<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NETGRAVITY, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 77-0410283
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) No.)
</TABLE>
NETGRAVITY, INC.
1700 S. AMPHLETT BLVD., SUITE 350
SAN MATEO, CA 94402
(650) 655-4777
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
JOHN W. DANNER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
NETGRAVITY, INC.
1700 S. AMPHLETT BLVD., SUITE 350
SAN MATEO, CA 94402
(650) 655-4777
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
LARRY W. SONSINI, ESQ. SCOTT C. DETTMER, ESQ.
JAMES N. STRAWBRIDGE, ESQ. CARLA S. NEWELL, ESQ.
JON C. GONZALES, ESQ. WILLIAM E. GROWNEY, JR., ESQ.
CHRISTOPHER G. NICHOLSON, ESQ. KIRIL DOBROVOLSKY, ESQ.
WILSON SONSINI GOODRICH & ROSATI GUNDERSON DETTMER STOUGH VILLENEUVE
PROFESSIONAL CORPORATION FRANKLIN & HACHIGIAN, LLP
650 PAGE MILL ROAD 155 CONSTITUTION AVE.
PALO ALTO, CA 94304 MENLO PARK, CA 94025
(650) 493-9300 (650) 321-2400
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE
<S> <C> <C>
Common Stock, $0.001 par value.................................. $37,950,000 $11,196
</TABLE>
(1) Includes shares that the Underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) promulgated under the Securities Act of 1933, as
amended.
--------------------------
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 THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 24, 1998
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.
<PAGE>
[LOGO]
SHARES
COMMON STOCK
------------------
All of the shares of Common Stock offered hereby are being sold by
NetGravity, Inc. ("NetGravity" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price per share will be between
$ and $ per share. See "Underwriting" for information relating
to the method of determining the initial public offering price. The Company has
applied to have the Common Stock approved for quotation on the Nasdaq National
Market under the symbol "NETG."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
<S> <C> <C> <C>
Per Share................................. $ $ $
Total(2).................................. $ $ $
</TABLE>
(1) Before deducting expenses of the offering payable by the Company, estimated
at $ .
(2) The Company and certain of the Company's stockholders (the "Selling
Stockholders") have granted to the Underwriters a 30-day option to purchase
up to an additional and shares of Common Stock,
respectively, solely to cover over-allotments, if any. See "Principal and
Selling Stockholders" and "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Stockholders will be $ ,
$ , $ and $ , respectively.
------------------------------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about on or about , 1998.
BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES LLC
FIRST ALBANY CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
EDGAR COLORWORK DESCRIPTIONS:
INSIDE FRONT COVER OF PROSPECTUS:
TITLE: Software solutions for online advertising and direct marketing
INTRO PARAGRAPH: NetGravity is the leading provider of online advertising
and direct marketing software solutions. At the core of NetGravity's
mission-critical solutions is its AdServer product family, which is designed
to enable customers to improve response rates by targeting advertisements to
individual users and to increase efficiency by automating certain
advertising and direct marketing business processes. These features are
designed to enhance the customers' ability to generate revenue from sales of
advertising space and from direct marketing campaigns.
GRAPHIC DEPICTING FUNCTIONS OF ADSERVER
CAPTION 1:
1) MANAGE AND SCHEDULE ADVERTISING AND DIRECT MARKETING OFFERS. NetGravity
solutions analyze historical data, forecast advertising inventory
capacities, and deliver up-to-date availability reports.
CAPTION 2:
2) DELIVER THE RIGHT MESSAGE TO THE RIGHT PERSON. AdServer is designed to
enhance the customer's ability to generate revenue through capabilities
such as targeting advertisements to individual users and groups of
users.
CAPTION 3:
3) TEST, TRACK AND FINE-TUNE MESSAGES. Report-generating functions reveal
important information about how an online advertisement, group of
advertisements, or direct marketing message is performing.
INSIDE GATEFOLD:
TITLE: NetGravity helps businesses build online relationships with
consumers.
INTRO PARAGRAPH:
The competitive nature of the global marketplace requires merchants to
continually seek out and obtain new customers while preserving their
relationships with current customers. To help build these relationships
online, NetGravity markets and supports three solutions, AdServer Enterprise
and AdServer Network and AdCenter, designed to support the needs of
companies in the online advertising and direct marketing industry.
NetGravity's solutions, together with its broad range of professional
services and support capabilities, are designed to enhance the effectiveness
and efficiency of the entire online advertising and direct marketing supply
chain: merchants (vendors of products and services), advertising agencies,
and content publishers (including advertising networks).
UPPER RIGHT-HAND CORNER CAPTIONS:
- Manage and schedule advertising and direct marketing offers.
- Deliver the right message to the right person.
- Test, track and fine-tune messages.
GRAPHIC INTRO: How NetGravity AdServer solutions can be used to facilitate
Internet business.
GRAPHIC DEPICTING ADSERVER'S ROLE IN ONLINE ADVERTISING AND DIRECT MARKETING
CAPTIONS 1-7:
1) An individual consumer surfs the Web.
2) The consumer encounters a site that piques interest.
3) A targeted advertisement is delivered to the consumer in real-time by
NetGravity AdServer.
4) The consumer clicks on the advertisement.
5) By means of a link, the consumer is sent to the merchant's site.
6) NetGravity AdServer delivers a targeted direct marketing offer to the
consumer.
7) NetGravity AdServer assists the merchant in collecting data for
future use.
INSIDE BACK COVER OF PROSPECTUS:
TITLE: A Few of Our Customers
INTRO PARAGRAPH:
NetGravity provides mission-critical online advertising and direct marketing
software solutions for merchants, advertising agencies and content
publishers.
CONTENT: 10 branded logos above a textual list of ~ 100 customer names.
Company logos for this sheet:
Netscape Communications
J. Walter Thompson
CNN Interactive
Time Inc. New Media
WhoWhere?
E*TRADE
Real Cities (Knight-Ridder New Media)
ONSALE
Virgin Net
@Home Network
NetGravity is a trademark of NetGravity, Inc. This Prospectus also contains
additional trademarks and tradenames of NetGravity and of other companies.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING 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, BY ANY SELLING SHAREHOLDER OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1998 (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 DELIVERY REQUIREMENT 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.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 22
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Dilution.................................................................. 24
Selected Consolidated Financial Data...................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 26
Business.................................................................. 36
Management................................................................ 53
Certain Transactions...................................................... 63
Principal and Selling Stockholders........................................ 66
Description of Capital Stock.............................................. 68
Shares Eligible for Future Sale........................................... 71
Underwriting.............................................................. 73
Legal Matters............................................................. 75
Experts................................................................... 75
Additional Information.................................................... 75
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------------------
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and to make available
quarterly reports containing unaudited summary financial information for the
first three fiscal quarters of each fiscal year.
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS
SHOULD CONSIDER CAREFULLY THE INFORMATION DISCUSSED UNDER "RISK FACTORS." THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON CURRENT EXPECTATIONS
THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE
TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
NetGravity is the leading provider of online advertising and direct
marketing software solutions. A pioneer in the online advertising management
software market, the Company believes that it was the first company to provide
such commercial software to major online content publishers and has recently
expanded into the market for online direct marketing software solutions. The
Company develops, markets and supports its mission-critical AdServer family of
software products which, together with its full range of professional services
and support capabilities, are designed to enhance the effectiveness and
efficiency of each constituent in the online advertising and direct marketing
supply chain: merchants (vendors of products and services), advertising
agencies, and content publishers (including advertising networks). The Company
markets and sells its products and services primarily through its field sales
and telesales organizations and maintains sales and support operations in North
America, Europe and Asia Pacific. To date, the Company has sold its software and
services to over 225 customers, including 37 of the content publishers listed in
CMR's Interwatch (formerly Jupiter's AdSpend) list of the top 100
revenue-generating online content publishers for the eight months ended August
31, 1997. The Company's customers include @Home Network, CNN Interactive,
E*TRADE, J. Walter Thompson, Netscape Communications, ONSALE, Real Cities
(Knight-Ridder New Media), Time Inc. New Media, Virgin Net and WhoWhere?.
The competitive nature of the global marketplace requires merchants to
continually seek out and obtain new customers while preserving their
relationships with existing customers. Historically, merchants have communicated
with consumers through advertising in traditional media (such as print,
television and radio) and through traditional direct marketing channels (such as
telemarketing and direct mail) to establish and maintain their brand identities,
introduce new products, announce improved product features and target offers to
potential and current customers.
The dramatic growth of the Internet in recent years has led, and continues
to lead, merchants, advertising agencies and content publishers to devote
increasing resources toward developing and improving their utilization of the
Internet as a medium for advertising and direct marketing. The Web provides
advertisers with the opportunity to cost-effectively reach global audiences and
to target their advertising based on consumers' demographic characteristics,
specific interests and geographic location. IDC has estimated that online
advertising in the United States would increase from $551 million in 1997 to
$4.0 billion in 2001. Similarly, the Internet has the potential to enable direct
marketers to increase response rates and reduce cost-per-transaction by
targeting and delivering direct marketing campaigns to consumers based on their
specific demographics, characteristics and interests. Jupiter Communications
estimates that expenditures on online direct marketing will exceed $1.3 billion
in 2002.
As merchants, advertising agencies and content publishers increase their
online presence, they require comprehensive, reliable and scalable software
solutions to allow them to effectively and efficiently leverage the power of the
Internet for advertising and direct marketing. To address this need, the
NetGravity AdServer family of software products is designed to enable customers
to increase their revenue from online advertising and direct marketing by
improving response rates through consumer targeting and to enable customers to
reduce their administrative expenses by automating certain advertising and
direct marketing business processes. In addition, as the Company's software
delivers advertisements, it gathers consumer viewing and response data. This
data is retained by the Company's customers and can be used to more precisely
target future advertisements. NetGravity's solutions, which include AdServer
Enterprise, AdServer Network and the AdCenter service, are designed to be
extensible and robust systems for deploying advertising and direct marketing
management solutions on the Internet.
4
<PAGE>
They utilize a common fault-tolerant, scalable architecture for real-time
delivery of targeted advertisements, a management system for tracking
advertising inventory and a customizable reporting and analysis system allowing
AdServer users to better understand their customers.
To complement its software solution, the Company offers worldwide
consulting, technical support and training to its customers through its
professional services organization. To help customers develop strong online
advertising and direct marketing businesses, the Company has built a consulting
organization capable of offering technical and business expertise to implement
customer solutions. These services consist of implementation, system extension
and migration services as well as other advanced services. The Company also
provides its customers with an extensive array of ongoing support services,
including software updates, telephone support and product and Internet
advertising education.
The Company's objective is to extend its leadership position in the online
advertising and direct marketing industry by establishing AdServer as the
standard customer acquisition and retention solution for online merchants,
advertising agencies and content publishers. The Company is seeking to meet its
objective by extending its leadership in online advertising solutions,
establishing leadership in online direct marketing solutions, maximizing
customer value, enabling efficient advertising buying on the Internet, expanding
and leveraging alliances with key business and technology partners and expanding
its international presence.
The Company was incorporated in Delaware in September 1995. The Company's
principal executive offices are located at 1700 S. Amphlett Blvd., Suite 350,
San Mateo, California 94402 and its telephone number at that address is (650)
655-4777.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.............. shares
Common Stock to be outstanding
after the offering.............. shares(1)
Use of proceeds................... For repayment of certain indebtedness, working capital
and general corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol.......................... NETG
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER THREE MONTHS ENDED
SEPTEMBER 5, 1995 31, MARCH 31,
(INCEPTION) TO -------------------- --------------------
DECEMBER 31, 1995 1996 1997 1997 1998
------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues...................................... $ -- $ 1,939 $ 6,358 $ 1,353 $ 2,003
Loss from operations................................ (191) (4,681) (6,872) (1,154) (2,830)
Net loss............................................ (195) (4,627) (6,882) (1,160) (2,800)
Basic and diluted net loss per share(2)............. $ (0.19) $ (2.19) $ (2.46) $ (0.55) $ (0.93)
Shares used in per share calculation(2)............. 1,006 2,111 2,799 2,121 3,025
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(3)
--------- --------------
BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 6,318
Working capital........................................................................ 2,682
Total assets........................................................................... 11,832
Notes payable.......................................................................... 1,745
Stockholders' equity................................................................... 3,559
</TABLE>
- ---------
(1) Based on shares outstanding as of March 31, 1998. Excludes, as of March 31,
1998, (i) 1,329,408 shares of Common Stock issuable upon exercise of options
outstanding under the Company's 1995 Stock Option Plan (the "Plan") at a
weighted average exercise price of $0.27 per share and 189,298 shares
reserved for future issuance under the Plan and (ii) 27,273 shares of Common
Stock issuable upon exercise of outstanding warrants at a weighted average
exercise price of $0.22 per share. Also excludes an aggregate of 2.4 million
shares reserved for issuance under the Company's 1998 Stock Plan, 1998
Employee Stock Purchase Plan and 1998 Director Option Plan. See
"Management-- Employee Benefit Plans," "Description of Capital Stock" and
Note 5 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for the
determination of shares used in computing basic and diluted net loss per
share.
