hereunder or any termination of this
Agreement, and whether or not this Agreement is otherwise carried out, the
provisions of Section 8 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
12. Notices. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and, if sent to any Underwriter,
shall be mailed, delivered or telegraphed and confirmed to Donald & Co.
Securities Inc., 65 East 55th Street, New York, New York 10022, Att: Stephen A.
Blum, President; and if sent to the Company, shall be mailed, delivered or
telegraphed and confirmed to K2 Design, Inc., 80 East 11th Street, Suite 619,
New York, NY 10003, Attn: David J. Center, Chief Executive Officer.
13. Parties. This Agreement shall be binding upon, you, the Company, and
the controlling persons, directors and officers referred to in Section 8 hereof,
and their respective successors, legal representatives and assigns, and no other
person shall have or be construed to have any legal or equitable right, remedy
or claim under or in respect of or by virtue of this Agreement or any provision
herein contained.
14. Construction. This Agreement shall be construed in accordance with
the laws of the State of New York.
27
<PAGE>
If the foregoing correctly sets forth the understanding between you
and the Company, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
K2 DESIGN, INC.
By:
-----------------------------------------------
David J. Center, Chief Executive Officer
Accepted as of the date
first above written:
DONALD & CO. SECURITIES INC.
As Representative of the Underwriters
named in Schedule I hereto
By:
-------------------------------------------------
Stephen A. Blum, President
28
<PAGE>
SCHEDULE I
Underwriters Number of Firm Units
------------ --------------------
Donald & Co. Securities Inc.
___________
TOTAL 1,000,000
Exhibit 3.1
CERTIFICATE OF INCORPORATION
of
K2 DESIGN, INC.
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
FIRST: The name of the corporation (hereafter called, the "Corporation")
is K2 Design, Inc.
SECOND: The address of the Corporation's registered office of the
Corporation in the State of Delaware is 1013 Centre Road, in the City of
Wilmington, County of New Castle, State of Delaware 19805. The name of the
registered agent of the Corporation in the State of Delaware is The Prentice-
Hall Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH: (a) The total number of shares of stock which the Corporation
shall have authority to issue is 10,000,000 consisting of 9,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred Stock,
par value $.01 per share.
(b) The board of directors is hereby empowered to authorize by resolution
or resolutions from time to time the issuance of one or more classes or series
of Preferred Stock and to fix the voting powers, full or limited or no voting
powers, and such designations, powers, preferences and relative, participating,
optional or other rights, if any, and the qualifications, limitations or
restrictions thereof if any, with respect to each such class or series of
Preferred Stock (including without limitation liquidation preferences, dividend
rates, conversion rights and redemption provisions), and the number of shares
constituting each such class or series, and to increase or decrease the number
of shares of any such class or series to the extent permitted by the Delaware
General Corporation Law.
<PAGE>
FIFTH: (a) The business and affairs of the Corporation shall be managed
by or under the direction of a board of directors consisting of not less than
three nor more than 15 directors, the exact number of directors to be determined
from time to time solely by resolution adopted by the affirmative vote of a
majority of the directors then in office.
(b) Each director shall hold office until such director's successor shall
have been duly elected and qualified or until such director's earlier death,
resignation or removal. Vacancies on the board of directors resulting from
death, resignation, removal or otherwise and newly created directorships
resulting from any increase in the number of directors may be filled solely by a
majority of the directors then in office (although less than a quorum) or by a
sole remaining director, and each director so elected shall hold office for a
term that shall coincide with the remaining term of the directors then in
office. Whenever the holders of one or more classes or series of Preferred
Stock shall have the right, voting separately as a class or series, to elect
directors, the nomination, election, term of office, filling of vacancies,
removal and other features of such directorships shall not be governed by this
Article Fifth unless otherwise provided for in the certificate of designation
for such classes or series.
(c) There shall be no cumulative voting in the election of directors.
(d) No director may be removed from office by the stockholders except for
cause with the affirmative vote of the holders of not less than a majority of
the total voting power of all outstanding securities of the Corporation then
entitled to vote generally in the election of directors, voting together as a
single class.
SIXTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation and for the further
definition of the powers of the Corporation and its directors and stockholders:
(a) The board of directors shall have the power to adopt, amend or repeal
the bylaws of the Corporation. The stockholders may adopt, amend or repeal the
bylaws only with the affirmative vote of the holders of not less than a majority
of the total voting power of all outstanding securities of the Corporation then
entitled to vote generally in the election of directors, voting together as a
single class.
(b) Elections of directors need not be by written ballot unless the bylaws
of the Corporation so provide.
(c) Whenever, and so long as, the Corporation is subject to the reporting
requirements of Section 12 or 15(d) of the Securities Exchange Act of 1934 (or
any successor law), any action required or permitted to be taken at any annual
or special meeting of stockholders may be taken only upon the vote of
stockholders at an annual or special meeting duly noticed and called in
accordance with the Delaware General Corporation Law, and may not be taken by
written consent of stockholders without a meeting.
-2-
<PAGE>
(d) Special meetings of stockholders may be called by the board of
directors, the chairman of the board of directors or the vice chairman of the
board of directors of the Corporation, or at the request in writing by the
holders of not less than 20% of all of the issued and outstanding common stock,
and may not be called by any other person. Notwithstanding the foregoing,
whenever holders of one or more classes or series of Preferred Stock shall have
the right, voting separately as a class or series, to elect directors, such
holders may call special meetings of such holders for the purpose of electing
such directors pursuant to the certificate of designation for such classes or
series.
SEVENTH: (a) A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except to the extent such exemption from liability
or limitation thereof is not permitted under the Delaware General Corporation
Law.
(b) (1) Each person (and the heirs, executors or administrators of such
person) who was or is a party or is threatened to be made a party to, or is
involved in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, shall be
indemnified and held harmless by the Corporation to the fullest extent permitted
by the Delaware General Corporation Law. The right to indemnification conferred
in this Article Seventh shall also include the right to be paid by the
Corporation the expenses incurred in connection with any such proceeding in
advance of its final disposition to the fullest extent permitted by the Delaware
General Corporation Law. The right to indemnification conferred in this Article
Seventh shall be a contract right.
(2) The Corporation may, by action of its board of directors, provide
indemnification to such of the employees and agents of the Corporation and such
other persons serving at the request of the Corporation as employees or agents
of another corporation, partnership, joint venture, trust or other enterprise to
such extent and to such effect as is permitted by the Delaware General
Corporation Law and the board of directors shall determine to be appropriate.
(c) The Corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee 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 against any expense, liability or loss
incurred by such person 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 Delaware General Corporation Law.
(d) The rights and authority conferred in this Article Seventh shall not
be exclusive of any other right which any person may otherwise have or hereafter
acquire.
-3-
<PAGE>
(e) No amendment, modification or repeal of this Article Seventh, nor the
adoption of any provision of this certificate of incorporation or the bylaws of
the Corporation, nor, to the fullest extent permitted by the Delaware General
Corporation Law, any amendment, modification or repeal of law shall eliminate or
reduce the effect of this Article Seventh or adversely affect any right or
protection then existing hereunder in respect of any acts or omissions occurring
prior to such amendment, modification, repeal or adoption.
EIGHTH: The Corporation reserves the right to amend this certificate of
incorporation in any manner permitted by the Delaware General Corporation Law
and all rights and powers conferred upon stockholders, directors and officers
herein are granted subject to this reservation. Notwithstanding the foregoing,
the provisions set forth in Articles Fifth, Sixth, Seventh, and this Article
Eighth may not be repealed or amended in any respect, and no other provision may
be adopted, amended or repealed which would have the effect of modifying or
permitting the circumvention of the provisions set forth in Articles Fifth,
Sixth (except for clause (d) thereof), Seventh and this Article Eighth, unless
such action is approved by the affirmative vote of the holders of not less than
80% of the total voting power of all outstanding securities of the Corporation
then entitled to vote generally in the election of directors, voting together as
a single class.
NINTH: The name and the mailing address of the incorporator is as
follows:
MAILING
NAME ADDRESS
---- -------
Robert W. Burke c/o Sill Cummis Zuckerman Radin
Tischman Epstein & Gross, P.A.
One Riverfront Plaza
Newark, New Jersey 07102
TENTH: The Corporation is to have perpetual existence.
-4-
<PAGE>
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
signed under the seal of the Corporation this 16th day of January, 1996.
K2 DESIGN, INC.
By:_____________________________________________
Robert W. Burke, Incorporator
-5-
Exhibit 3.2
BYLAWS
OF
K2 DESIGN, INC.
* * * * *
ARTICLE I
OFFICES
Section 1. Registered Office. The address of the registered office of K2
-----------------
Design, Inc. (the "Corporation") in the State of Delaware shall be 1013 Centre
Road, in the City of Wilmington, County of New Castle, State of Delaware 19805.
Section 2. Other Offices. The Corporation may also have offices at such
-------------
other place(s), either within or without the State of Delaware, as the Board of
Directors may from time to time determine or as the business of the Corporation
may require.
Section 3. Books. The books of the Corporation may be kept either within
-----
or
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. Time and Place of Meetings. All meetings of shareholders shall
--------------------------
be held at such place, within or without the State of Delaware, at such time as
may be determined from time to time by the Board of Directors or, in the absence
of a designation by the Board of Directors, by the Chairman of the Board of
Directors.
Section 2. Annual Meetings. Annual meetings of shareholders, commencing
---------------
with the year 1997, shall be held to elect directors and transact such other
business as may properly be brought before the meeting.
Section 3. Special Meetings. Special meetings of shareholders may be
----------------
called by the Board of Directors, the Chairman of the Board of Directors, the
Vice Chairman of the Board of Directors, or the request in writing by the
holders of not less than 20% of all of the issued and outstanding Common Stock
and may not be called by any other person. Notwithstanding the foregoing,
whenever holders of one or more classes or series of Preferred Stock have the
right, voting separately as a class or series, to elect directors, such
<PAGE>
holders may call special meetings of such holders pursuant to the certificate of
designation for such classes or series.
Section 4. Notice of Meetings; Waivers of Notice. (a) Whenever
-------------------------------------
shareholders are required or permitted to take any action at a meeting, a
written notice of the meeting shall be given which shall state the place, date
and hour of the meeting, and, in the case of a special meeting, the purpose or
purposes for which the meeting is called. Unless otherwise provided by the
General Corporation Law of the State of Delaware as the same exists or may
hereafter be amended ("Delaware Law"), such notice shall be given not less than
10 nor more than 60 days before the date of the meeting to each shareholder of
record entitled to vote at such meeting. Unless these bylaws otherwise require,
when a meeting is adjourned to another time or place (whether or not a quorum is
present), notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting, the Corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than 30 days or after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at the meeting.
(b) A written waiver of any such notice signed by the person entitled
thereto, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
(c) Business transacted at any special meeting of shareholders shall
be limited to the purposes stated in the notice.
Section 5. Quorum. Unless otherwise provided in Delaware Law, the
------
certificate of incorporation or these bylaws, the presence, in person or by
proxy, of the holders of a majority of the outstanding stock of the Corporation
entitled to vote at a meeting of shareholders shall constitute a quorum for the
transaction of business.
Section 6. Voting. (a) Unless otherwise provided in Delaware Law or the
------
certificate of incorporation, each shareholder shall be entitled to one vote for
each outstanding share of stock of the Corporation held by such shareholder.
Unless otherwise provided in Delaware Law, for all matters other than the
election of directors, the vote of a majority of the shares of stock of the
Corporation present, in person or by proxy, at a meeting of shareholders at
which a quorum is present and then entitled to vote on the subject matter shall
be the act of the shareholders.
(b) Each shareholder entitled to vote at a meeting of shareholders
may authorize another person or persons to act for him by proxy, but no such
proxy shall be
-2-
<PAGE>
voted or acted upon after three years from its date, unless the proxy provides
for a longer period.
Section 7. No Action by Consent. Whenever, and so long as, the
--------------------
Corporation is subject to the reporting requirements of Section 12 or 15(d) of
the Securities Exchange Act of 1934 (or any successor law), any action required
or permitted to be taken at any annual or special meeting of shareholders may be
taken only upon the vote of shareholders at an annual or special meeting duly
noticed and called in accordance with Delaware Law and may not be taken by
written consent of shareholders without a meeting.
Section 8. Organization. At each meeting of shareholders, the Chairman of
------------
the Board of Directors, if one shall have been elected (or in his absence or if
one shall not have been elected, the Vice Chairman of the Board of Directors),
shall act as chairman of the meeting. The Secretary (or in his absence or
inability to act, the person whom the chairman of the meeting shall appoint
secretary of the meeting) shall act as Secretary of the meeting and keep the
minutes thereof.
Section 9. Order of Business. The order of business at all meetings of
-----------------
shareholders shall be determined by the chairman of the meeting.
Section 10. Nomination of Directors. Only persons who are nominated in
-----------------------
accordance with the procedures set forth in these bylaws shall be eligible to
serve as directors. Nominations of persons for election to the Board of
Directors of the Corporation may be made at a meeting of shareholders (a) by or
at the direction of the Board of Directors or (b) by any shareholder of the
Corporation who is a shareholder of record at the time of giving of notice
provided for in this Section 10, who shall be entitled to vote for the election
of directors at the meeting and who complies with the procedures set forth
below. Any such nominations (other than those made by or at the direction of
the Board of Directors) must be made pursuant to timely notice in writing to the
Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be received no later than the close
of business on the 10th day following the day on which notice of the date of the
meeting was mailed or public disclosure thereof was made, whichever occurred
first. Such shareholder's notice shall set forth (a) as to each person whom the
shareholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934
(including such person's written consent to being named as a nominee and to
serving as a director if elected); and (b) as to the shareholder giving the
notice (i) the name and address, as they appear on the Corporation's books, of
such shareholder and (ii) the class and number of shares of stock of the
Corporation which are beneficially owned by such shareholder. At the
-3-
<PAGE>
request of the Board of Directors, any person nominated by the Board of
Directors for election as a director shall furnish to the Secretary of the
Corporation that information required to be set forth in a shareholder's notice
of nomination which pertains to the nominee. Notwithstanding anything in these
bylaws to the contrary, no person shall be eligible to serve as a director of
the Corporation unless nominated in accordance with the procedures set forth in
this Section 10. If the chairman of the meeting shall determine, based on the
facts, that a nomination was not made in accordance with the procedures set
forth in this Section 10, he shall so declare to the meeting and the defective
nomination shall be disregarded. Notwithstanding the foregoing provisions of
this Section 10, a shareholder shall also comply with all applicable
requirements of the Securities Exchange Act of 1934, and the rules and
regulations thereunder with respect to the matters set forth in this Section 10.
Section 11. Notice of Business. At any meeting of the shareholders, only
------------------
such business shall be conducted as shall have been brought before the meeting
(a) by or at the direction of the Board of Directors or (b) by any shareholder
of the Corporation who is a shareholder of record at the time of giving of the
notice provided for in this Section 11, who shall be entitled to vote at such
meeting and who complies with the procedures set forth below. For business to
be properly brought before a shareholder meeting by a shareholder, the
shareholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a shareholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation not
less than 60 days nor more than 90 days prior to the meeting; provided, however,
that in the event that less than 70 days' notice or prior public disclosure of
the date of the meeting is given or made to shareholders, notice by the
shareholder to be timely must be received no later than the close of business on
the 10th day following the day on which notice of the date of the meeting was
mailed or public disclosure thereof was made, whichever occurred first. Such
shareholder's notice shall set forth as to each matter the shareholder proposes
to bring before the meeting (a) a brief description of the business desired to
be brought before the meeting and the reasons for conducting such business at
the meeting, (b) the name and address, as they appear on the Corporation's
books, of the shareholder proposing such business, (c) the class and number of
shares of stock of the Corporation which are beneficially owned by the
shareholder and (d) any material interest of the shareholder in such business.
Notwithstanding anything in these bylaws to the contrary, no business shall be
conducted at a shareholder meeting except in accordance with the procedures set
forth in this Section 11. If the chairman of the meeting shall determine, based
on the facts, that business was not properly brought before the meeting in
accordance with the procedures set forth in this Section 11, he shall so declare
to the meeting and any such business not properly brought before the meeting
shall not be transacted. Notwithstanding the foregoing provisions of this
Section 11, a shareholder shall also comply with all application requirements of
the Securities Exchange Act of 1934, and the rules and regulations thereunder
with respect to the matters set forth in this Section 11.
-4-
<PAGE>
ARTICLE III
DIRECTORS
Section 1. General Powers. Unless otherwise provided in Delaware Law or
--------------
the certificate of incorporation, the business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors.
Section 2. Number, Classes, Term of Office, Etc. (a) The Board of
-------------------------------------
Directors shall consist of not less than three nor more than 15 directors, with
the exact number of directors to be determined from time to time solely by
resolution adopted by the affirmative vote of a majority of the directors then
in office. Except as otherwise provided in the certificate of incorporation,
each director shall serve for a term ending on the date of the annual meeting of
shareholders next following the annual meeting at which such director was
elected. Notwithstanding the foregoing, each director shall hold office until
such director's successor shall have been duly elected and qualified or until
such director's earlier death, resignation or removal.
(b) No person may stand for election to, or be elected to, the Board
of Directors or be appointed by the directors to fill a vacancy on the Board of
Directors who shall have made, or be making, improper or unlawful use of the
Corporation's confidential information, or who has interests which conflict
materially with the interests of the Corporation. Directors need not be
shareholders.
Section 3. Quorum and Manner of Acting. Unless the certificate of
---------------------------
incorporation or these bylaws require a greater number, a majority of the total
number of directors shall constitute a quorum for the transaction of business,
and the affirmative vote of a majority of the directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors. When a
meeting is adjourned to another time or place (whether or not a quorum is
present), notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting, the Board of Directors may transact any business which
might have been transacted at the original meeting. If a quorum shall not be
present at any meeting of the Board of Directors, the directors present thereat
may adjourn the meeting, from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 4. Time and Place of Meetings. The Board of Directors shall hold
--------------------------
its meetings at such place, within and without the State of Delaware, and at
such time as may be determined from time to time by the Board of Directors or,
in the absence of a determination by the Board of Directors, by the Chairman of
the Board of Directors.
Section 5. Annual Meeting. The Board of Directors shall meet for the
--------------
purpose of organization, the election of officers and the transaction of other
business, as soon as
-5-
<PAGE>
practicable after each annual meeting of shareholders, on the same day and at
the same place where such annual meeting shall be held. Notice of such meeting
need not be given. In the event such annual meeting is not so held, the annual
meeting of the Board of Directors may be held at such place, within or without
the State of Delaware, at such time as shall be specified in a notice thereof
given as hereinafter provided in Section 7 of this Article III or in a waiver of
notice thereof signed by any director who chooses to waive the requirement of
notice.
Section 6. Regular Meetings. After the place and time of regular meetings
----------------
of the Board of Directors shall have been determined and notice thereof shall
have been once given to each member of the Board of Directors, regular meetings
may be held without further notice being given.
Section 7. Special Meetings. Special meetings of the Board of Directors
----------------
may be called by the Chairman of the Board of Directors, the Vice Chairman of
the Board of Directors, or by any two directors. Notice of special meetings of
the Board of Directors shall be given to each director in such manner as is
determined by the Board of Directors at least five business days before the date
of the meeting.
Section 8. Committees. The Board of Directors may, by resolution passed
----------
by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the shareholders the sale,
lease or exchange of all or substantially all of the Corporation's property and
assets, recommending to the shareholders a dissolution of the Corporation or a
revocation of a dissolution, or amending the bylaws of the Corporation; and
unless the resolution of the Board of Directors, the certificate of
incorporation or these bylaws expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock or to adopt a certificate of ownership and merger pursuant to Delaware
Law. Each committee shall keep regular minutes of its meetings and report the
same to the Board of Directors when required.
Section 9. Action by Consent. Unless otherwise restricted by the
-----------------
certificate of incorporation or these bylaws, 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 members of the Board or 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 or committee.
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<PAGE>
Section 10. Telephonic Meetings. Unless otherwise restricted by the
-------------------
certificate of incorporation or these bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or such committee, as the case may be, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at the meeting.
Section 11. Resignation. Any director may resign at any time by giving
-----------
written notice to the Board of Directors or to the Secretary of the Corporation.
The resignation of any director shall take effect upon receipt of notice thereof
or at such later time as shall be specified in such notice; and unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
Section 12. Vacancies. Unless otherwise provided in the certificate of
---------
incorporation, vacancies on the Board of Directors resulting from death,
resignation, removal or otherwise and newly created directorships resulting from
any increase in the number of the directors may be filled solely by a majority
of the directors then in office (although less than a quorum) or by a sole
remaining director, and each director so elected shall hold office for a term
that shall coincide with the remaining term of the class to which such director
shall have been elected. If there are no directors in office, then an election
of directors may be held in accordance with Delaware Law. Unless otherwise
provided in the certificate of incorporation, when one or more directors shall
resign from the Board, effective at a future date, a majority of the directors
then in office, including those who have so resigned, shall have the power to
fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office as provided in the filling of the other vacancies.
Section 13. Removal. No director may be removed from office by the
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shareholders except for cause with the affirmative vote of the holders of not
less than a majority of the total voting power of all outstanding securities of
the Corporation then entitled to vote generally in the election of directors,
voting together as a single class.
Section 14. Compensation. Unless otherwise restricted by the certificate
------------
of incorporation or these bylaws, the Board of Directors shall have authority to
fix the compensation of directors, including fees and reimbursement of expenses,
provided, however, that no such compensation or fees shall be paid to directors
who are also employees of the Corporation.
Section 15. Preferred Directors. Notwithstanding anything else contained
-------------------
herein, whenever the holders of one or more classes or series of Preferred Stock
shall have the right, voting separately as a class or series, to elect
directors, the nomination, election, term of office, filling of vacancies,
removal and other features of such directorships shall be governed by the terms
of the certificate of designation for such classes or series, and such directors
so
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<PAGE>
elected shall not be subject to the provisions of Sections 2, 12 and 13 of this
Article III unless otherwise provided therein.
ARTICLE IV
OFFICERS
Section 1. Principal Officers. The principal officers of the Corporation
------------------
shall be a Chairman of the Board of Directors, a Vice Chairman of the Board of
Directors, a President, one or more Vice Presidents, a Treasurer and a Secretary
who shall have the duty, among other things, to record the proceedings of the
meetings of shareholders and directors in a book kept for that purpose. The
Corporation may also have such other principal officers, as the Board may in its
discretion appoint. One person may hold the offices and perform the duties of
any two or more offices, except that no one person shall hold the offices and
perform the duties of President and Secretary.
Section 2. Election, Term of Office and Remuneration. The principal
-----------------------------------------
officers of the Corporation shall be elected annually by the Board of Directors
at the annual meeting thereof. Each such officer shall hold office until his
successor is elected and qualified or until his earlier death, resignation or
removal. The remuneration of all such officers shall be fixed by the Board of
Directors. Any vacancy in any such office shall be filled in such manner as the
Board of Directors shall determine.
Section 3. Subordinate Officers. In addition to the principal officers
--------------------
enumerated in Section 1 of this Article IV, the Corporation may have one or more
Assistant Treasurers and Assistant Secretaries and such other subordinate
officers, agents and employees as the Board of Directors may deem necessary,
each of whom shall hold office for such period as the Board of Directors may
from time to time determine. The Board of Directors may delegate to any
principal officer the power to appoint and to remove any such subordinate
officers, agents or employees.
Section 4. Removal. Any officer may be removed, with or without cause, at
-------
any time, by resolution adopted by the Board of Directors.
Section 5. Resignations. Any officer may resign at any time by giving
------------
written notice to the Board of Directors (or to a principal officer if the Board
of Directors has delegated to such principal officer the power to appoint and to
remove such officer). The resignation of any officer shall take effect upon
receipt of notice thereof or at such later time as shall be specified in such
notice; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 6. Powers and Duties. The Board of Directors may designate an
-----------------
officer as the chief executive officer. The chief executive officer shall,
subject to the direction and
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<PAGE>
control of the Board of Directors, be the general manager of, and supervise and
direct, the business and affairs of the Corporation and the conduct of the
officers of the Corporation. The other officers of the Corporation shall have
such powers and perform such duties incident to each of their respective offices
and such other duties as may from time to time be conferred upon or assigned to
them by the Board of Directors or the chief executive officer.
ARTICLE V
GENERAL PROVISIONS
Section 1. Fixing the Record Date. (a) In order that the Corporation may
----------------------
determine the shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the purpose of any other lawful action, the Board of Directors may fix,
in advance, a record date, which shall not be more than 60 nor less than 10 days
before the date of such meeting, nor more than 60 days prior to any other
action. A determination of shareholders of record entitled to notice of or to
vote at a meeting of shareholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
(b) If no record date is fixed by the Board of Directors (i) the
record date for determining shareholders entitled to notice of or to vote at a
meeting of shareholders shall be at the close of business on the business day
next preceding the day on which notice is given or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held; and (ii) the record date for determining shareholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
Section 2. Dividends. Subject to limitations contained in Delaware Law
---------
and the certificate of incorporation, the Board of Directors may declare and pay
dividends upon the shares of capital stock of the Corporation, which dividends
may be paid either in cash, securities of the corporation or in other property.
Section 3. Fiscal Year. The fiscal year of the Corporation shall end on
-----------
December 31 each year.
Section 4. Corporate Seal. The corporate seal shall have inscribed
--------------
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed, affixed or otherwise reproduced.
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<PAGE>
Section 5. Voting of Stock Owned by the Corporation. The Board of
----------------------------------------
Directors may authorize any person, on behalf of the Corporation, to attend,
vote at and grant proxies to be used at any meeting of shareholders of any
corporation (except this Corporation) in which the Corporation may hold stock.
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Exhibit 10.1
K2 DESIGN, INC.
1996 STOCK INCENTIVE PLAN
1. Purposes.
The purposes of the 1996 Stock Incentive Plan (the "Plan") are to provide
long-term incentives and rewards to employees, non-employee directors and
consultants of K2 Design, Inc. (the "Company" or the "Corporation") and its
Affiliates (as defined below) to assist the Company in attracting and retaining
persons with experience and/or ability on a basis competitive with industry
practices and to associate the interests of such persons with those of the
Company's stockholders.
2. Effective Date.
The Plan is effective as of the date it is adopted by the Board of
Directors and by the stockholders of the Company. Awards may be made under the
Plan on and after its effective date.
3. Administration of the Plan.
The Plan shall be administered by the Board of Directors until such time,
if ever, that the Corporation is subject to the reporting requirements of
Section 12 or 15(d) of the Securities Exchange Act of 1934 (or any successor
law), at which time and for all times thereafter, the Plan shall be administered
by the Compensation Committee of the Board of Directors of the Company, or such
other committee of the Board as may be directed by the Board (any such committee
shall hereinafter be referred to as the "Committee"), and the Committee shall be
so constituted as to permit the Plan to comply with the disinterested
administration requirements under Rule 16b-3 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the "outside director" requirement of
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
Members of the Committee shall serve at the pleasure of the Board of Directors
of the Company. References herein to the Board and to the Committee shall mean
the appropriate governing body as provided in this section 3.
The Committee shall have all the powers vested in it by the terms of the
Plan, such powers to include exclusive authority (within the limitations
described herein) to select the grantees to be granted awards under the Plan, to
determine the type, size and terms of awards to be made to each grantee
selected, to
<PAGE>
determine the time when awards will be granted, when they will vest, when they
may be exercised and when they will be paid, to amend awards previously granted
and to establish objectives and conditions, if any, for earning awards and
whether awards will be paid after the end of the award period. The Committee
shall have full power and authority to administer and interpret the Plan and to
adopt such rules, regulations, agreements, guidelines and instruments for the
administration of the Plan and for the conduct of its business as the Committee
deems necessary or advisable and to interpret same. The Committee's
interpretation of the Plan, and all actions taken and determinations made by the
Committee pursuant to the powers vested in it hereunder, shall be conclusive and
binding on all parties concerned, including the Company, its Affiliates,
stockholders, any participants in the Plan and any other employee of the Company
or any of its Affiliates.
All employees, non-employee directors and consultants of the Company and
its Affiliates shall be eligible to participate in the Plan. The Committee, in
its sole discretion, shall from time to time designate from among the eligible
persons those individuals who are to receive awards under and thereby become
participants in the Plan. For purposes of the Plan, "Affiliate" shall mean any
entity, as may from time to time be designated by the Committee, that is a
subsidiary corporation of the Company (within the meaning of Section 424 of the
Code), and each other entity directly or indirectly controlled by or under
common control with the Company. For purposes of this definition, "control"
means the power to direct the management and policies of such entity, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meaning correlative to the foregoing.
4. Awards.
(a) Types. Awards under the Plan shall be made with reference to shares
of the Company's common stock and shall consist of stock options (including
nonqualified stock options and incentive stock options qualifying under Section
422 of the Code).
(b) Rules and Policies. The Committee may adopt from time to time written
rules and policies implementing the Plan. Such rules and policies may include,
but need not be limited to, the type, size and term of awards to be made to
participants and the conditions for the exercise or payment of such awards.
Rules relating to stock options attached hereto as Exhibit A have been approved
by the Board and the Company's stockholders. The rules set forth in Exhibit A
may be amended by the Board or the Committee in accordance with the provisions
and subject to the
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<PAGE>
limitations set forth in Section 10 of the Plan. The Committee shall determine,
in its sole discretion, the extent to which rules and policies that it may adopt
in the future shall be subject to the approval of the Company's stockholders
and/or limitations on the Committee's authority to amend such rules or policies.
5. Shares of Stock Subject to the Plan.
The shares that may be delivered or purchased or used for reference
purposes under the Plan shall not exceed an aggregate of 225,000 shares of the
Company's common stock. Any shares subject to an award which for any reason
expires or is terminated unexercised as to such shares shall again be available
for issuance under the Plan.
6. Payment of Awards.
The Committee may determine that all or a portion of a payment to a
participant under the Plan, whether it is to be made in cash, shares of the
Company's common stock or a combination thereof shall be deferred. Deferrals
shall be for such periods and upon such terms as the Committee may determine in
its sole discretion.
7. Vesting.
The Committee may determine that all or a portion of a payment to a
participant under the Plan, whether it is to be made in cash, shares of the
Company's common stock or a combination thereof, shall be vested at such times
and upon such terms as may be selected by it in its sole discretion.
8. Dilution and Other Adjustment.
In the event of any change in the outstanding shares of the Company's
common stock by reason of any split, stock dividend, recapitalization, merger,
consolidation, spin-off, reorganization, combination or exchange of shares or
other similar corporate change, such equitable adjustments shall be made in the
Plan and the awards thereunder as the Committee determines are necessary or
appropriate, including, if necessary, any adjustments in the number, kind or
character of shares that may be subject to existing or future awards under the
Plan (including by substitution of shares of another corporation including,
without limitation, any successor of the Company), adjustments in the exercise,
purchase or base price of an
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<PAGE>
outstanding award and any adjustments in the maximum numbers of shares referred
to in Section 5 of the Plan. All such adjustments shall be conclusive and
binding for all purposes of the Plan.
9. Miscellaneous Provisions.
(a) Rights as Stockholder. A participant under the Plan shall have no
rights as a holder of the Company's common stock with respect to awards
hereunder, unless and until certificates for shares of such stock are issued to
the participant.