(3) Adjusted to reflect the sale of shares of Common Stock by the
Company at the assumed initial public offering price of $ per share
and the application of the estimated net proceeds therefrom.
------------------------------
EXCEPT AS SET FORTH IN THE CONSOLIDATED FINANCIAL STATEMENTS OR OTHERWISE
INDICATED HEREIN, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. SEE "PRINCIPAL AND SELLING
STOCKHOLDERS" AND "UNDERWRITING". EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN
THIS PROSPECTUS (I) HAS BEEN ADJUSTED TO GIVE EFFECT TO A 1-FOR-2.2 REVERSE
SPLIT OF THE COMPANY'S COMMON STOCK TO BE EFFECTED PRIOR TO THE CLOSING OF THE
OFFERING; (II) REFLECTS THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED
STOCK IMMEDIATELY PRIOR TO THE CLOSING OF THE OFFERING, AND (III) REFLECTS THE
FILING OF AN AMENDMENT TO THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION WHICH, AMONG OTHER THINGS, WILL INCREASE THE AUTHORIZED NUMBER OF
SHARES OF COMMON STOCK TO 50,000,000 AND WILL AUTHORIZE 5,000,000 SHARES OF
UNDESIGNATED PREFERRED STOCK. SEE "DESCRIPTION OF CAPITAL STOCK" AND NOTE 5 OF
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. UNLESS OTHERWISE INDICATED,
REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" OR TO "NETGRAVITY" REFER TO
NETGRAVITY, INC., A DELAWARE CORPORATION, TOGETHER WITH ITS WHOLLY-OWNED
SUBSIDIARIES, NETGRAVITY EUROPE LIMITED AND NETGRAVITY ASIA PACIFIC K.K.
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING SHARES OF THE COMMON STOCK OFFERED HEREBY.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND
ELSEWHERE IN THIS PROSPECTUS.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; ANTICIPATED CONTINUED LOSSES
The Company was incorporated in September 1995 and therefore has a limited
operating history upon which an evaluation of the Company and its prospects can
be based. The Company's prospects 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, such as the markets for online advertising and direct marketing
solutions. To address these risks, the Company must, among other things,
effectively develop new relationships and maintain existing relationships with
its customers, business and technology partners and other third parties, develop
and upgrade its technology, improve its technical support and service, respond
to competitive developments, implement and improve operational, financial and
managerial information systems and attract, retain and motivate qualified
personnel. There can be no assurance that the Company will succeed in addressing
such risks and the failure to do so could have a material adverse effect on the
Company's business, results of operations or financial condition. Additionally,
the limited operating history of the Company makes the prediction of future
operating results difficult or impossible, and there can be no assurance that
the Company's revenues will increase or even continue at their current level or
that the Company will achieve or maintain profitability or generate cash from
operations in future periods. Since inception, the Company has incurred
significant losses and, as of March 31, 1998, had an accumulated deficit of
$14.5 million. The Company anticipates that its operating expenses will increase
substantially for the foreseeable future as it continues the development of its
technology, increases its sales and marketing personnel and activities, and
creates and expands its distribution channels. Accordingly, the Company expects
to incur additional losses and continued negative cash flow from operations for
the foreseeable future, and such losses are anticipated to increase
significantly from current levels, which in turn will increase the Company's
accumulated deficit. Additionally, although the Company has experienced revenue
growth in recent periods, due to the Company's limited operating history, such
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY; POSSIBLE
PRICE EROSION
As a result of the Company's limited operating history, the Company does not
have relevant historical financial data for a significant number of periods on
which to base planned operating expenses. Accordingly, the Company's expense
levels are based in part on the Company's expectations as to future revenues.
Since the Company's expenses are to a large extent fixed in the short term, the
Company may be unable to, or may elect not to, adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Therefore, any
significant shortfall in revenues in relation to the Company's expectations
would have an immediate material adverse effect on the Company's business,
results of operations and financial condition.
The Company's results of operations may fluctuate significantly in the
future as a result of a variety of additional factors, many of which are beyond
the Company's control. These factors include: (i) varying demand for the
Company's products and services, (ii) the Company's success in addressing new
and related market opportunities, (iii) the introduction of new or enhanced
online advertising or direct marketing solutions by the Company or its
competitors, (iv) changes in the market demand for online advertising and direct
marketing software, (v) market acceptance of new products and services, (vi) the
timing and size of individual license transactions, (vii) the sales and
implementation cycles of its customers, (viii) the addition or loss of
customers, (ix) the mix between license and service revenues, (x) the mix
between domestic and international revenues, (xi) the amount of advertising
7
<PAGE>
budgets committed to online advertising and direct marketing activities, (xii)
price changes or changes in pricing models by the Company or its competitors,
(xiii) the mix of distribution channels through which products are sold, (xiv)
increasing complexity of products resulting in higher costs to develop and
maintain which may not be recouped by increased prices, (xv) the loss of key
employees and the time required to train new hires, particularly sales
personnel, (xvi) the penetration of markets outside of North America, (xvii) the
incurrence of costs relating to possible acquisitions of technology or
businesses, (xviii) seasonality related to slower European sales in the third
quarter and a shorter implementation period in the fourth quarter, (xix) the
amount and timing of capital expenditures and other costs relating to the
expansion of the Company's operations, and (xx) general economic conditions.
Historically, a significant portion of the Company's revenue for a given
quarter has been recognized in the last month of that quarter and the Company
expects this trend to continue. In particular, because the Company's revenue
recognition policy requires that the implementation of AdServer be substantially
completed before recognition of software license revenue, any delay in the
implementation of the Company's products at the end of a quarter could
materially adversely affect operating results for that quarter. The Company's
revenues are also likely to fluctuate due to factors that impact prospective
customers of the Company's products. Expenditures by these customers tend to
vary in cycles that reflect overall economic conditions and budgeting and buying
patterns. The Company's business could be materially adversely affected by a
decline in the economic prospects of its customers or the economy generally,
which could alter current or prospective customers' spending priorities or
budget cycles or extend the Company's sales cycle with respect to certain
customers. In addition, the Company may increase its operating expenses to
exploit new market opportunities for its products and services, fund greater
levels of research and development, increase its sales and marketing operations,
develop new distribution channels, improve its operational and financial systems
and broaden its customer support capabilities. To the extent that such expenses
precede or do not correspond with increased revenues, the Company's business,
results of operations or financial condition could be materially adversely
affected.
Since the markets for online advertising and direct marketing are in the
early stages of development, there can be no assurance that the Company's model
for pricing of its products and services will remain an acceptable pricing
model. If gross margins on the Company's products and services decline because a
new pricing model develops or the Company's competitors offer products and
services at lower prices than the Company, the Company's business, results of
operations or financial condition could be materially adversely effected. The
terms of the Company's agreement with its customers typically contain a
perpetual license, a one-year renewable subscription for product upgrades and a
one-year renewable support agreement. If the Company's customers do not renew
their subscription and support agreements, the Company's business, results of
operations or financial condition could be materially adversely effected.
Due to all of the foregoing factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Furthermore it is likely that in some future quarters the Company's results of
operations may fall below the expectations of securities analysts and investors.
In such event, the trading price of the Company's Common Stock will likely be
materially and adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Results of Operations."
RISKS ASSOCIATED WITH EMERGING MARKETS
The markets for online advertising and direct marketing have only recently
begun to develop, are rapidly evolving and are characterized by an increasing
number of market entrants. As is typical in the case of a new and rapidly
evolving industry, demand and market acceptance for recently introduced products
and services are subject to a high level of uncertainty. Since the Company
expects to derive substantially all of its revenues in the foreseeable future
from sales of its online advertising and direct marketing software solutions,
the Company is highly dependent on the continued use of the Internet for
information, entertainment and other purposes and, in particular, on the
increased use of the Internet as an advertising and direct marketing medium.
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ONLINE ADVERTISING. The Internet as an advertising medium has not been
available for a sufficient period of time to gauge its effectiveness as compared
with traditional advertising media (such as print, television and radio). Many
advertisers have limited or no experience using the Internet as an advertising
medium, have not devoted a significant portion of their advertising expenditures
to online advertising and may not find online advertising to be effective for
promoting their products and services relative to advertising using traditional
media. The adoption of online advertising, particularly by those entities that
have historically relied upon traditional media for advertising, requires the
acceptance of a new way of conducting business and exchanging information. In
addition, most of the Company's current and potential Web publisher customers
have limited or no experience in generating revenues from the sale of
advertising space on their Web sites. Further, advertisers and advertising
agencies that have invested substantial resources in traditional methods of
advertising may be reluctant to reallocate their media buying resources to
online advertising. The Internet must therefore compete for a share of
advertisers' total advertising budgets with traditional advertising media.
Additionally, there are no widely accepted standards for the measurement of the
effectiveness of online advertising, and there can be no assurance that such
standards will develop sufficiently to support online advertising as a
significant advertising medium. To the extent that the Internet is perceived to
be a limited or ineffective advertising medium, advertisers may be reluctant to
devote a significant portion of their advertising budget to online advertising,
which could limit the growth of online advertising and would have a material
adverse effect on the Company's business, results of operations and financial
condition. Because initial growth of online advertising was driven by a limited
number of early adopters, there can be no assurance that the market for online
advertising will continue to emerge or become sustainable. To the extent the
market does not attain widespread acceptance or develops more slowly than
expected, the Company's business, results of operations or financial condition
could be materially and adversely affected.
Further, there can be no assurance that advertisers will determine that
banner advertising, the delivery method which currently comprises substantially
all of the advertising delivered via the Company's products, is an effective or
attractive advertising medium, and there can be no assurance that the Company
will effectively transition to any other forms of online advertising should they
develop and achieve market acceptance. Moreover, "filter" software programs that
limit or prevent advertising from being delivered to a Web user's computer are
available. Widespread adoption of such software by users could have a material
adverse effect upon the commercial viability of online advertising, which would
have a material adverse effect on the Company's business, results of operations
and financial condition.
Additionally, if the outsourced service model increases in popularity for
the Company's targeted markets, the Company will be required to devote
additional resources to keep its own outsourcing solution competitive. Any
failure by the Company to successfully design, develop and market an advanced
outsourced solution under such circumstances would have a material adverse
effect on the Company's business, results of operations and financial condition.
ONLINE DIRECT MARKETING. Adoption of online direct marketing, particularly
by those entities that have historically relied upon traditional means of direct
marketing (such as telemarketing and direct mail), requires the broad acceptance
of a new and substantially different approach to direct marketing. As with
online advertising and other new markets, intensive marketing and sales efforts
may be necessary to educate prospective customers regarding the uses and
benefits of the Company's products and services in order to generate demand for
the Company's solutions. Enterprises that have already invested substantial
resources in other methods of conducting business may be reluctant or slow to
adopt a new approach that may replace, limit, or compete with their existing
systems. In addition, since online direct marketing is emerging as a new and
distinct market apart from online advertising, potential adoptees of online
direct marketing solutions will increasingly demand functionality tailored to
their specific requirements.
Additionally, online direct marketers may delay adoption of any direct
marketing solutions offered by the Company until the market for online
advertising has reached a broader level of acceptance. Although AdServer's
largely advertising-oriented features can be deployed for online direct
marketing, the Company has not yet
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developed products with the custom features required by online direct marketers
and there can be no assurance that the Company will develop any such products or
if such products are developed, that they will achieve a satisfactory level of
market acceptance.
NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
The market in which the Company competes is characterized by: rapidly
changing technology; evolving industry standards; frequent new product and
service announcements, introductions and enhancements; and changing customer
demands. These market characteristics are heightened by the emerging nature of
the Web, in general, and online advertising and direct marketing in particular.
Accordingly, the Company is dependent upon its ability to adapt to rapidly
changing technologies, its ability to adapt its solutions to meet evolving
industry standards and its ability to continually improve the performance,
features and reliability of its solutions in response to both changing customer
demands and competitive product and service offerings. The failure of the
Company to successfully adapt to such changes in a timely manner could have a
material adverse effect on the Company's business, results of operations or
financial condition.