(b) Assignment or Transfer. No award under this Plan shall be
transferrable by the participant or shall be subject in any manner to
alienation, sale, transfer, assignment, pledge, encumbrance or charge (other
than by or to the Company), except (i) by will or the laws of descent and
distribution (with all references herein to the rights or duties of holders or
participants to be deemed to include such beneficiaries or legal representatives
of the holder or participant unless the context otherwise expressly requires);
or (ii) subject to the prior approval of the Committee, for transfers to members
of the participant's immediate family, charitable institutions, trusts whose
beneficiaries are members of the participant's immediate family and/or
charitable institutions, or to such other persons or entities as may be approved
by the Committee, in each case subject to the condition that the Committee be
satisfied that such transfer is being made for estate and/or tax planning
purposes on a gratuitous or donative basis and without consideration (other than
nominal consideration) being received therefor. Except as provided above,
during the lifetime of a participant, awards hereunder are exercisable only by,
and payable only to, the participant.
(c) Agreements. All awards granted under the Plan shall be evidenced by
agreements in such form and containing such terms and conditions (not
inconsistent with the Plan) as the Committee shall adopt.
(d) Compliance with Legal Regulations. During the term of the Plan and
the term of any awards granted under the Plan, the Company will at all times
reserve and keep available such number of shares as may be issuable under the
Plan, and will seek to obtain from any regulatory body having jurisdiction, any
requisite authority required in the opinion of counsel for the Company in order
to grant options to purchase common stock hereunder, and transfer, issue or sell
such number of shares of common stock as shall be sufficient to satisfy the
requirements of any options. If in the opinion of counsel for the Company the
transfer, issue or sale of any shares of its stock under the Plan shall not be
lawful for any reason, including the inability of the Company to obtain from any
regulatory body having jurisdiction authority deemed by such counsel to be
necessary to such transfer, issue or sell any such shares. In any event, the
Company shall not be obligated to transfer, issue or sell any shares to any
participant unless a registration statement which complies with the provisions
of the Securities Act of 1933, as amended (the "Securities Act"), is in effect
at the time with respect to such shares or other appropriate action has been
taken under and pursuant to the terms and provisions of the Securities Act and
any other applicable securities laws, or the Company receives evidence
satisfactory to the Committee that the transfer, issuance or sale of such
shares, in the absence of an effective registration statement or other
appropriate action, would not constitute a violation of the terms and provisions
of the Securities Act. The Company's obligation to issue shares upon the
exercise of any award granted under the Plan
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<PAGE>
shall in any case be subject to the Company being satisfied that the shares
purchased are being purchased for investment and not with a view to the
distribution thereof, if at the time of such exercise a resale of such shares
would otherwise violate the Securities Act in the absence of an effective
registration statement relating to such shares.
(e) Withholding Taxes. The Company shall have the right to deduct from
all awards hereunder paid in cash any federal, state, local or foreign taxes
required by law to be withheld with respect to such awards and, with respect to
awards paid in stock, to require the payment (through withholding from the
participant's salary or otherwise) of any such taxes. The obligation of the
Company to make delivery of awards in cash or the Company's common stock shall
be subject to currency or other restrictions imposed by any government.
(f) No Right to Award. No employee or other person shall have any right
to be granted an award under the Plan. Neither the Plan nor any action taken
hereunder shall be construed as giving any employee any right to be retained in
the employ of the Company or any of its subsidiaries or shall interfere with or
restrict in any way the rights of the Company or any of its subsidiaries, which
are hereby reserved, to discharge the employee at any time for any reason
whatsoever, with or without good cause.
(g) Costs and Expenses. The costs and expenses of administering the Plan
shall be borne by the Company and not charged to any award nor to any employee
receiving an award.
(h) Funding of Plan. The Plan shall be unfunded. The Company shall not be
required to establish any special or
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<PAGE>
separate fund or to make any other segregation of assets to assure the payment
of any award under the Plan.
10. Amendments and Termination.
(a) Amendments. The Committee may at any time terminate or from time to
time amend the Plan in whole or in part, but no such action shall adversely
affect any rights or obligations with respect to any awards theretofore made
under the Plan.
Unless the holders of at least a majority of the outstanding shares of
the Company's common stock present, or represented, and entitled to vote at a
meeting of stockholders shall have first approved thereof, no amendment of the
Plan shall be effective which would (i) increase the maximum number of shares
referred to in section 5 of the Plan or (ii) extend the maximum period during
which awards may be granted under the Plan. For purposes of this section 10(a),
any (A) cancellation and reissuance or (B) repricing of any awards made under
the Plan at a new option price as provided in Exhibit A hereto shall not
constitute an amendment of this Plan.
With the consent of the employee adversely affected, the Committee may
amend outstanding agreements evidencing awards under the Plan in a manner not
inconsistent with the terms of the Plan.
(b) Termination. Unless the Plan shall theretofore have been terminated
as above provided, the Plan (but not the awards theretofore granted under the
Plan) shall terminate on and no awards shall be granted after January 1, 2006.
11. Governing Law.
The validity and construction of the Plan and any agreements entered into
thereunder shall be governed by the laws of the State of Delaware.
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<PAGE>
EXHIBIT A
K2 DESIGN, INC.
1996 STOCK INCENTIVE PLAN
RULES RELATING TO STOCK OPTIONS
The Committee herein sets forth rules under which stock options and stock
appreciation rights may be granted to employees of the Company or its Affiliates
under the Plan. All such grants are subject to the terms and provisions of the
Plan. Defined terms used herein and not otherwise defined shall have the
meanings set forth in the Plan.
1. Award of Options.
Subject to the provisions of the Plan, the Board or the Committee may from
time to time, in its sole discretion, award to participants in the Plan stock
options to purchase shares of common stock of the Company. In connection
therewith, the Committee shall have full and final authority, inter alia, in its
discretion, subject to the provisions of the Plan, (a) to determine the
participants to whom options are to be awarded, (b) in the case of each option
awarded, to determine whether the same shall be an incentive stock option
pursuant to Section 422 of the Code (an "incentive stock option"), or an option
which does not qualify under such Section 422 (a "non-qualified option"), (c) to
determine the number of shares subject to each option, (d) to determine the time
or times at which options will be awarded, (e) to determine the option price of
the shares subject to each option, which price shall not be less than the
minimum specified in section 2 hereof, (f) to determine the time or times when
each option becomes exercisable and to determine the duration of the exercise
period and (g) to prescribe the form or forms of the instruments evidencing any
options awarded under the Plan and the manner in which, and the form of
consideration for which, the option price should be paid.
2. Option Price.
The option price shall be determined by the Committee at the time any
option is awarded and shall not be less than 100% of the fair market value of
the common stock of the Company on the date on which the option is granted or
the Stock Option Agreement (as described in section 9 hereof) is amended
pursuant to section 10 hereof; provided, that the option price for incentive
stock options shall be not less than 110% of such fair market value for
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<PAGE>
all options granted to any person who, immediately after such grant, would be
the owner or would be deemed in accordance with Section 424 of the Code to be
the owner of more than 10% of the total combined voting power or value of all
classes of stock of the Company or any of its subsidiary or parent corporations.
Subject to certain limitations that may be imposed by the Committee to comply
with the requirements for exemption under Rule 16b-3 of the Exchange Act or any
other applicable rule, regulation or guideline, the option price shall be paid
in cash (whether or not such cash is loaned by the Company to the participant
for such purpose) or by the surrender, at the fair market value on the date on
which the option is exercised, of shares of common stock of the Company, or by
any combination of cash and such shares. The purchase price for shares being
purchased upon exercise of non-qualified options may also be paid in any other
manner approved by the Committee, including, without limitation, by delivery to
the Company of (a) a cash amount which shall not be less than the par value of
the common stock of the Company multiplied by the number of shares being
purchased and (b) a binding, joint and several obligation of the participant and
a financial institution or broker approved by the Committee, to pay the balance
of the purchase price upon such terms and conditions as may be specified from
time to time by the Committee.
3. Duration and Period for Exercise of Options.
Subject to earlier termination as provided in section 4 hereof, an option
granted under the Plan shall expire ten years, after the date the option is
granted, and a unless otherwise provided by the Committee; provided, that an
incentive stock option granted to any person who, immediately after such grant,
would be the owner or would be deemed in accordance with Section 424 of the Code
to be the owner of more than 10% of the total combined voting power or value of
all classes of stock of the Company or any of its subsidiary or parent
corporations, shall expire within 5 years of the date of its grant. The
Committee shall specify at the time each option is granted, and shall state in
the Stock Option Agreement, the time or times at which, and in what proportions,
that option may be exercised prior to its expiration or earlier termination.
Except as otherwise provided (a) by the Committee in the Stock Option Agreement
or any amendment thereto or (b) in section 4 hereof; (i) no option may be
exercised during the first year from the date it is granted; (ii) after one year
from the date an option is granted, it may be exercised as to not more than 20%
of the shares optioned; and (iii) after the expiration of the second, third,
fourth and fifth years, from the date the option is granted, it may be exercised
as to no more than an additional 20% of such shares plus any shares as to which
the option might theretofore have been
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<PAGE>
exercised but shall not have been exercised; provided that the participant is
employed with, or is a director or consultant to, the Company or an Affiliate on
each such vesting date or on a date no more than three months prior to such
vesting date. The Committee shall also determine at the time each option is
granted, and shall state in the Stock Option Agreement whether that option is to
be treated as an incentive stock option.
4. Conditions to Exercise of Options.
Except as provided in section 3 and this section 4 or as otherwise may be
provided by the Committee, no option may be exercised at any time unless the
participant is then an employee, director or consultant of the Company or one of
its Affiliates.
The option of any participant whose employment, directorship or consultancy
by, with or of the Company or one of its Affiliates is terminated for any
reason, shall terminate on the earlier of (a) the date that the option expires
in accordance with its terms (including any terms required under Section 422 of
the Code if the option is an incentive stock option) or (b) the expiration of
such period after such termination as the Committee shall specify in the Stock
Option Agreement, provided that such period shall not be less than: (i) twelve
months if employment ceased due to permanent and total disability, (ii) eighteen
months if the participant died while employed by, or while serving as, a
director or consultant of the Company or any of its Affiliates, or (iii) three
months if employment ceased for any other reason, except termination for cause
(as described below). During such period as described above, except as
otherwise specified in the Stock Option Agreement or in the event employment,
directorship or consultancy was terminated by the death of the participant, the
option may be exercised by such participant in respect of the same number of
shares, in the same manner, and to the same extent as if he had continued as an
employee, director or consultant, as the case may be, during the first three
months of such period; but no additional rights shall vest after such three
months. Notwithstanding the preceding two sentences and the second to last
sentence of section 3 hereof, in the event of termination of employment or
discharge of a participant for cause, as determined by the Committee in its sole
discretion, the basis for which may, but need not be, specified in the Stock
Option Agreement, then, subject to the terms of the Stock Option Agreement, any
option or options held by such participant under the Plan, not theretofore
exercised, shall terminate immediately upon such termination or discharge and
may not be exercised thereafter. The Committee shall have authority to
determine in each case whether an authorized leave of absence shall be deemed a
termination of employment.
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Except as otherwise provided by the Committee, the option of any
participant who died while employed or while serving as a director or consultant
of the Company or any of its Affiliates may be exercised by a legatee or
legatees of the option under the participant's last will, or by such
participant's executors, personal representatives or distributees, in respect of
all or any part of the total number of shares under option to such participant
under the Plan at the time of such participant's death (whether or not, at the
time of death, the deceased participant would have been entitled, pursuant to
the provisions of section 3 hereof, to exercise such option to the extent of all
or any of the shares covered thereby). However, in the event of the death of
the participant after the date of termination of employment, directorship or
consultancy with the Company or any of its Affiliates, then such deceased
participant's option shall expire in accordance with its terms, the same as if
such participant had not died. Except as otherwise provided by the Committee,
prior to its expiration, the option of a participant who died after he severed
employment or after the termination of his directorship or consultancy with the
Company or any of its Affiliates may be exercised by a legatee or legatees of
that option under the participant's last will, or by such participant's
executors, personal representatives, or distributees in respect to the same
number of shares, in the same manner and to the same extent as if such
participant were then living. The Committee may accelerate vesting and
exercisability or waive exercisability or vesting conditions in such other
circumstances as it deems appropriate.
For purposes hereof, the Committee shall have the sole power to make all
determinations regarding the termination of any participant's employment,
directorship or consultancy, including, but not limited to, the effective time
thereof for the purposes of this Plan, the cause(s) therefor and the
consequences thereof. Unless otherwise provided by the Committee, if an entity
ceases to be an Affiliate of the Company or otherwise ceases to be qualified
under the Plan or if all or substantially all of the assets of an Affiliate of
the Company are conveyed (other than by encumbrance), such cessation or action,
as the case may be, shall be deemed for purposes hereof to be a termination of
the employment, directorship or consultancy, as the case may be, of each
employee of that entity.
5. Method of Exercising Options.
Any option granted under the Plan may be exercised by the participant, by a
legatee or legatees of such option under such participant's last will, or by
such participant's executors, personal representatives or distributees or such
other persons as may be approved by the Committee by delivering to the Company
at
-10-
<PAGE>
its main office (attention of its Secretary) written notice of the number of
shares to which the option is being exercised accompanied by full payment to the
Company of the purchase price of the shares being purchased in accordance with
section 2 hereof.
6. Incentive Stock Options.
(a) Award of ISOs. Incentive stock options may be granted only to those
persons who are employees of the Company or any subsidiary corporation or parent
corporation of the Company, within the meaning of Section 424 of the Code.
(b) Annual Limits. No incentive stock option shall be granted to a
participant if as a result of which the aggregate fair market value (determined
as of the date of grant) of the stock with respect to which incentive stock
options are exercisable for the first time in any calendar year under the Plan,
and any other stock option plans of the Company or any subsidiary or any parent
corporation, would exceed $100,000, determined in accordance with Section 422 of
the Code. This limitation shall be applied by taking options into account in
the order in which granted.
(c) Terms and Conditions; Nontransferability. Any incentive stock option
granted under the Plan shall contain such terms and conditions, not inconsistent
with the terms of the Plan, as are deemed necessary or desirable by the
Committee. Such terms, together with the terms of this Plan, shall be intended
and interpreted to cause such incentive stock option to qualify as an "incentive
stock option" under Section 422 of the Code. Such terms shall include a term of
exercise of the option which is not greater than ten years from the date of
grant (except as otherwise provided herein), and additional limitations on the
period of exercise of the option following termination of employment. An
incentive stock option shall by its terms be nontransferable otherwise than by
will or by the laws of descent and distribution, and shall be exercisable,
during the lifetime of a participant, only by such participant.
(d) Disqualifying Dispositions. If shares of the Company's common stock
acquired by exercise of an incentive stock option are disposed of within two
years following the date of grant or one year following the transfer of such
shares to the participant upon exercise, the participant shall be required,
within 30 days after such disposition, to notify the Company in writing of the
date and terms of such disposition and provide such other information regarding
the disposition as the Committee may reasonably require.
-11-
<PAGE>
7. Intentionally Omitted.
8. Transferability of Options.
The Committee may provide, in the Stock Option Agreement, or any amendment
thereto, the extent to which a stock option granted under the Plan shall be
transferable by the participant during his lifetime or upon his death. The
terms and conditions of any such transferability shall be established by the
Committee in accordance with the requirements of section 9(b) of the Plan.
Incentive stock options shall not be transferrable except as provided in section
6 hereof.
9. Stock Option Agreements.
Each option awarded under the Plan shall be evidenced by a Stock Option
Agreement (which need not be identical with other Stock Option Agreements)
executed on behalf of the Company by a member of the Board or the Committee or
by an officer designated by the Committee and by the optionee which shall set
forth the terms and conditions of the option, if any (including, in the case of
incentive stock options, such terms as shall be requisite in the judgment of the
Committee pursuant to Section 422 of the Code), either expressly or by reference
to the Plan and which may contain other provisions provided they are neither
inconsistent with nor prohibited by the Plan. No modification of any Stock
Option Agreement shall be effective unless explicitly set forth in a written
instrument executed on behalf of the Company by a member of the Board, or of the
Committee or by an officer designated by the Committee and, if adverse to the
optionee, by the optionee. Except as provided in the immediately preceding
sentence, no statement, undertaking or representation purporting to confer or
affect any rights under the Plan, whether oral or written, made by any director,
officer or employee of the Company or any Affiliate shall modify the terms of
any Stock Option Agreement or constitute a grant of additional options or rights
under the Plan.
10. Grant of Options in Substitution for Previously Granted Options; Repricing
of Previously Granted Options.
(a) Substitution of Options. Options may be granted in the discretion of
the Committee in substitution for options previously granted pursuant to the
Plan or any other stock option, stock incentive or incentive compensation plan
of the Company, provided that any option so granted shall be exercisable at a
new price which is not less than 100% of the fair market value of the common
stock of the Company on the date on which the replacement options are granted.
The Stock Option Agreement evidencing the replacement options may, in the
discretion of the
-12-
<PAGE>
Committee, contain the same terms and conditions, including, without limitation,
the same vesting schedule as the agreement evidencing the original award.
(b) Repricing of Options. The Committee may, in its discretion, amend the
terms of any Stock Option Agreement, with the consent of the affected
participant, to provide that the option price of the shares remaining subject to
the original award shall be reestablished at a price not less than 100% of the
fair market value of the common stock of the Company on the effective date of
the amendment. No modification of any other term or provision of any Stock
Option Agreement which is amended in accordance with the foregoing shall be
required, although the Committee may, in its discretion, make such further
modifications of any such Stock Option Agreement as are not inconsistent with or
prohibited by the Plan.
-13-
AGREEMENT OF LEASE
Between
55 BROAD STREET COMPANY,
Owner
and
K 2 DESIGN INC.,
Tenant
Premises
Portion of Seventh (7th) Floor
New York Information Technology Center
55 Broad Street
New York, New York
Dated March 14, 1996
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE 1 Demised Premises, Term, Rents
ARTICLE 2 Use and Occupancy
ARTICLE 3 Alterations
ARTICLE 4 Ownership of Improvements
ARTICLE 5 Repairs
ARTICLE 6 Compliance With Laws
ARTICLE 7 Subordination, Attornment, Etc.
ARTICLE 8 Property Loss, Etc.
ARTICLE 9 Destruction-Fire or Other Casualty
ARTICLE 10 Eminent Domain
ARTICLE 11 Assignment and Subletting
ARTICLE 12 Owner's Initial Construction
ARTICLE 13 Access to Demised Premises
ARTICLE 14 Vault Space
ARTICLE 15 Certificate of Occupancy
ARTICLE 16 Default
ARTICLE 17 Remedies
ARTICLE 18 Damages
ARTICLE 19 Fees and Expenses; Indemnity
ARTICLE 20 Entire Agreement
ARTICLE 21 End of Term
ARTICLE 22 Quiet Enjoyment
ARTICLE 23 Escalation
ARTICLE 24 No Waiver
ARTICLE 25 Mutual Waiver of Trial by Jury
ARTICLE 26 Inability to Perform
ARTICLE 27 Notices
ARTICLE 28 Partnership Tenant
ARTICLE 29 Utilities and Services
ARTICLE 30 Table of Contents, Etc.
ARTICLE 31 Miscellaneous Definitions, Severability and
Interpretation Provisions
ARTICLE 32 Adjacent Excavation
ARTICLE 33 Building Rules
ARTICLE 34 Broker
ARTICLE 35 Security
ARTICLE 36 Arbitration, Etc.
ARTICLE 37 Parties Bound
SCHEDULE A Building Rules
ADDENDUM A Owner's Initial Construction
-i-
<PAGE>
LEASE dated as of the 14 day of March, 1996, between 55 BROAD
-------
STREET COMPANY, a New York partnership having its principal office at 345 Park
Avenue, Borough of Manhattan, City, County, and State of New York 10154, as
landlord (referred to as "Owner"), and K 2 DESIGN INC., a New York corporation,
-----
having its principal office at 80 East 11th Street, New York, New York 10003,
as tenant (referred to as "Tenant").
------
W I T N E S S E T H:
Owner and Tenant hereby covenant and agree as follows:
ARTICLE 1
DEMISED PREMISES, TERM, RENTS
-----------------------------
Section 1.01. Demised Premises: Owner hereby leases to Tenant and
-----------------
Tenant hereby hires from Owner that portion of the seventh (7th) floor indicated
by outlining and diagonal markings on the floor plan initialled by the parties
and annexed hereto as Exhibit 1 in the building known as 55 Broad Street, in the
Borough of Manhattan, City of New York (said building is referred to as the
"Building", and the Building together with the plot of land upon which it stands
--------
is referred to as the "Real Property"), at the annual rental rate or rates set
-------------
forth in Section 1.03, and upon and subject to all of the terms, covenants and
conditions contained in this Lease. The premises leased to Tenant, together
with all appurtenances, fixtures, improvements, additions and other property
attached thereto or installed therein at the commencement of, or at any time
during, the term of this Lease, other than Tenant's Personal Property (as
defined in Article 4), are referred to, collectively, as the "Demised Premises".
----------------
Section 1.02. Demised Term: A. The Demised Premises are leased for
------------
a term (referred to as the "Demised Term") to commence on May 1, 1996 and to end
------------
on April 30, 2001 (subject to the provisions of Subsection B of this Section
1.02), unless the Demised Term shall sooner terminate pursuant to any of the
terms, covenants or conditions of this Lease or pursuant to law.
B. Notwithstanding anything in Subsection A of this
Section 1.02 to the contrary, if, on or prior to the date set forth in said
Subsection A for the commencement of the Demised Term, Owner shall have failed
substantially to complete Owner's Initial Construction (as defined in Article
12), then: (a) the Demised Term shall not commence on the date set forth in said
Subsection A but shall, instead, commence on a date, fixed by Owner in a notice
to Tenant, not sooner than five (5) days next following the date of the giving
of such notice, which notice shall state that Owner has, or prior to the
commencement date fixed in said notice will have, substantially completed
Owner's Initial Construction; and (b) the Demised Term shall end on the last day
of the calendar month in which the day immediately preceding the fifth (5th)
anniversary date of the commencement of the Demised Term shall occur, unless
sooner terminated pursuant to any of the terms, covenants or conditions of this
Lease or pursuant to law; and (c) except as aforesaid, neither the validity of
this Lease nor the obligations of Tenant under this Lease shall be affected
thereby. The date upon which the Demised Term shall commence pursuant to
Subsection A of this Section or pursuant to this Subsection B is referred to as
the "Commencement Date", and the date fixed pursuant to said Subsection A or
------------------
this Subsection B as the date upon which the Demised Term shall end is referred
to as the "Expiration Date".
---------------
C. Tenant waives any right to rescind this Lease under
Section 223-a of the New York Real Property Law or any successor statute of
similar import then in force and further waives the right to recover any damages
which may result from Owner's failure to deliver possession of the Demised
Premises on the date set forth in Subsection A of this Section, or in any notice
given pursuant to Subsection B of this Section, for the commencement of the
Demised Term.
1
<PAGE>
D. After the determination of the Commencement Date,
Tenant agrees, upon demand of Owner, to execute, acknowledge and deliver to
Owner, an instrument, in form satisfactory to Owner, setting forth said
Commencement Date and the Expiration Date.
Section 1.03. Fixed Rent: A. This Lease is made at the annual
-----------
rental rates (referred to as "Fixed Rent") of EIGHTY-SIX THOUSAND NINE HUNDRED
----------
FIFTY-FIVE and 00/100 ($86,955.00) DOLLARS with respect to the period ("First
-----
Rent Period") from the Commencement Date to the last day of the calendar month
- -----------
in which the day immediately preceding the first anniversary of the Commencement
Date shall occur, both dates inclusive, NINETY-TWO THOUSAND SEVEN HUNDRED FIFTY-
TWO and 00/100 ($92,752.00) DOLLARS with respect to the next year of the Demised
Term ("Second Rent Period) and NINETY-EIGHT FIVE HUNDRED FORTY-NINE and 00/100
-------------------
($98,549.00) DOLLARS with respect to the remainder of the Demised Term ("Third
-----
Rent Period").
- -----------
B. The Fixed Rent, any increases in the Fixed Rent and any
additional rent payable pursuant to the provisions of this Lease shall be
payable by Tenant to Owner at its office (or at such other place as Owner may
designate in a notice to Tenant) in lawful money of the United States which
shall be legal tender in payment of all debts and dues, public and private, at
the time of payment or by Tenant's good check drawn on a bank or trust company
whose principal office is located in New York City and which is a member of the
New York Clearinghouse Association, without prior demand therefor and without
any offset or deduction whatsoever except as otherwise specifically provided in
this Lease. The Fixed Rent shall be payable in equal monthly installments of
SEVEN THOUSAND TWO HUNDRED FORTY-SIX and 25/100 ($7,246.00) DOLLARS, with
respect to the First Rent Period, SEVEN THOUSAND SEVEN HUNDRED TWENTY-NINE and
33/100 ($7,729.33) DOLLARS with respect to the Second Rent Period and EIGHT
THOUSAND TWO HUNDRED TWELVE and 42/100 ($8,212.42) DOLLARS with respect to the
Third Rent Period and shall be payable in advance, on the first (1st) day of
each month during the Demised Term (except as otherwise provided in Subsection C
of this Section).
C. The sum of SEVEN THOUSAND TWO HUNDRED FORTY-SIX and
25/100 ($7,246.00) DOLLARS, representing the installment of Fixed Rent for the
first (1st) full calendar month of the Demised Term, is due and payable at the
time of the execution and delivery of this Lease. In the event that the
Commencement Date shall occur on a date other than the first (1st) day of any
calendar month, Tenant shall pay to Owner, on the first (1st) day of the month
next succeeding the month during which the Commencement Date shall occur, a sum
equal to TWO HUNDRED FIFTY-ONE and 54/100 ($251.54) DOLLARS, multiplied by the
number of calendar days in the period from the Commencement Date to the last day
of the month in which the Commencement Date shall occur, both inclusive. Such
payment, together with the sum paid by Tenant upon the execution of this Lease,
shall constitute payment of the Fixed Rent for the period from the Commencement
Date to and including the last day of the next succeeding calendar month.
Section 1.04. Tenant's General Covenant: Tenant covenants (i) to pay
-------------------------
the Fixed Rent, any increases in the Fixed Rent, and any additional rent payable
pursuant to the provisions of this Lease, and (ii) to observe and perform, and
to permit no violation of, the terms, covenants and conditions of this Lease on
Tenant's part to be observed and performed.
ARTICLE 2
USE AND OCCUPANCY
-----------------
Section 2.01. General Covenant of Use: Tenant shall use and occupy
-----------------------
the Demised Premises for the following purpose: general offices of Tenant for
Tenant's information technology business.
-2-
<PAGE>
Section 2.02. No Adverse Use: Tenant shall not use or occupy, or
---------------
permit the use or occupancy of, the Demised Premises or any part thereof, for
any purpose other than the purpose specifically set forth in Section 2.01, or in
any manner which, in Owner's judgment, (a) shall adversely affect or interfere
with (i) any services required to be furnished by Owner to Tenant or to any
other tenant or occupant of the Building, or (ii) the proper and economical
rendition of any such service, or (iii) the use or enjoyment of any part of the
Building by any other tenant or occupant, or (b) shall tend to impair the
character or dignity of the Building.
ARTICLE 3
ALTERATIONS
-----------
Section 3.01. General Alteration Covenants: Tenant shall not make or
----------------------------
perform, or permit the making or performance of, any alterations, installations,
decorations, improvements, additions or other physical changes in or about the
Demised Premises (referred to collectively, as "Alteration" and individually as
----------
an "Alteration") without Owner's prior consent in each instance. Owner agrees
----------
not unreasonably to withhold its consent to any non-structural Alterations
proposed to be made by Tenant to adapt the Demised Premises for Tenant's
business purposes. Notwithstanding the foregoing provisions of this Section or
Owner's consent to any Alterations, all Alterations shall be made and performed
in conformity with and subject to the following provisions:
A. All Alterations shall be made and performed at Tenant's
sole cost and expense and at such time and in such manner as Owner may, from
time to time, designate;
B. No Alteration shall adversely affect the structural
integrity of the Building;
C. Alterations shall be made only by contractors or
mechanics approved by Owner, such approval not unreasonably to be withheld
(notwithstanding the foregoing, all Alterations requiring mechanics in trades
with respect to which Owner has adopted or may hereafter adopt a list or lists
of approved contractors shall be made only by contractors selected by Tenant
from such list or lists);
D. No Alteration shall affect any part of the Building
other than the Demised Premises or adversely affect any service required to be
furnished by Owner to Tenant or to any other tenant or occupant of the Building
(including, without limitation, the Building-wide standard systems required to
provide elevator, heat, ventilation, air-conditioning and electrical and
plumbing services in the Building);
E. No Alteration shall reduce the value or utility of the
Building or any portion thereof;
F. No Alteration shall affect the Certificate of Occupancy
for the Building or the Demised Premises;
G. No Alteration shall affect the outside appearance of
the Building or the color or style of any venetian blinds (except that Tenant
may remove any venetian blinds provided that they are promptly replaced by
Tenant with blinds of a similar type, material and color);
H. All business machines and mechanical equipment shall be
placed and maintained by Tenant in settings sufficient, in Owner's judgment, to
absorb and prevent vibration, noise and annoyance to other tenants or occupants
of the Building;
-3-
<PAGE>
I. Tenant shall submit to Owner detailed plans and
specifications stamped by Tenant's architect (including layout, architectural,
mechanical and structural drawings) for each proposed Alteration and shall not
commence any such Alteration without first obtaining Owner's approval of such
plans and specifications and following the completion of each Alteration, Tenant
shall submit to Owner a computerized "as built" drawing file for the Demised
Premises (or if the Demised Premises comprise more than one (1) floor, for each
floor of the Demised Premises being altered); such file will be in DXF format
and contain, on a separate layer, all ceiling-height partitions and doors within
the Demised Premises (or if the Demised Premises comprise more than one (1)
floor, within each floor of the Demised Premises being altered);
J. Prior to the commencement of each proposed Alteration,
Tenant shall have procured and paid for and exhibited to Owner, so far as the
same may be required from time to time, all permits, approvals and
authorizations of all Governmental Authorities (as defined in Section 6.01.)
having or claiming jurisdiction;
K. Prior to the commencement of each proposed Alteration,
Tenant shall furnish to Owner duplicate original policies of workmen's com-
pensation insurance covering all persons to be employed in connection with such
Alteration, including those to be employed by all contractors and
subcontractors, and of comprehensive public liability insurance (including
property damage coverage) in which Owner, its agents, the holder of any Mortgage
(as defined in Section 7.01.) and any lessor under any Superior Lease (as
defined in Section 7.01.) shall be named as parties insured, which policies
shall be issued by companies, and shall be in form and amounts, satisfactory to
Owner and shall be maintained by Tenant until the completion of such Alteration;
L. In the event Owner or its agents employ any independent
architect or engineer to examine any plans or specifications submitted by Tenant
to Owner in connection with any proposed Alteration, Tenant agrees to pay to
Owner a sum equal to any reasonable fees incurred by Owner in connection
therewith.
M. All fireproof wood test reports, electrical and air
conditioning certificates, and all other permits, approvals and certificates
required by all Governmental Authorities shall be timely obtained by Tenant and
submitted to Owner;
N. All Alterations, once commenced, shall be made promptly
and in a good and workmanlike manner;
O. Notwithstanding Owner's approval of plans and
specifications for any Alteration, all Alterations shall be made and performed
in full compliance with all Legal Requirements (as defined in Section 6.01.) and
with all applicable rules, orders, regulations and requirements of the New York
Board of Fire Underwriters and the New York Fire Insurance Rating Organization
or any similar body;
P. All Alterations shall be made and performed in
accordance with the Building Rules and Building Rules for Alterations;
Q. All materials and equipment to be installed,
incorporated or located in the Demised Premises as a result of all Alterations
shall be new and first quality;
R. No materials or equipment shall be subject to any lien,
encumbrance, chattel mortgage or title retention or security agreement of any
kind;
S. Tenant, before commencement of each Alteration, shall
furnish to Owner a performance bond or other security satisfactory to Owner, in
an amount at least equal to the estimated cost of such Alteration, guaranteeing
the performance and payment thereof;
-4-
<PAGE>
T. No Alteration shall be commenced unless any preceding
Alteration shall have been fully paid for and proof of such payment furnished to
Owner;
U. Following the completion of each Alteration, Tenant, at
Tenant's expense, shall obtain certificates of final approval of such Alteration
required by any Governmental Authority and shall furnish Owner with copies
thereof.
V. Tenant agrees that Tenant will not install, affix, add
or paint in or on, nor permit, any work of visual art (as defined in the Federal
Visual Artists' Rights Act of 1990 or any successor law of similar import) or
other Alteration to be installed in or on, or affixed, added to, or painted on,
the interior or exterior of the Demised Premises, or any part thereof,
including, but not limited to, the walls, floors, ceilings, doors, windows,
fixtures and on land included as part of the Demised Premises, which work of
visual art or other Alteration would, under the provisions of the Federal Visual
Artists' Rights Act of 1990, or any successor law of similar import, require the
consent of the author or artist of such work or Alteration before the same could
be removed, modified, destroyed or demolished.
W. Under no circumstances shall Tenant be permitted to
locate any telecommunications facilities in the telecommunications closets of
the Building. With respect to Tenant's telecommunications facilities, (i)
Tenant shall contract separately with all providers of Tenant's
telecommunications facilities (each of which is referred to as a "Provider") and
pay each Provider for all services provided by it to Tenant, and (ii) each
Provider shall use, exclusively, the telecommunications cable distribution
system in the Building designated by Owner and shall contract separately with
the company providing cable distribution service in the Building (referred to as
the "Telecommunications Cable Distribution Company") for the supply and
maintenance of distribution cables. The Provider and Tenant shall comply with
all reasonable rules and regulations adopted by Owner and the Telecommunications
Cable Distribution Company. Owner shall not be liable to Tenant or anyone
claiming through or under Tenant for any damages, including, but not limited to,
special, incidental, remote or consequential damages, including, without
limitation, lost revenue, lost profits and additional operating or personnel
expenses arising from any acts, omissions or negligence of the Provider and the
Telecommunications Cable Distribution Company.
Section 3.02. No Consent to Contractor/No Mechanics Lien: Nothing in
------------------------------------------
this Lease shall be deemed or construed in any way as constituting the consent
or request of Owner, express or implied, by inference or otherwise, to any
contractor, subcontractor, laborer or materialmen, for the performance of any
labor or the furnishing of any material for any specific Alteration to, or
repair of, the Demised Premises, the Building, or any part of either. Any
mechanic's or other lien filed against the Demised Premises or the Building or
the Real Property for work claimed to have been done for, or materials claimed
to have been furnished to, Tenant or any person claiming through or under Tenant
or based upon any act or omission or alleged act or omission of Tenant or any
such person shall be discharged by Tenant, at Tenant's sole cost and expense,
within ten (10) days after the filing of such lien.
Section 3.03. Labor Harmony: Tenant shall not, at any time prior to
-------------
or during the Demised Term, directly or indirectly employ, or permit the
employment of, any contractor, mechanic or laborer in the Demised Premises,
whether in connection with any Alteration or otherwise, if such employment will
interfere or cause any conflict with other contractors, mechanics, or laborers
engaged in the construction, maintenance or operation of the Building by Owner,
Tenant or others. In the event of any such interference or conflict, Tenant,
upon demand of Owner, shall cause all contractors, mechanics or laborers causing
such interference or conflict to leave the Building immediately.
Section 3.04. Compliance with Fire Safety: Without in any way
-----------------------------
limiting the generality of the provisions of Section 3.01, all Alterations shall
be made and performed in full compliance with all standards and practices
adopted by Owner for fire safety in the Building. No Alteration shall affect
all or any part of any
-5-
<PAGE>
Class E Fire Alarm and Communication system installed in the Demised Premises,
except that in connection with any such Alteration Tenant may relocate certain
components of such system, provided (i) such relocation shall be performed in a
manner first approved by Owner, (ii) the new location of any such component
shall be first approved by Owner, (iii) prior to any such relocation Tenant
shall submit to Owner detailed plans and specifications therefor which shall be
first approved by Owner and (iv) Owner shall have the election of relocating
such components either by itself or by its contractors, in which event all
expenses incurred by Owner shall be reimbursed by Tenant upon demand of Owner,
as additional rent.
Section 3.05. Sprinklers: The Demised Premises shall contain a
----------
sprinkler system and notwithstanding anything to the contrary set forth in
Sections 5.01 and 6.01, Owner, at Owner's expense, shall perform routine
maintenance of, and shall repair and replace if necessary, said sprinkler system
and any replacements thereof, unless such repair or replacement is due to
Tenant's acts, omissions or negligence, in which event Owner shall repair or
replace same, at Tenant's sole cost and expense. Owner shall also perform
controlled inspections of said sprinkler system as and when required by law and
Tenant shall give Owner reasonable access to perform such repairs, maintenance
and inspections. Any sprinkler system and any replacements thereof whether made
at Tenant's expense or Owner's expense, shall be deemed the property of Owner.
Section 3.06. Asbestos or Other Hazardous Material: If any Legal
--------------------------------------
Requirement or any Governmental Authority requires that any asbestos or other
hazardous material contained in or about the Demised Premises be removed or
dealt with in any particular manner in connection with any Alterations of the
Demised Premises or otherwise, then it shall be Tenant's obligation, at Tenant's
expense, to remove or so deal with such asbestos or other hazardous material in
accordance with all such laws, orders, rules and regulations. In the event
Tenant is required to remove or so deal with such asbestos or other hazardous
material in accordance with the provisions of the foregoing sentence then,
notwithstanding anything to the contrary contained herein, Owner, at Owner's
election, shall have the option to itself remove or so deal with such asbestos
or other hazardous material and, in such event, Tenant shall pay to Owner all of
Owner's costs in connection therewith within ten (10) days next following the
rendition of a statement thereof by Owner to Tenant.
Section 3.07. Dispute Resolution: Any dispute with respect to the
-------------------
reasonability of any failure or refusal of Owner to grant its consent or
approval to any request for such consent or approval pursuant to the provisions
of Section 3.01 with respect to which request Owner has agreed, in such Section
not unreasonably to withhold such consent or approval, shall be determined by
arbitration in accordance with the provisions of Article 36.
Section 3.08. Fire Alarm and Communication System Connection Fees:
------------------------------------------------------
In the event that Tenant, pursuant to the provisions of this Lease, including,
but not limited to, the provisions of this Article 3 and Article 6, connects any
of the following equipment to any Class E Fire Alarm and Communication system
installed in the Demised Premises, Tenant shall pay to Owner as a one (1) time
connection fee the following sums set forth opposite the equipment listed below
(which sums shall be subject to increases due to increases in the cost to Owner
of operating and maintaining such Class E Fire Alarm and Communication system
over such costs on the date of this Lease):
A. Speakers in excess of 4 per
floor of the Demised Premises (or
if the Demised Premises contain
less than one (1) floor, in excess
of four in the Demised Premises) $500.00 per device
B. Strobe Lights (single unit) $100.00 per device
C. Combination Speaker/Strobe
-6-
<PAGE>
light $250.00 per device
D. Duct Detectors (supplementary
air conditioning systems) $500.00 per point
E. Smoke Detectors (multi-purpose) $500.00 per point
F. Preaction Sprinkler System:
waterflow $500.00 per point
tamper $500.00 per point
G. Warden Phone (additional) $1,000.00 per unit
H. Fail Safe Door Release $250.00 per connection
ARTICLE 4
OWNERSHIP OF IMPROVEMENTS
-------------------------
Section 4.01. General Rights of Owner and Tenant : All
-------------------------------------------
appurtenances, fixtures, improvements, additions and other property attached to
or installed in the Demised Premises, whether by Owner or Tenant or others, and
whether at Owner's expense, or Tenant's expense, or the joint expense of Owner
and Tenant, shall be and remain the property of Owner, except that any such
fixtures, improvements, additions and other property installed at the sole
expense of Tenant with respect to which Tenant has not been granted any credit
or allowance by Owner, whether pursuant to Addendum A or otherwise, and which
are removable without material damage to the Demised Premises shall be and
remain the property of Tenant and are referred to as "Tenant's Personal
------------------
Property". Any replacements of any property of Owner, whether made at Tenant's
- --------
expense or otherwise, shall be and remain the property of Owner.
ARTICLE 5
REPAIRS
-------
Section 5.01. Tenant's Repair Obligations: Tenant shall take good
----------------------------
care of the Demised Premises (including, but not limited to, any Class E Fire
Alarm and Communication system and any sprinkler system installed therein and
any installations made or equipment installed therein as a result of any
requirement of New York City Local Law #16 of 1984 or any successor law or like
import) and, at Tenant's sole cost and expense, shall make all repairs and
replacements, structural and otherwise, ordinary and extraordinary, foreseen and
unforeseen as and when needed to preserve the Demised Premises (including, but
not limited to, any Class E Fire Alarm and Communication system and any
installations made or equipment installed therein as a result of any requirement
of New York City Local Law #16 of 1984 or any successor law of like import) in
good and safe working order and in first class repair and condition, except that
Tenant shall not be required to make any repairs or replacements to said
sprinkler system in the Demised Premises and any structural repairs or
structural replacements to the Demised Premises unless necessitated or
occasioned by the acts, omissions or negligence of Tenant or any person claiming
through or under Tenant or any of their servants, employees, contractors,
agents, visitors or licensees, or by the use or occupancy or manner of use or
occupancy of the Demised Premises by Tenant or any such person. For the
purposes of this Article, any repairs or work involving asbestos or other
hazardous materials or involving compliance with Local Laws #5 of 1973, #16 of
1984, #58 of 1987 and the Americans With Disabilities Act and any successor laws
of like import shall be deemed to be non-structural repairs or replacements.
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<PAGE>
Without affecting Tenant's obligations set forth in the preceding sentence,
Tenant, at Tenant's sole cost and expense, shall also (i) make all repairs and
replacements, and perform all maintenance as and when necessary, to the lamps,
tubes, ballasts, and starters in the lighting fixtures installed in the Demised
Premises, (ii) make all repairs and replacements, as and when necessary, to
Tenant's Personal Property and to any Alterations made or performed by or on
behalf of Tenant or any person claiming through or under Tenant, and (iii) if
the Demised Premises shall include any space on any ground, street, mezzanine or
basement floor in the Building, make all replacements, as and when necessary, to
all windows and plate and other glass in, on or about such space, and obtain and
maintain, throughout the Demised Term, plate glass insurance policies issued by
companies, and in form and amounts, satisfactory to Owner, in which Owner, its
agents and any lessor under any ground or underlying lease shall be named as
parties insured, and (iv) perform all maintenance and make all repairs and
replacements, as and when necessary, to any air conditioning equipment, private
elevators, escalators, conveyors or mechanical systems (other than the
Building's standard equipment and systems) which may be installed in the Demised
Premises by Owner, Tenant or others. However, the provisions of the foregoing
sentence shall not be deemed to give to Tenant any right to install air
conditioning equipment, elevators, escalators, conveyors or mechanical systems.
All repairs and replacements made by or on behalf of Tenant or any person
claiming through or under Tenant shall be made and performed in conformity with,
and subject to the provisions of Article 3 and shall be at least equal in
quality and class to the original work or installation. The necessity for, and
adequacy of, repairs and replacements pursuant to this Article 5 shall be
measured by the standard which is appropriate for first class office buildings
of similar construction and class in the Borough of Manhattan, City of New York.
ARTICLE 6
COMPLIANCE WITH LAWS
--------------------
Section 6.01. General Covenants: Tenant, at Tenant's sole cost and
-----------------
expense, shall comply with all Legal Requirements (hereinafter defined) which
shall impose any duty upon Owner or Tenant with respect to the Demised Premises
or the use or occupation thereof, including, but not limited to, any requirement
that asbestos or other hazardous material be removed or dealt with in any
particular manner, except that Tenant shall not be required to make any
structural Alterations in order so to comply unless such Alterations shall be
necessitated or occasioned, in whole or in part, by the acts, omissions, or
negligence of Tenant or any person claiming through or under Tenant, or any of
their servants, employees, contractors, agents, visitors or licensees, or by the
use or occupancy or manner of use or occupancy of the Demised Premises by Tenant
or by any such person. For all purposes of this Lease the term "Legal
-----
Requirements" shall mean all present and future laws, codes, ordinances,
- ------------
statutes, requirements, orders and regulations, ordinary and extraordinary,
foreseen and unforeseen (including, but not limited to, the New York State
Energy Conservation Construction Code, New York City Local Laws #5 of 1973, #16
of 1984 and #58 of 1987, the Americans with Disabilities Act, New York City
Executive Order No. 50 of April 25, 1980 and the rules and regulations
promulgated thereunder and any successor laws of like import) of any
Governmental Authority (hereinafter defined) and all directions, requirements,
orders and notices of violations thereof. For all purposes of this Lease, the
term "Governmental Authority" shall mean the United States of America, the State
----------------------
of New York, the County of New York, the Borough of Manhattan, the City of New
York, any political subdivision thereof and any agency, department, commission,
board, bureau or instrumentality of any of the foregoing, now existing or
hereafter created, having jurisdiction over Owner, Tenant, this Lease or the
Real Property or any portion thereof. Any work or installations made or
performed by or on behalf of Tenant or any person claiming through or under
Tenant pursuant to the provisions of this Article shall be made in conformity
with, and subject to the provisions of Article 3. For the purposes of this
Article, any requirement that any asbestos or other hazardous material be
removed or dealt with in any particular manner or any Alterations required to
comply with Local Law #5 of 1973, #16 of 1984, #58 of 1987 and the Americans
With Disabilities Act and any successor laws of like import shall be deemed to
be a non-structural Alteration. Compliance with any requirement regarding
asbestos or other hazardous material shall be made in conformity with the
provisions of Section 3.06.
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<PAGE>
Section 6.02. Tenant's Compliance with Owner's Fire Insurance:
------------------------------------------------------
Tenant shall not do anything, or permit anything to be done, in or about the
Demised Premises which shall (i) invalidate or be in conflict with the
provisions of any fire and/or other insurance policies covering the Building or
any property located therein, or (ii) result in a refusal by fire insurance
companies of good standing to insure the Building or any such property in
amounts reasonably satisfactory to Owner, or (iii) subject Owner to any
liability or responsibility for injury to any person or property by reason of
any business operation being conducted in the Demised Premises, or (iv) cause
any increase in the fire insurance rates applicable to the Building or property
located therein at the beginning of the Demised Term or at any time thereafter.
Tenant, at Tenant's expense, shall comply with all present and future rules,
orders, regulations and/or requirements of the New York Board of Fire
Underwriters and the New York Fire Insurance Rating Organization or any similar
body and the issuer of any insurance obtained by Owner covering the Building
and/or the Real Property, whether ordinary or extraordinary, foreseen or
unforeseen, including, but not limited to, any requirement that asbestos or
other hazardous material be removed or dealt with in any particular manner and
any requirement of New York City Local Law #5 of 1973, #16 of 1984, #58 of 1987
and the Americans With Disabilities Act or any successor laws of like import.
Section 6.03. Fire Insurance Rates: In any action or proceeding
---------------------
wherein Owner and Tenant are parties, a schedule or "make up" of rates
applicable to the Building or property located therein issued by the New York
Fire Insurance Rating Organization, or other similar body fixing such fire
insurance rates, shall be conclusive evidence of the facts therein stated and of
the several items and charges in the fire insurance rates then applicable to the
Building or property located therein.
ARTICLE 7
SUBORDINATION, ATTORNMENT, ETC.
-------------------------------
Section 7.01. Lease Subordination: This Lease and all rights of
--------------------
Tenant under this Lease are, and shall remain, unconditionally subject and
subordinate in all respects to all ground and underlying leases now or hereafter
in effect affecting the Real Property or any portion thereof, and to all
mortgages which may now or hereafter affect such leases or the Real Property,
and to all advances made or hereafter to be made under such mortgages, and to
all renewals, modifications, consolidations, correlations, replacements and
extensions of, and substitutions for, such leases and mortgages (such leases as
above described are referred to herein collectively as the "Superior Lease" and
---------------
such mortgages as above described are referred to herein collectively as the
"Mortgage"). The foregoing provisions of this Section shall be self-operative
--------
and no further instrument of subordination shall be required. In confirmation
of such subordination, Tenant shall execute and deliver promptly any certificate
or other instrument which Owner, or any lessor under any Superior Lease, or any
holder of any Mortgage may request, and Tenant hereby, irrevocably constitutes
and appoints Owner and all such lessors and holders, acting jointly or
severally, as Tenant's agent and attorney-in-fact to execute any such
certificate or other instrument for or on behalf of Tenant. If, in connection
with obtaining financing with respect to the Building, the Real Property, or the
interest of the lessee under any Superior Lease, any recognized lending
institution shall request reasonable modifications of this Lease as a condition
of such financing, Tenant covenants not unreasonably to withhold or delay its
agreement to such modifications, provided that such modifications do not
materially increase the obligations, or materially and adversely affect the
rights, of Tenant under this Lease. No act or failure to act on the part of
Owner which would entitle Tenant under the terms of this Lease, or by law, to be
relieved of Tenant's obligations hereunder or to terminate this Lease shall
result in a release or termination of such obligations or a termination of this
Lease unless (i) Tenant shall have first given written notice of Owner's act or
failure to act to the holder or holders of any Mortgage and/or the lessor under
any Superior Lease of whom Tenant has been given written notice, specifying the
act or failure to act on the part of Owner which could or would give basis to
Tenant's rights; and (ii) the holder or holders of such Mortgage and/or the
lessors under any Superior Lease, after receipt of such notice, have failed or
refused to correct or cure the condition complained of within a reasonable time
thereafter, but nothing contained in this sentence shall be deemed to impose any
obligation on any such holder or lessor to correct or cure any such
-9-
<PAGE>
condition. "Reasonable time" as used above means and includes a reasonable time
---------------
to obtain possession of the Building if any such holder or lessor elects to do
so (provided such holder or lessor institutes proceedings to obtain possession
within a reasonable time after notice from Tenant pursuant to the foregoing
provisions and conducts such proceedings with reasonable diligence) and a
reasonable time after so obtaining possession to correct or cure the condition
if such condition is determined to exist (provided such holder or lessor
commences said cure within ten (10) days after obtaining possession and
prosecutes the work required to cure with reasonable diligence).
Section 7.02. Tenant Attornment: If, at any time prior to the
------------------
expiration of the Demised Term, any Superior Lease under which Owner then shall
be the lessee shall terminate or be terminated for any reason, or the holder of
any Mortgage comes into possession of the Real Property or the Building or the
estate created by any Superior Lease by a receiver or otherwise, Tenant agrees,
at the election and upon demand of any owner of the Real Property, or of the
holder of any Mortgage so in possession, or of any lessee under any Superior
Lease covering the premises which include the Demised Premises, to attorn, from
time to time, to any such owner, holder, or lessee, upon the then executory
terms and conditions of this Lease, for the remainder of the term originally
demised in this Lease, provided that such owner, holder or lessee, as the case
may be, shall then be entitled to possession of the Demised Premises. The
provisions of this Section shall enure to the benefit of any such owner, holder,
or lessee, shall apply notwithstanding that, as a matter of law, this Lease may
terminate upon the termination of any Superior Lease, shall be self-operative
upon any such demand, and no further instrument shall be required to give effect
to said provisions. Tenant, however, upon demand of any such owner, holder, or
lessee, agrees to execute, from time to time, instruments in confirmation of the
foregoing provisions of this Section, satisfactory to any such owner, holder, or
lessee, acknowledging such attornment and setting forth the terms and conditions
of its tenancy. Nothing contained in this Section shall be construed to impair
any right otherwise exercisable by any such owner, holder, or lessee.
Notwithstanding anything to the contrary set forth in this Article no such
owner, holder or lessee shall be bound by (i) any payment of any instalment of
Fixed Rent or increases therein or any additional rent which may have been made
more than thirty (30) days before the due date of such instalment (except
prepayments in the nature of security for the performance of Tenant's
obligations under this Lease), or (ii) any amendment or modification to this
Lease which is made without its consent.
Section 7.03. Tenant Estoppel Certificate: From time to time, within
---------------------------
seven (7) days next following Owner's request, Tenant shall deliver to Owner a
written statement executed and acknowledged by Tenant, in form satisfactory to
Owner, (i) stating that this Lease is then in full force and effect and has not
been modified (or if modified, setting forth the specific nature of all
modifications), and (ii) setting forth the date to which the Fixed Rent has been
paid, and (iii) stating whether or not, to the best knowledge of Tenant, Owner
is in default under this Lease, and, if Owner is in default, setting forth the
specific nature of all such defaults and (iv) stating that Tenant has accepted
and occupied the Demised Premises and all improvements required to be made by
Owner pursuant to the provisions of this Lease, have been made, if such be the
case. Tenant acknowledges that any statement delivered pursuant to this Section
may be relied upon by any purchaser or owner of the Building, or of the Real
Property, or any part thereof, or of Owner's interest in the Building or the
Real Property or any Superior Lease, or by the holder of any Mortgage, or by any
assignee of the holder of any Mortgage, or by any lessor under any Superior
Lease.
Section 7.04. Owner Assignment of Lease and Rents: If Owner assigns
------------------------------------
its interest in this Lease, or the rents payable hereunder, to the holder of any
Mortgage or the lessor under any Superior Lease, whether the assignment shall be
conditional in nature or otherwise, Tenant agrees that (a) the execution
thereof by Owner and the acceptance by such holder or lessor shall not be deemed
an assumption by such holder or lessor of any of the obligations of the Owner
under this Lease unless such holder or lessor shall, by written notice sent to
Tenant, specifically otherwise elect; and (b) except as aforesaid, such holder
or lessor shall be treated as having assumed Owner's obligations hereunder only
upon the foreclosure of such holder's Mortgage or the termination of such
lessor's Superior Lease and the taking of possession of the Demised Premises by
such holder or lessor, as the case may be.
-10-
<PAGE>
ARTICLE 8
PROPERTY LOSS, ETC.
-------------------
Section 8.01. Any Building employee to whom any property shall be
entrusted by or on behalf of Tenant shall be deemed to be acting as Tenant's
agent with respect to such property and neither Owner nor Owner's agents shall
be liable for any loss of or damage to any such property by theft or otherwise.
Neither (i) the performance by Owner, Tenant or others of any decorations,
repairs, alterations, additions or improvements in or to the Building or the
Demised Premises, nor (ii) the failure of Owner or others to make any such
decorations, repairs, alterations, additions or improvements, nor (iii) any
damage to the Demised Premises or to the property of Tenant, nor any injury to
any persons, caused by other tenants or persons in the Building, or by
operations in the construction of any private, public or quasi-public work, or
by any other cause, nor (iv) any latent defect in the Building or in the Demised
Premises, nor (v) any temporary or permanent closing, darkening or bricking up
of any windows of the Demised Premises for any reason whatsoever including, but
not limited to, Owner's own acts, nor (vi) any inconvenience or annoyance to
Tenant or injury to or interruption of Tenant's business by reason of any of the
events or occurrences referred to in the foregoing subdivisions (i) through (v),
shall constitute an actual or constructive eviction, in whole or in part, or
entitle Tenant to any abatement or diminution of rent, or relieve Tenant from
any of its obligations under this Lease, or impose any liability upon Owner, or
its agents, or any lessor under any Superior Lease, other than such liability as
may be imposed upon Owner by law for Owner's negligence or the negligence of
Owner's agents, servants or employees in the operation or maintenance of the
Building or for the breach by Owner of any express covenant of this Lease on
Owner's part to be performed. Tenant's taking possession of the Demised
Premises shall be conclusive evidence, as against Tenant, that, at the time such
possession was so taken, the Demised Premises and the Building were in good and
satisfactory condition and Owner's Initial Construction was substantially
completed.
ARTICLE 9
DESTRUCTION-FIRE OR OTHER CASUALTY
----------------------------------
Section 9.01. Owner's Repair Obligations: If the Demised Premises
--------------------------
shall be damaged by fire or other casualty and if Tenant shall give prompt
notice to Owner of such damage, Owner, at Owner's expense, shall repair such
damage. However, Owner shall have no obligation to repair any damage to, or to
replace, Tenant's Personal Property or any other property or effects of Tenant.
Except as otherwise provided in Section 9.03, if the entire Demised Premises
shall be rendered untenantable by reason of any such damage, the Fixed Rent
shall abate for the period from the date of such damage to the date when such
damage shall have been repaired, and if only a part of the Demised Premises
shall be so rendered untenantable, the Fixed Rent shall abate for such period in
the proportion which the area of the part of the Demised Premises so rendered
untenantable bears to the total area of the Demised Premises. However, if,
prior to the date when all of such damage shall have been repaired, any part of
the Demised Premises so damaged shall be rendered tenantable and shall be used
or occupied by Tenant or any person or persons claiming through or under Tenant,
then the amount by which the Fixed Rent shall abate shall be equitably
apportioned for the period from the date of any such use or occupancy to the
date when all such damage shall have been repaired. Tenant hereby expressly
waives the provisions of Section 227 of the New York Real Property Law, and of
any successor law of like import then in force, and Tenant agrees that the
provisions of this Article shall govern and control in lieu thereof. Notwith-
standing the foregoing provisions of this Section, if, prior to or during the
Demised Term, (i) the Demised Premises shall be totally damaged or rendered
11-
<PAGE>
wholly untenantable by fire or other casualty, and if Owner shall decide not to
restore the Demised Premises, or (ii) the Building shall be so damaged by fire
or other casualty that, in Owner's opinion, substantial alteration, demolition,
or reconstruction of the Building shall be required (whether or not the Demised
Premises shall have been damaged or rendered untenantable), then, in any of such
events, Owner, at Owner's option, may give to Tenant, within ninety (90) days
after such fire or other casualty, a five (5) days' notice of termination of
this Lease and, in the event such
-12-
<PAGE>
notice is given, this Lease and the Demised Term shall come to an end and expire
(whether or not said term shall have commenced) upon the expiration of said five
(5) days with the same effect as if the date of expiration of said five (5) days
were the Expiration Date, the Fixed Rent shall be apportioned as of such date
and any prepaid portion of Fixed Rent for any period after such date shall be
refunded by Owner to Tenant.
Section 9.02. Owner's Subrogation Waiver Provisions: Owner shall
---------------------------------------
attempt to obtain and maintain, throughout the Demised Term, in Owner's fire
insurance policies covering the Building, provisions to the effect that such
policies shall not be invalidated should the insured waive, in writing, prior to
a loss, any or all right of recovery against any party for loss occurring to the
Building. In the event that at any time Owner's fire insurance carriers shall
exact an additional premium for the inclusion of such or similar provisions,
Owner shall give Tenant notice thereof. In such event, if Tenant agrees, in
writing, to reimburse Owner for such additional premium for the remainder of the
Demised Term, Owner shall require the inclusion of such or similar provisions by
Owner's fire insurance carriers. As long as such or similar provisions are
included in Owner's fire insurance policies then in force, Owner hereby waives
(i) any obligation on the part of Tenant to make repairs to the Demised Premises
necessitated or occasioned by fire or other casualty that is an insured risk
under such policies, and (ii) any right of recovery against Tenant, any other
permitted occupant of the Demised Premises, and any of their servants,
employees, agents or contractors, for any loss occasioned by fire or other
casualty which is an insured risk under such policies. In the event that at any
time Owner's fire insurance carriers shall not include such or similar
provisions in Owner's fire insurance policies, the waivers set forth in the
foregoing sentence shall, upon notice given by Owner to Tenant, be deemed of no
further force or effect.
Section 9.03. Tenant Negligence: Except to the extent expressly
------------------
provided in Section 9.02, nothing contained in this Lease shall relieve Tenant
of any liability to Owner or to its insurance carriers which Tenant may have
under law or the provisions of this Lease in connection with any damage to the
Demised Premises or the Building caused by fire or other casualty.
Notwithstanding the provisions of Section 9.01, if any such damage, occurring
after any date when the waivers set forth in Section 9.02 are no longer in force
and effect, is due to the fault or neglect of Tenant, any person claiming
through or under Tenant, or any of their servants, employees, agents,
contractors, visitors or licensees, then there shall be no abatement of Fixed
Rent by reason of such damage.
Section 9.04. Tenant Subrogation Waiver Provisions: Tenant
------------------------------------------
acknowledges that it has been advised that Owner's insurance policies do not
cover Tenant's Personal Property or any other property of Tenant in the Demised
Premises; accordingly, it shall be Tenant's obligation to obtain and maintain
insurance covering its property in the Demised Premises and loss of profits
including, but not limited to, water damage coverage and business interruption
insurance. Tenant shall attempt to obtain and maintain, throughout the Demised
Term, in Tenant's fire and other insurance policies covering Tenant's Personal
Property and other property of Tenant in the Demised Premises, and Tenant's use
and occupancy of the Demised Premises, and/or Tenant's profits (and shall cause
any other permitted occupants of the Demised Premises to attempt to obtain and
maintain, in similar policies), provisions to the effect that such policies
shall not be invalidated should the insured waive, in writing, prior to a loss,
any or all right of recovery against any party for loss occasioned by fire or
other casualty which is an insured risk under such policies. In the event that
at any time the fire insurance carriers issuing such policies shall exact an
additional premium for the inclusion of such or similar provisions, Tenant shall
give Owner notice thereof. In such event, if Owner agrees, in writing, to
reimburse Tenant or any person claiming through or under Tenant, as the case may
be, for such additional premium for the remainder of the Demised Term, Tenant
-13-
<PAGE>
shall require the inclusion of such or similar provisions by such insurance
carriers. As long as such or similar provisions are included in such insurance
policies then in force, Tenant hereby waives (and agrees to cause any other
permitted occupants of the Demised Premises to execute and deliver to Owner
written instruments waiving) any right of recovery against Owner, any lessors
under any Superior Leases, the holders of any Mortgage, and all other tenants or
occupants of the Building, and any servants, employees, agents or contractors of
Owner, or of any such lessor, or holder or any such other tenants or occupants,
for any loss occasioned by fire or other casualty which is an insured risk under
such policies. In the event that at any time such insurance carriers shall not
include such or
-14-
<PAGE>
similar provisions in any such insurance policy, the waiver set forth in the
foregoing sentence (or in any written instrument executed by any other permitted
occupant of the Demised Premises) shall, upon notice given by Tenant to Owner,
be deemed of no further force or effect with respect to any insured risks under
such policy from and after the giving of such notice. During any period while
any such waiver of right of recovery is in effect, Tenant, or any other
permitted occupant of the Demised Premises, as the case may be, shall look
solely to the proceeds of such policies to compensate Tenant or such other
permitted occupant for any loss occasioned by fire or other casualty which is an
insured risk under such policies.