If the Company is unable, for technological or other reasons, to develop on
a timely basis the next release of AdServer or other new software products,
enhancements to existing products or corrections to errors in products, or if
such new products or enhancements do not achieve a significant degree of market
acceptance or if such products, in order to be released on a timely basis,
contain material defects or errors, the Company's business, results of
operations and financial condition would be materially adversely affected. In
addition, there can be no assurance that the introduction or announcement of new
product offerings by the Company or one or more of its competitors will not
cause customers to decline or defer licensing of existing Company products. Any
decline or deferral of purchases could have a material adverse effect on the
Company's business, results of operations or financial condition. Further, if
the Company's current or future products do not meet the scalability
requirements of its customers due to vastly increased use of the Internet, the
Company would have to incur substantial expenditures and resources to address
such issue and there can be no assurance that the Company will be successful in
scaling the capabilities of its products to such level.
Although the Company sells products to each of the constituencies in the
advertising chain (including merchants, advertising agencies and content
publishers), it does not currently offer products automating the online
advertising purchasing process among such constituencies. If demand for a
comprehensive solution develops and the Company fails to develop such a solution
on a timely basis, or at all, it could have a material adverse effect on the
Company's business, results of operations or financial condition. In addition,
as more customers demand online advertising and direct marketing solutions, the
Company must tailor its products to the specific requirements of both online
advertisers and direct marketers and provide a solution for supplying
demographic and behavioral data. Specifically, the online direct marketing
market will require more narrowly targeted advertisements than the online
advertising market and will be even more reliant on demographic data than the
online advertising market. Although AdServer's largely advertising-oriented
features can be used for online direct marketing, the Company has not yet
developed products with the custom features required by online direct marketers.
If the Company does not develop a satisfactory product to address the online
direct marketing market, future growth of the Company could be impaired and the
Company could lose customers to competitors with more comprehensive solutions.
The occurrence of any such event could have a material adverse effect on the
Company's business, results of operations or financial condition. See "--Risks
Associated with Emerging Markets" and "Business--Competition."
The Company's products are designed to operate on a variety of hardware and
software platforms employed by its customers in their individual networks. The
Company must continually modify and enhance its products to keep pace with
changes in hardware and software platforms and database technology. As a result,
uncertainties related to the timing and nature of new product announcements,
introductions or modifications by operating systems vendors, particularly
Microsoft and Sun, by vendors of relational database software, particularly
Oracle and Microsoft, and browsers, particularly Netscape and Microsoft could
materially adversely impact the Company's business, results of operations or
financial condition. See "Business--Technology."
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COMPETITION
The market for online advertising and direct marketing products and related
products and services is relatively new, intensely competitive, rapidly evolving
and subject to rapid technological change. The Company expects competition to
continue to increase both from existing competitors and new market entrants.
There are no substantial barriers to entry in these markets and the Company
believes that its ability to compete is dependent upon many factors within and
beyond its control, including the timing and market acceptance of new solutions
and enhancements to existing solutions developed by the Company and its
competitors, customer service and support, sales and marketing efforts and the
ease of use, performance, features, price and reliability of the Company's
solutions.
Historically, participants in the advertising and direct marketing supply
chain have used internally developed systems to manage their own online
advertising and direct marketing functions. The Company believes that its
primary competition will increasingly come from vendors that provide online
advertising and direct marketing software or service solutions. In the online
advertising market, the Company competes directly with DoubleClick, CMG (through
its Engage/Accipiter unit) and Excite (through its MatchLogic unit), and a
variety of other online advertising service providers. Some of these companies
(such as DoubleClick) have adopted a business model focused on outsourcing of
advertising and direct marketing management. If this model increases in
popularity for the Company's targeted markets, the Company will be required to
devote additional resources to keep its own outsourcing solution competitive.
Any failure by the Company to successfully design, develop and market an
advanced outsourced solution under such circumstances would have a material
adverse effect on the Company's business, results of operations and financial
condition. In the online direct marketing market, the Company expects to face
indirect competition from the vendors of electronic commerce systems including
BroadVision, Interworld and Open Market, among others. Additionally, providers
of electronic commerce could build online direct marketing solutions that would
obviate the need for any current or future products of the Company targeted to
the online direct marketing industry. The Company also encounters competition
from Netscape and Microsoft, which build or bundle advertising management
products with their Internet commerce solutions. Both Netscape and Microsoft
have significantly greater resources than the Company, and due to their control
of the browser market, if either of them offer online advertising and direct
marketing management solutions with comparable features to those offered by the
Company, there can be no assurance that the Company would be able to compete
effectively against any such product offerings.
Many of the Company's current and potential competitors have longer
operating histories and significantly greater financial, technical, marketing
and other resources than the Company and thus may be able to respond more
quickly to new or changing opportunities, technologies and customer
requirements. Also, many current and potential competitors have greater name
recognition, more extensive customer bases and larger proprietary consumer
databases that could be leveraged, thereby gaining market share to the Company's
detriment. Such competitors may be able to undertake more extensive promotional
activities, adopt more aggressive pricing policies, and offer more attractive
terms to purchasers than the Company. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to enhance their products. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, results of operations or financial condition.
There can be no assurance that the Company will be able to compete successfully
against existing or potential competitors or that competitive pressures will not
have a material adverse effect on the Company's business, results of operations
or financial condition.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL QUALIFIED PERSONNEL
The Company is dependent, to a significant extent, upon members of senior
management, product development personnel, the Company's sales and marketing and
customer support staff, and other key employees. Given the
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Company's early stage of development, the loss of one or more key employees
could have a material adverse effect on the business, results of operations or
financial condition of the Company. The Company does not have employment
agreements with its executive officers requiring their service for any
particular term and does not carry key person life insurance covering such
persons. In addition, the Company is dependent upon its ability to attract,
hire, train and retain highly skilled technical, managerial, sales and marketing
personnel. Competition for such personnel in the computer software industry is
very intense and the Company has at times and continues to experience difficulty
in recruiting qualified personnel. The Company must also recruit senior
executives with industry expertise in online advertising and direct marketing.
See "Business--Employees."
Should the Company's growth continue, the Company will have to recruit and
hire a substantial number of new engineering, managerial, finance, sales and
marketing and support personnel; however, due to the extremely competitive
environment for such personnel, there can be no assurance that the Company will
be successful at hiring or retaining qualified personnel. In particular the
Company plans to expand its sales and marketing and customer support
organizations both domestically and internationally. Based on the Company's
experience, it takes at least six months, if not longer, for a salesperson to
become fully productive. There can be no assurance that the Company will be
successful in increasing the productivity of its sales personnel, and the
failure to do so could have a material adverse effect on the Company's business,
results of operations or financial condition. The competition for such
individuals is extremely intense and there can be no assurance that the Company
will be successful in attracting, hiring, training and retaining such personnel,
and the failure to do so could have a material adverse effect on the Company's
business, results of operations or financial condition. Additionally, as the
Company continues to expand internationally, it will require the services of
individuals in the countries in which it conducts operations. The Company has
had limited experience hiring foreign personnel. There can be no assurance that
the Company will be successful in attracting, hiring, training and retaining
such personnel, and the failure to do so could have a material adverse effect on
the Company's business, results of operations or financial condition. See
"Business-- Professional Services."
MANAGEMENT OF GROWTH; RISKS OF POTENTIAL FUTURE ACQUISITIONS
The Company has recently experienced a period of rapid growth and expansion
that has placed and continues to place a significant strain upon the Company's
management, systems and resources. The Company has grown from 10 employees as of
December 31, 1995 to 98 employees as of March 31, 1998 and currently plans to
expand its staff (both domestically and internationally). See "--Dependence on
Key Personnel; Need for Additional Qualified Personnel." The Company's ability
to compete effectively and manage future growth, if any, will require the
Company to continue to implement and improve operational, financial and
management information systems on a timely basis and to hire, train, motivate
and manage additional managerial, finance, sales and marketing and support
personnel. Any failure to implement and improve the Company's operational,
financial and management systems or to hire, train, motivate or manage employees
could have a material adverse effect on the Company's business, results of
operations or financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Employees."
In the future as part of its growth strategy, the Company may pursue
acquisitions of product lines, technologies or businesses. Future acquisitions
by the Company may result in the use of significant amounts of cash, potentially
dilutive issuances of equity securities, incurrence of debt and amortization
expenses related to goodwill and other intangible assets, each of which could
materially adversely affect the Company's business, results of operations or
financial condition. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies, products and
personnel of the acquired company, the diversion of management's attention from
other business concerns, risks of entering markets in which the Company has no
or limited direct prior experience, and the potential loss of key employees of
the acquired company. From time to time, the Company has engaged in discussions
with third parties concerning potential acquisitions of product lines,
technologies and businesses. However, there are currently no active
negotiations, commitments or agreements with respect to any acquisition. In the
event that such an acquisition does occur, however, there can be no assurance
that the Company's business, results of operations or financial condition will
not be materially adversely effected.
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RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
A significant component of the Company's strategy is to aggressively expand
its international operations and international sales and marketing efforts.
Through its two subsidiaries, NetGravity Europe Limited and NetGravity Asia
Pacific K.K., the Company has recently commenced operations in a number of
international markets. International revenues comprised approximately 9% of the
Company's total revenues in 1997 and are expected to comprise a significant
portion of the Company's total revenues in 1998. Although the Company believes
that localized versions of its products will be extremely important for the
Company to achieve any significant international growth, to date, the Company
has not developed localized versions of its products (which will likely involve
a significant amount of the Company's resources) and has limited experience in
marketing, selling and distributing its products and services internationally.
Additionally, international markets are in earlier stages of development than
the United States in the market for online advertising and direct marketing and
there can be no assurance that the market for, and use, of online advertising
and direct marketing will be significant in the future. Factors that may further
account for slower growth in the online advertising and direct marketing markets
in Europe and Asia include: slower growth in the number of individuals using the
Internet internationally; privacy concerns; a lower rate of advertising spending
internationally than in the United States; and a greater reluctance
internationally to use the Internet for advertising and direct marketing.
Further, any future success of the Company in selling its products and services
internationally may be conditioned on the Company delivering improved versions
of its products (including localized versions of its products) and having
additional international personnel available for service and support. Due to all
of the foregoing, there can be no assurance that the Company will be able to
successfully market, sell and deliver its products and services in these
markets. In addition, there are certain risks and challenges inherent in doing
business in international markets, such as difficulties in collecting accounts
receivable and longer collection periods, multiple and continual changes in
regulatory requirements, conflicting regulatory requirements (for example
Germany has imposed laws limiting the use of cookies and there can be no
assurance that other countries will not also place limitations on the use of
cookies), potentially adverse tax consequences, export restrictions, export
controls relating to encryption technology, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, political instability,
fluctuations in currency exchange rates, seasonal reductions in business
activity during the summer months in Europe and certain other parts of the
world, and the impact of local economic conditions and practices, any of which
could have a material adverse effect on the success of the Company's
international operations and, consequently, on the Company's business, results
of operations or financial condition.
A portion of the Company's international revenues and expenses are
denominated in foreign currencies. However, the Company has not engaged in
hedging transactions in such international markets. To the extent the Company
expands its international operations and has additional portions of its
international revenues denominated in foreign currencies, the Company could
become subject to increased risks relating to foreign currency exchange rate
fluctuations. Additionally, recent weakness in many of the Asian economies as
well as weakness in the Japanese yen may result in the Company's products being
too expensive for customers in such countries resulting in decreased sales and
profitability in such countries. There can be no assurance that one or more of
the factors discussed above will not have a material adverse effect on the
Company's future international operations and, consequently, on the Company's
business, results of operations or financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Strategy."
LENGTHY SALES AND IMPLEMENTATION CYCLES
Sales of the Company's software products often require the Company to engage
in a lengthy sales effort including significant education of prospective
customers regarding the use and benefits of the Company's products. As a result,
the sales cycle for the Company's products is long, currently averaging
approximately four months. In particular, the sales cycle for the Company's
online direct marketing solutions is likely to be comparatively longer than the
sales cycle for the online advertising solutions, since online direct marketing
is less established and will require more education of the Company's potential
customers. In addition, the implementation of the Company's products often
involves a significant commitment of resources by customers and/or the Company's
consultants over
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an extended period of time. The Company's sales and customer implementation
cycles are subject to a number of potential delays. These include delays related
to product defects or errors as well as delays over which the Company has little
or no control, including customers' budgetary constraints, internal acceptance
reviews and the complexity of customers' online advertising or direct marketing
needs. To the extent the use of the Internet becomes a more widely accepted
means of conducting advertising campaigns and targeting potential customers, the
Company believes that the average sales size of its transactions may increase.