ARTICLE 10
EMINENT DOMAIN
--------------
Section 10.01. Taking of the Demised Premises: If the whole of the
-------------------------------
Demised Premises shall be acquired for any public or quasi-public use or
purpose, whether by condemnation or by deed in lieu of condemnation, this Lease
and the Demised Term shall end as of the date of the vesting of title with the
same effect as if said date were the Expiration Date. If only a part of the
Demised Premises shall be so acquired or condemned then, except as otherwise
provided in this Section, this Lease and the Demised Term shall continue in
force and effect but, from and after the date of the vesting of title, the Fixed
Rent shall be reduced in the proportion which the area of the part of the
Demised Premises so acquired or condemned bears to the total area of the Demised
Premises immediately prior to such acquisition or condemnation. If only a part
of the Real Property shall be so acquired or condemned, then (i) whether or not
the Demised Premises shall be affected thereby, Owner, at Owner's option, may
give to Tenant, within sixty (60) days next following the date upon which Owner
shall have received notice of vesting of title, a five (5) days' notice of
termination of this Lease, and (ii) if the part of the Real Property so acquired
or condemned shall contain more than ten (10%) percent of the total area of the
Demised Premises immediately prior to such acquisition or condemnation, or if,
by reason of such acquisition or condemnation, Tenant no longer has reasonable
means of access to the Demised Premises, Tenant, at Tenant's option, may give to
Owner, within sixty (60) days next following the date upon which Tenant shall
have received notice of vesting of title, a five (5) days' notice of termination
of this Lease. In the event any such five (5) days' notice of termination is
given, by Owner or Tenant, this Lease and the Demised Term shall come to an end
and expire upon the expiration of said five (5) days with the same effect as if
the date of expiration of said five (5) days were the Expiration Date. If a
part of the Demised Premises shall be so acquired or condemned and this Lease
and the Demised Term shall not be terminated pursuant to the foregoing
provisions of this Section, Owner, at Owner's expense, shall restore that part
of the Demised Premises not so acquired or condemned to a self-contained rental
unit. In the event of any termination of this Lease and the Demised Term
pursuant to the provisions of this Section, the Fixed Rent shall be apportioned
as of the date of such termination and any prepaid portion of Fixed Rent for any
period after such date shall be refunded by Owner to Tenant.
Section 10.02. Condemnation Award or Claims: In the event of any such
----------------------------
acquisition or condemnation of all or any part of the Real Property, Owner shall
be entitled to receive the entire award for any such acquisition or
condemnation, Tenant shall have no claim against Owner or the condemning
authority for the value of any unexpired portion of the Demised Term and Tenant
hereby expressly assigns to Owner all of its right in and to any such award.
Nothing contained in this Section shall be deemed to prevent Tenant from making
a claim in any condemnation proceedings for the value of any items of Tenant's
Personal Property which are compensable, in law, as trade fixtures.
-15-
<PAGE>
ARTICLE 11
ASSIGNMENT AND SUBLETTING
-------------------------
Section 11.01. General Covenant: Tenant, for itself, its heirs,
----------------
distributees, executors, administrators, legal representatives, successors and
assigns, covenants that, without the prior consent of Owner in each instance, it
shall not (i) assign whether by merger, consolidation or otherwise, mortgage or
encumber its interest in this Lease, in whole or in part, or (ii) sublet, or
permit the subletting of, the Demised Premises or any part thereof, or (iii)
permit the Demised Premises or any part thereof to be occupied, or used for desk
space, mailing privileges or otherwise, by any person other than Tenant. The
sale, pledge, transfer or other alienation of (a) any of the issued and
outstanding capital stock of any corporate Tenant (unless such stock is publicly
traded on a recognized security exchange or over-the counter market) or (b) any
interest in any partnership or joint venture Tenant, however accomplished, and
whether in a single transaction or in a series of related and/or unrelated
transactions, shall be deemed for the purposes of this Section as an assignment
of this Lease which shall require the prior consent of Owner in each instance.
Section 11.02. Owner's Rights Upon Assignment: If Tenant's interest
------------------------------
in this Lease is assigned, whether or not in violation of the provisions of this
Article, Owner may collect rent from the assignee; if the Demised Premises or
any part thereof are sublet to, or occupied by, or used by, any person other
than Tenant, whether or not in violation of this Article, Owner, after default
by Tenant under this Lease, may collect rent from the subtenant, user or
occupant. In either case, Owner shall apply the net amount collected to the
rents reserved in this Lease, but neither any such assignment, subletting,
occupancy, or use, whether with or without Owner's prior consent, nor any such
collection or application, shall be deemed a waiver of any term, covenant or
condition of this Lease or the acceptance by Owner of such assignee, subtenant,
occupant or user as tenant. The consent by Owner to any assignment, subletting,
occupancy or use shall not relieve Tenant from its obligation to obtain the
express prior consent of Owner to any further assignment, subletting, occupancy
or use. If this Lease is assigned to any person or entity pursuant to any pro-
ceeding of the type referred to in Subsections 16.01(c) and 16.01(d), any and
all monies or other consideration payable or otherwise to be delivered in
connection with such assignment shall be paid or delivered to Owner, shall be
and remain the exclusive property of Owner and shall not constitute property of
Tenant or of the estate of Tenant within the meaning of any proceeding of the
type referred to in Subsections 16.01(c) and 16.01(d). Any and all monies or
other considerations constituting Owner's property under the preceding sentence
not paid or delivered to Owner shall be held in trust for the benefit of Owner
and shall be promptly paid to or turned over to Owner. Any person or entity to
which this Lease is assigned pursuant to any proceeding of the type referred to
in Subsections 16.01(c) and 16.01(d) shall be deemed without further act or deed
to have assumed all of the obligations arising under this Lease on and after the
date of such assignment. Any such assignee shall execute and deliver to Owner
upon demand an instrument confirming such assumption. The listing of any name
other than that of Tenant on any door of the Demised Premises or on any
directory or in any elevator in the Building, or otherwise, shall not operate to
vest in the person so named any right or interest in this Lease or in the
Demised Premises, or the Building, or be deemed to constitute, or serve as a
substitute for, any prior consent of Owner required under this Article, and it
is understood that any such listing shall constitute a privilege extended by
Owner which shall be revocable at Owner's will by notice to Tenant. Tenant
agrees to pay to Owner reasonable counsel fees incurred by Owner in connection
with any proposed assignment of Tenant's interest in this Lease or any proposed
subletting of the Demised Premises or any part thereof. Neither any assignment
of Tenant's interest in this Lease nor any subletting, occupancy or use of the
Demised Premises or any part thereof by any person other than Tenant, nor any
collection of rent by Owner from any person other than Tenant as provided in
this Section, nor any application of any such rent as provided in this Section
shall, in any circumstances, relieve Tenant of its obligation fully to observe
and perform the terms, covenants and conditions of this Lease on Tenant's part
to be observed or performed.
Section 11.03. Sublet Rights: A. (1) As long as Tenant is not
-------------
in default under any of the terms, covenants or conditions of this Lease on
Tenant's part to be observed or performed, Owner
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agrees not to unreasonably withhold Owner's prior consent to sublettings by
Tenant of all or parts of the Demised Premises to not more than two (2)
subtenants. Each such subletting shall be for undivided occupancy by the
subtenant of that part of the Demised Premises affected thereby, for the use
expressly permitted in this Lease, i.e., as general offices for an information
---
technology business, and at no time shall there be more than two (2) occupants,
including Tenant, in the Demised Premises.
(2) Without Owner's prior consent, Tenant shall not
(a) negotiate or enter into a proposed subletting with any tenant, subtenant or
occupant of any space in the Building or (b) list or otherwise publicly
advertise the Demised Premises or any part thereof for subletting at a rental
lower than the higher of (i) the Fixed Rent then in effect under this Lease,
allocable to the space sought to be sublet or (ii) the rental at which the Owner
is then offering to rent comparable space in the Building.
(3) At least thirty (30) days prior to any proposed
subletting, Tenant shall submit to Owner a statement (the "Proposed Sublet
----------------
Statement") containing the name and address of the proposed subtenant, the
- ---------
nature of the proposed subtenant's business and its current financial status, if
such status is obtained or obtainable by Tenant, and all of the principal terms
and conditions of the proposed subletting including, but not limited to, the
proposed commencement and expiration dates of the term thereof. Unless the pro-
posed sublet area shall constitute only an entire floor (or floors), the
Proposed Sublet Statement shall be accompanied by a floor plan delineating the
proposed sublet area.
(4) Owner may arbitrarily withhold consent to a
proposed subletting if, (a) in Owner's reasonable judgment, the occupancy of the
proposed subtenant will tend to impair the character or dignity of the Building
or impose any additional burden upon Owner in the operation of the Building or
(b) in Owner's reasonable judgment, the occupancy of the proposed subtenant will
tend to impair the reputation of (i) the Building as an information technology
center or (ii) the floor on which the proposed sublet area is located as a floor
devoted to information technology tenants, or (c) the proposed subtenant shall
be a person or entity with whom Owner is then negotiating or discussing to lease
space in the Building.
(5) In the event of any dispute between Owner and
Tenant as to the reasonableness of Owner's failure or refusal to consent to any
subletting, such dispute shall be submitted to arbitration in accordance with
the provisions of Article 36.
B. Notwithstanding the foregoing provisions of this
Section 11.03, Owner shall have the following rights with respect to each
proposed subletting by Tenant:
(1) In the event Tenant proposes to sublet all or
substantially all of the Demised Premises, Owner, at Owner's option, may give to
Tenant, within thirty (30) days after the submission by Tenant to Owner of the
Proposed Sublet Statement, a notice terminating this Lease on the date (referred
to as the "Earlier Termination Date") immediately prior to the proposed
--------------------------
commencement date of the term of the proposed subletting, as set forth in such
statement, and, in the event such notice is given, this Lease and the Demised
Term shall come to an end and expire on the Earlier Termination Date with the
same effect as if it were the Expiration Date, the Fixed Rent shall be
apportioned as of said Earlier Termination Date and any prepaid portion of Fixed
Rent for any period after such date shall be refunded by Owner to Tenant; or
(2) In the event Tenant proposes to sublet all or any
portion of the Demised Premises, Owner, at Owner's option, may give to Tenant,
within thirty (30) days after the submission by Tenant to Owner, of the Proposed
Sublet Statement, a notice electing to eliminate such portion of the Demised
Premises (said portion is referred to as the "Eliminated Space") from the
----------------
Demised Premises during the period (referred to as the "Elimination Period")
------------------
commencing on the date (referred to as "Elimination Date") immediately prior to
----------------
the proposed commencement date of the term of the proposed subletting, as set
forth in the Proposed Sublet
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Statement, and ending on the proposed expiration date of the term of the
proposed subletting, as set forth in the Proposed Sublet Statement, and in the
event such notice is given the following shall apply:
(a) The Eliminated Space shall be eliminated from the Demised
Premises during the Elimination Period;
(b) Tenant shall surrender the Eliminated Space to Owner on or
prior to the Elimination Date in the same manner as if said Date were
the Expiration Date;
(c) If the Eliminated Space shall constitute less than an entire
floor, (i) Owner, at Owner's expense, shall have the right to make any
alterations and installations in the Demised Premises required, in
Owner's judgment, reasonably exercised, to make the Eliminated Space a
self-contained rental unit with access through corridors to the
elevators and core toilets serving the Eliminated Space, and if the
Demised Premises shall contain any core toilets (for the purposes of
this Article core toilets shall be deemed to include any unisex
toilets) or any corridors (including any corridors proposed to be
constructed by Owner pursuant to this subdivision (c), providing
access from the Eliminated Space to the core area), (ii) Owner and any
tenant or other occupant of the Eliminated Space shall have the right
to use such toilets and corridors in common with Tenant and any other
permitted occupants of the Demised Premises, and the right to install
signs and directional indicators in or about such corridors indicating
the name and location of such tenant or other occupant;
(d) During the Elimination Period, the Fixed Rent, the Demised
Premises Area (as defined in Article 23) and Tenant's Electrical Share
(as defined in Section 29.05) shall each be reduced in the proportion
which the area of the Eliminated Space bears to the total area of the
Demised Premises immediately prior to the Elimination Date (including
an equitable portion of the area of any corridors referred to in
subdivision (c) of this Subsection 11.03.B.(2) as part of the area of
the Eliminated Space for the purpose of computing such reduction), and
in the event that the Eliminated Space shall be the entire Demised
Premises, during the Elimination Period, Tenant shall have no rights
with respect to the Demised Premises nor any obligations with respect
to the Demised Premises, including, but not limited to, any
obligations to pay Fixed Rent or any increases therein or any
additional rent, and any prepaid portion of Fixed Rent for any period
after the Elimination Date allocable to the Elimination Space shall be
refunded by Owner to Tenant;
(e) There shall be an equitable apportionment of any increase in
the Fixed Rent pursuant to Article 23 for the Escalation Year and Tax
Escalation Year (as defined in Article 23) in which said Elimination
Date shall occur;
(f) If the Elimination Period shall end prior to the Expiration
Date, the Eliminated Space, in its then existing condition, shall be
deemed restored to and once again a part of the Demised Premises
during the period (referred to as the "Restoration Period") commencing
------------------
on the date next following the expiration of the Elimination Period
and ending on the Expiration Date;
(g) During the Restoration Period, if any, the Fixed Rent, the
Demised Premises Area and Tenant's Electrical Share shall each be
increased in the proportion which the area of the Eliminated Space
bears to the total area of the Demised Premises immediately prior to
the commencement of the Restoration Period (including an equitable
portion of the area of any corridors referred to in subdivision (c) of
this Subsection 11.03.B.(2) as a part of the area of the Eliminated
Space for the purpose of computing such increase) and in the event
that the Eliminated Space shall be the entire Demised Premises, during
the Restoration Period, the Demised Premises, in its then existing
condition, shall be deemed restored to Tenant and Tenant shall have
all rights
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<PAGE>
with respect to the Demised Premises which are set forth in this Lease
and all obligations with respect to the Demised Premises which are set
forth in this Lease, including, but not limited to, the obligations
for the payment of Fixed Rent and any increases therein (as it would
have been adjusted if Tenant occupied the Demised Premises during the
Elimination Period) and any additional rent; and
(h) There shall be an equitable apportionment of any increase in
the Fixed Rent pursuant to Article 23 for the Escalation Year and Tax
Escalation Year in which the Restoration Period, if any, shall
commence.
However, notwithstanding the foregoing, Owner and Tenant acknowl-
edge the possibility that all or any of the tenants or occupants of
the Eliminated Space may not have vacated and surrendered all or any
portions of the Eliminated Space to Owner by the commencement of the
Restoration Period; accordingly, notwithstanding anything to the
contrary contained in the foregoing provisions of this Subsection B,
the following shall apply:
(x) the Restoration Period applicable to the Eliminated Space
shall commence on the commencement date of the Restoration Period with
respect to those portions, if any, of the Eliminated Space which are
vacant on the commencement of the Restoration Period and with respect
to those portions, if any, of the Eliminated Space which are not
vacant on the commencement of the Restoration Period on the respective
later date or dates upon which such portions of the Eliminated Space
become vacant and Owner gives notice to Tenant of such vacancy but the
Expiration Date shall not be affected thereby, the increases in the
Fixed Rent, the Demised Premises Area and Tenant's Electrical Share
shall be equitably adjusted to reflect the fact that all or any
portions of the Eliminated Space have not been restored to Tenant on
the commencement of the Restoration Period but are restored to Tenant
and included back in the Demised Premises on a date or dates after the
commencement of the Restoration Period;
(y) except as expressly set forth in this Subsection 11.03.B. to
the contrary, neither the validity of this Lease nor the obligations
of Tenant under this Lease shall be affected thereby; and
(z) Tenant waives any rights to rescind this Lease and to
recover any damages which may result from the failure of Owner to
deliver possession of all or any portions of the Eliminated Space on
the commencement of the Restoration Period; Owner agrees to institute
within thirty (30) days after the commencement of the Restoration
Period, possession proceedings against any tenants and occupants who
have not so vacated and surrendered all or any portions of the
Eliminated Space, and agrees to prosecute such proceedings with
reasonable diligence.
At the request of Owner, Tenant shall execute and deliver an instrument or
instruments, in form satisfactory to Owner, setting forth any modifications to
this Lease contemplated in or resulting from the operation of the foregoing
provisions of this Subsection 11.03; however, neither Owner's failure to request
any such instrument nor Tenant's failure to execute or deliver any such
instrument shall vitiate the effect of the foregoing provisions of this Section.
The failure by Owner to exercise any option under this Section 11.03 with
respect to any subletting shall not be deemed a waiver of such option with
respect to any extension of such subletting or any subsequent subletting of the
premises affected thereby or any other portion of the Demised Premises. Tenant
agrees to indemnify Owner from all loss, cost, liability, damage and expense,
including, but not limited to, reasonable counsel fees and disbursements,
arising from any claims against Owner by any broker or other person, for a
brokerage commission or other similar compensation in connection with any such
proposed subletting, in the event (a) Owner shall (i) fail or refuse to consent
to any proposed subletting, or (ii) exercise any of its options under this
Section 11.03, or (b) any proposed subletting shall fail to be consummated for
any reason whatsoever.
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<PAGE>
C. Tenant agrees that (1) any increase in the rental value
of the Demised Premises over and above the Fixed Rent payable pursuant to the
provisions of this Lease, as such Fixed Rent may be increased from time to time
pursuant to the provisions of this Lease, and (2) any consideration paid to
Tenant or any subtenant or other person claiming through or under Tenant in
connection with an assignment of Tenant's interest in this Lease or the interest
of any subtenant or other person claiming through or under Tenant under any
sublease whether or not such assignment shall be effected with court approval in
a proceeding of the types described in Subsection 16.01(c) or (d), or in any
similar proceeding, or otherwise, shall accrue to the benefit of Owner and not
to the benefit of Tenant, or of any subtenant or other person claiming through
or under Tenant, or of the creditors of Tenant or of any such subtenant or other
person claiming through or under Tenant. Accordingly, Tenant agrees that if
Owner shall fail to exercise its option to sooner terminate this Lease in
connection with any proposed subletting by Tenant of all or substantially all of
the Demised Premises, or its option to eliminate the Demised Premises or to
eliminate from the Demised Premises any portion thereof, in connection with any
proposed subletting by Tenant of the entire Demised Premises or any portion
thereof, or if any subtenant or other person claiming through or under Tenant
shall sublet all or any portion of the Demised Premises, Tenant shall pay to
Owner a sum equal to any Subletting Profit, as such term is hereinafter defined.
All rentals and other sums (including, but not limited to, sums payable for the
sale or rental of any fixtures, leasehold improvements, equipment, furniture or
other personal property, less, in the case of the sale thereof, the then net
unamortized [on a straight-line basis over the term of this Lease or, in the
event of a further subletting, over the term of the initial sublease, as the
case may be] cost thereof, which were provided and installed in the sublet
premises at the sole cost and expense of Tenant or such subtenant or other
person claiming through or under Tenant and for which no allowance or other
credit has been given by Owner) payable by any subtenant to Tenant or to any
subtenant or other person claiming through or under Tenant in connection with
(i) any subletting of the entire Demised Premises in excess of the Fixed Rent
then payable by Tenant to Owner under this Lease, or (ii) any subletting of a
portion of the Demised Premises in excess of that proportion of the Fixed Rent
payable by Tenant to Owner under this Lease which the area of the portion of the
Demised Premises so sublet bears to the total area of the Demised Premises, are
referred to, in the aggregate, as "Subletting Profit"; in computing any
------------------
Subletting Profit it shall be deemed that the rental reserved under any such
subletting shall commence to accrue as of the commencement of the term of such
subletting even if such rental actually commences to accrue as of a date
subsequent to such commencement, and there shall be deducted a reasonable single
brokerage commission, if any such commission shall be incurred by Tenant or any
such subtenant or other person claiming through or under Tenant in connection
with such subletting which deduction for such reasonable single brokerage
commission shall be amortized on a straight-line basis over the entire term of
such subletting. Tenant agrees that if Tenant, or any subtenant or other person
claiming through or under Tenant, shall assign or have assigned its interest as
Tenant under this Lease or its interest as subtenant under any sublease, as the
case may be, whether or not such assignment shall be effected with court
approval in a proceeding of the types described in Subsections 16.01(c) or (d),
or in any similar proceeding, or otherwise, Tenant shall pay to Owner a sum
equal to any consideration payable to Tenant or any subtenant or other person
claiming through or under Tenant for such assignment. All sums payable
hereunder to Tenant shall be paid to Owner as additional rent immediately upon
such sums becoming payable to Tenant or to any subtenant or other person
claiming through or under Tenant and, if requested by Owner, Tenant shall
promptly enter into a written agreement with Owner setting forth the amount of
such sums to be paid to Owner, however, neither Owner's failure to request the
execution of such agreement nor Tenant's failure to execute such agreement shall
vitiate the provisions of this Section. For the purposes of this Article, a
trustee, receiver or other representative of the Tenant's or any subtenant's
estate under any federal or state bankruptcy act shall be deemed a person
claiming through or under Tenant.
D. Neither Owner's consent to any subletting nor anything
contained in this Section shall be deemed to grant to any subtenant or other
person claiming through or under Tenant the right to sublet all or any portion
of the Demised Premises or to permit the occupancy of all or any portion of the
Demised Premises by others. Neither any subtenant referred to in this Section
nor its heirs, distributees, executors, administrators, legal representatives,
successors nor assigns, without the prior consent of Owner in each instance,
shall (i) assign, whether by merger, consolidation or otherwise, mortgage or
encumber its interest in any sublease,
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<PAGE>
in whole or in part, or (ii) sublet, or permit the subletting of, that part of
the Demised Premises affected by such subletting or any portion thereof, or
(iii) permit such part of the Demised Premises affected by such subletting or
any portion thereof to be occupied or used for desk space, mailing privileges or
otherwise, by any person other than such subtenant and any sublease shall
provide that any violation of the foregoing provisions of this sentence shall be
an event of default thereunder. The sale, pledge, transfer or other alienation
of (a) any of the issued and outstanding capital stock of any corporate
subtenant (unless such stock is publicly traded on any recognized security
exchange or over-the-counter market) or (b) any interest in any partnership or
joint venture subtenant, however accomplished, and whether in a single
transaction or in a series of related or unrelated transactions, shall be deemed
for the purposes of this Section to be an assignment of such sublease which
shall require the prior consent of Owner in each instance and any sublease shall
so provide.
Section 11.04. Owner's Rights Upon Lease Disaffirmance: A. In the
----------------------------------------
event that, at any time after Tenant may have assigned Tenant's interest in this
Lease, this Lease shall be disaffirmed or rejected in any proceeding of the
types described in Subsections 16.01(c) and (d), or in any similar proceeding,
or in the event of termination of this Lease by reason of any such proceeding or
by reason of lapse of time following notice of termination given pursuant to
Section 16.01 based upon any of the Events of Default set forth in said
Subsections, Tenant, upon request of Owner given within thirty (30) days next
following any such disaffirmance, rejection or termination (and actual notice
thereof to Owner in the event of a disaffirmance or rejection or in the event of
termination other than by act of Owner), shall (i) pay to Owner all Fixed Rent,
additional rent and other charges due and owing by the assignee to Owner under
this Lease to and including the date of such disaffirmance, rejection or
termination, and (ii) as "tenant", enter into a new lease with Owner of the
Demised Premises for a term commencing on the effective date of such
disaffirmance, rejection or termination and ending on the Expiration Date unless
sooner terminated as in such lease provided, at the same Fixed Rent and then
executory terms, covenants and conditions as are contained in this Lease, except
that (a) Tenant's rights under the new lease shall be subject to the possessory
rights of the assignee under this Lease and the possessory rights of any person
claiming through or under such assignee or by virtue of any statute or of any
order of any court, and (b) such new lease shall require all defaults existing
under this Lease to be cured by Tenant with due diligence, and (c) such new
lease shall require Tenant to pay all increases in the Fixed Rent reserved in
this Lease which, had this Lease not been so disaffirmed, rejected or termi-
nated, would have accrued under the provisions of Article 23 of this Lease after
the date of such disaffirmance, rejection or termination with respect to any
period prior thereto. In the event Tenant shall default in its obligation to
enter into said new lease for a period of ten (10) days next following Owner's
request therefor, then, in addition to all other rights and remedies by reason
of such default, either at law or in equity, Owner shall have the same rights
and remedies against Tenant as if Tenant had entered into such new lease and
such new lease had thereafter been terminated as at the commencement date
thereof by reason of Tenant's default thereunder. Nothing contained in this
Section shall be deemed to grant to Tenant any right to assign Tenant's interest
in this Lease.
Section 11.05 A. Supplementing the provisions of Article 11, as
long as Tenant is not in default under any of the terms, covenants or conditions
of this Lease on Tenant's part to be observed and performed, K 2 Design
Incorporated, Tenant named herein, shall have the right, without the prior
consent of Owner, to assign its interest in this Lease, for the use permitted in
this Lease, to any subsidiary or affiliate of Tenant named herein, which is in
the same general line of business as Tenant named herein and only for such
period as it shall remain such subsidiary or affiliate. For the purposes of
this Article: (a) a "subsidiary" of Tenant named herein shall mean any
corporation not less than fifty-one (51%) percent of whose outstanding voting
stock at the time shall be owned by Tenant named herein, and (b) an "affiliate"
of Tenant named herein shall mean any corporation, partnership or other business
entity which controls or is controlled by, or is under common control with
Tenant. For the purpose of the definition of "affiliate" the word "control"
(including, "controlled by" and "under common control with") as used with
respect to any corporation, partnership or other business entity, shall mean the
possession of the power to direct or cause the direction of the management and
policies of such corporation, partnership or other business entity, whether
through the ownership of voting securities or contract. No such assignment
shall be valid or effective unless, within ten (10) days after the execution
thereof, Tenant shall deliver
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to Owner all of the following: (I) a duplicate original instrument of
assignment, in form and substance satisfactory to Owner, duly executed by
Tenant, in which Tenant shall (a) waive all notices of default given to the
assignee, and all other notices of every kind or description now or hereafter
provided in this Lease, by statute or rule of law, and (b) acknowledge that
Tenant's obligations with respect to this Lease shall not be discharged,
released or impaired by (i) such assignment, (ii) any amendment or modification
of this Lease, whether or not the obligations of Tenant are increased thereby,
(iii) any further assignment or transfer of Tenant's interest in this Lease,
(iv) any exercise, non-exercise or waiver by Owner of any right, remedy, power
or privilege under or with respect to this Lease, (v) any waiver, consent,
extension, indulgence or other act or omission with respect to any other
obligations of Tenant under this Lease, (vi) any act or thing which, but for the
provisions of such assignment, might be deemed a legal or equitable discharge of
a surety or assignor, to all of which Tenant shall consent in advance, and (c)
expressly waive and surrender any then existing defense to its liability
hereunder it being the purpose and intent of Owner and Tenant that the
obligations of Tenant hereunder as assignor shall be absolute and unconditional
under any and all circumstances, and (II) an instrument, in form and substance
satisfactory to Owner, duly executed by the assignee, in which such assignee
shall assume the observance and performance of, and agree to be personally bound
by, all of the terms, covenants and conditions of this Lease on Tenant's part to
be observed and performed.
B. Further supplementing the provisions of Article 11, as long
as Tenant is not in default under any of the terms, covenants or conditions of
this Lease on Tenant's part to be observed and performed, K 2 Design
Incorporated, Tenant named herein, shall have the right without the prior
consent of Owner, to sublet to, or permit the use or occupancy of, all or any
part of the Demised Premises by any subsidiary or affiliate (as said terms are
defined in Section 11.05.A.) of Tenant named herein for the use permitted in
this Lease provided that such subsidiary or affiliate is in the same general
line of business as the Tenant named herein and only for such period as it shall
remain such subsidiary or affiliate and in the same general line of business as
the Tenant named herein. However, no such subletting shall be valid unless,
prior to the execution thereof, Tenant shall give notice to Owner of the
proposed subletting, and within ten (10) days prior the commencement of said
subletting, Tenant shall deliver to Owner an agreement, in form and substance
satisfactory to Owner, duly executed by Tenant and said subtenant, in which said
subtenant shall assume performance of and agree to be personally bound by, all
of the terms, covenants and conditions of this Lease which are applicable to
said subtenant and such subletting. Tenant shall give prompt notice to Owner of
any such use or occupancy of all or any part of the Demised Premises and such
use or occupancy shall be subject and subordinate to all of the terms, covenants
and conditions of this Lease. No such use or occupancy shall operate to vest in
the user or occupant any right or interest in this Lease or the Demised
Premises. For the purposes of determining the number of subtenants or occupants
in the Demised Premises, the occupancy of any such permitted subsidiary or
affiliate of Tenant shall be deemed the occupancy of Tenant and such subsidiary
or affiliate shall not be counted as a subtenant or occupant for the purposes of
Section 11.03 and the provisions of Section 11.03 relating to Owner's option to
terminate this Lease and the provisions of Section 11.03.C. relating to
Subletting Profits shall not be applicable to any proposed subletting to any
such subsidiary or affiliate of Tenant pursuant to the provisions of this
Section.
ARTICLE 12
OWNER'S INITIAL CONSTRUCTION
----------------------------
Section 12.01. Owner agrees to perform work and make installations in
the Demised Premises as set forth in Addendum A. Such work and installations
are referred to as "Owner's Initial Construction". All of the terms, covenants
----------------------------
and conditions of Addendum A are incorporated in this Lease by reference and
shall be deemed a part of this Lease as though fully set forth in the body of
this Lease.
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ARTICLE 13
ACCESS TO DEMISED PREMISES
--------------------------
Section 13.01. Owner's Right to Enter: Owner and its agents shall
------------------------
have the following rights in and about the Demised Premises: (i) to enter the
Demised Premises at all times to examine the Demised Premises or for any of the
purposes set forth in this Article or for the purpose of performing any
obligation of Owner under this Lease or exercising any right or remedy reserved
to Owner in this Lease, or complying with any Legal Requirement which Owner is
obligated to comply with hereunder, and if Tenant, its officers, partners,
agents or employees shall not be personally present or shall not open and permit
an entry into the Demised Premises at any time when such entry shall be
necessary or permissible, to use a master key or to forcibly enter the Demised
Premises; (ii) to erect, install, use and maintain pipes, ducts and conduits in
and through the Demised Premises; (iii) to exhibit the Demised Premises to
others; (iv) to make such decorations, repairs, alterations, improvements or
additions, or to perform such maintenance, including, but not limited to, the
maintenance of all heating, air conditioning, ventilating, elevator, plumbing,
electrical, telecommunication and other mechanical facilities, as Owner may deem
necessary or desirable; (v) to take all materials into and upon the Demised
Premises that may be required in connection with any such decorations, repairs,
alterations, improvements, additions or maintenance; and (vi) to alter, renovate
and decorate the Demised Premises at any time during the Demised Term if Tenant
shall have removed all or substantially all of Tenant's property from the
Demised Premises. The lessors under any Superior Lease and the holders of any
Mortgage shall have the right to enter the Demised Premises from time to time
through their respective employees, agents, representatives and architects to
inspect the same or to cure any default of Owner or Tenant relating thereto.
Owner shall have the right, from time to time, to change the name, number or
designation by which the Building is commonly known which right shall include,
without limitation, the right to name the Building after any tenant of the
Building.
Section 13.02. Owner's Reservation of Rights to Portions of the
-------------------------------------------------------
Building: All parts (except surfaces facing the interior of the Demised
- --------
Premises) of all walls, windows and doors bounding the Demised Premises
(including exterior Building walls, core corridor walls, doors and entrances),
all balconies, terraces and roofs adjacent to the Demised Premises, all space in
or adjacent to the Demised Premises used for shafts, stacks, stairways, chutes,
pipes, conduits, ducts, fan rooms, heating, air conditioning, ventilating,
plumbing, electrical, telecommunication and other mechanical facilities,
closets, service closets and other Building facilities, and the use thereof, as
well as access thereto through the Demised Premises for the purposes of
operation, maintenance, alteration and repair, are hereby reserved to Owner.
Owner also reserves the right at any time to change the arrangement or location
of entrances, passageways, doors, doorways, corridors, elevators, stairs,
toilets and other public parts of the Building, provided any such change does
not permanently and unreasonably obstruct Tenant's access to the Demised
Premises. Nothing contained in this Article shall impose any obligation upon
Owner with respect to the operation, maintenance, alteration or repair of the
Demised Premises or the Building.
Section 13.03. Access to Third Parties: Owner and its agents shall
------------------------
have the right to permit access to the Demised Premises, whether or not Tenant
shall be present, to any receiver, trustee, assignee for the benefit of
creditors, sheriff, marshal or court officer entitled to, or reasonably
purporting to be entitled to, such access for the purpose of taking possession
of, or removing, any property of Tenant or any other occupant of the Demised
Premises, or for any other lawful purpose, or by any representative of the fire,
police, building, sanitation or other department of the City, State or Federal
Governments. Neither anything contained in this Section, nor any action taken by
Owner under this Section, shall be deemed to constitute recognition by Owner
that any person other than Tenant has any right or interest in this Lease or the
Demised Premises.
Section 13.04. No Actual or Constructive Eviction: The exercise by
------------------------------------
Owner or its agents or by the lessor under any Superior Lease or by the holder
of any Mortgage of any right reserved to Owner in this Article shall not consti-
tute an actual or constructive eviction, in whole or in part, or entitle Tenant
to any abatement or diminution of rent, or relieve Tenant from any of its
obligations under this Lease, or impose any liability upon
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Owner, or its agents, or upon any lessor under any Superior Lease or upon the
holder of any Mortgage, by reason of inconvenience or annoyance to Tenant, or
injury to or interruption of Tenant's business, or otherwise.
ARTICLE 14
VAULT SPACE
-----------
Section 14.01. The Demised Premises do not contain any vaults, vault
space or other space outside the boundaries of the Real Property,
notwithstanding anything contained in this Lease or indicated on any sketch,
blueprint or plan. Owner makes no representation as to the location of the
boundaries of the Real Property. All vaults and vault space and all other space
outside the boundaries of the Real Property which Tenant may be permitted to use
or occupy are to be used or occupied under a revocable license, and if any such
license shall be revoked, or if the amount of such space shall be diminished or
required by any Federal, State or Municipal Authority or by any public utility
company, such revocation, diminution or requisition shall not constitute an
actual or constructive eviction, in whole or in part, or entitle Tenant to any
abatement or diminution of rent, or relieve Tenant from any of its obligations
under this Lease, or impose any liability upon Owner. Any fee, tax or charge
imposed by any governmental authority for any such vault, vault space or other
space shall be paid by Tenant.
ARTICLE 15
CERTIFICATE OF OCCUPANCY
------------------------
Section 15.01. Tenant will not at any time use or occupy, or permit
the use or occupancy of, the Demised Premises in violation of any Certificate(s)
of Occupancy covering the Demised Premises. Owner agrees that a temporary or
permanent Certificate(s) of Occupancy covering the Demised Premises will be in
force on the Commencement Date permitting the Demised Premises to be used as
"offices". However, neither such agreement, nor any other provision of this
Lease, nor any act or omission of Owner, its agents or contractors, shall be
deemed to constitute a representation or warranty that the Demised Premises, or
any part thereof, may be lawfully used or occupied for any particular purpose or
in any particular manner, in contradistinction to mere "office" use.
ARTICLE 16
DEFAULT
-------
Section 16.01. Events of Default: Upon the occurrence, at any time
------------------
prior to or during the Demised Term, of any one or more of the following events
(referred to herein, singly, as an "Event of Default" and collectively as
-----------------
"Events of Default"):
-----------------
(a) if Tenant shall default in the payment when due of any
installment of Fixed Rent or any increase in the Fixed Rent or in the
payment when due of any additional rent; or
(b) if Tenant shall default in the observance or performance of
any term, covenant or condition of this Lease on Tenant's part to be
observed or performed (other than the covenants for the payment of
Fixed Rent, any increase in the Fixed Rent and additional rent) and
Tenant shall fail to remedy such default within ten (10) days after
notice by Owner to Tenant of such default, or if such default is of
such a nature that it cannot be completely remedied within said period
of ten (10) days and Tenant shall not commence, promptly after receipt
of such notice, or shall not thereafter diligently prosecute to
completion, all steps necessary to remedy such default; or
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(c) if Tenant shall file a voluntary petition in bankruptcy or
insolvency, or shall be adjudicated a bankrupt or insolvent, or shall
file any petition or answer seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief
under the present or any future federal bankruptcy act or any other
present or future applicable federal, state or other statute or law,
or shall make an assignment for the benefit of creditors, or shall
seek or consent to or acquiesce in the appointment of any trustee,
receiver or liquidator of Tenant or of all or any part of Tenant's
property; or
(d) if, within thirty (30) days after the commencement of any
proceeding against Tenant, whether by the filing of a petition or
otherwise, seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under the
present or any future federal bankruptcy act or any other present or
future applicable federal, state or other statute or law, such
proceeding shall not have been dismissed, or if, within thirty (30)
days after the appointment of any trustee, receiver or liquidator of
Tenant, or of all or any part of Tenant's property, without the
consent or acquiescence of Tenant, such appointment shall not have
been vacated or otherwise discharged, or if any execution or
attachment shall be issued against Tenant or any of Tenant's property
pursuant to which the Demised Premises shall be taken or occupied or
attempted to be taken or occupied; or
(e) if Tenant shall default in the observance or performance of
any term, covenant or condition on Tenant's part to be observed or
performed under any other lease with Owner of space in the Building
and such default shall continue beyond any grace period set forth in
such other lease for the remedying of such default; or
(f) if the Demised Premises shall become vacant, deserted or
abandoned; or
(g) if (i) Tenant's interest in this Lease shall devolve upon or
pass to any person, whether by operation of law or otherwise, or (ii)
there shall be any sale, pledge, transfer or other alienation
described in Section 11.01 of this Lease which is deemed an assignment
of this Lease for purposes of said Section 11.01, except as expressly
permitted under Article 11;
then, during such time as such Event(s) of Default is/are continuing, Owner may
at any time, at Owner's option, give to Tenant a five (5) days' notice of
termination of this Lease and, in the event such notice is given, this Lease and
the Demised Term shall come to an end and expire (whether or not said term shall
have commenced) upon the expiration of said five (5) days with the same effect
as if the date of expiration of said five (5) days were the Expiration Date, but
Tenant shall remain liable for damages and all other sums payable pursuant to
the provisions of Article 18.
Section 16.02. "Tenant"/Moneys Received: If, at any time (i) Tenant
-------------------------
shall be comprised of two (2) or more persons, or (ii) Tenant's obligations
under this Lease shall have been guaranteed by any person other than Tenant, or
(iii) Tenant's interest in this Lease shall have been assigned, the word
"Tenant", as used in Subsections (c) and (d) of Section 16.01, shall be deemed
to mean any one or more of the persons primarily or secondarily liable for
Tenant's obligations under this Lease. Any monies received by Owner from or on
behalf of Tenant during the pendency of any proceeding of the types referred to
in said Subsections (c) and (d) shall be deemed paid as compensation for the use
and occupation of the Demised Premises and the acceptance of any such
compensation by Owner shall not be deemed an acceptance of rent or a waiver on
the part of Owner of any rights under Section 16.01.
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ARTICLE 17
REMEDIES
--------
Section 17.01. Owner's Right of Re-Entry and Right to Relet: If
----------------------------------------------
Tenant shall default in the payment when due of any installment of Fixed Rent or
in the payment when due of any increase in the Fixed Rent or any additional
rent, or if this Lease and the Demised Term shall expire and come to an end as
provided in Article 16:
(a) Owner and its agents and servants may immediately, or at any
time after such default or after the date upon which this Lease and
the Demised Term shall expire and come to an end, re-enter the Demised
Premises or any part thereof, without notice, either by summary
proceedings or by any other applicable action or proceeding, or by
force or otherwise (without being liable to indictment, prosecution or
damages therefor), and may repossess the Demised Premises and
dispossess Tenant and any other persons from the Demised Premises and
remove any and all of their property and effects from the Demised
Premises; and
(b) Owner, at Owner's option, may relet the whole or any part
or parts of the Demised Premises, from time to time, either in the
name of Owner or otherwise, to such tenant or tenants, for such term
or terms ending before, on or after the Expiration Date, at such
rental or rentals and upon such other conditions, which may include
concessions and free rent periods, as Owner, in its sole discretion,
may determine. Owner shall have no obligation to relet the Demised
Premises or any part thereof and shall in no event be liable for
refusal or failure to relet the Demised Premises or any part thereof,
or, in the event of any such reletting, for refusal or failure to
collect any rent due upon any such reletting, and no such refusal or
failure shall operate to relieve Tenant of any liability under this
Lease or otherwise to affect any such liability; Owner, at Owner's
option, may make such repairs, replacements, alterations, additions,
improvements, decorations and other physical changes in and to the
Demised Premises as Owner, in its sole discretion, considers advisable
or necessary in connection with any such reletting or proposed
reletting, without relieving Tenant of any liability under this Lease
or otherwise affecting any such liability.
Section 17.02. Waiver of Right to Redeem, etc.: Tenant hereby waives
--------------------------------
the service of any notice of intention to re-enter or to institute legal
proceedings to that end which may otherwise be required to be given under any
present or future law. Tenant, on its own behalf and on behalf of all persons
claiming through or under Tenant, including all creditors, does further hereby
waive any and all rights which Tenant and all such persons might otherwise have
under any present or future law to redeem the Demised Premises, or to re-enter
or repossess the Demised Premises, or to restore the operation of this Lease,
after (i) Tenant shall have been dispossessed by a judgment or by warrant of any
court or judge, or (ii) any re-entry by Owner, or (iii) any expiration or
termination of this Lease and the Demised Term, whether such dispossess, re-
entry, expiration or termination shall be by operation of law or pursuant to the
provisions of this Lease. The words "re-enter", "re-entry" and "re-entered" as
used in this Lease shall not be deemed to be restricted to their technical legal
meanings. In the event of a breach or threatened breach by Tenant, or any
persons claiming through or under Tenant, of any term, covenant or condition of
this Lease on Tenant's part to be observed or performed, Owner shall have the
right to enjoin such breach and the right to invoke any other remedy allowed by
law or in equity as if re-entry, summary proceedings and other special remedies
were not provided in this Lease for such breach. The right to invoke the
remedies hereinbefore set forth in this Lease is cumulative and shall not
preclude Owner from invoking any other remedy allowed by law or in equity.
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ARTICLE 18
DAMAGES
-------
Section 18.01. Amount of Owner's Damages: If this Lease and the
---------------------------
Demised Term shall expire and come to an end as provided in Article 16, or by
or under any summary proceeding or any other action or proceeding, or if Owner
shall re-enter the Demised Premises as provided in Article 17, or by or under
any summary proceeding or any other action or proceeding, then, in any of said
events:
(a) Tenant shall pay to Owner all Fixed Rent, additional rent
and other charges payable under this Lease by Tenant to Owner to the
date upon which this Lease and the Demised Term shall have expired and
come to an end or to the date of re-entry upon the Demised Premises by
Owner, as the case may be; and
(b) Tenant shall also be liable for and shall pay to Owner, as
damages, any deficiency (referred to as a "Deficiency") between the
----------
Fixed Rent reserved in this Lease for the period which otherwise would
have constituted the unexpired portion of the Demised Term and the net
amount, if any, of rents collected under any reletting effected
pursuant to the provisions of Section 17.01 for any part of such
period (first deducting from the rents collected under any such
reletting all of Owner's expenses in connection with the termination
of this Lease or Owner's re-entry upon the Demised Premises and with
such reletting including, but not limited to, all repossession costs,
brokerage commissions, legal expenses, attorneys' fees, alteration
costs and other expenses of preparing the Demised Premises for such
reletting). Any such Deficiency shall be paid in monthly installments
by Tenant on the days specified in this Lease for payment of
installments of Fixed Rent, Owner shall be entitled to recover from
Tenant each monthly Deficiency as the same shall arise, and no suit to
collect the amount of the Deficiency for any month shall prejudice
Owner's right to collect the Deficiency for any subsequent month by a
similar proceeding. Solely for the purposes of this Subsection (b),
the term "Fixed Rent" shall mean the Fixed Rent in effect immediately
prior to the date upon which this Lease and the Demised Term shall
have expired and come to an end, or the date of re-entry upon the
Demised Premises
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by Owner, as the case may be, adjusted, from time to time, to reflect
any increases which would have been payable pursuant to any of the
provisions of this Lease including, but not limited to, the provisions
of Article 23 of this Lease if the term hereof had not been
terminated; and
(c) At any time after the Demised Term shall have expired and
come to an end or Owner shall have re-entered upon the Demised
Premises, as the case may be, whether or not Owner shall have
collected any monthly Deficiencies as aforesaid, Owner shall be
entitled to recover from Tenant, and Tenant shall pay to Owner, on
demand, as and for liquidated and agreed final damages, a sum equal to
the amount by which the Fixed Rent reserved in this Lease for the
period which otherwise would have constituted the unexpired portion of
the Demised Term exceeds the then fair and reasonable rental value of
the Demised Premises for the same period, both discounted to present
worth at the rate of four (4%) percent per annum. If, before
presentation of proof of such liquidated damages to any court,
commission or tribunal, the Demised Premises, or any part thereof,
shall have been relet by Owner for the period which otherwise would
have constituted the unexpired portion of the Demised Term, or any
part thereof, the amount of rent reserved upon such reletting shall be
deemed, prima facie, to be the fair and reasonable rental value for
the part or the whole of the Demised Premises so relet during the term
of the reletting. Solely for the purposes of this Subsection (c), the
term "Fixed Rent" shall mean the Fixed Rent in effect immediately
prior to the date upon which this Lease and the Demised Term shall
have expired and come to an end, or the date of re-entry upon the
Demised Premises by Owner, as the case may be, adjusted to reflect any
increases pursuant to the provisions of Article 23 for the Escalation
Year and Tax Escalation Year immediately preceding such event.
Section 18.02. Rents Under Reletting: If the Demised Premises, or any
---------------------
part thereof, shall be relet together with other space in the Building, the
rents collected or reserved under any such reletting and the expenses of any
such reletting shall be equitably apportioned for the purposes of this Article
18. Tenant shall in no event be entitled to any rents collected or payable
under any reletting, whether or not such rents shall exceed the Fixed Rent
reserved in this Lease. Nothing contained in Articles 16, 17 or this Article
shall be deemed to limit or preclude the recovery by Owner from Tenant of the
maximum amount allowed to be obtained as damages by any statute or rule of law,
or of any sums or damages to which Owner may be entitled in addition to the
damages set forth in Section 18.01.
ARTICLE 19
FEES AND EXPENSES; INDEMNITY
----------------------------
Section 19.01. Owner's Right to Cure Tenant's Default: If Tenant
-----------------------------------------
shall default in the observance or performance of any term, covenant or
condition of this Lease on Tenant's part to be observed or performed, Owner, at
any time thereafter and without notice, may remedy such default for Tenant's
account and at Tenant's expense, without thereby waiving any other rights or
remedies of Owner with respect to such default.
Section 19.02. Tenant's Indemnity and Liability Insurance Obligations:
------------------------------------------------------
A. Tenant agrees to indemnify and save Owner and "Owner's Indemnitees" (as
hereinafter defined) harmless of and from all loss, cost, liability, damage and
expense including, but not limited to, reasonable counsel fees, penalties and
fines, incurred in connection with or arising from (i) any default by Tenant in
the observance or performance of any of the terms, covenants or conditions of
this Lease on Tenant's part to be observed or performed, or (ii) the breach or
failure of any representation or warranty made by Tenant in this Lease, or (iii)
the use or occupancy or manner of use or occupancy of the Demised Premises by
Tenant or any person claiming through or under Tenant, or (iv) any acts,
omissions or negligence of Tenant or any such person, or the contractors,
agents, servants, employees, visitors or licensees of Tenant or any such person,
in or about the Demised Premises or the Building either prior to, during, or
after the expiration of, the Demised Term, including, but not limited to, any
acts omissions or negligence in the making or performing of any Alterations.
Tenant further agrees to indemnify and save harmless Owner and Owner's
Indemnitees of and from all loss, cost, liability, damage and expense,
including, but not limited to, reasonable counsel fees and disbursements
incurred in connection with or arising from any claims by any persons by reason
of injury to persons or damage to property occasioned by any use, occupancy,
act, omission or negligence referred to in the preceding sentence. "Owner's
-------
Indemnitees" shall mean the Owner, the shareholders or the partners comprising
- -----------
Owner and its and their partners and shareholders, officers, directors,
employees, agents (including without limitation, any leasing and managing
agents) and contractors together with the lessor under any Superior Lease and
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the holder of any Mortgage. If any action or proceeding shall be brought
against Owner or Owner's Indemnitees based upon any such claim and if Tenant,
upon notice from Owner, shall cause such action or proceeding to be defended at
Tenant's expense by counsel acting for Tenant's insurance carriers in connection
with such defense or by other counsel reasonably satisfactory to Owner, without
any disclaimer of liability by Tenant or such insurance carriers in connection
with such claim, Tenant shall not be required to indemnify Owner and Owner's
Indemnitees for counsel fees in connection with such action or proceeding.
B. Throughout the Demised Term Tenant shall maintain
comprehensive public liability and water legal liability insurance against any
claims by reason of personal injury, death and property damage occurring in or
about the Demised Premises covering, without limitation, the operation of any
private air conditioning equipment and any private elevators, escalators or
conveyors in or serving the Demised Premises or any part thereof, whether
installed by Owner, Tenant or others, and shall furnish to Owner duplicate
original policies of such insurance at least ten (10) days prior
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to the Commencement Date and at least ten (10) days prior to the expiration of
the term of any such policy previously furnished by Tenant, in which policies
Owner, and Owner's Indemnitees shall be named as parties insured, which policies
shall be issued by companies, and shall be in form and amounts, satisfactory to
Owner.
Section 19.03. Payments: Tenant shall pay to Owner, within five (5)
--------
days next following rendition by Owner to Tenant of bills or statements
therefor: (i) sums equal to all expenditures made and monetary obligations
incurred by Owner including, but not limited to, expenditures made and
obligations incurred for reasonable counsel fees and disbursements, in
connection with the remedying by Owner, for Tenant's account pursuant to the
provisions of Section 19.01, of any default of Tenant, and (ii) sums equal to
all losses, costs, liabilities, damages and expenses referred to in Section
19.02, and (iii) sums equal to all expenditures made and monetary obligations
incurred by Owner including, but not limited to, expenditures made and
obligations incurred for reasonable counsel fees and disbursements, in col-
lecting or attempting to collect the Fixed Rent, any additional rent or any
other sum of money accruing under this Lease or in enforcing or attempting to
enforce any rights of Owner under this Lease or pursuant to law, whether by the
institution and prosecution of summary proceedings or otherwise; and (iv) all
other sums of money (other than Fixed Rent) accruing from Tenant to Owner under
the provisions of this Lease. Any sum of money (other than Fixed Rent) accruing
from Tenant to Owner pursuant to any provision of this Lease including, but not
limited to, the provisions of Addendum A, whether prior to or after the
Commencement Date, may, at Owner's option, be deemed additional rent, and Owner
shall have the same remedies for Tenant's failure to pay any item of additional
rent when due as for Tenant's failure to pay any installment of Fixed Rent when
due. Tenant's obligations under this Article shall survive the expiration or
sooner termination of the Demised Term.
Section 19.04. Tenant's Late Payments - Late Charges: If Tenant shall
-------------------------------------
fail to make payment of any installment of Fixed Rent or any increase in the
Fixed Rent or any additional rent within fifteen (15) days after the date when
such payment is due, Tenant shall pay to Owner, in addition to such installment
of Fixed Rent or such increase in the Fixed Rent or such additional rent, as the
case may be, as a late charge and as additional rent, a sum equal to three (3%)
percent per annum above the then current prime rate (as the term "prime rate" is
defined in Section 31.03) charged by Chemical Bank or its successor of the
amount unpaid computed from the date such payment was due to and including the
date of payment.
ARTICLE 20
ENTIRE AGREEMENT
----------------
Section 20.01. Entire Agreement: This Lease contains the entire
-----------------
agreement between the parties and all prior negotiations and agreements are
merged in this Lease. Neither Owner nor Owner's agents have made any
representations or warranties with respect to the Demised Premises, the
Building, the Real Property or this Lease except as expressly set forth in this
Lease and no rights, easements or licenses are or shall be acquired by Tenant by
implication or otherwise unless expressly set forth in this Lease. This Lease
may not be changed, modified or discharged, in whole or in part, orally and no
executory agreement shall be effective to change, modify or discharge, in whole
or in part, this Lease or any provisions of this Lease, unless such agreement is
set forth in a written instrument executed by the party against whom enforcement
of the change, modification or discharge is sought. All references in this
Lease to the consent or approval of Owner shall be deemed to mean the written
consent of Owner, or the written approval of Owner, as the case may be, and no
consent or approval of Owner shall be effective for any purpose unless such
consent or approval is set forth in a written instrument executed by Owner.
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ARTICLE 21
END OF TERM
-----------
Section 21.01. End of Term: On the date upon which the Demised Term
-----------
shall expire and come to an end, whether pursuant to any of the provisions of
this Lease or by operation of law, and whether on or prior to the Expiration
Date, Tenant, at Tenant's sole cost and expense, (i) shall quit and surrender
the Demised Premises to Owner, broom clean and in good order and condition,
ordinary wear excepted, and (ii) shall remove all of Tenant's Personal Property
and all other property and effects of Tenant and all persons claiming through or
under Tenant (including, but not limited to, all telecommunications facilities)
from the Demised Premises and the Building, and (iii) shall repair all damage to
the Demised Premises and the Building occasioned by such removal and (iv) shall,
at Owner's election, exercisable within six (6) months following the expiration
or earlier termination of the Demised Term, remove any private interior
staircases in the Demised Premises or connecting the Demised Premises or any
part thereof with any other space (referred to herein as the "Other Space") in
-----------
the Building occupied by Tenant, and restore those portions of the Demised
Premises, the Other Space and the Building affected by any such staircases
(including, but not limited to, the slabbing over of any openings) to the
condition of each which existed prior to the installation of any such
staircases, and repair any damage to the Demised Premises, Other Space and the
Building occasioned by such removal. Notwithstanding the provisions of
subdivision (iv) of the foregoing sentence, in the event Owner does not elect to
have removed any such staircase referred to therein, any such staircase shall be
and remain the property of Owner at no cost or expense to Owner. Owner shall
have the right to retain any property and effects which shall remain in the
Demised Premises after the expiration or sooner termination of the Demised Term,
and any net proceeds from the sale thereof, without waiving Owner's rights with
respect to any default by Tenant under the foregoing provisions of this Section.
Tenant expressly waives, for itself and for any person claiming through or under
Tenant, any rights which Tenant or any such person may have under the provisions
of Section 2201 of the New York Civil Practice Law and Rules and of any
successor law of like import then in force, in connection with any holdover
summary proceedings which Owner may institute to enforce the foregoing
provisions of this Article. If said date upon which the Demised Term shall
expire and come to an end shall fall on a Sunday or holiday, then Tenant's
obligations under the first sentence of this Section shall be performed on or
prior to the Saturday or business day immediately preceding such Sunday or
holiday. Tenant's obligations under this Section shall survive the expiration
or sooner termination of the Demised Term.
ARTICLE 22
QUIET ENJOYMENT
---------------
Section 22.01. Quiet Enjoyment: Owner covenants and agrees with
----------------
Tenant that upon Tenant paying the Fixed Rent and additional rent reserved in
this Lease and observing and performing all of the terms, covenants and
conditions of this Lease on Tenant's part to be observed and performed, Tenant
may peaceably and quietly enjoy the Demised Premises during the Demised Term,
subject, however, to the terms, covenants and conditions of this Lease
including, but not limited to, the provisions of Section 37.01, and subject to
the Superior Lease and the Mortgage referred to in Section 7.01.
ARTICLE 23
TAX PAYMENTS AND OPERATING ESCALATION
-------------------------------------
Section 23.01. Definitions: In the determination of any increase in
-----------
the Fixed Rent under the provisions of this Article, Owner and Tenant agree that
the following terms shall have the following meanings:
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A. The term "Tax Escalation Year" shall mean each fiscal
--------------------
year commencing July 1st and ending on the following June 30th which shall
include any part of the Demised Term.
B. The term "Escalation Year" shall mean each calendar
---------------
year which shall include any part of the Demised Term.
C. The term "Taxes" shall be deemed to mean a sum equal to
-----
the aggregate of: (i) the product determined by multiplying (a) the then
applicable full New York City real estate tax rate in effect with respect to the
Borough of Manhattan by (b) the then applicable assessed valuation of the Real
Property plus (ii) amounts assessed by any business improvement district in
which the Real Property is located plus (iii) any other assessments, special or
otherwise, upon or with respect to the Real Property imposed by the City or
County of New York or any other taxing authority. If, due to any change in the
method of taxation, any franchise, income, profit, sales, rental, use and
occupancy or other tax or payments in lieu of any such taxes shall be
substituted for, or levied against Owner or any owner of the Building or the
Real Property, in lieu of any real estate taxes or assessments upon or with
respect to the Real Property, such tax or payments in lieu of any such taxes
shall be included in the term Taxes for the purposes of this Article.
D. The term "Demised Premises Area" shall mean 5,797
-----------------------
square feet.
E. The term "Building Area" shall mean 398,537 square
-------------
feet.
F. The term "Tenant's Proportionate Share" shall mean the
-----------------------------
fraction, the denominator of which is the Building Area and the numerator of
which is the Demised Premises Area.
G. (1) The term "Operating Expenses" shall, subject to
------------------
the provisions of Paragraph (2) of this Subsection 23.01.G, mean the aggregate
cost and expense incurred by Owner in the operation, maintenance, management and
security of the Real Property and any plazas, sidewalks and curbs adjacent
thereto including, without limitation, the cost and expense of the following:
(a) salaries, wages, medical, surgical and general welfare
and other so-called "fringe" benefits (including group insurance
and retirement benefits) for employees (including, but not
limited to, employees who provide twenty four (24) hour services,
seven (7) days per week throughout the year) of Owner or any
contractor of Owner engaged in the cleaning, operation,
maintenance or management of the Real Property, or engaged for
security purposes and/or for receiving or transmitting deliveries
to and from the Building, and payroll taxes and workmen's
compensation insurance premiums relating thereto,
(b) gas, steam, water and sewer rental,
(c) thirty five (35%) percent of all electrical costs
incurred in the operation of the Building, provided, however, in
the event that Owner discontinues the redistribution or
furnishing of electrical energy to the tenants and occupants of
the Building, then the cost and expense incurred by Owner for
electricity shall thereafter be deemed to be one hundred (100%)
percent of (i) the total cost and expense to Owner of purchasing
electricity for the Building less (ii) any reimbursement to Owner
by the tenants in the Building for the payment for the Floor HVAC
Units and the Floor Public Light and Power (as said terms are
defined in Section 29.05).
(d) utility taxes,
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(e) rubbish removal,
(f) fire, casualty, liability, rent and other insurance
carried by Owner,
(g) repairs, repainting, replacement, maintenance of
grounds, and Included Improvements (as provided in Paragraph (2)
of this Subsection 23.01.G),
(h) Building supplies,
(i) uniforms and cleaning thereof,
(j) snow removal,
(k) window cleaning,
(l) service contracts with independent contractors for any
of the foregoing (including, but not limited to, elevator,
heating, air conditioning, ventilating, sprinkler system, fire
alarm and telecommunication equipment maintenance),
(m) management fees (whether or not paid to any person,
firm or corporation having an interest in or under common
ownership with Owner or any of the persons, firms or corporations
comprising Owner) in the amount of one ($1.00) dollar per
rentable square foot of the Building Area in the first Escalation
Year which amount for management fees shall increase in each
Escalation Year subsequent to the first Escalation Year by the
same percentage of increase as the percentage of increase in the
aggregate of all other Operating Expenses,
(n) legal fees and disbursements and other expenses
(excluding, however, legal fees and expenses incurred in
connection with any application or proceeding brought for
reduction of the assessed valuation of the Real Property or any
part thereof),
(o) auditing fees,
(p) advertising and promotion expenses,
(q) all costs of compliance under the provisions of any
present or future Superior Lease other than the payment of rental
and impositions thereunder and increases in the basic rent under
such leases as a result of adjustments in such basic rent, and
(r) all other costs and expenses incurred in connection
with the operation, maintenance, management and security of the
Real Property, and any plazas, sidewalks and curbs adjacent
thereto.
(2) The cost and expense of the following shall be excluded from
the calculation of operating expenses:
(a) leasing commissions;
(b) executives' salaries above the grade of building
manager and superintendent;
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<PAGE>
(c) capital improvements and replacements which under
generally accepted accounting principles and practice would
be classified as capital expenditures, except the cost and
expense of any improvement, alteration, replacement or
installation which is either (i) required by any Legal
Requirement, or (ii) designed, in Owner's judgment, to
result in savings or reductions in Operating Expenses or
(iii) designed, in Owner's judgment, to benefit the tenants
of the Building (such improvements, alterations,
replacements and installations are referred to as "Included
--------
Improvements"); the cost and expense of Included
------------
Improvements whenever made shall be included in Operating
Expenses for any Escalation Year subsequent to the Base
Escalation Year to the extent of (x) the annual amortization
or depreciation of the cost and expense to Owner of such
Included Improvements, as amortized or depreciated on a
straight line basis over ten (10) years allocable to such
Escalation Year plus (y) an annual charge for interest upon
the unamortized or undepreciated portions of such cost and
expense at the average prime rate (as defined in Section
31.03) during the Escalation Year in question;
(d) any other item which under generally accepted
accounting principles and practice would not be regarded as
an operating, maintenance or management expense;
(e) any item for which Owner is compensated through
proceeds of insurance;
(f) any specific compensation which Owner receives from
any tenant for services rendered to such tenant by Owner
above and beyond those services generally rendered by Owner
to tenants in the Building without specific compensation
therefor; and
(g) sixty-five (65%) percent of all electrical costs
incurred in the operation of the Building, provided however,
in the event that Owner discontinues the redistribution or
furnishing of electrical energy to the tenants and occupants
of the Building, then the aforesaid exclusion of sixty-five
(65%) percent of such electrical costs shall not apply.
H. (1) The term "Base Operating Expenses" shall mean the
------------------------
sum of $2,391,222.00.