An increase in the average sales size of transactions would also likely result
in a longer sales cycle as the license of the Company's software products
becomes more of an enterprise-wide decision by prospective customers requiring a
significant commitment of resources. Delays due to lengthy sales cycles or
delays in customer deployment of a product could have a material adverse effect
on the Company's business, results of operations or financial condition. For
example, due to errors contained in early versions of AdServer 3.0 and the
complexity involved in its implementation, deployment of the product required a
significant amount of time and resources on the part of the Company and its
customers. Partly as a result, the Company's license revenue declined in the
fourth quarter of 1997 from the prior quarter due to the delay in revenue
recognition and greater than anticipated utilization of the Company's personnel
and other resources in deploying such products. See "Potential Fluctuations in
Quarterly Operating Results; Seasonality; Possible Price Erosion," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Sales and Marketing."
PRODUCT CONCENTRATION
To date, substantially all of the Company's revenues have been attributable
to sales of the Company's AdServer family of software and related services and
the Company currently expects that such AdServer sales will account for most of
its revenues for the foreseeable future. The Company's future financial
performance is dependent, in significant part, upon the successful development,
introduction and customer acceptance of new and enhanced versions of AdServer
and of new products and services that the Company may develop. There can be no
assurance that the Company will be successful in upgrading and continuing to
market AdServer or that the Company will successfully develop new products and
services or that any new product or service will achieve market acceptance.
Consequently, factors affecting the pricing of and demand for AdServer, such as
competition, technological changes, failure of the market for online advertising
and direct marketing solutions to develop as the Company anticipates or lack of
customer acceptance of AdServer could have a material adverse effect on the
Company's business, results of operations or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET
The Company's operations are largely dependent upon the widespread
acceptance and use of the Internet as an advertising and direct marketing
medium. The Internet may not be accepted as a viable commercial medium for a
number of reasons, including potentially inadequate development of the necessary
network infrastructure, timely development of enabling technologies or
commercial support for online advertising and direct marketing. To the extent
that the Internet continues to experience an increase in users, an increase in
frequency of use or an increase in the bandwidth requirements of users, there
can be no assurance that the Internet infrastructure will be able to support the
demands placed upon it. In addition, the Internet could lose its viability as a
commercial medium due to the delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or due to increased government regulation. Changes in, or insufficient
availability of, telecommunications services to support the Internet also could
result in slower response times and could adversely affect use of the Internet
generally. If use of the Internet does not continue to grow or grows more slowly
than expected, or if the Internet infrastructure, standards, protocols or
complementary products, services or facilities do not effectively support growth
that may occur, the Company's business, results of operations and financial
condition would be materially adversely affected. See "Business--Industry
Background." Even if the required infrastructure, standards, protocols or
complementary products, services or facilities are developed, there can be no
assurance that the Company will not be required to incur substantial
expenditures in order to adapt its solutions to changing or emerging
technologies. The occurrence of any such event could have a material adverse
effect on the Company's
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business, results of operations or financial condition. Moreover, critical
issues concerning the commercial use and government regulation of the Internet
(including security, cost, ease of use and access, intellectual property
ownership and other legal liability issues) remain unresolved and could
materially and adversely impact both the growth of the Internet and the
Company's business, results of operations or financial condition.
RELIANCE ON THIRD PARTIES AND THIRD PARTY SOFTWARE PLATFORMS
The Company's products are designed to operate on a variety of hardware and
software platforms employed by its customers in their networks. The Company must
continually modify and enhance its products to keep pace with changes in
hardware and software platforms and database technology. As a result,
uncertainties related to the timing and nature of new product announcements,
introductions or modifications by vendors of operating systems, particularly
Microsoft and Sun, by vendors of relational database management software,
particularly Oracle and Microsoft, and by vendors of browsers, particularly
Netscape and Microsoft, could materially adversely impact the Company's
business, results of operations or financial condition. The failure of the
Company's products to operate effectively across the various existing and
evolving versions of hardware and software platforms and database environments
employed by customers could have a material adverse effect on the Company's
business, results of operations or financial condition. The Company also relies
upon the licensing of certain software from third parties, including database
access technology and other tools from Rogue Wave, and there can be no assurance
that the Company's third-party technology licenses will continue to be available
to the Company on commercially reasonable terms, if at all. The loss or
inability to maintain any of these technology licenses could result in delays in
introduction of the Company's products and services until equivalent technology,
if available, is identified, licensed, and integrated, which could have a
material adverse effect on the Company's business, results of operations or
financial condition.
In order for the Company to provide adequate demographic data for its
customers without their own demographic data or without access to their
demographic data, the Company will need to partner with companies offering such
demographic data. The failure of the Company to form such partnerships could
have a material adverse effect on the business, results of operations or
financial condition of the Company.
EVOLVING DISTRIBUTION CHANNELS
The Company has historically sold its products and services primarily
through its field sales and telesales organization, but is pursuing a strategy
to increase sales by offering its products through Internet systems integrators,
Web hosting organizations and value added resellers (collectively, "Resellers").
The Company expects that any material increase in sales through Resellers as a
percentage of total revenues will adversely affect the Company's gross margins
due to discounts offered to Resellers. Another potential adverse consequence of
the Company's focus on increasing sales through Resellers is the diversion of
management resources and attention from field sales and telesales, which could
adversely affect field sales and telesales revenue. Moreover, there can be no
assurance that the Company will be able to attract and retain Resellers that
will be able to market the products effectively, particularly due to the
sophisticated nature of the Company's products, and that will be qualified to
provide timely and cost-effective customer support and service. In the event
that a Reseller provides inadequate support and service to the Company's
customers, the Company's future revenues could be negatively impacted and the
Company's reputation could be seriously damaged. The occurrence of any of such
events could have a material adverse effect on the Company's business, results
of operations or financial condition.
PRIVACY CONCERNS; DEPENDENCE ON COOKIES FOR AD TARGETING; SECURITY
The Company's software uses "cookies" to deliver targeted advertising, to
help compile demographic information, and to limit the frequency with which an
advertisement is shown to the user. Cookies are bits of information keyed to a
specific server, file pathway or directory location that are stored on a user's
hard drive and passed to a Web site's server through the user's browser
software. Cookies are placed on the user's hard drive without the user's
knowledge or consent. Due to privacy concerns, some Internet commentators,
advocates and governmental bodies have suggested that the use of cookies be
limited or eliminated. In addition, certain currently
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available Internet browsers allow a user to delete cookies or prevent cookies
from being stored on the user's hard drive. Germany has imposed laws limiting
the use of cookies and there can be no assurance that other countries will not
also place limitations on the use of cookies. See "--Risks Associated with
International Expansion." Any reduction or limitation in the use of cookies
could require the Company to switch to other technology allowing the gathering
of information for ad targeting. Switching to other technology could require
significant reengineering time and resources and there can be no assurance that
the Company would be able to switch to such technology on a timely basis, if at
all. The failure to do so could have a material adverse effect on the Company's
business, results of operations or financial condition.
The Company has included basic security features in certain of its products
that are intended to protect the privacy and integrity of customer data.
However, in the Company's AdServer product, passwords for certain operations are
not encrypted and therefore susceptible to hacker interception, break-ins and
disruption. Such computer break-ins and other disruptions may jeopardize the
security of information stored in and transmitted through the computer systems
of the Company's customers. Alleviating problems caused by third parties may
require significant expenditures of capital and resources by the Company which
may have a material adverse effect on the Company's business, results of
operations or financial condition. Additionally, as e-commerce becomes more
prevalent (and consequently the focus of the Company's development of direct
marketing products), security concerns will become of increasing concern to
consumers (and if not addressed could limit or slow the development of
e-commerce) and the Company's customers. If the Company does not add sufficient
security features to future product releases, the Company's products may not
achieve an acceptable level of market acceptance or if purchased by customers,
may result in additional legal exposure. The occurrence of any of the foregoing
could have a material adverse effect on the Company's business, results of
operations or financial condition.
RISK OF PRODUCT DEFECTS; PRODUCT LIABILITY
Software products as complex as AdServer frequently contain errors or
defects or performance problems, especially when first introduced or when new
versions or enhancements are released. Despite extensive product testing by the
Company prior to introduction, the Company's products have in the past contained
software errors that were discovered after commercial introduction. For example,
AdServer 3.0, although functional when released, had a number of software errors
that affected the product's performance, reliability and compatibility with
certain operating environments. As a result of such errors, the Company had to
allocate significant customer support resources to addressing such errors. There
can be no assurance that, despite testing by the Company and by current and
potential customers, serious defects and errors will not be found in new
versions or enhancements of the Company's current products after commencement of
commercial shipments. Any future software defects or errors discovered after
delivery of the Company's products could result in the allocation of technical
personnel's time, lost revenues or delays in customer acceptance of the
Company's products and would be detrimental to the Company's market reputation,
which, in each case, could have a material adverse effect on the Company's
business, results of operations or financial condition. The Company's customers
and potential customers may be particularly sensitive to any such software
defects or errors given that a failure of a Web site's advertising management
and delivery system often immediately and directly results in lost or reduced
advertising revenue during such failure.
Since the Company's products are used by its customers for advertising
management, errors or defects in the Company's products, misuse of the Company's
products or other potential problems within or out of the Company's control that
may arise from the use of the Company's products could result in financial or
other damages to the Company's customers. Such customers could seek damages from
the Company for any such losses, which, if successful, could have a material
adverse effect on the Company's business, results of operations or financial
condition. Additionally, although the Company's license agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential claims as well as any liabilities arising from such claims, such
provisions may not effectively protect the Company against such claims and the
liability and costs associated therewith as a result of existing or future
federal, state or local laws or ordinances or unfavorable judicial decisions.
Although the Company has not experienced any product liability claims to date,
there can be no assurance that the Company will not be subject to such claims in
the future. Because the Company's software products are used in
16
<PAGE>
business-critical applications, a successful product liability claim brought
against the Company could have a material adverse effect on the Company's
business, results of operations or financial condition. Moreover, defending such
a suit, regardless of its merits, could entail substantial expense and require
the time and attention of key management personnel, either of which could have a
material adverse effect on the Company's business, results of operations or
financial condition.
DEPENDENCE ON PROPRIETARY RIGHTS; RISK OF INFRINGEMENT
The Company's success and ability to compete are dependent in part upon its
proprietary technology. The Company relies on trademark, trade secret and
copyright law to protect its technology. Legal standards relating to the
validity, enforceability and scope of protection of certain proprietary rights
in Internet-related industries are uncertain and still evolving, and no
assurance can be given as to the future viability or value of any proprietary
rights of the Company or other companies within the industry. Furthermore, the
Company believes that factors such as the technological and creative skills of
its personnel, new product developments, product enhancements, name recognition
and reliable product maintenance are more essential to establishing and
maintaining its technology leadership position than the legal protection of its
technology. There can be no assurance that others will not develop technologies
that are similar or superior to the Company's technology.
The Company generally provides its products to end users under nonexclusive,
nontransferable licenses during the term of the agreement, which is usually in
perpetuity. Under the general terms and conditions of the Company's standard
license agreements, the licensed software may be used pursuant to NetGravity's
published licensing practices. The source code for the Company's proprietary
software is protected both as a trade secret and as a copyrighted work. In
addition, some of the Company's agreements with its customers contain provisions
requiring release of source code for limited, non-exclusive use by the customer
in the event that the Company ceases to do business or the Company fails to
support its products. This release of source code may increase the likelihood of
misappropriation by third parties. The Company's policy is to enter into
confidentiality and interim assignment agreements with its employees,
consultants, and vendors and generally to control access to and distribution of
its software, documentation, and other proprietary information. Notwithstanding
these precautions, it may be possible for a third party to copy or otherwise
obtain and use the Company's software or other proprietary information without
authorization or to develop similar software independently. Policing
unauthorized use of the Company's products is difficult, particularly because
the global nature of the Internet makes it difficult to control the ultimate
destination or security of software or other data transmitted. The laws of other
countries may afford the Company little or no effective protection of its
intellectual property. There can be no assurance that the steps taken by the
Company will prevent misappropriation of its technology or that agreements
entered into for that purpose will be enforceable. In addition, litigation may
be necessary in the future to enforce the Company's intellectual property
rights, to protect the Company's trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Such litigation, whether successful or unsuccessful,
could result in substantial costs and diversions of resources, either of which
could have a material adverse effect on the Company's business, results of
operations or financial condition.
Although the Company believes that its products do not infringe the
proprietary rights of third parties, there can be no assurance that the
Company's products or business activities will not infringe upon the patent or
other proprietary rights of others, or that other parties will not assert or
prosecute infringement or invalidity claims (or claims for indemnification
resulting from infringement claims) against the Company or that any such
assertions or prosecutions will not materially adversely affect the Company's
business, results of operations or financial condition. From time to time the
Company has been, and expects to continue to be, subject to claims in the
ordinary course of its business, including claims of alleged infringement of the
copyrights, trade secrets and other intellectual property rights of third
parties by the Company. Although such claims have not resulted in litigation or
had a material adverse effect on the Company's business, results of operations
or financial condition, such claims and any resultant litigation, should they
occur, could subject the Company to significant liability for damages and could
result in invalidation of the Company's proprietary rights and, even if not
meritorious, could be time-consuming and expensive to defend, and could result
in the diversion of management time and attention, any of which could have a
17
<PAGE>
material adverse effect on the Company's business, results of operations or
financial condition. If any such claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that under
such circumstances, a license would be available on reasonable terms or at all.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
Due to concerns arising in connection with the increasing popularity and use
of the Web, a number of laws and regulations may be adopted covering issues such
as user privacy, pricing, characteristics, acceptable content, taxation and
quality of products and services. Such legislation could dampen the growth in
use of the Web generally and decrease the acceptance of the Web as a
communications and commercial medium, which could have a material adverse effect
on the Company's business, results of operations or financial condition. In
addition, because the growing popularity and use of the Web has burdened the
existing telecommunications infrastructure and many areas with high Web use have
begun to experience interruptions in phone service, certain local telephone
carriers have petitioned governmental bodies to regulate Internet service
providers ("ISPs") and online service providers ("OSPs") in a manner similar to
long distance telephone carriers and to impose access fees on ISPs and OSPs. If
any of these petitions or the relief sought therein is granted, the costs of
communicating on the Web could increase substantially, potentially adversely
affecting the growth in use of the Web which could in turn decrease the demand
for the Company's products or otherwise have a material adverse effect on the
Company's business, results of operations or financial condition. Further, due
to the global nature of the Web, it is possible that multiple federal, states or
foreign jurisdictions might attempt to concurrently and inconsistently regulate
the transmissions of the Company or its customers or levy sales or other taxes
relating to the Company's activities. There can be no assurance that violations
of local laws will not be alleged or charged by state or foreign governments,
that the Company might not unintentionally violate such laws or that such laws
will not be modified, or new laws enacted, in the future. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, libel and personal privacy is uncertain. Any of the foregoing
developments could have a material adverse effect on the Company's business,
results of operations or financial condition. See "Privacy Concerns; Dependence
on Cookies for Ad Targeting; Security."
YEAR 2000 COMPLIANCE
Many current installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries in order to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/ or software used by many companies will
need to be upgraded to comply with "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance issues. A number of code fields in the user
interface portion of Company's AdServer products are currently programmed to
accept only two digit entries and, as a result, the Company is not yet Year 2000
compliant. While the Company believes that date code fields in other components
of its products are Year 2000 compliant, there can be no assurance that all or
any of such date fields are Year 2000 compliant. The Company is currently taking
steps to make its products Year 2000 compliant. However, there can be no
assurance that the Company will be successful in making its products Year 2000
compliant. Any failure by the Company to make its products Year 2000 compliant
could result in a decrease in sales of the Company's products, an increase in
the allocation of resources to address Year 2000 problems of the Company's
customers without additional revenue commensurate with such dedication of
resources, or an increase in litigation costs relating to losses suffered by the
Company's customers due to such Year 2000 problems. The occurrence of any such
event could have a material adverse effect on the Company's business, results of
operations or financial condition. In addition, the Company believes that the
purchasing patterns of customers and potential customers may be impacted by Year
2000 issues. Additionally, many companies are expending significant resources to
correct or patch their current software systems. These expenditures of funds may
result in reduced funds available to purchase software products such as those
offered by the Company. Any of the foregoing could result in a material adverse
effect to the Company's business, results of operations or financial condition.
18
<PAGE>
UNCERTAIN NEED AND AVAILABILITY OF ADDITIONAL FUNDING
Although the Company believes that, following the offering, its cash
reserves and cash flows from operations will be adequate to fund the Company's
operations for at least the next 12 months, there can be no assurance that such
sources will be adequate or that additional funds will not be required either
during or after such 12 month period. No assurance can be given that additional
financing will be available or that, if available, it will be available on terms
favorable to the Company or its stockholders. If additional funds are raised
through the issuance of equity securities, the percentage ownership of the then
current stockholders of the Company will be reduced and such equity securities
may have rights, preferences or privileges senior to those of the holders of the
Company's Common Stock. If adequate funds are not available to satisfy either
short or long-term capital requirements, the Company may be required to limit
its operations significantly. The Company's capital requirements are dependent
upon many factors, including, but not limited to, the rate at which the Company
develops and introduces its products, the market acceptance and competitive
position of such products, the level of promotion and advertising required to
market such products and attain a competitive position in the marketplace, and
the response of competitors to the Company's products. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Capital
Stock--Preferred Stock."
CONCENTRATION OF STOCK OWNERSHIP
Immediately after the closing of this offering, % of the outstanding
Common Stock ( % if the Underwriter's over-allotment option is exercised in
full) will be beneficially owned by the directors and executive officers of the
Company, together with certain entities affiliated with them. As a result, these
stockholders, if acting together, will be able to exercise significant influence
over all matters requiring approval by the stockholders of the Company,
including, the election of all directors and approval of significant corporate
transactions. See "Principal and Selling Stockholders."
ANTITAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS, BYLAWS AND DELAWARE LAW
Pursuant to the terms of the Company's Amended and Restated Certificate of
Incorporation, as amended, the Board of Directors has the authority to issue up
to 5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the Company's stockholders. The
rights of the holders of Common Stock 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 (including, but not limited to, preferences by the Preferred Stock
with respect to the payment of dividends and upon liquidation, dissolution or
winding up). The issuance of Preferred Stock, while providing desirable
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 a majority of the outstanding voting stock of the Company. The Company
has no present plans to issue shares of Preferred Stock. Further, certain
provisions of the Company's Amended and Restated Certificate of Incorporation,
as amended, and of the Amended and Restated Bylaws and of Delaware law could
delay or make difficult a merger, tender offer or proxy contest involving the
Company. See "Description of Capital Stock-- Preferred Stock" and
"--Antitakeover Effects of Provisions of Certificate of Incorporation, Bylaws
and Delaware Law."
Section 203 of the General Corporation Law of the State of Delaware, which
is applicable to the Company, prohibits certain business combinations with
certain stockholders for a period of three years after they acquire 15% or more
of the outstanding voting stock of a corporation. See "Description of Capital
Stock--Effect of Delaware Antitakeover Statute."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of significant amounts of Common Stock in the public market after the
offering or the perception that such sales will occur could materially and
adversely affect the market price of the Common Stock or the future ability of
the Company to raise capital through an offering of its equity securities. Of
the shares of
19
<PAGE>
Common Stock to be outstanding upon the closing of the offering, the
shares offered hereby will be eligible for immediate sale in the public market
without restriction unless the shares are purchased by "affiliates" of the
Company within the meaning of Rule 144 promulgated under the Securities Act of
1933, as amended (the "Securities Act"). The remaining shares of Common
Stock held by existing stockholders upon the closing of the offering are
"restricted securities" as that term is defined in Rule 144 under the Securities
Act. Restricted securities may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144, 144(k) or
701 promulgated under the Securities Act. The Company's directors and officers
and certain of its stockholders have agreed that they will not sell, directly or
indirectly, any Common Stock without the prior consent of the representatives of
the Underwriters for a period of 180 days from the date of this Prospectus.
Subject to these lock-up agreements and the provisions of Rules 144, 144(k) and
701, additional shares will be available for sale in the public market (subject
in the case of shares held by affiliates to compliance with certain volume
restrictions) as follows: (i) shares will be eligible for sale prior to
180 days after the date of this Prospectus, (ii) shares will be eligible
for sale upon the expiration of lock-up agreements 180 days after the date of
this Prospectus and (iii) thereafter, additional shares will be eligible
for sale (subject to volume limitations) from time to time after the one-year
holding period required by Rule 144 has elapsed. In addition, there are
outstanding options to purchase shares of Common Stock which will be
eligible for sale in the public market from time to time subject to vesting and
the expiration of lock-up agreements. In addition, certain stockholders,
representing approximately 9,305,110 shares of Common Stock, and certain
optionholders, with respect to an aggregate of 114 shares of Common Stock
issuable upon the exercise of stock options, have the right, subject to certain
conditions, to include their shares in future registration statements relating
to the Company's securities and/or to cause the Company to register certain
shares of Common Stock owned by them.
After the date of this Prospectus, the Company intends to file a Form S-8
registration statement under the Securities Act to register all shares of Common
Stock issuable under the Company's 1995 Stock Option Plan, 1998 Stock Plan, 1998
Employee Stock Purchase Plan and 1998 Directors' Option Plan. Such registration
statement is expected to become effective immediately upon filing, and shares
covered by that registration statement will thereupon be eligible for sale in
the public markets, subject to certain lock-up agreements and, in the case of
affiliates of the Company, Rule 144 volume limitations. See
"Management--Employee Benefit Plans," "Description of Capital
Stock--Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."
NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after this offering. The initial
public offering price will be determined by negotiations among the Company and
the representatives of the Underwriters based on several factors and may not be
indicative of the future market price of the Common Stock after this offering.
The market price of the Company's Common Stock is likely to be highly volatile
and may be subject to significant fluctuations in response to actual or
anticipated variations in quarterly operating results and other factors, such as
announcements of technological innovations, new products or new contracts by the
Company or its competitors, conditions and trends in the software and other
technology industries, adoption of new accounting standards affecting the
software industry, changes in earning estimates or recommendations by securities
analysts, general market conditions or other events. In addition, the stock
market has also experienced extreme volatility that has particularly affected
the market prices of equity securities of many high technology companies and
that has often been unrelated or disproportionate to the operating performance
of such companies. Broad market fluctuations, as well as economic conditions
generally and in the software industry specifically, may result in a substantial
decline in the market price of the Company's Common Stock. There can be no
assurance that the market price for the Company's Common Stock will not decline
below the initial public offering price. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against that company. There can
be no assurance that such litigation will not occur in the future with respect
to the Company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse effect upon the Company's business, operating results or financial
condition. See "Underwriting."
20
<PAGE>
DILUTION; DIVIDEND POLICY
Investors participating in this offering will incur immediate and
substantial dilution of net tangible book value per share of $ from the
initial public offering price and may incur additional dilution upon the
exercise of outstanding stock options. See "Dilution."
The Company has never paid or declared any cash dividends on the Common
Stock or other securities and intends to retain any future earnings to finance
the development and expansion of its business. The Company does not anticipate
paying any cash dividends on the Common Stock in the foreseeable future.
Additionally, the Company's debt facilities contain covenants which may restrict
the Company's ability to pay cash dividends. See "Dividend Policy."
21
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered hereby are estimated to be approximately $
(approximately $ if the Underwriters' over-allotment option is exercised in
full) assuming an initial public offering price of $ per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The primary purposes of this offering are to create a public market for the
Common Stock, to facilitate future access to public markets and to obtain
additional working capital. The Company expects to use the net proceeds of this
offering for working capital and other general corporate purposes, including the
repayment of outstanding notes payable which totaled $1,745,000 at March 31,
1998. A portion of the net proceeds may also be used for the acquisition of
businesses, products and technologies that are complementary to those of the
Company. The Company has no present plans, agreements or commitments and is not
currently engaged in any negotiations with respect to any such transactions.
Pending such uses, the net proceeds of this offering will be invested in
investment-grade, interest-bearing securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
In the event that the Underwriters' over-allotment option is exercised, the
Company will not receive any proceeds from the sale of the shares of Common
Stock offered by the Selling Stockholders.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently expects to retain future earnings, if any, for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future. The Company's bank line of credit agreement
contains a restrictive covenant which limits the Company's ability to pay cash
dividends or make stock repurchases without the prior written consent of the
lender. See Notes 3 and 5 of Notes to Consolidated Financial Statements.
22
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998, (i) on an actual basis, (ii) on a pro forma basis to reflect (A) the
filing of an amendment to the Company's Amended and Restated Certificate of
Incorporation to provide for authorized capital stock of 50,000,000 shares of
Common Stock and 5,000,000 shares of undesignated Preferred Stock and (B) the
conversion of all outstanding shares of Preferred Stock into 6,219,603 shares of
Common Stock immediately prior to the closing of this offering, and (iii) on
such pro forma basis as adjusted to reflect the sale by the Company of
shares of Common Stock offered hereby at an assumed initial public offering
price of $ per share and the application by the Company of the estimated net
proceeds therefrom, after deducting estimated underwriting discounts and
commissions and estimated offering expenses. See "Use of Proceeds." The
capitalization information set forth in the table below is qualified by the more
detailed Consolidated Financial Statements and Notes thereto included elsewhere
in this Prospectus and should be read in conjunction with such Consolidated
Financial Statements and Notes.