(2) Notwithstanding anything to the contrary set forth
in this Lease, if Operating Expenses for the calendar year 1996 shall be in
excess of TWO MILLION FIVE HUNDRED NINETY THOUSAND FOUR HUNDRED NINETY AND
00/100 ($2,590,490.00) DOLLARS then Operating Expenses for the calendar year
1996 shall, nevertheless, be deemed to be TWO MILLION FIVE HUNDRED NINETY
THOUSAND FOUR HUNDRED NINETY AND 00/100 ($2,590,490.00) DOLLARS. If Operating
Expenses for the calendar year 1996 shall be in excess of TWO MILLION THREE
HUNDRED NINETY-ONE THOUSAND TWO HUNDRED TWENTY-TWO AND 00/100 ($2,391,222.00)
DOLLARS then, notwithstanding anything to the contrary set forth in this Lease,
with respect to all Escalation Years from and after 1997, Base Operating
Expenses shall be increased by the lesser of (a) ONE HUNDRED NINETY-NINE
THOUSAND TWO HUNDRED SIXTY-EIGHT AND 00/100 ($199,268.00) DOLLARS or (b) the
amount by which Operating Expenses for the calendar year 1996 shall be in excess
of TWO MILLION THREE HUNDRED NINETY-ONE THOUSAND TWO HUNDRED TWENTY-TWO AND
00/100 ($2,391,222.00) DOLLARS.
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<PAGE>
I. The term "Owner's Tax Statement" shall mean an
-----------------------
instrument containing a computation of any increase in the Fixed Rent pursuant
to the provisions of Section 23.02 A. of this Article.
J. The term "Owner's Operating Expense Statement" shall
------------------------------------
mean an instrument containing a computation of any increase in the Fixed Rent
pursuant to the provisions of Section 23.04 of this Article.
K. The term "Monthly Escalation Installment" shall mean a
------------------------------
sum equal to one-twelfth (1/12th) of the increase in the Fixed Rent payable
pursuant to the provisions of Subsection 23.04 A for the Escalation Year with
respect to which Owner has most recently rendered an Owner's Operating Expense
Statement, appropriately adjusted to reflect (i) in the event such Escalation
Year is a partial calendar year, the increase in the Fixed Rent which would have
been payable for such Escalation Year if it had been a full calendar year, and
(ii) the amount by which current Operating Expenses as reasonably estimated by
Owner exceed Operating Expenses as reflected in such Owner's Operating Expense
Statement; and (iii) any net credit balance to which Tenant may be entitled
pursuant to the provisions of Subsection 23.05 C.
L. The term "Monthly Escalation Installment Notice" shall
--------------------------------------
mean a notice given by Owner to Tenant which sets forth the current Monthly
Escalation Installment; such Notice may be contained in a regular monthly rent
bill, in an Owner's Operating Expense Statement, or otherwise, and may be given
from time to time, at Owner's election.
M. Owner and Tenant acknowledge that Owner may apply for a
certificate of eligibility from the Department of Finance of the City of New
York determining that Owner is eligible to apply for exemption from tax payments
for the Real Property pursuant to the provisions of Section 11-256 through 11-
267 (the "ICIP Program") of the Administrative Code of the City of New York and
------------
the regulations promulgated pursuant to the ICIP Program. Any such tax
exemption for the Real Property is referred to as "Tax Exemption" and the period
-------------
of such Tax Exemption is referred to as the "Tax Exemption Period". Owner
---------------------
agrees that Tenant shall not be required to (a) pay Taxes or charges which
become due because of the willful neglect or fraud by Owner in connection with
the ICIP Program or (b) otherwise relieve or indemnify Owner from any personal
liability arising under the ICIP Program, except where imposition of such Taxes,
charges or liability is occasioned by actions of Tenant in violation of this
Lease. Tenant agrees to report to Owner, as often as is necessary under such
regulations, the number of workers engaged in employment in the Demised
Premises, the nature of each worker's employment and the residency of each
worker and to provide access to the Demised Premises by employees and agents of
the Department of Finance of the City of New York at all reasonable times at the
request of Owner. Tenant represents to the Owner that, within the seven (7)
years immediately preceding the date of this Lease, Tenant has not been adjudged
by a court of competent jurisdiction to have been guilty of (x) an act, with
respect to a building, which is made a crime under the provisions of Article 150
of the Penal Law of the State of New York or any similar law of another state,
or (y) any act made a crime or violation by the provisions of Section 235 of the
Real Property Law of the State of New York, nor is any charge for a violation of
such laws presently pending against Tenant. Upon request of Owner, from time to
time, Tenant agrees to update said representation when required because of the
ICIP Program and regulations thereunder. Tenant further agrees to cooperate
with Owner in compliance with such ICIP Program and regulations to aid Owner in
obtaining and maintaining the Tax Exemption and, if requested by Owner, to post
a notice in a conspicuous place in the Demised Premises and to publish a notice
in a newspaper of general circulation in the City of New York, in such form as
shall be prescribed by the Department of Finance stating that persons having
information concerning any violation by Tenant of Section 235 of the Real
Property Law or any Section of Article 150 of the Penal Law or any similar law
of another jurisdiction may submit such information to the Department of Finance
to be considered in determining Owner's eligibility for benefits. Tenant
acknowledges that its obligations under the provisions of Subsection 23.02A may
be greater if Owner fails to obtain a Tax Exemption, and agrees that Owner shall
have no liability to Tenant nor shall Tenant be entitled to any abatement or
diminution of rent if Owner fails to obtain a Tax Exemption.
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<PAGE>
N. Owner and Tenant acknowledge that Tenant may apply for
a certificate of abatement from the Department of Finance of the City of New
York pursuant to the provisions of Title 4 of the Real Property Law of the State
of New York (the "Tax Abatement Program"). Owner agrees, at no cost or expense
to Owner, to cooperate with Tenant in its efforts to procure a certificate of
abatement including, if necessary, and if Owner approves of its contents, co-
signing Tenant's application for a certificate of abatement. Pursuant to the
Tax Abatement Program, Owner hereby informs Tenant that:
"(1) an application for abatement of real property taxes
pursuant to this title will be made for the premises;
(2) the rent, including amount payable by the tenant for
real property taxes, will accurately reflect any abatement of real property
taxes granted pursuant to this title for the premises;
(3) at least ten dollars per square foot or thirty-five
dollars per square foot must be spent on improvements to the premises and the
common areas, the amount being dependent upon the length of the lease and
whether it is a new or a renewal lease; and
(4) all abatements granted with respect to a building
pursuant to this title will be revoked if, during the benefit period, real
estate taxes or water or sewer charges are unpaid for more than one year, unless
such delinquent amounts are paid as provided in subdivision four of section four
hundred ninety-nine-f of this title."
Tenant agrees that Owner shall have no liability to Tenant nor shall
Tenant be entitled to any abatement or diminution of rent if Tenant fails to
obtain a certificate of abatement under the Tax Abatement Program.
Section 23.02. Taxes: A. The Fixed Rent for each Tax Escalation
-----
Year shall be increased by a sum equal to Tenant's Proportionate Share of Taxes
for such Tax Escalation Year.
B. Unless the Commencement Date shall occur on a July 1st,
any increase in the Fixed Rent pursuant to the provisions of Subsection A of
this Section 23.02 for the Tax Escalation Year in which the Commencement Date
shall occur shall be apportioned in that percentage which the number of days in
the period from the Commencement Date to June 30th of such Tax Escalation Year,
both inclusive, bears to the total number of days in such Tax Escalation Year.
Unless the Demised Term shall expire on a June 30th, any increase in the Fixed
Rent pursuant to the provisions of said Subsection A for the Tax Escalation Year
in which the date of the expiration of the Demised Term shall occur shall be
apportioned in that percentage which the number of days in the period from July
1st of such Tax Escalation Year to such date of expiration, both inclusive,
bears to the total number of days in such Tax Escalation Year.
Section 23.03. Calculation and Payment of Taxes: A. Owner shall
--------------------------------
render to Tenant, either in accordance with the provisions of Article 27 or by
personal delivery at the Demised Premises, an Owner's Tax Statement or
Statements with respect to each Tax Escalation Year, either prior to or during
such Tax Escalation Year. Owner's failure to render an Owner's Tax Statement
with respect to any Tax Escalation Year shall not prejudice Owner's right to
recover any sums due to Owner hereunder with respect to such Tax Escalation Year
nor shall it deprive Tenant of any credit to which it otherwise might be
entitled to for any Tax Escalation Year pursuant to the provisions of
subsection B of this Section 23.03. Tenant acknowledges that under present law,
Taxes are payable by Owner (i) with respect to a fiscal year commencing July 1st
and ending on the following June 30th, and (ii) in two (2) installments, in
advance, the first of which is payable on July 1st, and the second and final
payment of which is payable on the following January 1st. Within ten (10) days
next following rendition of the first Owner's Tax Statement which shows an
increase in the Fixed Rent for any Tax Escalation Year, Tenant shall pay to
Owner one-half of the amount of the increase shown upon such Owner's Tax
Statement for such Tax Escalation Year
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<PAGE>
(including any apportionment pursuant to the provisions of subsection B of
Section 23.02); and, subsequently, provided Owner shall have rendered to Tenant
an Owner's Tax Statement, Tenant shall pay to Owner not later than thirty (30)
days prior to the date on which the installment of Taxes is required to be paid
by Owner a sum equal to one half (1/2) of Tenant's Proportionate Share of Taxes
payable with respect to such Tax Escalation Year as shown on such Owner's Tax
Statement. Tenant further acknowledges that it is the purpose and intent of
this Section 23.03 to provide Owner with Tenant's Proportionate Share of Taxes
thirty (30) days prior to the time such installment of Taxes is required to be
paid by Owner without penalty or interest. Accordingly, Tenant agrees if the
number of such installments and/or the date of payment thereof and/or the fiscal
year used for the purpose of Taxes shall change then (a) at the time that any
such revised installment is payable by Owner, Tenant shall pay to Owner the
amount which shall provide Owner with Tenant's Proportionate Share of Taxes
applicable to the revised installment of Taxes then required to be paid by
Owner, and (b) this Article shall be appropriately adjusted to reflect such
change and the time for payment to Owner of Tenant's Proportionate Share of
Taxes as provided in this Article shall be appropriately revised so that Owner
shall always be provided with Tenant's Proportionate Share of Taxes thirty (30)
days prior to the installment of Taxes required to be paid by Owner.
Notwithstanding the foregoing provisions of this subsection A to the contrary,
in the event the holder of any mortgage affecting the Real Property shall
require Owner to make monthly deposits on account of real estate taxes, then
this Article shall be appropriately adjusted to reflect the requirement that
Owner make monthly deposits on account of real estate taxes so that Owner shall
always be provided with one-twelfth (1/12th) of Tenant's Proportionate Share of
Taxes with respect to any Tax Escalation Year thirty (30) days prior to the
payment by Owner of such monthly deposits on account of real estate taxes.
B. If, as a result of any application or proceeding
brought by or on behalf of Owner for reduction of the assessed valuation of the
Real Property there shall be a decrease in Taxes for any Tax Escalation Year
with respect to which Owner shall have previously rendered an Owner's Tax
Statement, the next monthly installment or installments of Fixed Rent following
such decrease shall include an adjustment of the Fixed Rent for such Tax
Escalation Year reflecting a credit to Tenant equal to the amount by which (i)
the Fixed Rent actually paid by Tenant with respect to such Tax Escalation Year
(as increased pursuant to the operation of the provisions of subsection A of
Section 23.02), shall exceed (ii) the Fixed Rent payable with respect to such
Tax Escalation Year (as increased pursuant to the operation of the provisions of
subsection A of Section 23.02) based upon such reduction of the assessed
valuation. Tenant shall pay to Owner within thirty (30) days after demand, as
additional rent under this Lease, a sum equal to Tenant's Proportionate Share of
all costs and expenses, including, without limitation, counsel fees, paid or
incurred by Owner in connection with any application or proceeding brought for
reduction of the assessed valuation of the Real Property or any other contest of
Taxes upon the Real Property for any Tax Escalation Year, whether or not such
application, proceeding or other contest was commenced and/or settled and/or
determined prior to the Tax Escalation Year in question.
Section 23.04. Operating Expenses: A. If Operating Expenses in any
------------------
Escalation Year shall be in such an amount as shall constitute an increase above
Base Operating Expenses, the Fixed Rent for such Escalation Year shall be
increased by a sum equal to Tenant's Proportionate Share of any such increase.
In the event that Base Operating Expenses shall be in excess of Operating
Expenses in any Escalation Year, in no event shall Tenant be entitled to any
such excess and the Fixed Rent shall not be reduced in any way.
B. Unless the Commencement Date shall occur on a January
1st, any increase in the Fixed Rent pursuant to the provisions of Subsection A
of this Section 23.04 for the Escalation Year in which the Commencement Date
shall occur shall be apportioned in that percentage which the number of days in
the period from the Commencement Date to December 31st of such Escalation Year,
both dates inclusive, bears to the total number of days in such Escalation Year.
Unless the Demised Term shall expire on December 31st any increase in the Fixed
Rent pursuant to the provisions of Subsection A of this Section 23.04 for the
Escalation Year in which the date of the expiration of the Demised Term shall
occur shall be apportioned in that percentage which the number of days in the
period from January 1st of such Escalation Year to such date of expiration, both
dates inclusive, bears to the total number of days in such Escalation Year.
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<PAGE>
C. In the determination of any increase in the Fixed Rent
pursuant to the foregoing provisions of this Section 23.04, if the Building
shall not have been fully occupied during any Escalation Year, Operating
Expenses for such Escalation Year shall be equitably adjusted (by including such
additional expenses as Owner would have incurred) to the extent, if any,
required to reflect full occupancy.
Section 23.05.Calculation and Payment of Operating Expenses: A .
---------------------------------------------
Owner shall render to Tenant, either in accordance with the provisions of
Article 27 or by personal delivery at the Demised Premises, an Owner's Operating
Expense Statement with respect to each Escalation Year on or before the next
succeeding October 1st. Owner's failure to render an Owner's Operating Expense
Statement with respect to any Escalation Year shall not prejudice Owner's right
to recover any sums due to Owner hereunder with respect to such Escalation Year.
B. Within fifteen (15) days next following rendition of
the first Owner's Operating Expense Statement which shows an increase in the
Fixed Rent for any Escalation Year, Tenant shall pay to Owner the entire amount
of such increase. In order to provide for current payments on account of future
potential increases in the Fixed Rent which may be payable by Tenant pursuant to
the provisions of Subsection 23.04.A, Tenant shall also pay to Owner at such
time, provided Owner has given to Tenant a Monthly Escalation Installment
Notice, a sum equal to the product of (i) the Monthly Escalation Installment set
forth in such Notice multiplied by (ii) the number of months or partial months
which shall have elapsed between January 1st of the Escalation Year in which
such payment is made and the date of such payment, less any amounts theretofore
paid by Tenant to Owner on account of increases in the Fixed Rent for such Esca-
lation Year pursuant to the provisions of the penultimate sentence of this
Subsection 23.05.B; thereafter Tenant shall make payment of a Monthly Escalation
Installment throughout each month of the Demised Term. Monthly Escalation
Installments shall be added to and payable as part of each monthly installment
of Fixed Rent. Notwithstanding anything to the contrary contained in the
foregoing provisions of this Article, prior to the rendition of the first
Owner's Operating Expense Statement which shows an increase in the Fixed Rent
for any Escalation Year, Owner may render to Tenant a pro-forma Owner's
Operating Expense Statement containing a bona fide estimate of the increase in
the Fixed Rent for the Escalation Year in which the Commencement Date shall
occur and/or the subsequent Escalation Year. Following the rendition of such
pro-forma Owner's Operating Expense Statement, Tenant shall pay to Owner a sum
equal to one twelfth (1/12th) of the estimated increase in the Fixed Rent shown
thereon for such Escalation Year or Years multiplied by the number of months
which may have elapsed between the Commencement Date and the month in which such
payment is made and thereafter pay to Owner, on the first day of each month of
the Demised Term (until the rendition by Owner of the first Owner's Operating
Expense Statement) a sum equal to one twelfth (1/12th) of the increase in the
Fixed Rent shown on such pro-forma Owner's Operating Expense Statement. Any
sums paid pursuant to the provisions of the immediately preceding sentence shall
be credited against the sums required to be paid by Tenant to Owner pursuant to
the Owner's Operating Expense Statement for the first Escalation Year for which
there is an increase in the Fixed Rent pursuant to the provisions of Subsection
A.
C. Following rendition of the first Owner's Operating
Expense Statement and each subsequent Owner's Operating Expense Statement a
reconciliation shall be made as follows: Tenant shall be debited with any
increase in the Fixed Rent shown on such Owner's Operating Expense Statement and
credited with the aggregate amount, if any, paid by Tenant in accordance with
the provisions of Subsection B of this Section on account of future increases in
the Fixed Rent pursuant to Subsection 23.04 A. which has not previously been
credited against increases in the Fixed Rent shown on Owner's Operating Expense
Statements. Tenant shall pay any net debit balance to Owner within fifteen (15)
days next following rendition by Owner, either in accordance with the provisions
of Article 27 or by personal delivery at the Demised Premises of an invoice for
such net debit balance; any net credit balance shall be applied as an adjustment
against the next accruing Monthly Escalation Installment as provided in
Subsection L of Section 23.01.
Section 23.06. Dispute Resolution: A. In the event of any dispute
------------------
between Owner and Tenant arising out of the application of the Operating Expense
provisions of this Article, such dispute shall be
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determined by arbitration in New York City in accordance with the provisions of
Article 36. Notwithstanding any such dispute and submission to arbitration, or
any dispute with respect to the Tax Escalation provisions of this Article (which
dispute shall not be subject to arbitration but which can only be prosecuted by
the institution of legal proceedings by Tenant), any increase in the Fixed Rent
shown upon any Owner's Operating Expense Statement or any Monthly Escalation
Installment Notice or any Owner's Tax Statement shall be payable by Tenant
within the time limitation set forth in this Article. If the determination in
such arbitration or legal proceedings shall be adverse to Owner, any amount paid
by Tenant to Owner in excess of the amount determined to be properly payable
shall be credited against the next accruing installments of Fixed Rent due under
this Lease. However, if there are no such installments, such amounts shall be
paid by Owner to Tenant within ten (10) days following such determination.
B. In the event Tenant disagrees with any computation or
other matter contained in any Owner's Operating Expense Statement or any Monthly
Escalation Installment Notice, Tenant shall have the right to give notice to
Owner within sixty (60) days next following rendition of such Statement or
Notice setting forth the particulars of such disagreement. If the matter is not
resolved within thirty (30) days next following the giving of such notice by
Tenant, it shall be deemed a dispute which either party may submit to
arbitration pursuant to the provisions of Subsection A of this Section. If (i)
Tenant does not give a timely notice to Owner in accordance with the foregoing
provisions of this Subsection disagreeing with any computation or other matter
contained in any Owner's Operating Expense Statement or any Monthly Escalation
Installment Notice and setting forth the particulars of such disagreement, or
(ii) if any such timely notice shall have been given by Tenant, the matter shall
not have been resolved and neither party shall have submitted the dispute to
arbitration within thirty (30) days next following the giving of such notice by
Tenant, Tenant shall be deemed conclusively to have accepted such Owner's
Operating Expense Statement or Monthly Escalation Installment Notice, as the
case may be, and shall have no further right to dispute the same.
C. (1) Tenant or its usual auditors of its normal books
and records (provided same are certified public accountants) in each case at
Tenant's expense, shall have the right to examine those portions of Owner's
records which are reasonably required to verify the accuracy of any amounts
shown on any Owner's Operating Expense Statement provided Tenant shall notify
Owner of its desire to so examine such records within sixty (60) days next
following rendition of such Owner's Operating Expense Statement. Owner shall
maintain such records for a period of three (3) years following the expiration
of the Escalation Year to which they relate. Upon Tenant's timely request,
Owner shall make such records available and any such examination shall be
conducted at the office of Owner's accountants or at such other reasonable place
designated by Owner during normal office hours.
(2) Tenant acknowledges and agrees that not more than
three (3) of its employees or three (3) persons employed by such auditors shall
be entitled to entry to the offices of Owner at any one time for the purposes of
such review and inspection. Tenant hereby recognizes the confidential,
privileged and proprietary nature of such records and the information and data
contained therein, as well as any compromise, settlement or adjustment reached
between Owner and Tenant relating to the results of such examination, and Tenant
covenants and agrees for itself, and its employees, agents and representatives
(including, but not limited to, such auditors, and any attorneys or consultants
retained by Tenant as hereinafter provided), that such books, records,
information, data, compromise, settlement and adjustment will be held in the
strictest confidence and not be divulged, disclosed or revealed to any other
person except (x) to the extent required by law, court order or directive of any
Governmental Authority or (y) to such auditors or any attorneys retained by
Tenant or consultants retained by Tenant in connection with any action or
proceeding between Owner and Tenant as to Operating Expenses or Owner's
Operating Expense Statement and no examination of any such records shall be
permitted unless and until such auditors, attorneys and consultants
affirmatively agree and consent to be bound by the provisions of this Section
23.06C.
(3) Tenant agrees that this Section 23.06C is of
material importance to Owner and that any violation thereof shall result in
immediate harm to Owner and Owner shall have all rights
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<PAGE>
allowed by law or equity if Tenant, its employees, agents, and representatives
(including, but not limited to, such auditors, attorneys or consultants) violate
the terms of this Section 23.06C, including, but not limited to, the right to
terminate Tenant's right to audit Owner's records in the future pursuant to this
Section 23.06C, and Tenant shall indemnify and hold Owner harmless of and from
all loss, cost, damage, liability and expense (including, but not limited to
counsel fees and disbursements) arising from a breach of the foregoing
obligations of Tenant or any of its employees, agents and representatives,
(including but not limited to, such auditors, attorneys or consultants). This
obligation of Tenant and its employees, agents and representatives (including,
but not limited to, any such auditors, attorneys or consultants) shall survive
the expiration or sooner term of the Demised Term.
Section 23.07. Collection of Increases in Fixed Rent: The obligations
-------------------------------------
of Owner and Tenant under the provisions of this Article with respect to any
increase in the Fixed Rent, or any credit to which Tenant may be entitled, shall
survive the expiration or any sooner termination of the Demised Term. All sums
payable by Tenant under this Article shall be collectible by Owner in the same
manner as Fixed Rent.
ARTICLE 24
NO WAIVER
---------
Section 24.01. Owner's Termination Not Prevented: Neither any option
---------------------------------
granted to Tenant in this Lease or in any collateral instrument to renew or
extend the Demised Term, nor the exercise of any such option by Tenant, shall
prevent Owner from exercising any option or right granted or reserved to Owner
in this Lease or in any collateral instrument or which Owner may have by virtue
of any law, to terminate this Lease and the Demised Term or any renewal or
extension of the Demised Term either during the original Demised Term or during
the renewed or extended term. Any termination of this Lease and the Demised
Term shall serve to terminate any such renewal or extension of the Demised Term
and any right of Tenant to any such renewal or extension, whether or not Tenant
shall have exercised any such option to renew or extend the Demised Term. Any
such option or right on the part of Owner to terminate this Lease shall continue
during any extension or renewal of the Demised Term. No option granted to
Tenant to renew or extend the Demised Term shall be deemed to give Tenant any
further option to renew or extend.
Section 24.02. No Termination by Tenant/No Waiver: No act or thing
-----------------------------------
done by Owner or Owner's agents during the Demised Term shall constitute a valid
acceptance of a surrender of the Demised Premises or any remaining portion of
the Demised Term except a written instrument accepting such surrender, executed
by Owner. No employee of Owner or of Owner's agents shall have any authority to
accept the keys of the Demised Premises prior to the termination of this Lease
and the Demised Term, and the delivery of such keys to any such employee shall
not operate as a termination of this Lease or a surrender of the Demised
Premises; however, if Tenant desires to have Owner sublet the Demised Premises
for Tenant's account, Owner or Owner's agents are authorized to receive said
keys for such purposes without releasing Tenant from any of its obligations
under this Lease, and Tenant hereby relieves Owner of any liability for loss of,
or damage to, any of Tenant's property or other effects in connection with such
subletting. The failure by Owner to seek redress for breach or violation of, or
to insist upon the strict performance of, any term, covenant or condition of
this Lease on Tenant's part to be observed or performed, shall not prevent a
subsequent act or omission which would have originally constituted a breach or
violation of any such term, covenant or condition from having all the force and
effect of an original breach or violation. The receipt by Owner of rent with
knowledge of the breach or violation by Tenant of any term, covenant or
condition of this Lease on Tenant's part to be observed or performed shall not
be deemed a waiver of such breach or violation. Owner's failure to enforce any
Building Rule against Tenant or against any other tenant or occupant of the
Building shall not be deemed a waiver of any such Building Rule. No provision
of this Lease shall be deemed to have been waived by Owner unless such waiver
shall be set forth in a written instrument executed by Owner. No payment by
Tenant or receipt by Owner of a lesser amount than the aggregate of all Fixed
Rent and additional rent then due under this Lease shall be deemed to be other
than on account of the first accruing
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of all such items of Fixed Rent and additional rent then due, no endorsement or
statement on any check and no letter accompanying any check or other rent
payment in any such lesser amount and no acceptance of any such check or other
such payment by Owner shall constitute an accord and satisfaction, and Owner may
accept any such check or payment without prejudice to Owner's right to recover
the balance of such rent or to pursue any other legal remedy.
ARTICLE 25
MUTUAL WAIVER OF TRIAL BY JURY
------------------------------
Section 25.01. Owner and Tenant hereby waive trial by jury in any
action, proceeding or counterclaim brought by Owner or Tenant against the other
on any matter whatsoever arising out of or in any way connected with this Lease,
the relationship of landlord and tenant, the use or occupancy of the Demised
Premises by Tenant or any person claiming through or under Tenant, any claim of
injury or damage, and any emergency or other statutory remedy; however, the
foregoing waiver shall not apply to any action for personal injury or property
damage. The provisions of the foregoing sentence shall survive the expiration
or any sooner termination of the Demised Term. If Owner commences any summary
proceeding, or any other proceeding of like import, Tenant agrees: (i) not to
interpose any counterclaim of whatever nature or description in any such summary
proceeding, or any other proceeding of like import, unless failure to interpose
such counterclaim would preclude Tenant from asserting such claim in a separate
action or proceeding; and (ii) not to seek to remove to another court or
jurisdiction or consolidate any such summary proceeding, or other proceeding of
like import, with any action or proceeding which may have been, or will be,
brought by Tenant. In the event that Tenant shall breach any of its obligations
set forth in the immediately preceding sentence, Tenant agrees (a) to pay all of
Owner's attorneys' fees and disbursements in connection with Owner's enforcement
of such obligations of Tenant and (b) in all events, to pay all accrued, present
and future Fixed Rent and increases therein and additional rent payable pursuant
to the provisions of this Lease.
ARTICLE 26
INABILITY TO PERFORM
--------------------
Section 26.01. If, by reason of strikes or other labor disputes, fire
or other casualty (or reasonable delays in adjustment of insurance), accidents,
any Legal Requirements, any orders of any Governmental Authority or any other
cause beyond Owner's reasonable control, whether or not such other cause shall
be similar in nature to those hereinbefore enumerated, Owner is unable to
furnish or is delayed in furnishing any utility or service required to be
furnished by Owner under the provisions of Article 29 or any other Article of
this Lease or any collateral instrument, or is unable to perform or make or is
delayed in performing or making any installations, decorations, repairs,
alterations, additions or improvements, whether or not required to be performed
or made under this Lease or under any collateral instrument, or is unable to
fulfill or is delayed in fulfilling any of Owner's other obligations under this
Lease or any collateral instrument, no such inability or delay shall constitute
an actual or constructive eviction, in whole or in part, or entitle Tenant to
any abatement or diminution of rent, or relieve Tenant from any of its
obligations under this Lease, or impose any liability upon Owner or its agents
by reason of inconvenience or annoyance to Tenant, or injury to or interruption
of Tenant's business, or otherwise.
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ARTICLE 27
NOTICES
-------
Section 27.01. Except as otherwise expressly provided in this Lease,
any bills, statements, notices, demands, requests or other communications given
or required to be given under this Lease shall be effective only if rendered or
given in writing, sent by registered or certified mail (return receipt requested
optional), addressed as follows:
(a) To Tenant (i) at Tenant's address set forth in this
----------
Lease if mailed prior to Tenant's taking possession of the Demised Premises, or
(ii) at the Building if mailed subsequent to Tenant's taking possession of the
Demised Premises, or (iii) at any place where Tenant or any agent or employee of
Tenant may be found if mailed subsequent to Tenant's vacating, deserting,
abandoning or surrendering the Demised Premises, or
(b) To Owner at Owner's address set forth in this Lease,
--------
with a copy to Goldfarb & Fleece, 345 Park Avenue, New York, New York 10154,
Attention: Partner-in-Charge, Rudin Management, or
(c) addressed to such other address as either Owner or
Tenant may designate as its new address for such purpose by notice given to the
other in accordance with the provisions of this Section. Any such bill,
statement, notice, demand, request or other communication shall be deemed to
have been rendered or given on the date when it shall have been mailed as
provided in this Section.
Nothing contained in this Section 27.01 shall preclude, limit or modify Owner's
service of any notice, statement, demand or other communication in the manner
required by law, including, but not limited to, any demand for rent under
Article 7 of the New York Real Property Actions and Proceedings Law or any
successor law of like import.
ARTICLE 28
PARTNERSHIP TENANT
------------------
Section 28.01. If Tenant is a partnership or professional corporation
or limited liability company (or is comprised of two (2) or more persons,
individually and as co-partners of a partnership or shareholders of a
professional corporation or members of a limited liability company) or if
Tenant's interest in this Lease shall be assigned to a partnership or
professional corporation or limited liability company (or to two (2) or more
persons, individually and as co-partners of a partnership or shareholders of a
professional corporation or members of a limited liability company) pursuant to
Article 11 (any such partnership, professional corporation, limited liability
company and such persons are referred to in this Section as "Partnership
-----------
Tenant"), the following provisions of this Section shall apply to such
- ------
Partnership Tenant: (i) the liability of each of the persons comprising
Partnership Tenant shall be joint and several, individually and as a partner or
shareholder or member, with respect to all obligations of the Tenant under this
Lease whether or not such obligations arose prior to, during, or after any
period when any party comprising Partnership Tenant was a member or shareholder
of Partnership Tenant, and (ii) each of the persons comprising Partnership
Tenant, whether or not such person shall be one of the persons comprising Tenant
at the time in question, hereby consents in advance to, and agrees to be bound
by, any written instrument which may hereafter be executed, changing, modifying
or discharging this Lease, in whole or in part, or surrendering all or any part
of the Demised Premises to Owner, and by any notices, demands, requests or other
communications which may hereafter be given by Partnership Tenant or by any of
the persons comprising Partnership Tenant, and (iii) any bills, statements,
notices, demands, requests or other communications given or rendered to
Partnership
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<PAGE>
Tenant or to any of the persons comprising Partnership Tenant shall be deemed
given or rendered to Partnership Tenant and to all such persons and shall be
binding upon Partnership Tenant and all such persons, and (iv) if Partnership
Tenant shall admit new partners or shareholders or members, all of such new
partners or shareholders or members, as the case may be, 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 shall be liable for such performance, together with
all other parties, jointly or severally, individually and as a partner or
shareholder or member, whether or not the obligation to comply with such terms,
covenants or conditions arose prior to, during or after any period when any
party comprising Partnership Tenant was a member or shareholder of Partnership
Tenant and (v) Partnership Tenant shall give prompt notice to Owner of the
admission of any such new partners, or shareholders, or members, as the case may
be, and, upon demand of Owner, shall cause each such new partner or shareholder
or member to execute and deliver to Owner an agreement, in form satisfactory to
Owner, wherein each such new partner or shareholder or member shall so assume
performance of all of the terms, covenants and conditions of this Lease on
Tenant's part to be observed and performed whether or not the obligation to
comply with such terms, covenants or conditions arose prior to, during or after
any period when any party comprising Partnership Tenant was a member or
shareholder of Partnership Tenant (but neither Owner's failure to request any
such agreement nor the failure of any such new partner, shareholder or member to
execute or deliver any such agreement to Owner shall vitiate the provisions of
subdivision (iv) or any other provision of this Section).