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................................... $ 6,318 $ 6,318 $
---------- ----------- -----------
---------- ----------- -----------
Notes payable, less current portion......................................... 606 606
Stockholder's equity (1):
Convertible preferred stock, $0.001 par value; 22,299,576 shares
authorized; 12,600,525 shares issued and outstanding, actual; 5,000,000
shares authorized, no shares issued and outstanding, pro forma and pro
forma as adjusted........................................................ 13 -- --
Common stock, $0.001 par value; 30,000,000 shares authorized, 4,042,240
shares issued and outstanding, actual; 50,000,000 shares authorized,
10,261,842 shares outstanding, pro forma; 50,000,000 shares authorized,
shares issued and outstanding, pro forma as adjusted............ 4 10
Additional paid-in capital.................................................. 19,859 19,866
Deferred stock compensation................................................. (1,813) (1,813)
Accumulated deficit......................................................... (14,504) (14,504)
---------- ----------- -----------
Total stockholders' equity.............................................. 3,559 3,559
---------- ----------- -----------
Total capitalization.................................................. $ 4,165 $ 4,165 $
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
- ------------
(1) Excludes as of March 31, 1998: (i) 1,329,408 shares of Common Stock reserved
for issuance pursuant to options outstanding under the Company's 1995 Stock
Option Plan at a weighted average exercise price of $0.27 per share and
189,298 shares reserved for future issuance under the Plan and (ii) 27,273
shares of Common Stock issuable upon exercise of outstanding warrants at a
weighted average exercise price of $0.22 per share. Also excludes an
aggregate of 2.4 million shares of Common Stock reserved for future issuance
after March 31, 1998 under the Company's 1998 Stock Plan, 1998 Employee
Stock Purchase Plan and 1998 Director Option Plan. See "Management--
Employee Benefit Plans" and Note 5 of Notes to Consolidated Financial
Statements.
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<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1998,
after giving effect to the conversion of all outstanding shares of Preferred
Stock into Common Stock, was $3,559,000 or $0.35 per share of Common Stock. Pro
forma net tangible book value per share represents the Company's total tangible
assets less total liabilities, divided by the number of outstanding shares of
Common Stock on a pro forma basis. After giving effect to the sale of
shares of Common Stock offered by the Company hereby at an assumed initial
public offering price of $ per share and the application by the Company of
the estimated net proceeds therefrom, after deducting the estimated underwriting
discounts and commissions and estimated offering expenses, the Company's pro
forma net tangible book value at March 31, 1998 would have been $ or $ per
share of Common Stock. This represents an immediate increase in pro forma net
tangible book value of $ per share to existing stockholders and an immediate
dilution in pro forma net tangible book value of $ per share to new investors
purchasing shares of Common Stock in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $
Pro forma net tangible book value per share as of March 31, 1998........... $ 0.35
Increase in pro forma net tangible book value per share attributable to new
investors.................................................................
---------
Pro forma net tangible book value per share after offering...................
---------
Dilution per share to new investors.......................................... $
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and by new investors purchasing shares in this offering
(at an assumed initial public offering price of $ per share and before
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........................... 10,261,842 % $ 17,540,000 % $ 1.71
New investors......................................
------------ ----- ------------- -----
Total.......................................... 100.0% $ 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
The foregoing computations assume no exercise of the Underwriters'
over-allotment option or of any outstanding stock options after March 31, 1998.
As of March 31, 1998, there were (i) outstanding options to purchase 1,329,408
shares of Common Stock under the Company's 1995 Stock Option Plan at a weighted
average exercise price of $0.27 per share and 189,298 shares reserved for future
issuance thereunder and (ii) 27,273 shares of Common Stock issuable upon
exercise of outstanding warrants at a weighted average exercise price of $0.22
per share. Also excludes an aggregate of 2.4 million shares of Common Stock
reserved for future issuance after March 31, 1998 under the Company's 1998 Stock
Plan, 1998 Employee Stock Purchase Plan and 1998 Director Option Plan. To the
extent that any shares are issued upon exercise of options, warrants or rights
that are presently outstanding or granted in the future, or reserved for future
issuance under the Company's stock plans, there will be further dilution to new
investors. See "Management--Employee Benefit Plans," "Description of Capital
Stock" and Note 5 of Notes to Consolidated Financial Statements.
- ---------
(1) If the Underwriters' over-allotment option is exercised in full, sales by
the Selling Stockholders in this offering will reduce the number of shares
of Common Stock held by existing stockholders to or approximately %
of the total shares of Common Stock outstanding after this offering and will
increase the number of shares held by new investors to or approximately
% of the total shares of Common Stock outstanding after this offering.
See "Principal and Selling Stockholders."
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the period from
September 5, 1995 (inception) through December 31, 1995 and for, and as of the
end of, each of the years in the two-year period ended December 31, 1997, are
derived from the consolidated financial statements of NetGravity, Inc. and its
subsidiary, which consolidated financial statements have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, and are included
elsewhere in this Prospectus. The consolidated balance sheet data as of December
31, 1995 is derived from audited consolidated financial statements of the
Company that are not included herein. The consolidated statements of income for
the three-month periods ended March 31, 1997 and 1998 and the consolidated
balance sheet data at March 31, 1998 are derived from unaudited consolidated
financial statements included elsewhere in this Prospectus. In the opinion of
management, the unaudited consolidated financial statements have been prepared
on the same basis as the audited consolidated financial statements and contain
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the Company's results of operations for such periods and
financial condition at such dates. The results of operations for the three
months ended March 31, 1998 are not necessarily indicative of the results to be
expected for the full year or future periods. The selected consolidated
financial data set forth below is qualified in its entirety by, and should be
read in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER THREE MONTHS ENDED
SEPTEMBER 5, 1995 31, MARCH 31,
(INCEPTION) TO -------------------- --------------------
DECEMBER 31, 1995 1996 1997 1997 1998
----------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses................................... $ -- $ 1,262 2,901 $ 710 $ 775
Software upgrades................................... -- 107 1,123 185 402
Consulting and support.............................. -- 570 2,334 458 826
------- --------- --------- --------- ---------
Total revenues.................................... -- 1,939 6,358 1,353 2,003
------- --------- --------- --------- ---------
Costs of revenues:
Cost of software licenses........................... -- -- 76 7 15
Cost of consulting and support...................... -- 702 2,496 240 1,158
------- --------- --------- --------- ---------
Total cost of revenues............................ -- 702 2,572 247 1,173
------- --------- --------- --------- ---------
Gross profit...................................... -- 1,237 3,786 1,106 830
Operating costs and expenses:
Research and development............................ 39 1,764 3,033 678 996
Selling and marketing............................... 21 2,839 6,073 1,341 1,956
General and adminstrative........................... 131 1,315 1,552 241 708
------- --------- --------- --------- ---------
Total operating costs and expenses................ 191 5,918 10,658 2,260 3,660
------- --------- --------- --------- ---------
Loss from operations.............................. (191) (4,681) (6,872) (1,154) (2,830)
Other income (expense), net........................... (4) 54 (10) (6) 30
------- --------- --------- --------- ---------
Net loss.......................................... $ (195) $ (4,627) $ (6,882) $ (1,160) $ (2,800)
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
Basic and diluted net loss per share.................. $ (0.19) $ (2.19) $ (2.46) $ (0.55) $ (0.93)
Shares used in per share calculation(1)............... 1,006 2,111 2,799 2,121 3,025
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- MARCH 31,
1995 1996 1997 1998
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)............................................ $ (69) $ (221) $ 2,222 $ 2,682
Total assets......................................................... 486 3,159 9,887 11,832
Notes payable, less current portion.................................. -- 682 727 606
Accumulated deficit.................................................. (195) (4,822) (11,704) (14,504)
Total stockholders' equity (deficit)................................. (12) (164) 2,851 3,559
</TABLE>
- ---------
(1) See Note 1 of Notes to Consolidated Financial Statements.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY CONTAINS FORWARD-LOOKING
STATEMENTS RELATING TO THE FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF
THE COMPANY, WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
SET FORTH UNDER "RISK FACTORS", "BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
NetGravity, Inc. is the leading provider of online advertising and direct
marketing software solutions. The Company develops, markets and supports its
mission-critical AdServer family of software products, which together with its
extensive consulting and support capabilities, are designed to enhance the
effectiveness and efficiency of the entire advertising and direct marketing
supply chain. From inception (September 5, 1995) to December 31, 1995 (the
"Inception Period"), the Company was in the development stage, and its
activities primarily related to raising capital, recruiting personnel,
conducting research and development activities, purchasing operating assets, and
building the NetGravity identity. From January 1996 through March 31, 1998, the
Company began shipping products, built a consulting and support organization,
continued to invest in research and development, built domestic and
international sales organizations, expanded its marketing activities and
developed its general and administrative infrastructure.
To date, the Company has generated all of its revenue from the license and
related upgrade, consulting and support of its AdServer family of software
products. In March 1996, the Company's initial release, AdServer 1.0, became
generally available. Subsequently, the Company has had two major releases of its
AdServer products: AdServer 2.0 in October 1996 and AdServer 3.0 in June 1997.
The Company believes that its current AdServer family of software products and
software products in development, together with the related consulting and
support services, will continue to account for substantially all of its revenue
for the foreseeable future.
The Company records an account receivable and deferred revenue upon shipment
and invoicing of a software license to a customer. The Company recognizes
software license revenue upon completion of the product installation provided
that no significant vendor obligations exist, which the Company's management has
generally determined to occur at the point in time at which the customers begin
"serving ads" utilizing the Company's products. This methodology has been
applied consistently for all software license revenue since the inception of the
Company. A portion of the initial software product license fee is attributed to
the customer's right to receive at no additional charge significant software
upgrades released during the subsequent twelve months. Revenues attributable to
significant software upgrades are deferred and recognized ratably over the
period covered by the software license agreement, which is generally one year.
Revenue from consulting services are recognized as the services are performed.
Customer support revenue is deferred and recognized ratably over the period
covered by the customer support agreement, which is generally one year. In
October 1997, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 97-2, SOFTWARE REVENUE RECOGNITION, which the
Company adopted, effective January 1, 1998. Such adoption had no material effect
on the Company's methods of recognizing revenue from its license and support
activities. See Note 1 of Notes to Consolidated Financial Statements.
Pricing for AdServer products is based on the number of copies licensed to
the customer, scaled to provide discounts based on the overall size of the
system being licensed. Initial license sales include a one-year subscription
entitling the licensee to free upgrades of major releases of the product. The
software upgrade revenue is broken out separately for every license in
accordance with SOP 97-2, based on vendor specific objective evidence for the
upgrade element, and the revenue allocated to the upgrade element is recognized
over the agreement term. For subsequent years, customers subscribe on an annual
basis for the right to receive major product upgrades. The cost to subscribe to
the upgrade program is based on a percentage of the list price of software the
customer has licensed. Annual support contracts, which are generally purchased
in conjunction with the licensing of a product, are sold separately from the
initial license for a fee, which is also based on a percentage of the list price
of the software.
26
<PAGE>
Support packages typically include non-major product releases, on-line support
and telephone support. Consulting revenues consist of implementation services
and training. Consulting is charged at a per diem rate or on a fixed fee basis
for a package of services.
The Company sells its products and services primarily through its direct
sales force and telesales organizations and maintains sales and support
organizations in North America, Europe and Asia Pacific. Indirect sales
channels, including resellers and web hosting providers, also sell the Company's
products. Indirect channels generally provide less revenue per license to the
Company since the channel partner usually receives discounts. Through March 31,
1998, revenues through indirect channels have not been material.
The Company currently invoices its European customers in local currencies
and its customers in Asia Pacific in U.S. currency. The Company expects to
eventually invoice all of its international customers in local currencies.
Although the Company pays certain of the expenses of its European operations in
local currencies, the Company has not engaged in foreign currency hedging
activities, and international revenues are currently subject to currency
exchange fluctuation rates. To the extent that international revenues increase
as a percentage of total revenues in the future, foreign currency fluctuation
exposure may also increase.
The Company's business has grown from inception through March 31, 1998, with
total revenues increasing from $1.9 million in the year ended December 31, 1996
to $6.4 million in the year ended December 31, 1997 and $2.0 million in the
three months ended March 31, 1998. However the Company has experienced net
losses over this entire period, and as of March 31, 1998 had an accumulated
deficit of $14.5 million. These losses resulted from significant costs incurred
in the development and sale of the Company's products and services. During this
period, the number of Company employees increased from 10 at December 31, 1995
to 98 at March 31, 1998. The Company currently expects to expand its sales and
marketing operations, to continue international expansion, to increase its
investment in product development, to further expand its consulting and support
organizations and to improve its internal operating and financial infrastructure
in support of the Company's business plan, all of which will increase operating
expenses. As a result, the Company expects to incur additional losses and
continued negative cash flow from operations for the foreseeable future, and
such losses are anticipated to increase significantly from current levels.
The Company has recorded deferred stock compensation expense of $1,784,000
for the year ended December 31, 1997 and $390,000 for the three months ended
March 31, 1998 as a result of stock options granted during 1997 and the first
three months of 1998. Amortization of deferred stock compensation expense of
approximately $115,000 was recognized in 1997, and $246,000 was recognized in
the three months ended March 31, 1998. Amortization of deferred stock
compensation expense is allocated to costs of consulting and support and to all
operating expense lines identified on the statement of operations. Amortization
of deferred stock compensation expense will adversely impact the Company's
operating results for the next four years.
The Company believes that period-to-period comparisons of its operating
results are not meaningful and should not be relied upon as predictive of future
performance. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in the early stage
of development, particularly companies in new and rapidly evolving markets.
There can be no assurance that the Company will be successful in addressing such
risks and difficulties. In addition, although NetGravity has experienced
significant revenue growth recently, there can be no assurance that the Company
will increase or even sustain its current level of revenues or that the Company
will achieve profitability in the future. See "Risk Factors--Limited Operating
History; History of Losses; Anticipated Continued Losses," "--Potential
Fluctuations in Quarterly Operating Results; Seasonality; Possible Price
Erosion" and "--Management of Growth; Risks of Potential Future Acquisitions."
27
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data for
the periods indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues:
Software licenses..................................................... 65.1% 45.6% 52.5% 38.7%
Software upgrades..................................................... 5.5 17.7 13.7 20.1
Consulting and support................................................ 29.4 36.7 33.8 41.2
--------- --------- --------- ---------
Total revenues...................................................... 100.0 100.0 100.0 100.0
--------- --------- --------- ---------
Cost of revenues(1):
Cost of software licenses(2).......................................... -- 1.2 0.5 0.8
Cost of consulting and support(3)..................................... 36.2 39.3 17.7 57.8
--------- --------- --------- ---------
Total cost of revenues.............................................. 36.2 40.5 18.2 58.6
--------- --------- --------- ---------
Gross margin............................................................ 63.8 59.5 81.7 41.4
Operating expenses:
Research and development.............................................. 91.0 47.7 50.1 49.7
Selling and marketing................................................. 146.4 95.5 99.1 97.7
General and administrative............................................ 67.8 24.4 17.8 35.3
--------- --------- --------- ---------
Total operating expenses............................................ 305.2 167.6 167.0 182.7
--------- --------- --------- ---------
Operating loss........................................................ (241.4) (108.1) (85.3) (141.3)
Net other income........................................................ 2.8 (0.2) (0.4) 1.5
--------- --------- --------- ---------
Net loss................................................................ (238.6)% (108.2)% (85.7)% (139.8)%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ---------
(1) There are no material costs of revenue associated with software upgrades.
(2) As a percentage of software licenses revenue, cost of software licenses was
0.0%, 2.6%, 1.0% and 1.9% in the years ended December 31, 1996 and 1997 and
the three months ended March 31, 1997 and 1998, respectively.
(3) As a percentage of consulting and support revenue, cost of consulting and
support was 123.2%, 106.9%, 52.4% and 140.2% in the years ended December 31,
1996 and 1997 and the three months ended March 31, 1997 and 1998,
respectively.
REVENUES
The Company's total revenues increased from $1.4 million in the three months
ended March 31, 1997 to $2.0 million in the three months ended March 31, 1998.
Total revenues increased from $1.9 million in 1996 to $6.4 million in 1997. The
Company had no revenues in the Inception Period. International revenues,
primarily comprised of export revenues, as a percentage of total revenues were
0% and 31% in the three months ended March 31, 1997 and March 31, 1998,
respectively; and 0% and 9% in 1996 and 1997, respectively. Growth in
international revenues in all periods was attributable to expanded sales and
marketing efforts overseas and the opening of a European regional office in
April 1997. The increase in international revenues in the last three months of
1997 and the first three months of 1998 more than offset a decline in North
American revenues in each of those quarters. The decline in North American
revenues in those periods was primarily attributable to increased focus on
international revenues, dedication of resources in North America to
implementation issues associated with the release of AdServer 3.0 and
insufficient North American sales personnel. No customer accounted for more than
10% of total revenues in the three months ended March 31, 1997 or 1998 or in the
years ended December 31, 1996 or 1997.
28
<PAGE>
SOFTWARE LICENSES. Software licenses revenue increased from $710,000 in the
three months ended March 31, 1997 to $775,000 in the three months ended March
31, 1998, and increased from $1.3 million in 1996 to $2.9 million in 1997. The
increase in each period was attributable to an increase in the number of
AdServer Enterprise licenses sold and the introduction of AdServer Network in
March 1997. The Company anticipates that revenues attributable to licenses of
its AdServer Network product will increase as a percentage of total software
licenses revenues in future periods. The percentage of the Company's total
revenues attributable to software licenses revenues decreased from 53% in the
three months ended March 31, 1997 to 39% in the three months ended March 31,
1998, and decreased from 65% in 1996 to 46% in 1997. The decrease in each period
as a percentage of total revenues was primarily a result of increased demand for
consulting services and the increased number of customers participating in
software upgrade and support plans. Because software upgrades revenues and
consulting and support revenues are, to a large extent, a function of software
licenses revenues, the Company's future operating results will be materially
dependent on growth of software licenses revenues, and the failure to increase
software licenses revenues would likely have a material adverse effect on the
Company's business, results of operations and financial condition.
SOFTWARE UPGRADES. Software upgrades revenues increased from $185,000 in
the three months ended March 31, 1997 to $402,000 in the three months ended
March 31, 1998, and increased from $107,000 in 1996 to $1.1 million in 1997. The
increase in each period was a result of software upgrades being provided to a
larger installed customer base, which more than offset reductions in software
upgrade pricing during these periods. The percentage of the Company's total
revenues attributable to software upgrades revenues increased from 14% in the
three months ended March 31, 1997 to 20% in the three months ended March 31,
1998, and from 6% in 1996 to 18% in 1997.
CONSULTING AND SUPPORT. Consulting and support revenue increased from
$458,000 for the three months ended March 31, 1997 to $826,000 for the three
months ended March 31, 1998, and increased from $570,000 in 1996 to $2.3 million
in 1997. The increase in each period was primarily as a result of the increased
demand for consulting services, expansion into Europe and Asia, the larger
installed customer base, and customers electing to renew their support program.
The percentage of the Company's total revenues attributable to consulting and
support increased from 34% for the three months ended March 31, 1997 to 41% for
the three months ended March 31, 1998, and increased from 29% in 1996 to 37% in
1997.
COST OF REVENUES
Gross margins decreased from 82% in the three months ended March 31, 1997 to
41% in the three months ended March 31, 1998, as a result of the increase in
consulting and support revenue as a percentage of total revenue and the
increased staffing levels in the consulting and support organizations. Gross
margins decreased from 64% in 1996 to 60% in 1997. There were no costs of
revenues in 1995. There are no material costs of revenue associated with
software upgrade revenue.
COST OF SOFTWARE LICENSES. Cost of software licenses consists of royalties
paid to third parties for licensed technology. Cost of software licenses was
$7,000 and $15,000 in the three months ended March 31, 1997 and 1998,
respectively, and $0 and $76,000 in 1996 and 1997, respectively. As a percentage
of software licenses revenues, cost of software licenses was 1.0% and 1.9% in
the three months ended March 31, 1997 and 1998, respectively, and 0.0% and 2.6%
in 1996 and 1997, respectively.
COST OF CONSULTING AND SUPPORT. Cost of consulting and support consists
primarily of personnel-related costs incurred in providing consulting, support
and training to customers. The cost of consulting and support increased from
$240,000 in the three months ended March 31, 1997 to $1.2 million in the three
months ended March 31, 1998, and increased from $702,000 in 1996 to $2.5 million
in 1997. The increase in each period was primarily due to an increase in
personnel as the Company increased staff to meet customer demand and due to
travel costs associated with the increased volume of service provided by the
consulting and support organizations. The Company expects that the cost of
consulting and support will continue to increase in absolute dollar amounts in
future periods as the Company continues to hire additional consulting, training
and customer support personnel.
29
<PAGE>
Cost of consulting and support increased as a percentage of consulting and
support revenues from 52% in the three months ended March 31, 1997 to 140% in
the three months ended March 31, 1998 due to a significant increase in
consulting and support personnel. Cost of consulting and support as a percentage
of consulting and support revenue decreased from 123% in 1996 to 107% in 1997,
primarily due to better utilization of consulting and support personnel
associated with an increased customer base.
Gross margins may be impacted by the mix of products sold by the Company,
the mix of software licenses revenues, software upgrades revenues and consulting
and support revenues, the mix of international and North American revenues, and
the mix of distribution channels used by the Company. The Company typically
realizes higher gross margins on software upgrades revenues than on software
licenses revenues, substantially higher gross margins on software licenses
revenues than on consulting and support revenues, and higher gross margins on
direct sales than on indirect sales. Shifts in mix towards lower margin revenues
or sales through indirect channels would adversely impact the Company's overall
gross margin and could materially adversely impact the Company's operating
results.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of compensation and
consulting expenses and related equipment. To date, the Company has not
capitalized any such development costs under Statement of Financial Accounting
Standards ("SFAS") No. 86; all research and development costs have been expensed
as incurred. Research and development expenses increased from $678,000 in the
three months ended March 31, 1997 to $996,000 in the three months ended March
31, 1998, and increased from $39,000 in the Inception Period to $1.8 million in
1996 to $3.0 million in 1997. The increase in absolute dollars in all periods
was primarily due to the increased personnel and related costs associated with
enhancements of existing products and development of new products. Research and
development costs as a percentage of total revenues remained constant at 50% in
the three months ended March 31, 1997 and 1998, and decreased from 91% in 1996
to 48% in 1997. The Company believes that continued investment in research and
development is critical to attaining its strategic objectives and, as a result,
expects research and development expenses to increase significantly in absolute
dollars in future periods.
SELLING AND MARKETING
Selling and marketing expenses consist primarily of salaries, commissions,
advertising, trade show expenses, seminars and costs of marketing materials.
Selling and marketing expenses increased from $1.3 million in the three months
ended March 31, 1997 to $2.0 million in the three months ended March 31, 1998,
and increased from $21,000 in the Inception Period to $2.8 million in 1996 to
$6.1 million in 1997. The increase in absolute dollars in each period was due
primarily to the increase in sales personnel and commissions and costs related
to the continued development and implementation of the Company's marketing and
branding campaigns. Selling and marketing expenses decreased as a percentage of
total revenues from 99% in the three months ended March 31, 1997 to 98% in the
three months ended March 31, 1998, and decreased from 146% in 1996 to 96% in
1997. The Company expects selling and marketing expenses to increase
significantly in absolute dollars in future periods, as the Company hires
additional personnel, expands into new markets and continues to promote the
NetGravity brand.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries and
related costs for the Company's executive, administrative, finance and human
resources personnel, support services and professional services fees. General
and administrative expenses increased from $241,000 in the three months ended
March 31, 1997 to $708,000 in the three months ended March 31, 1998, and
increased from $131,000 in the Inception Period to $1.3 million in 1996 to $1.6
million in 1997. The increase in absolute dollars in each period was primarily a
result of increased personnel, professional service fees and facility expenses
necessary to support the Company's increased scale of operations, both
domestically and internationally. General and administrative expenses as a
percentage of total revenues increased from 18% in the three months ended March
31, 1997 to 35% in the three months ended March 31, 1998, primarily as a result
of expansion of international operations. General and
30
<PAGE>
administrative expenses decreased as a percentage of total revenues from 68% in
1996 to 24% in 1997. The Company expects general and administrative expenses to
increase in absolute dollars in future periods as the Company expands its staff,
incurs additional costs related to expansion of its operations, and is subject
to the requirements of being a publicly traded company.
INCOME TAXES
As of December 31, 1997, the Company had a net operating loss carryforward
for federal and state income tax purposes of approximately $9.8 million. In
addition, the Company had federal and state research and development credit
carryforwards of approximately $145,000 and $120,000, respectively. The
Company's federal net operating loss and research and development credit
carryforwards will expire in the years 2010 through 2012, if not utilized. The
Company's state net operating loss carryforwards will expire in the year 2003.
The state research and development credit can be carried forward indefinitely.
As of December 31, 1997, NetGravity Europe Limited had net operating loss
carryforwards in the United Kingdom of approximately $600,000, which can be used
to offset NetGravity Europe Limited's future income. The United Kingdom net
operating loss carryforward can be carried forward indefinitely.
Federal and California tax laws impose substantial restrictions on the
utilization of net operating loss and tax credit carryforwards in the event of
an "ownership change" as defined in Section 382 of the Internal Revenue Code of
1986, as amended. The Company has not yet determined whether such an ownership
change has occurred.