ARTICLE 29
UTILITIES AND SERVICES
----------------------
Section 29.01. Elevators: As long as Tenant is not in default under
---------
any of the terms, covenants or conditions of this Lease on Tenant's part to be
observed or performed, Owner, at Owner's expense, shall furnish necessary
passenger elevator facilities twenty-four (24) hours per day on business days
(as defined in Section 31.01) and on Saturdays from 8:00 A.M. to 6:00 P.M. and
shall have a passenger elevator subject to call at all other times. Tenant
shall be entitled to the non-exclusive use of the freight elevator in common
with other tenants and occupants of the Building from 8:00 A.M. to 6:00 P.M. on
business days, subject to such reasonable rules as Owner may adopt for the use
of the freight elevator. At any time or times all or any of the elevators in
the Building may, at Owner's option, be automatic elevators, and Owner shall not
be required to furnish any operator service for automatic elevators. If Owner
shall, at any time, elect to furnish operator service for any automatic
elevators, Owner shall have the right to discontinue furnishing such service
with the same effect as if Owner had never elected to furnish such service.
Section 29.02. Heat: As long as Tenant is not in default under any of
----
the terms, covenants or conditions of this Lease on Tenant's part to be observed
or performed, Owner, at Owner's expense, shall furnish heat to the Demised
Premises, as and when required by law, twenty-four (24) hours per day on
business days and on Saturdays from 8:00 A.M. to 6:00 P.M.
Section 29.03. Air Conditioning and Ventilation: As long as Tenant is
--------------------------------
not in default under any of the terms, covenants or conditions of this Lease on
Tenant's part to be observed or performed, Owner, at Owner's expense, shall
furnish and distribute to the Demised Premises (i) conditioned air at reasonable
temperatures, pressures and degrees of humidity and in reasonable volumes and
velocities, twenty-four (24) hours per day on business days and on Saturdays
from 8:00 A.M. to 6:00 P.M. during the months of May, June, July, August,
September and October when required for the comfortable occupancy of the Demised
Premises; and (ii) mechanical ventilation through the Building air conditioning
system twenty-four (24) hours per day on business days and on Saturdays from
8:00 A.M. to 6:00 P.M. throughout the year, except when conditioned air or heat
is being furnished. Notwithstanding the foregoing provisions of this Section,
Owner shall not be responsible if the normal operation of the Building air
conditioning system shall fail to provide conditioned air at reasonable
temperatures, pressures or degrees of humidity or in reasonable volumes or
velocities in any portions of the Demised Premises
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<PAGE>
(a) which, by reason of any machinery or equipment installed by or on behalf of
Tenant or any person claiming through or under Tenant, shall have an electrical
load in excess of four (4) watts per square foot of usable area for all purposes
(including lighting and power), or which shall have a human occupancy factor in
excess of one person per 100 square feet of usable area (the average electrical
load and human occupancy factors for which the Building air conditioning system
is designed) or (b) because of any rearrangement of partitioning or other
Alterations made or performed by or on behalf of Tenant or any person claiming
through or under Tenant. Whenever said air conditioning system is in operation,
Tenant agrees to cause all the windows in the Demised Premises to be kept closed
and to cause the venetian blinds in the Demised Premises to be kept closed if
necessary because of the position of the sun. Tenant agrees to cause all the
windows in the Demised Premises to be closed whenever the Demised Premises are
not occupied. Tenant shall cooperate fully with Owner at all times and abide by
all regulations and requirements which Owner may reasonably prescribe for the
proper functioning and protection of the air conditioning and ventilating
system. In addition to any and all other rights and remedies which Owner may
invoke for a violation or breach of any of the foregoing provisions of this
Section, Owner may discontinue heating, air conditioning and ventilating service
during the period of such violation or breach, and such discontinuance shall not
constitute an actual or constructive eviction, in whole or in part, or entitle
Tenant to any abatement or diminution of rent, or relieve Tenant from any of its
obligations under this Lease, or impose any liability upon Owner, or its agents,
by reason of inconvenience or annoyance to Tenant, or injury to or interruption
of Tenant's business, or otherwise.
Section 29.04. Cleaning: A. Tenant, at Tenant's expense, shall keep
--------
the Demised Premises in order, shall cause the Demised Premises to be cleaned
and shall cause Tenant's refuse and rubbish to be removed, all at regular
intervals in accordance with standards and practices adopted by Owner for the
Building. Tenant shall cooperate with any waste and garbage recycling program
of the Building and shall comply with all reasonable rules and regulations of
Owner with respect thereto. Tenant, at Tenant's expense, shall cause all
portions of the Demised Premises used for the storage, preparation, service or
consumption of food or beverages to be cleaned daily in a manner satisfactory to
Owner, and to be exterminated against infestation by vermin, roaches or rodents
regularly and, in addition, whenever there shall be evidence of any infestation.
B. Owner, at Owner's expense, shall clean the public
portions of the Building at regular intervals in accordance with practices and
standards adopted by Owner for the Building.
C. The removal of refuse and rubbish and the furnishing of
office cleaning services to Tenant by persons other than Owner and its
contractors shall be performed in accordance with such regulations and
requirements as, in Owner's judgment, are necessary for the proper operation of
the Building, and Tenant agrees that Tenant will not permit any person to enter
the Demised Premises or the Building for such purposes, or for the purpose of
providing extermination services required to be performed by Tenant pursuant to
Subsection A of this Section, other than persons first approved by Owner, such
approval not unreasonably to be withheld.
Section 29.05. Electricity: A. As long as Tenant is not in default
-----------
under any of the terms, covenants or conditions of this Lease on Tenant's part
to be observed or performed, Owner shall redistribute or furnish electrical
energy to or for the use of Tenant in the Demised Premises for the operation of
the lighting fixtures and the electrical receptacles installed in the Demised
Premises on the Commencement Date. If either the quantity or character of
electrical service is changed by the public utility corporation supplying
electrical service to the Building or is no longer available or suitable for
Tenant's requirements, no such change, unavailability or unsuitability shall
constitute an actual or constructive eviction, in whole or in part, or entitle
Tenant to any abatement or diminution of rent, or relieve Tenant from any of its
obligations under this Lease, or impose any liability upon Owner, or its agents,
by reason of inconvenience or annoyance to Tenant, or injury to or interruption
of Tenant's business or otherwise.
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<PAGE>
B. Owner represents that the electrical feeder or riser
capacity serving the Demised Premises on the Commencement Date shall be adequate
to serve the lighting fixtures and electrical receptacles installed in the
Demised Premises on the Commencement Date. Any additional feeders or risers to
supply Tenant's additional electrical requirements, and all other equipment
proper and necessary in connection with such feeders or risers shall be
installed by Owner upon Tenant's request, at the sole cost and expense of
Tenant, provided, that, in Owner's judgment, such additional feeders or risers
are necessary and are permissible under applicable laws and insurance
regulations and the installation of such feeders or riders will not cause
permanent 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 or repairs to or interfere with or disturb other tenants or
occupants of the Building. Tenant covenants that at no time shall the use of
electrical energy in the Demised Premises exceed the capacity of the existing
feeders or risers or wiring installations then serving the Demised Premises.
C. Prior to the Commencement Date Owner, at Owner's
expense, shall have installed a submeter or submeters in the Demised Premises to
measure Tenant's actual consumption of electricity in the entire Demised
Premises. Tenant shall pay to Owner, from time to time, upon demand, for the
electricity consumed in the Demised Premises, as determined by such submeter or
submeters, the actual cost to Owner of purchasing electricity for the Demised
Premises (as such actual cost is hereinafter defined) plus all applicable taxes
thereon. Owner's actual cost for Tenant's KW and KWH shall be determined by the
application of the Building's electric rate schedule per month to Tenant's
usage. With respect to any period when any such submeter is not in good working
order, Tenant shall pay Owner for electricity consumed in the portion of the
Demised Premises served by such submeter at the rate paid by Tenant to Owner
during the most recent comparable period when such submeter was in good working
order. Tenant shall take good care of any such submeter and all submetering
installation equipment, at Tenant's sole cost and expense, and make all repairs
thereto occasioned by any acts, omissions or negligence of Tenant or any person
claiming through or under Tenant as and when necessary to insure that any such
submeter is, at all times during the Demised Term, in good working order. With
respect to the period (referred to as the "Interim Period"), if any, from the
--------------
Commencement Date through the date immediately prior to the date upon which the
submeter or submeters shall be operable, Tenant shall pay to Owner monthly on
demand of Owner, for the electricity consumed in the Demised Premises, a sum
equal to one-twelfth (1/12th) of the product of (x) $2.75 multiplied by (y) the
Demised Premises Area. With respect to any period during the Interim Period
constituting less than a full calendar month, the monthly payment referred to in
the preceding sentence shall be appropriately prorated.
D. Owner may, at any time, elect to discontinue the
redistribution or furnishing of electrical energy. In the event of any such
election by Owner, (i) Owner agrees to give reasonable advance notice of any
such discontinuance to Tenant, (ii) Owner agrees to permit Tenant to receive
electrical service directly from the public utility corporation supplying
electrical service to the Building and to permit the existing feeders, risers,
wiring and other electrical facilities serving the Demised Premises to be used
by Tenant for such purpose to the extent they are suitable and safely capable,
(iii) Owner agrees to pay such charges and costs, if any, as such public utility
corporation may impose in connection with the installation of Tenant's meters,
(iv) the provisions of Subsection C of this Section 29.05 shall be deemed
deleted from this Lease, and (v) this Lease shall remain in full force and
effect and such discontinuance shall not constitute an actual or constructive
eviction, in whole or in part, or entitle Tenant to any abatement or diminution
of rent, or relieve Tenant from any of its obligations under this Lease, or
impose any liability upon Owner or its agents by reason of inconvenience or
annoyance to Tenant, or injury to or interruption of Tenant's business, or
otherwise.
E. Notwithstanding anything to the contrary set forth in
this Lease, any sums payable or granted in any way by the public utility
corporation supplying electricity to the Building resulting from the
installation in the Demised Premises of energy efficient lighting fixtures,
lamps, special supplemental heating, ventilation and air conditioning systems or
any other Alterations, which sums are paid or given by way of rebate, direct
payment, credit or otherwise, shall be and remain the property of Owner, and
Tenant shall not be entitled to any portion thereof, unless such lighting
fixtures, lamps, supplemental heating, ventilation and air
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conditioning systems or other Alterations were installed by Tenant, solely at
Tenant's expense, without any contribution, credit or allowance by Owner, in
accordance with all of the provisions of this Lease. Nothing contained in the
foregoing sentence, however, shall be deemed to obligate Owner to supply or
install in the Demised Premises any such lighting fixtures, lamps, supplemental
heating, ventilation and air conditioning systems or other Alterations.
F. Tenant acknowledges that the Building heating,
ventilating and air conditioning system unit serving the floor of the Building
on which the Demised Premises are located (referred to herein as the "Floor HVAC
Unit") shall not be connected to the submeter(s) serving the Demised Premises,
but, instead, shall be connected to a separate meter(s) measuring the electrical
energy consumed by such Floor HVAC Unit. Accordingly, Tenant agrees that during
the Demised Term, Tenant shall pay to Owner, from time to time upon demand of
Owner and submission by Owner to Tenant of invoices or bills therefor, thirty-
six and 68/100 (36.68%) percent (hereinafter "Tenant's Electrical Share") of all
amounts shown on said separate meter(s) for such Floor HVAC Unit.
G. Tenant acknowledges that the light and power systems
serving the public areas of the floor of the Building on which the Demised
Premises are located (referred to herein as the "Floor Public Light and Power")
shall not be connected to the submeter(s) serving the Demised Premises but,
instead, shall be connected to a separate meter(s) measuring the electrical
energy consumed by such Floor Public Light and Power. Accordingly, Tenant
agrees that during the Demised Term, Tenant shall pay to Owner, from time to
time upon demand of Owner and submission by Owner to Tenant of invoices or bills
therefor, Tenant's Electrical Share of all amounts shown on said separate
meter(s) for such Floor Public Light and Power.
Section 29.06. Water: If Tenant requires, uses or consumes water for
-----
any purpose in addition to ordinary lavatory and drinking purposes, Owner may
install a hot water meter and a cold water meter and thereby measure Tenant's
consumption of water for all purposes. Tenant shall pay to Owner the cost of
any such meters and their installation, and Tenant shall keep any such meters
and any such installation equipment in good working order and repair, at
Tenant's cost and expense. Tenant agrees to pay for water consumed as shown on
said meters, and sewer charges, taxes and any other governmental charges
thereon, as and when bills are rendered. In addition to any sums required to be
paid by Tenant for hot water consumed and sewer charges, taxes and any other
governmental charges thereon under the foregoing provisions of this Section,
Tenant agrees to pay to Owner, for the heating of said hot water, an amount
equal to three (3X) times the total of said sums required to be paid by Tenant
for hot water and sewer charges thereon. For the purposes of determining the
amount of any sums required to be paid by Tenant under this Section, all hot and
cold water consumed during any period when said meters are not in good working
order shall be deemed to have been consumed at the rate of consumption of such
water during the most comparable period when such meters were in good working
order.
Section 29.07. Overtime Periods: The Fixed Rent does not reflect or
----------------
include any charge to Tenant for the furnishing or distributing of any necessary
elevator facilities, heat, conditioned air or mechanical ventilation to the
Demised Premises during periods (referred to as "Overtime Periods") other than
-----------------
the hours and days set forth above in this Article for the furnishing and
distributing of such services. Accordingly, if Owner shall furnish any such
elevator facilities, heat, conditioned air or mechanical ventilation to the
Demised Premises at the request of Tenant during Overtime Periods, Tenant shall
pay Owner for such services at the following rates as of the date of this Lease:
$10.00 Dollars per hour for air-conditioning, $10.00 Dollars per hour for
ventilation, $10.00 Dollars per hour for heating and $60.00 Dollars per hour for
freight elevator service. Any increases above such rates shall be in an amount
equal to the actual increases after the date of this Lease in the cost to Owner
of furnishing such services. Owner shall not be required to furnish any such
services during Overtime Periods, unless Owner has received reasonable advance
notice from Tenant requesting such services. If Tenant fails to give Owner
reasonable advance notice requesting such services during any Overtime Periods,
then, whether or not the Demised Premises are habitable during such Overtime
Periods, failure by Owner to furnish or distribute any such services during such
Overtime Periods shall not constitute an actual or constructive eviction, in
whole or in part, or entitle
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Tenant to any abatement or diminution of rent, or relieve Tenant from any of its
obligations under this Lease, or impose any liability upon Owner or its agents
by reason of inconvenience or annoyance to Tenant, or injury to or interruption
of Tenant's business or otherwise.
Section 29.08. Owner's Right to Stop Service: Owner reserves the
-------------------------------
right to stop the service of the heating, air conditioning, ventilating,
elevator, plumbing, electrical or other mechanical systems or facilities in the
Building when necessary by reason of accident or emergency, or for repairs,
alterations, replacements or improvements, which, in the judgment of Owner are
desirable or necessary, until said repairs, alterations, replacements or
improvements shall have been completed. The exercise of such right by Owner
shall not constitute an actual or constructive eviction, in whole or in part, or
entitle Tenant to any abatement or diminution of rent, or relieve Tenant from
any of its obligations under this Lease, or impose any liability upon Owner or
its agents by reason of inconvenience or annoyance to Tenant, or injury to or
interruption of Tenant's business, or otherwise.
Section 29.09. Tenant acknowledges that Owner has advised Tenant that
it is Owner's intention to maintain at least the following services in the
Building and, accordingly, Owner shall use reasonable diligence to supply and
install all work and installations in the Building necessary to provide and
maintain at least such services (referred to collectively as "Communication
Facilities"):
Telecommunications Infrastructure
The base building network is comprised of:
Voice Grade Services: Voice grade services are
--------------------
available on NEC Article 800, Type CMR, 24 AWG, twisted
pair copper cable, terminated on a column mounted RJ21
block. Technical parameters of this Category 3 cable
are:
Mutual Capacitance 15.8 pF/ft
DC Resistance 25.7 ohms per 1000 ft.
Characteristic Impedance 650 ohms @ 1 Khz.
Characteristic Impedance 105 ohms @ 1MHz
Attenuation @ 1 MHz 0.45 db/1000 ft
Attenuation @ 1 MHz 6.8 db/100 ft
High Speed Copper Services: TI.5 service is available
--------------------------
on individually shielded transmit and receive, 22 AWG
cables for high reliability. These cables are
terminated on wire-wrap blocks. Technical parameters
of this Category 4 cable are:
Mutual Capacitance 15.6 pF/ft
DC Resistance 17.6 ohms per 1000 ft.
Characteristic impedance 600 ohms @ 1 Khz
Characteristic impedance 110 ohms @ 1 MHz
Attenuation @ 1 KHz 0.35 db/1000 ft
Attenuation @ 1 MHz 5.0 db/1000 ft
High Speed Internet Access: Available via hypergrade,
--------------------------
Category 5, 24 AWG, Twisted Pair, Type CMR/MPR, with
extended distance/extended frequency of 100 Mbps.
Technical parameters of this Category 5 cable are:
Mutual Capacitance 14 pF/ft
DC Resistance 27 ohms per 1000 ft.
Characteristic Impedance 100 ohms +/- 15% from 1-
100MHZ
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NVP:72%
Meets EIA/TIA- 568 Category 5 and NEMA Extended
Frequency Low Loss Requirements.
Single Mode Ring Configured. Fiber Optic/cable: Fiber
-----------------------------------------------
optic cable is MIC (Mutifiber Indoor Cable) 10/125
micron OFNR (Riser) with a PVC jacket, manufactured by
Siecor. Technical parameters of this Fiber Optic cable
are:
Attenuation @ 1310 nanometers: 1.0 dB/km
Attenuation @ 1550 nanometers: 0.75 dB/km
Maximum tensile load: 600 lb. Short Term
Maximum tensile load: 225 lb. Long Term
Multi-Mode Fiber Optic Cable: For use as intrabuilding,
----------------------------
interfloor LAN connection, Internet access, and
interLAN connections between diverse businesses. This
stranded Multifiber building (MFB) cable may be as a
backbone for fiber based data systems, or to connect
different fiber based systems together. Fiber optic
cable is MIC (Multifiber Indoor Cable) 62.5/125 micron,
graded index, OFNR (Riser) with a PVC jacket
manufactured by Siecor. Technical parameters of this
Fiber Optic cable are:
Attenuation @ 850 nanometers: 3.75 db/km
Attenuation @ 1300 nanometers: 1.5 dB/km
Minimum Bandwith @ 850 nanometers: 160 MHz-Km
Minimum Bandwith @ 1300 nanometers: 500 MHz-Km
Maximum tensile load: 125 lb. Short Term
Maximum tensile load: 560 lb. Long Term
ARTICLE 30
TABLE OF CONTENTS, ETC.
-----------------------
Section 30.01. Table of Contents/Captions: The Table of Contents and
--------------------------
the captions following the Articles and Sections of this Lease have been
inserted solely as a matter of convenience and in no way define or limit the
scope or intent of any provision of this Lease.
ARTICLE 31
MISCELLANEOUS DEFINITIONS, SEVERABILITY AND INTERPRETATION PROVISIONS
---------------------------------------------------------------------
Section 31.01. The term "business days" as used in this Lease shall
-------------
exclude Saturdays, Sundays and holidays, the term "Saturdays" as used in this
---------
Lease shall exclude holidays and the term "holidays" as used in this Lease shall
--------
mean all days observed as legal holidays by either the New York State Government
or the Federal Government.
Section 31.02. The terms "person" and "persons" as used in this Lease
------ -------
shall be deemed to include natural persons, firms, corporations, associations
and any other private or public entities, whether any of the foregoing are
acting on their own behalf or in a representative capacity.
-48-
<PAGE>
Section 31.03. The term "prime rate" shall mean the rate of interest
----------
announced publicly by Chemical Bank, or its successor, from time to time, as
Chemical Bank's or such successor's base rate, or if there is no such base rate,
then the rate of interest charged by Chemical Bank or its successor to its most
credit worthy customers on commercial loans having a ninety (90) day duration.
Section 31.04. If any term, covenant or condition of this Lease or any
application thereof shall be invalid or unenforceable, the remainder of this
Lease and any other application of such term, covenant or condition shall not be
affected thereby.
Section 31.05. This Lease shall be construed without regard to any
presumption or other rule requiring construction against the party causing this
Lease to be drafted. In the event of any action, suit, dispute or proceeding
affecting the terms of this Lease, no weight shall be given to any deletions or
striking out of any of the terms of this Lease contained in any draft of this
Lease and no such deletion or strike out shall be entered into evidence in any
such action, suit or dispute or proceeding given any weight therein.
ARTICLE 32
ADJACENT EXCAVATION
-------------------
Section 32.01. If an excavation shall be made upon land adjacent to
the Real Property, or shall be authorized to be made, Tenant shall afford to the
person causing or authorized to cause such excavation license to enter upon the
Demised Premises for the purpose of doing such work as said person shall deem
necessary to preserve the walls and other portions of the Building from injury
or damage and to support the same by proper foundations and no such entry shall
constitute an actual or constructive eviction, in whole or in part, or entitle
Tenant to any abatement or diminution of rent, or relieve Tenant from any of its
obligations under this Lease, or impose any liability upon Owner or said person.
ARTICLE 33
BUILDING RULES
--------------
Section 33.01. Tenant shall observe faithfully, and comply strictly
with, and shall not permit the violation of, the Building Rules set forth in
Schedule A annexed to and made a part of this Lease and such additional
reasonable Building Rules as Owner may, from time to time, adopt. All of the
terms, covenants and conditions of Schedule A are incorporated in this Lease by
reference and shall be deemed part of this Lease as though fully set forth in
the body of this Lease. The term "Building Rules" as used in this Lease shall
--------------
include those set forth in Schedule A and those hereafter made or adopted as
provided in this Section. In case Tenant disputes the reasonableness of any
additional Building Rule hereafter adopted by Owner, the parties hereto agree to
submit the question of the reasonableness of such Building Rule for decision to
the Chairman of the Board of Directors of the Management Division of the Real
Estate Board of New York, Inc., or its successor (the "Chairman"), or to such
--------
impartial person or persons as the Chairman may designate, whose determination
shall be final and conclusive upon Owner and Tenant. Tenant's right to dispute
the reasonableness of any additional Building Rule shall be deemed waived unless
asserted by service of a notice upon Owner within ten (10) days after the date
upon which Owner shall give notice to Tenant of the adoption of any such
additional Building Rule. Owner shall have no duty or obligation to enforce any
Building Rule, or any term, covenant or condition of any other lease, against
any other tenant or occupant of the Building, and Owner's failure or refusal to
enforce any Building Rule or any term, covenant or condition of any other lease
against any other tenant or occupant of the Building shall not constitute an
actual or constructive eviction, in whole or in part, or entitle Tenant to any
abatement or diminution of rent, or relieve Tenant from any of its obligations
under this Lease, or impose any liability upon Owner or its agents by reason of
inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's
business, or otherwise.
-49-
<PAGE>
ARTICLE 34
BROKER
------
Section 34.01. Tenant represents and warrants to Owner that with the
exception of Rudes Realty Company, Owner's consultant, no broker was responsible
for bringing about this Lease and that this Lease was negotiated directly
between Owner and Tenant. Tenant shall indemnify Owner from all loss, cost,
liability, damage and expenses, including, but not limited to, reasonable
counsel fees and disbursements, arising from any breach of the foregoing
representation and warranty.
ARTICLE 35
SECURITY
--------
Section 35.01. Letter of Credit: A. Tenant has deposited with
----------------
Owner, at the time of the execution and delivery of this Lease, an
unconditional, irrevocable letter of credit issued by Republic National Bank of
New York (referred to as the "Bank"), in favor of Owner, in the sum of THIRTY
----
THOUSAND and 00/100 ($30,000.00) DOLLARS in funds available immediately or same
day funds in the City of New York, as security for the faithful observance and
performance by Tenant of the terms, covenants and conditions of this Lease on
Tenant's part to be observed and performed. Such letter of credit is for a term
of not less than one (1) year which term shall be automatically renewed for
successive one (1) year terms, unless the Bank gives not less than one hundred
twenty (120) days prior written notice that it will not so renew the letter of
credit for such successive term and the last term of the letter of credit shall
end not less than sixty (60) days after the Expiration Date. If such letter of
credit is not automatically renewed as aforesaid, Tenant agrees to cause the
Bank to renew such letter of credit, from time to time, during the Demised Term,
at least ninety (90) days prior to the expiration of said letter of credit or
any renewal or replacement, upon the same terms and conditions. In the event of
any transfer of said letter of credit pursuant to Section 35.05, and notice of
such transfer to Tenant, Tenant, within twenty (20) days thereafter, shall cause
a new letter of credit to be issued by said Bank to the transferee, upon the
same terms and conditions, in replacement of the letter of credit so transferred
and Owner agrees that, simultaneously with the delivery of such new letter of
credit, it will return to said Bank the letter of credit being replaced. The
letter of credit deposited hereunder, and all renewals and replacements, are
referred to, collectively, as the "Letter of Credit". The Letter of Credit
----------------
shall be held in trust by Owner for the purposes set forth in this Article and
shall not be transferred except for transfer (a) to an agent for collection, or
(b) pursuant to the provisions of Section 35.05. In the event Tenant defaults
beyond any applicable grace period hereunder in the performance of its
obligations to issue a replacement Letter of Credit, or in the observance or
performance of Tenant's agreement to cause the Bank to renew the Letter of
Credit, Owner, in addition to all rights and remedies which Owner may have under
this Lease or at law, shall have the right to require the Bank to make payment
to Owner of the entire sum of THIRTY THOUSAND and 00/100 ($30,000.00) DOLLARS or
the undrawn portion thereof, as the case may be, represented by the Letter of
Credit, which sum may be held by Owner as Cash Security (as said term is
hereinafter defined) in the same manner as if said sum had been deposited with
Owner pursuant to the provisions of Subsection B of this Section. If payment of
the entire sum of THIRTY THOUSAND and 00/100 ($30,000.00) DOLLARS or the undrawn
portion thereof is made to Owner by reason of Tenant's failure to renew or
replace the Letter of Credit in accordance with the foregoing provisions of this
Article, Owner shall have the right, at any time on behalf of Tenant, to replace
said Cash Security with a new Letter of Credit issued by the Bank or any other
bank selected by Owner, in Owner's sole discretion, and Tenant hereby
irrevocably constitutes and appoints Owner as Tenant's agent and attorney-in-
fact to cause the Bank or any such other bank selected by Owner to issue such a
replacement Letter of Credit. The Letter of Credit provides for partial
drawings. In the event Tenant defaults in the payment when due of an
installment of Fixed Rent or in the payment when due of any additional rent and
such default shall continue for a period of ten (10) days after notice by Owner
to Tenant of such default or if this Lease and the Demised Term shall expire and
come to an end as provided in Article 16 or by or under any summary proceeding
-50-
<PAGE>
or any other action or proceeding, or if Owner shall re-enter the Demised
Premises as provided in Article 17, or by or under any summary proceeding or any
other action or proceeding, then Owner, in addition to all rights and remedies
which Owner may have under this Lease or at law, may from time to time, draw on
the Letter of Credit in one or more drawings for the amount of any Fixed Rent or
additional rent then due and for any amount then due and payable to Owner under
Article 18 or Article 19. In the event of a partial drawing, as provided in the
immediately preceding sentence, Tenant shall, within five (5) days after demand,
cause the Bank to issue an amendment to the Letter of Credit restoring the
amount available thereunder to THIRTY THOUSAND and 00/100 ($30,000.00) DOLLARS.
Notwithstanding anything to the contrary set forth in this Lease, including, but
not limited to, the foregoing provisions of this Article, in addition to all
rights granted to Owner pursuant to the provisions of the Lease, if this Lease
and the Demised Term shall expire and come to an end as provided in Article 16,
or by or under any summary proceeding, or any other action or proceeding, or if
Owner shall re-enter the Demised Premises as provided in Article 17, or by or
under any summary proceeding or any other action or proceeding, Owner, in
addition to all rights and remedies which Owner may have under this Lease or at
law, shall have the right to require the Bank to make payment to Owner of the
entire sum of THIRTY THOUSAND and 00/100 ($30,000.00) DOLLARS or the undrawn
portion thereof, as the case may be, represented by the Letter of Credit, which
sum shall be held by Owner as Cash Security in the same manner as if said sum
had been deposited with Owner pursuant to the provisions of Subsection B of this
Section.
B. Any sum held by Owner as cash security ("Cash
Security") shall be held subject to the provisions of Section 7-103 of the
General Obligations Law or any similar statute successor thereto.
Section 35.02. Application of Cash Security: In the event Tenant
----------------------------
defaults in the observance or performance of any term, covenant or condition of
this Lease on Tenant's part to be observed or performed, including, but not
limited to, the covenant for the payment of Fixed Rent and additional rent,
beyond the applicable grace period provided under this Lease for curing such
default, Owner may use, apply or retain the whole or any part of any Cash
Security held by Owner under any of the provisions of Section 35.01, to the
extent required for the payment of any Fixed Rent, additional rent or any other
sum with respect to which Tenant is in default, or for the payment of any sum
which Owner may expend or incur because of Tenant's default in the observance or
performance of any such term, covenant or condition, including, but not limited
to, the payment of any damages or deficiency in the reletting of the Demised
Premises, whether such damage or deficiency accrued before or after summary
proceedings or other re-entry by Owner, without thereby waiving any other rights
or remedies of Owner with respect to such default, and Owner shall hold the
remainder of such Cash Security as security for the faithful performance and
observance by Tenant of the terms, covenants and conditions of this Lease on
Tenant's part to be observed and performed with the same rights as hereinabove
set forth to use, apply or retain all or any part of such remainder in the event
of any further default by Tenant under this Lease.
Section 35.03. Restoration of Cash Security: If Owner uses, applies
----------------------------
or retains the whole or any part of the Cash Security held by Owner under any of
the provisions of Section 35.01, Tenant, promptly after notice thereof, shall
deliver to Owner, in cash or by a cashier's check, or Tenant's certified check,
in either case drawn by or on a bank which is a member of the New York Clearing
House Association and payable to the order of Owner, the sum necessary to
restore the Cash Security to the sum of THIRTY THOUSAND and 00/100 ($30,000.00)
DOLLARS.
Section 35.04. Return of Security: The Letter of Credit and/or any
------------------
remaining portion of any Cash Security then held by Owner for the performance of
Tenant's obligations under this Lease as security shall be returned to Tenant
after (i) the Expiration Date and (ii) the full observance and performance by
Tenant of all of the terms, covenants and conditions of this Lease on Tenant's
part to be observed and performed, including, but not limited to, the provisions
of Article 21.
Section 35.05. Transfer of Letter of Credit: In the event of a sale
----------------------------
or other transfer of the Land and/or Building, or Owner's interest in this
Lease, Owner shall transfer the Letter of Credit and/or any
-51-
<PAGE>
remaining portion of any Cash Security then held by Owner as security for the
performance of Tenant's obligations under this Lease to the transferee, and
Owner shall thereupon be released from all liability for the return of such
security; Tenant agrees to look solely to the transferee for the return of any
such security and it is agreed that the provisions of this sentence shall apply
to every sale or transfer of the Land and/or Building or Owner's interest in
this Lease by Owner named herein or its successors, and to every transfer or
assignment made of any such security. Any transferee shall be deemed to have
agreed that any Letter of Credit or Cash Security transferred to such transferee
pursuant to this Section shall be held in trust for the purposes of this
Article. A lease of the entire Building pursuant to which the lessee shall be
entitled to collect the rents hereunder shall be deemed a transfer within the
meaning of this Section.
Section 35.06. Deposit of Cash Security in Interest-Bearing Account:
----------------------------------------------------
Owner agrees that, if not prohibited by law or the general policies of lending
institutions in New York City, Owner shall deposit any Cash Security held by
Owner in an interest-bearing savings account at a bank or banks selected by
Owner, and all interest accruing thereon shall be added to and become part of
such Cash Security and shall be retained by Owner under the same conditions as
the principal sum held as Cash Security. Notwithstanding anything to the
contrary set forth in this Article with respect to any Cash Security, Owner
shall be entitled to retain the one (1%) percent administrative fee permitted by
law to be retained by landlords with respect to cash security deposits.
Section 35.07. No Assignment of Security by Tenant: Tenant agrees
-----------------------------------
that it will not assign, mortgage or encumber, or attempt to assign, mortgage or
encumber, the Letter of Credit or any Cash Security held by Owner under this
Lease, and that neither Owner nor its successors or assigns shall be bound by
any such assignment, mortgage, encumbrance, attempted assignment, attempted
mortgage or attempted encumbrance. Owner shall not be required to exhaust its
remedies against Tenant before having recourse to the Letter of Credit, the Cash
Security or any other security held by Owner. Recourse by Owner to the Letter
of Credit, the Cash Security or any other security held by Owner shall not
affect any remedies of Owner which are provided in this Lease or which are
available in law or equity.
ARTICLE 36
ARBITRATION, ETC.
-----------------
Section 36.01. Any dispute (i) with respect to the reasonability of
any failure or refusal of Owner to grant its consent or approval to any request
for such consent or approval pursuant to the provisions of Sections 3.01 or
11.03 with respect to which request Owner has agreed, in such Sections, not
unreasonably to withhold such consent or approval, or (ii) arising out of the
application of the Operating Expenses provisions of Article 23, which is
submitted to arbitration shall be finally determined by arbitration in the City
of New York in accordance with the rules and regulations then obtaining of the
American Arbitration Association or its successor. Any such determination shall
be final and binding upon the parties, whether or not a judgment shall be
entered in any court. In making their determination, the arbitrators shall not
subtract from, add to, or otherwise modify any of the provisions of this Lease.
Owner and Tenant may, at their own expense, be represented by counsel and employ
expert witnesses in any such arbitration. Any dispute with respect to the
reasonability of any failure or refusal of Owner to grant its consent or
approval to any request for such consent or approval pursuant to any of the
provisions of this Lease (other than Sections 3.01 and 11.03) with respect to
which Owner has covenanted not unreasonably to withhold
-52-
<PAGE>
such consent or approval, and any dispute arising with respect to the increases
in Fixed Rent due to the provisions of Section 23.02 shall be determined by
applicable legal proceedings. If the determination of any such legal
proceedings, or of any arbitration held pursuant to the provisions of this
Section with respect to disputes arising under Sections 3.01 and 11.03 or the
Operating Expense provisions of Article 23, shall be adverse to Owner, Owner
shall be deemed to have granted the requested consent or approval, or be bound
by any determination as to Taxes and Operating Expenses and the increases in
Fixed Rent relating thereto, but that shall be Tenant's sole remedy in such
event and Owner shall not be liable to Tenant for a breach of Owner's covenant
not unreasonably to withhold such consent or approval, or otherwise. Each party
shall pay its own counsel and expert witness fees and expenses, if any, in
connection with any arbitration held pursuant to the provisions of this Section
and the parties will share all other expenses and fees of any such arbitration.
ARTICLE 37
PARTIES BOUND
-------------
Section 37.01. The terms, covenants and conditions contained in this
Lease shall bind and inure to the benefit of Owner and Tenant and, except as
otherwise provided in this Lease, their respective heirs, distributees,
executors, administrators, successors and assigns. However, the obligations of
Owner under this Lease shall no longer be binding upon Owner named herein after
the sale, assignment or transfer by Owner named herein (or upon any subsequent
Owner after the sale, assignment or transfer by such subsequent Owner) of its
interest in the Building as owner or lessee, and in the event of any such sale,
assignment or transfer, such obligations shall thereafter be binding upon the
grantee, assignee or other transferee of such interest, and any such grantee,
assignee or transferee, by accepting such interest, shall be deemed to have
assumed such obligations. A lease of the entire Building shall be deemed a
transfer within the meaning of the foregoing sentence. Neither the partners
(direct or indirect) comprising Owner, nor the shareholders (nor any of the
partners comprising same), partners, directors or officers of any of the
foregoing (collectively, the "Owner's Parties") shall be liable for the
---------------
performance of Owner's obligations under this Lease. Tenant shall look solely
to Owner to enforce Owner's obligations hereunder and shall not seek any damages
against any of the Owner's Parties. Notwithstanding anything contained in this
Lease to the contrary, Tenant shall look solely to the estate and interest of
Owner, its successors and assigns, in the Real Property and Building for the
collection or satisfaction of any judgment recovered against Owner based upon
the breach by Owner of any of the terms, conditions or covenants of this Lease
on the part of Owner to be performed, and no other property or assets of Owner
or any of Owner's Parties shall be subject to levy, execution or other
enforcement procedure 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.
IN WITNESS WHEREOF, Owner and Tenant have respectively signed and
sealed this Lease as of the day and year first above written.
55 BROAD STREET COMPANY
Witness:
By:
- --------------------------------------- ----------------------
Owner
- ---------------------------------------
Name:
Title: Partner
K 2 DESIGN INCORPORATED
Attest:
By:
- --------------------------------------- ----------------------
Tenant
- ------------------------------------------
Name:
Title:
-53-
<PAGE>
CORPORATE TENANT ACKNOWLEDGMENT
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this day of , 19 , before me
----------- --------------------- -----
personally came
, to me known, who
- ------------------------------------------------------------
being by me duly sworn, did depose and say that he resides in
------------------
, City of
- -------------------------------------- --------------------------------
, State of , that he is
- -- ------------------------ -----------------------------
of K 2 DESIGN INCORPORATED, the corporation described in and which executed
- ----
the foregoing Lease, as Tenant; and that he signed his name thereto by authority
of the Board of Directors of said corporation.
-------------------------------------------------
Notary Public
54-
<PAGE>
A-1
SCHEDULE A
BUILDING RULES
1. The sidewalks, entrances, passages, courts, elevators, vestibules,
stairways, corridors or halls of the Building shall not be obstructed or
encumbered or used for any purpose other than ingress and egress to and from the
premises demised to any tenant or occupant. Any tenant whose premises are
situate on the ground floor of the Building shall, at said tenant's own expense,
keep the sidewalks and curb directly in front of said premises clean and free
from ice and snow.
2. No awnings or other projections shall be attached to the outside walls
or windows of the Building without the prior consent of Owner. No curtains,
blinds, shades, or screens shall be attached to or hung in, or used in
connection with, any window or door of the premises demised to any tenant or
occupant, without the prior consent of Owner. Such awnings, projections,
curtains, blinds, shades, screens or other fixtures must be of a quality, type,
design and color, and attached in a manner, approved by Owner.
3. No sign, advertisement, object, notice or other lettering shall be
exhibited, inscribed, painted or affixed on any part of the outside or inside of
the premises demised to any tenant or occupant or of the Building without the
prior consent of Owner. Interior signs on doors and directory tablets, if any,
shall be of a size, color and style approved by Owner.
4. 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
Building shall not be covered or obstructed, nor shall any bottles, parcels, or
other articles be placed on any window sills.
5. No showcases or other articles shall be put in front of or affixed to
any part of the exterior of the Building, nor placed in the halls, corridors,
vestibules or other public parts of the Building.
6. The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were constructed, and no
sweepings, rubbish, rags, or other substances shall be thrown therein. No tenant
shall bring or keep, or permit to be brought or kept, any inflammable,
combustible or explosive fluid, material, chemical or substance in or about the
premises demised to such tenant.
7. No tenant or occupant shall mark, paint, drill into, or in any way
deface any part of the Building or the premises demised to such tenant or
occupant. No boring, cutting or stringing of wires shall be permitted, except
with the prior consent of Owner, and as Owner may direct. No tenant or occupant
shall install any resilient tile or similar floor covering in the premises
demised to such tenant or occupant except in a manner approved by Owner.
8. No bicycles, vehicles or animals of any kind shall be brought into or
kept in or about the premises demised to any tenant. No cooking shall be done
or permitted in the Building by any tenant without the approval of Owner. No
tenant shall cause or permit any unusual or objectionable odors to emanate from
the premises demised to such tenant.
9. No space in the Building shall be used for manufacturing, for the
storage of merchandise, or for the sale of merchandise, goods or property of any
kind at auction.
10. No tenant shall make, or permit to be made, any unseemly or disturbing
noises or disturb or
<PAGE>
A-2
interfere with other tenants or occupants of the Building or neighboring
buildings or premises whether by the use of any musical instrument, radio,
television set or other audio device, unmusical noise, whistling, singing, or in
any other way. Nothing shall be thrown out of any doors or windows.
11. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows, nor shall any changes be made in locks or the mechanism
thereof. Each tenant must, upon the termination of its tenancy, restore to
Owner all keys of stores, offices and toilet rooms, either furnished to, or
otherwise procured by, such tenant.
12. All removals from the Building, or the carrying in or out of the
Building or the premises demised to any tenant, of any safes, freight, furniture
or bulky matter of any description must take place at such time and in such
manner as Owner or its agents may determine, from time to time. Owner reserves
the right to inspect all freight to be brought into the Building and to exclude
from the Building all freight which violates any of the Building Rules or the
provisions of such tenant's lease.
13. No tenant shall use or occupy, or permit any portion of the premises
demised to such tenant to be used or occupied, as an office for a public
stenographer or typist, or as a barber or manicure shop, or as an employment
bureau. No tenant or occupant shall engage or pay any employees in the
Building, except those actually working for such tenant or occupant in the
Building, nor advertise for laborers, giving an address at the Building.
14. No tenant or occupant shall purchase spring water, ice, food, bev-
erage, lighting maintenance, cleaning, towels, or other like service, from any
company or persons not approved by Owner, such approval not unreasonably to be
withheld.
15. Owner shall have the right to prohibit any advertising by any tenant
or occupant which, in Owner's opinion, tends to impair the reputation of the
Building or its desirability as a building for offices, and upon notice from
Owner, such tenant or occupant shall refrain from or discontinue such
advertising.
16. Owner reserves the right to exclude from the Building, between the
hours of 6 P.M. and 8 A.M. on business days and at all hours on Saturdays,
Sundays and holidays, all persons who do not present a pass to the Building
signed by Owner. Owner will furnish passes to persons for whom any tenant
requests such passes. Each tenant shall be responsible for all persons for whom
it requests such passes and shall be liable to Owner for all acts of such
persons.
17. Each tenant, before closing and leaving the premises demised to such
tenant at any time, shall see that all entrance doors are locked and all windows
closed.
18. Each tenant shall, at its expense, provide artificial light in the
premises demised to such tenant for Owner's agents, contractors and employees
while performing janitorial or other cleaning services and making repairs or
alterations in said premises.
19. No premises shall be used, or permitted to be used, for lodging or
sleeping or for any immoral or illegal purpose.
20. The requirements of tenants will be attended to only upon application
at the office of Owner. Building employees shall not be required to perform,
and shall not be requested by any tenant or occupant to perform, any work
outside of their regular duties, unless under specific instructions from the
office of Owner.
<PAGE>
A-3
21. Canvassing, soliciting and peddling in the Building are prohibited and
each tenant and occupant shall cooperate in seeking their prevention.
22. There shall not be used in the Building, either by any tenant or
occupant or by their agents or contractors, in the delivery or receipt of
merchandise, freight or other matter, any hand trucks or other means of
conveyance except those equipped with rubber tires, rubber side guards and such
other safeguards as Owner may require.
23. If the premises demised to any tenant become infested with vermin,
such tenant, at its sole cost and expense, shall cause its premises to be
exterminated, from time to time, to the satisfaction of Owner, and shall employ
such exterminators therefor as shall be approved by Owner.
24. No premises shall be used, or permitted to be used, at any time, as a
store for the sale or display of goods, wares or merchandise of any kind, or as
a restaurant, shop, booth, bootblack or other stand, or for the conduct of any
business or occupation which predominantly involves direct patronage of the
general public in the premises demised to such tenant, or for manufacturing or
for other similar purposes.
25. No tenant shall clean, or permit to be cleaned, any window of the
Building from the outside in violation of Section 202 of the New York Labor Law
or any successor law or statute, or of the rules of the Board of Standards and
Appeals or of any board or body having or asserting jurisdiction.
26. No tenant shall move, or permit to be moved, into or out of the
Building or the premises demised to such tenant, any heavy or bulky matter,
without the specific approval of Owner. If any such matter requires special
handling, only a person holding a Master Rigger's license shall be employed to
perform such special handling. No tenant shall place, or permit to be placed,
on any part of the floor or floors of the premises demised to such tenant, a
load exceeding the floor load per square foot which such floor was designed to
carry and which is allowed by law. Owner reserves the right to prescribe the
weight and position of safes and other heavy matter, which must be placed so as
to distribute the weight.
<PAGE>
ADDENDUM A
OWNER'S INITIAL CONSTRUCTION
----------------------------
I. Owner agrees to supply and install in the Demised Premises all of the items
set forth on Tenant's Final Plans referred to in Paragraph IV of this Schedule
unless prevented by job conditions or other circumstances beyond the reasonable
control of Owner. At or about the time that Owner performs Owner's Initial
Construction, Owner, at Owner's expense, shall supply and install a single
unisex toilet located outside the Demised Premises adjacent to the core toilets
on the floor, where designated by Owner. The supply and installation of such
unisex toilet shall not affect the substantial completion of Owner's Initial
Construction or the Commencement Date.
II. (1) Owner's Initial Construction shall be equal to standards adopted by
Owner for the Building, and shall be consistent with, and a reasonable
projection of, Tenant's Preliminary Plans (as hereinafter defined). Owner's
Initial Construction shall constitute a single non-recurring obligation on the
part of Owner. In the event the Lease is renewed or extended for a further term
by agreement or operation of law, Owner's obligation to perform Owner's Initial
Construction shall not apply to any such renewal or extension.
(2) In the event that as a result of Tenant's written request to Owner for
modification to the work and installations set forth in the Preliminary Plans
(as hereinafter defined), Tenant's Final Plans shall obligate Owner to perform
any work or supply any installations in the Demised Premises in addition to or
in substitution for the work and installations set forth in the Preliminary
Plans (referred to as "Extra Work"), Tenant shall pay to Owner, upon demand, a
sum equal to the amount by which the aggregate of (a) the actual cost and
expense to Owner of supplying and installing all of such Extra Work (including,
but not limited to, the cost to Owner of a field superintendent, operating
engineer, laborers, freight elevator costs, rubbish removal, temporary
sprinklers and lighting, electric and heat, protection, insurance, Building
Department filing and expediting, Building permits and other governmental
approvals, blueprint costs, and every other item which customarily would be
considered a general condition and, if applicable, any construction management
or other fees paid to the general contractor or construction manager who is
performing Owner's Initial Construction [such aggregate actual cost and expense
is referred to as "Owner's Additional Construction Cost"]) plus (b) if there is
no general contractor or construction manager who is performing Owner's Initial
Construction ten (10%) percent of Owner's Additional Construction Cost for
office overhead and as a construction management fee shall exceed (c) the
following credits: a sum equal to the actual cost and expense to Owner
(including, but not limited to, the cost to Owner of a field superintendent,
operating engineer, laborers, freight elevator costs, rubbish removal, temporary
sprinklers and lighting, electric and heat, protection, insurance, Building
Department filing and expediting, Building permits and other governmental
approvals, blueprint costs, and every other item which customarily would be
considered a general condition) of all items required to be supplied and
installed by Owner pursuant to the Preliminary Plans for which Extra Work is
substituted by Tenant on Tenant's Final Plans (however, if the actual cost and
expense to Owner of any item of Extra Work designated by Tenant as a
substitution shall be less than the actual cost and expense to Owner of the item
set forth in the Preliminary Plans for which such substitution is made, the
credit to which Tenant shall be entitled for such substitution shall be limited
to the actual cost and expense to Owner of the item of Extra Work so designated
by Tenant). The term "substitute" or "substitution" as used in this Paragraph
II shall be expressly limited to an item of Extra Work designated by Tenant in
replacement of an item required to be supplied and installed by Owner originally
pursuant to the Preliminary Plans which item of Extra Work so designated by
Tenant serves the same function as the item so replaced; e.g., a lighting
fixture in replacement of a lighting fixture originally designated on the
Preliminary Plans.
III. Subject to the provisions of Paragraphs VI and VII of this Schedule Owner's
Initial Construction shall be substantially completed prior to the Commencement
Date. At any time after the Commencement Date, Owner may enter the Demised
Premises to complete unfinished details of Owner's Initial Construction, and
entry by Owner, its agents, servants, employees, or contractors for such purpose
shall not constitute an actual or constructive eviction, in whole or in part, or
entitle Tenant to any abatement or diminution of rent or relieve Tenant from any
of its obligations under the Lease, or impose any liability upon Owner or its
agents by reason of inconvenience or annoyance to Tenant, or injury to or
interruption of Tenant's business or otherwise.
<PAGE>
IV. (1) Owner has caused to be prepared three (3) preliminary plans for
Owner's Initial Construction entitled "No. SK-RO7DE-1, Floor Part Plan", "No.
SK-RO7DE-2, Reflected Ceiling Plan", "No. SK-RO7DE-3, Power/Communications
Plan", respectively, all dated February 13, 1996, prepared by Fox & Fowle
Architects (referred to as the "Preliminary Plans") and Owner and Tenant have
-----------------
each initialled two (2) sets of the Preliminary Plans. Owner, at Tenant's
expense (which expense to Tenant shall be in the amount of FOURTEEN THOUSAND and
00/100 ($14,000.00) DOLLARS and shall be hereinafter referred to as "Tenant's
--------
A&E Expense"), shall cause to be prepared a complete set of detailed plans and
- -----------
specifications including, without limitation, engineering plans and
specifications, for the work and installations of Owner's Initial Construction
(referred to, collectively, as "Tenant's Final Plans"). Tenant's Final Plans
--------------------
shall be a reasonable projection of the Preliminary Plans and shall comply with
the provisions of Articles 3 and 6 of the Lease and shall contain, but shall not
be limited to, the heat factor, if any, of all equipment intended to be used in,
and the human load factor proposed for, each room or other area. Tenant's Final
Plans shall provide for a sprinkler system and shall, accordingly, designate,
subject to compliance with all laws, orders and regulations of all governmental
authorities having jurisdiction, the location of sprinkler heads and associated
piping. Tenant's Final Plans shall also show all work necessary to comply with
the Americans with Disabilities Act and Local Law #58. Tenant's Final Plans
shall not designate any work, materials or installations which (i) is not in
compliance with the provisions of Articles 3 and 6 of the Lease, (ii) is not
practical and consistent with the physical conditions in the Building and with
the plans for the Building filed with the Department of Buildings of the City of
New York, (iii) will impair Owner's ability to perform any of Owner's
obligations under the provisions of the Lease, (iv) will affect any portions of
the Building other than the Demised Premises or (v) does not comply with the
provisions of Section 29.05. Tenant's Final Plans shall not designate any area
which shall have an electrical load in excess of four (4) watts per square foot
of usable area for all purposes (including lighting and power or which shall
have a human occupancy factor in excess of one (1) person per one hundred (100)
square feet of usable area (the average electrical load and human occupancy
factors for which the air conditioning system serving the Demised Premises has
been designed).
Tenant acknowledges and agrees that Tenant's Final Plans shall be prepared
by licensed professional architects and engineers selected by Owner and shall be
signed, sealed and certified by a registered architect and, if applicable,
engineer duly licensed in the State of New York so that such Tenant's Final
Plans may be filed with and approved by the Department of Buildings of the City
of New York.
(2) Tenant shall pay to Owner Tenant's A&E Expense as follows: (i) the
sum of SEVEN THOUSAND and 00/100 ($7,000.00) DOLLARS upon the execution and
delivery of this Lease and (ii) the sum of SEVEN THOUSAND and 00/100 ($7,000.00)
DOLLARS on or prior to January 1, 1997. Tenant shall be responsible for any
additional architectural and engineering expenses incurred as a result of (i)
any Change Work (as hereinafter defined) or (ii) any Extra Work as a result of
Tenant's written request to Owner for modifications to the work and
installations set forth in the Preliminary Plans.
(3) In the event substantial completion of Owner's Initial Construction
shall be delayed by reason of Tenant's delays in submitting any plans or
specifications, other than Tenant's Preliminary Plans and Tenant's Final Plans
or in supplying information (including, but not limited to, information required
for the completion of Tenant's Final Plans), or in approving plans or
specifications or estimates, or in giving authorizations or by reason of any
Change Work (as hereinafter defined) or by reason of any other similar acts or
omissions of Tenant, then, and in any such event, Tenant agrees to pay to Owner,
as agreed liquidated damages for Tenant's failure aforesaid, or for such delays
occasioned by Tenant's acts or omissions, as the case may be, sums equal to one
(1) day's rent for each day that such failure or delay shall continue. Tenant
shall also pay to Owner a sum equal to any additional cost to Owner in
completing Owner's Initial Construction resulting from any of the foregoing
failures, acts, or omissions of Tenant. Any such sums may be collected by
Owner, from time to time, upon demand, whether or not the Commencement Date
shall have occurred.
(4) Anything to the contrary herein notwithstanding, it is understood and
agreed that the Owner will at its sole cost and expense provide the initial
construction and installation in accordance with the Preliminary Plans
5-
<PAGE>
and Budget Estimate dated February 21, 1996, prepared by Tischman Construction
Corp. The construction and installation shall be performed in accordance with
the Preliminary Plans as they are finally set forth in Tenant's Final Plans. If
there should be a discrepancy between the Preliminary Plans and the Budget
Estimate, the Preliminary Plans shall prevail. With the exception of payment
for Tenant's A&E Expense, as hereinabove provided, Tenant shall not contribute
in any way toward the cost of construction, filing or any other construction
related expense unless Tenant shall request, in writing, a change or
modification of the construction as reflected by the Preliminary Plans which are
hereinabove referred to as Change Work and Extra Work and Tenant shall pay
therefor in accordance with the provisions of this Addendum. In such event,
Owner shall not unreasonably withhold such consent to such Extra Work or Change
Work.
V. If any Alterations, other than Owner's Initial Construction, shall be made
or performed by or on behalf of Tenant in the Demised Premises prior to the
Commencement Date, Tenant shall pay to Owner a sum equal to fifteen (15%)
percent of the aggregate cost and expense to Tenant of such Alterations as
agreed reimbursement to Owner for overhead and for supervising and coordinating
the work. Any such sums shall be payable by Tenant to Owner, whether or not the
Demised Term shall have commenced, within five (5) days next following the
rendition of a statement thereof by Owner to Tenant. To assist Owner in
determining the sums so due, Tenant agrees, upon Owner's request, to furnish
Owner with copies of all contracts, statements, invoices and other information
relating to such Alterations.
VI. At or about the time of the completion of Tenant's Final Plans, Owner shall
notify Tenant of which items contained in Tenant's Final Plans, if any, will or
might be subject to certain delays in delivery and which might affect the date
of substantial completion of Owner's Initial Construction. Tenant may, within
five (5) days after such notice from Owner, designate, subject to the
limitations set forth in subparagraph (1) of Paragraph IV, other available items
which will not be subject to delays in delivery. If Tenant fails to timely make
such designations, Owner will have no obligation to supply and install the items
set forth in Owner's notice or, at Owner's election, Owner shall have the right
to perform such items and for the purpose of determining whether or not Owner's
Initial Construction shall have been substantially completed and for the purpose
of fixing the Commencement Date, said items set forth in such Owner's notice and
all other related work and installations shall be deemed unfinished details of
Owner's Initial Construction which may be performed by Owner after the
substantial completion of Owner's Initial Construction in accordance with the
provisions of Paragraph III of this Schedule and, accordingly, shall not affect
the Commencement Date.
VII. Tenant, after the completion of Tenant's Final Plans, may designate,
subject to Owner's approval, not unreasonably to be withheld, and the
limitations set forth in subparagraph (1) of Paragraph IV, substitute or
additional work, materials or installations (referred to, collectively, as
"Change Work") to be supplied and installed by Owner in replacement of, or in
addition to, the work, materials and installations set forth on Tenant's Final
Plans provided that such Change Work: (i) is in compliance with the provisions
of Articles 3 and 6 of the Lease; (ii) is practical and consistent with the
physical conditions in the Building and with the plans for the Building filed
with the Department of Buildings of the City of New York and with Tenant's Final
Plans and does not represent a material change thereof; (iii) will not impair
Owner's ability to perform any of Owner's obligations under the provisions of
the Lease; (iv) will not affect any portions of the Building other than the
Demised Premises; (v) complies with the provisions of Section 29.05; and (vi)
shall be signed, certified and sealed by a registered architect and, if
applicable, engineer duly licensed in the State of New York and shall comply
with all applicable laws, orders, rules and directions of all applicable
governmental authorities so that Tenant's Final Plans may without further
amendment or change be used for engineering drawings and specifications and
filed with, and approved by, the Department of Buildings of the City of New
York. Tenant shall pay to Owner, upon demand, a sum equal to the amount by
which the aggregate of (a) the actual cost and expense to Owner of supplying and
installing all of such Change Work (including, but not limited to, the cost to
Owner of a field superintendent, operating engineer, laborers, freight elevator
costs, rubbish removal, temporary sprinklers and lighting, electric and heat,
protection, insurance, Building Department filing and expediting, Building
permits and other governmental approvals, blueprint costs and every other item
which customarily would be considered a general condition and, if applicable,
any
6-
<PAGE>
construction management or other fees paid to the general contractor or
construction manager who is performing Owner's Initial Construction [such
aggregate actual cost and expense is referred to as "Owner's Extra Work
Construction Cost"]) plus (b) if there is no general contractor or construction
manager who is performing Owner's Initial Construction ten (10%) percent of
Owner's Extra Work Construction Cost for office overhead and as a construction
management fee shall exceed (c) the following credits: a sum equal to the actual
cost and expense to Owner (including, but not limited to, the cost to Owner of a
field superintendent, operating engineer, laborers, freight elevator costs,
rubbish removal, temporary sprinklers and lighting, electric and heat,
protection, insurance, Building Department filing and expediting, Building
permits and other governmental approvals, blueprint costs, and every other item
which customarily would be considered a general condition) of all items required
to be supplied and installed by Owner pursuant to Tenant's Final Plans for which
Change Work is substituted by Tenant (however, if the actual cost and expense to
Owner of any item of Change Work designated by Tenant as a substitution shall be
less than the actual cost and expense to Owner of the item set forth in Tenant's
Final Plans for which such substitution is made, the credit to which Tenant
shall be entitled for such substitution shall be limited to the actual cost and
expense to Owner of the item of Change Work so designated by Tenant). The term
"substitute" or "substitution" as used in this Paragraph VII shall be expressly
limited to an item of Change Work designated by Tenant in replacement of an item
required to be supplied or installed by Owner originally pursuant to Tenant's
Final Plans which item of Change Work so designated by Tenant serves the same
function as the item so replaced; e.g., a lighting fixture in replacement of a
lighting fixture originally designated on Tenant's Final Plans. Any sums
payable pursuant to the foregoing provisions of this Paragraph VII shall be in
addition to any sums payable pursuant to the provisions of subparagraph (2) of
Paragraph II so that if any Change Work replaces any Extra Work, the credit set
forth in subdivision (c) of this Paragraph VII shall be reduced by the excess of
the cost of the Extra Work in question over the original item set forth in
Tenant's Preliminary Plans which such Extra Work replaced. At or about the time
of the submission by Tenant to Owner of any Change Work if it appears to Owner
that any item of Change Work designated by Tenant will tend to delay completion
of Owner's Initial Construction, or, notwithstanding Owner's approval of any
Change Work, if it subsequently appears to Owner that any item of Change Work
designated by Tenant will tend to delay completion of Owner's Initial
Construction, Owner in each case, shall notify Tenant to that effect and Tenant,
within five (5) days after notice from Owner to that effect, will designate,
subject to the foregoing limitations (i) through (v), other available items of
Change Work which will not so tend to delay completion. If Tenant fails to make
such designations within five (5) days after said notice from Owner, Owner will
have no obligation to supply or install the items set forth in such Owner's
notice or, at Owner's election, Owner shall have the right to perform such items
of Change Work in accordance with the provisions of this Schedule, except that,
solely for the purpose of determining whether or not Owner's Initial
Construction has been substantially completed and for the purpose of fixing the
Commencement Date, such items of Change Work and all other related work and
installations shall be deemed unfinished details of Owner's Initial Construction
which may be performed after the Commencement Date in accordance with the
provisions of Paragraph III of this Schedule and, accordingly, shall not affect
the Commencement Date.
7-
Exhibit 23.1
Consent of Independent Public Accountants to K2 Design, Inc.
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of the
registration statement.
Arthur Andersen LLP
Roseland, New Jersey
May 22, 1996
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<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 17,756 52,268
<SECURITIES> 0 0
<RECEIVABLES> 143,694 328,105
<ALLOWANCES> 10,000 10,000
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<CURRENT-ASSETS> 151,450 420,098
<PP&E> 98,879 145,060
<DEPRECIATION> 31,276 40,389
<TOTAL-ASSETS> 223,458 559,174
<CURRENT-LIABILITIES> 228,456 443,570
<BONDS> 72,297 102,090
0 0
0 0
<COMMON> 18,955 20,955
<OTHER-SE> (50,480) 48,267
<TOTAL-LIABILITY-AND-EQUITY> 223,458 559,174
<SALES> 1,196,208 512,434
<TOTAL-REVENUES> 1,196,208 512,434
<CGS> 957,027 499,109
<TOTAL-COSTS> 957,027 499,109
<OTHER-EXPENSES> 227,285 136,053
<LOSS-PROVISION> 10,000 0
<INTEREST-EXPENSE> 939 982
<INCOME-PRETAX> 12,896 (122,728)
<INCOME-TAX> 1,000 0
<INCOME-CONTINUING> 11,896 (122,728)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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<NET-INCOME> 11,896 (122,728)
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