The Company has not recognized any benefit from the future use of such loss
carryforwards because management's evaluation of all the available evidence in
assessing the realizability of the tax benefits of such loss carryforwards
indicates that the underlying assumptions of future profitable operations
contain risks that do not provide sufficient assurance to recognize such tax
benefits currently. See Note 4 of Notes to Consolidated Financial Statements.
31
<PAGE>
QUARTERLY RESULTS OF OPERATIONS DATA
The following table sets forth certain unaudited consolidated statement of
operations data for each of the nine quarters ended March 31, 1998, as well as
such data expressed as a percentage of the Company's total revenues for the
periods indicated. In the opinion of management, this information has been
prepared substantially on the same basis as the audited consolidated financial
statements appearing elsewhere in this Prospectus, and all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly the unaudited consolidated
quarterly results of operations data. The consolidated quarterly data should be
read in conjunction with the audited consolidated financial statements of the
Company and the related notes thereto appearing elsewhere in this Prospectus.
The operating results for any quarter should not be considered indicative of
results of any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------
MAR. 31 JUNE 30 SEP. 30 DEC. 31 MAR. 31 JUNE 30 SEP. 30 DEC. 31 MAR. 31
1996 1996 1996 1996 1997 1997 1997 1997 1998
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses.... $ -- $ 172 $ 597 $ 493 $ 710 $ 665 $ 824 $ 702 $ 775
Software upgrades.... -- 1 16 90 185 266 303 369 402
Consulting and
support............. 11 60 155 344 458 470 614 792 826
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total revenues....... 11 233 768 927 1,353 1,401 1,741 1,863 2,003
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Costs of revenues: (1)
Cost of software
licenses............ -- -- -- -- 7 21 7 41 15
Cost of consulting
and support......... -- 217 274 211 240 513 728 1,015 1,158
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total cost of
revenues............ -- 217 274 211 247 534 735 1,056 1,173
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit....... 11 16 494 716 1,106 867 1,006 807 830
Operating expenses:
Research and
development......... 261 333 521 649 678 782 677 896 996
Selling and
marketing........... 103 568 925 1,243 1,341 1,410 1,558 1,764 1,956
General and
adminstrative....... 270 181 254 610 241 353 310 648 708
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total operating
expenses............ 634 1,082 1,700 2,502 2,260 2,545 2,545 3,308 3,660
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating loss....... (623) (1,066) (1,206) (1,786) (1,154) (1,678) 1,539) (2,501) (2,830)
Net other income
(expense)............. 17 24 16 (2) (6) (8) (27) 31 30
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net loss............... $ (606) $ (1,042) $ (1,190) $ (1,788) $ (1,160) $ (1,686) $ (1,566) $ (2,470) $ (2,800)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Revenues:
Software licenses.... -- 73.8% 77.7% 53.2% 52.5% 47.5% 47.3% 37.7% 38.7%
Software upgrades.... -- 0.4 2.1 9.7 13.7 19.0 17.4 19.8 20.1
Consulting and
support............. 100.0% 25.8 20.2 37.1 33.8 33.5 35.3 42.5 41.2
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Cost of revenues: (1)
Cost of software
licenses(2)......... -- -- -- -- 0.5 1.5 0.4 2.2 0.7
Cost of consulting
and support(3)...... -- 93.1 35.7 22.8 17.7 36.6 41.8 54.5 57.8
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total cost of
revenues............ -- 93.1 35.7 22.8 18.2 38.1 42.2 56.7 58.6
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit....... 100.0 6.9 64.3 77.2 81.7 61.9 57.8 43.3 41.4
Operating expenses:
Research and
development......... 2,372.7 142.9 67.8 70.0 50.1 55.8 38.9 48.1 49.7
Selling and
marketing........... 936.4 243.8 120.4 134.1 99.1 100.6 89.5 94.7 97.7
General and
administrative...... 2,454.5 77.7 33.1 65.8 17.8 25.2 17.8 34.8 35.3
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total operating
expenses............ 5,763.6 464.4 221.3 269.9 167.0 181.7 146.2 177.6 182.7
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating loss....... (5,663.6) (455.7) (156.9) (192.7) (85.3) (119.8) (88.4) (134.2) (141.3)
Net other income
(expense)............. 154.5 10.3 2.0 (0.2) (0.4) (0.6) (1.6) 1.7 1.5
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net loss............... (5,509.1)% (447.2)% (154.9)% (192.9)% (85.7)% (120.3)% (89.9)% (132.6)% (139.8)%
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------
(1) There are no material costs of revenue associated with software upgrades
revenues.
(2) As a percentage of software licenses revenues, costs of software licenses
have been 0.0%, 0.0%, 0.0%, 0.0%, 1.0%, 3.2%, 0.8%, 5.8% and 1.9%,
respective to the quarters presented chronologically above.
(3) As a percentage of consulting and support revenues, costs of consulting and
support have been 0.0%, 361.7%, 176.8%, 61.3%, 52.4%, 109.1%, 118.6%, 128.2%
and 140.2%, respective to the quarters presented chronologically above.
The Company's total revenues have increased in each quarter presented. The
increases have been generally due to increased acceptance of the Company's
AdServer family of products, expansion of the Company's direct sales force, the
introduction of AdServer Network in April 1997 and increased upgrade and support
revenues as the
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installed customer base has grown. Total costs of revenues have generally
increased in absolute dollars over the quarters presented due to the Company's
increased staffing in customer support, consulting and training. Cost of
revenues as a percentage of total revenues has increased every quarter since the
three months ended March 31, 1997 to the three months ended March 31, 1998 as a
result of the increased percentage of consulting and support revenue over this
period of time. Total operating expenses have generally increased in absolute
dollar amounts over the quarters shown due to the Company's increased staffing
in research and development, sales and marketing and general and administrative
functions.
FACTORS AFFECTING OPERATING RESULTS
As a result of the Company's limited operating history, the Company does not
have relevant historical financial data for a significant number of periods on
which to base planned operating expenses. Accordingly, the Company's expense
levels are based in part on the Company's expectations as to future revenues.
Since the Company's expenses are to a large extent fixed in the short term, the
Company may be unable to, or may elect not to, adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Therefore, any
significant shortfall in revenues in relation to the Company's expectations
would have an immediate material adverse effect on the Company's business,
results of operations and financial condition.
The Company's results of operations may fluctuate significantly in the
future as a result of a variety of additional factors, many of which are beyond
the Company's control. These factors include: (i) varying demand for the
Company's products and services, (ii) the Company's success in addressing new
and related market opportunities, (iii) the introduction of new or enhanced
online advertising or direct marketing solutions by the Company or its
competitors, (iv) changes in the market demand for online advertising and direct
marketing software, (v) market acceptance of new products and services, (vi) the
timing and size of individual license transactions, (vii) the sales and
implementation cycles of its customers, (viii) the addition or loss of
customers, (ix) the mix between license and service revenues, (x) the mix
between domestic and international revenues, (xi) the amount of advertising
budgets committed to online advertising and direct marketing activities, (xii)
price changes or changes in pricing models by the Company or its competitors,
(xiii) the mix of distribution channels through which products are sold, (xiv)
increasing complexity of products resulting in higher costs to develop and
maintain which may not be recouped by increased prices, (xv) the loss of key
employees and the time required to train new hires, particularly sales
personnel, (xvi) the penetration of markets outside of North America, (xvii) the
incurrence of costs relating to possible acquisitions of technology or
businesses, (xviii) seasonality related to slower European sales in the third
quarter and a shorter implementation period in the fourth quarter, (xix) the
amount and timing of capital expenditures and other costs relating to the
expansion of the Company's operations, and (xx) general economic conditions.
Historically, a significant portion of the Company's revenue for a given
quarter has been recognized in the last month of that quarter and the Company
expects this trend to continue. In particular, because the Company's revenue
recognition policy requires that the implementation of AdServer be substantially
completed before recognition of software license revenue, any delay in the
implementation of the Company's products at the end of a quarter could
materially adversely affect operating results for that quarter. The Company's
revenues are also likely to fluctuate due to factors that impact prospective
customers of the Company's products. Expenditures by these customers tend to
vary in cycles that reflect overall economic conditions and budgeting and buying
patterns. The Company's business could be materially adversely affected by a
decline in the economic prospects of its customers or the economy generally,
which could alter current or prospective customers' spending priorities or
budget cycles or extend the Company's sales cycle with respect to certain
customers. In addition, the Company may increase its operating expenses to
exploit new market opportunities for its products and services, fund greater
levels of research and development, increase its sales and marketing operations,
develop new distribution channels, improve its operational and financial systems
and broaden its customer support capabilities. To the extent that such expenses
precede or do not correspond with increased revenues, the Company's business,
results of operations or financial condition could be materially adversely
affected.
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Due to all of the foregoing factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Furthermore it is likely that in some future quarters the Company's results of
operations may fall below the expectations of securities analysts and investors.
In such event, the trading price of the Company's Common Stock will likely be
materially and adversely affected. See "Risk Factors--Potential Fluctuations in
Quarterly Operating Results; Seasonality; Possible Price Erosion."
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through the private placement of equity securities and bank and investor
borrowings. As of March 31, 1998, the Company had approximately $6.3 million of
cash and cash equivalents.
The Company has a revolving credit facility with a bank in the amount of
$1,000,000 which bears interest at the prime rate (8.50% as of December 31,
1997) plus 0.75%, and expires in May 1998. Borrowings are limited to the lesser
of $1,000,000 or 70% of the net amount of eligible accounts receivable and are
secured by the Company's accounts receivable. As of December 31, 1997 and March
31, 1998, borrowings under this credit facility were $655,000 and $655,000,
respectively. The Company has an equipment line of credit with the same bank
that provides up to $1,000,000, bears interest at the prime rate, and expires in
June 2000. The line of credit is secured by the Company's fixed assets. As of
December 31, 1996 and 1997, and March 31, 1998, $683,000, $584,000 and $544,000,
respectively, had been advanced under this agreement with the principal amount
due in 30 monthly installments of $19,467 beginning December 31, 1997. The
Company also has a second equipment line of credit with the same bank that
provides up to $1,200,000, bears interest at the prime rate, and expires in June
2000. The line of credit is secured by the Company's fixed assets. As of
December 31, 1997 and March 31, 1998, $628,000 and $587,000, respectively, had
been advanced under this agreement with the principal amount due in 30 monthly
installments of $20,933 beginning December 31, 1997. As of December 31, 1997 and
March 31, 1998, the Company was not in compliance with certain financial
covenants on all of the aforementioned credit facilities, and the Company has
received a waiver of such non-compliance.
Net cash used in operating activities was $1.1 million and $2.1 million in
the three months ended March 31, 1997 and 1998, respectively, and was $146,000,
$3.3 million and $5.1 million in the Inception Period and in 1996 and 1997,
respectively. In each period, cash used by operating activities was primarily a
result of a net loss.
Net cash used in investing activities was $2.7 million and $358,000 in the
three months ended March 31, 1997 and 1998, respectively, and was $62,000,
$854,000 and $1.2 million in the Inception Period and in 1996 and 1997,
respectively. Cash used in investing activities in each period was primarily
related to purchases of property and equipment, except for the three months
ended March 31, 1997, in which cash used in investing activities related
primarily to short-term investments.
Net cash provided by financing activities of $4.5 million and $3.1 million
in the three months ended March 31, 1997 and 1998, respectively, was primarily
attributable in each period to net proceeds from the issuance of Preferred
Stock. Net cash provided by financing activities of $633,000 for the Inception
Period consisted primarily of $450,000 in bank borrowings and $183,000 from the
issuance of Common Stock. Net cash provided by financing activities of $4.7
million for the year ended December 31, 1996 primarily consisted of net proceeds
of $4.4 million from the issuance of Preferred Stock. Net cash provided by
financing activities of $10.8 million for the year ended December 31, 1997
primarily consisted of net proceeds of $9.7 million from the issuance of
Preferred Stock and bank borrowings of $1.2 million on an equipment line of
credit and an accounts receivable line.
The Company's deferred revenue balance includes deferred license revenue and
uncompleted consulting engagements, as well as the unamortized portion of the
upgrade and support contracts. The Company records an accounts receivable and
deferred revenue upon shipment and invoicing of a software license to a
customer. The Company's accounts receivable balance is relatively large in
comparison to quarterly and annual revenues because
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the Company generally recognizes revenue from the licensing of software later
than shipment and invoicing. Further, the Company's deferred revenue balance or
changes therein may not be indicative of changes in the ordering patterns of
customers or the Company's backlog.
Although the Company has no other material commitments other than its
facilities leases (see Note 6 of Notes to Consolidated Financial Statements),
management anticipates that it will experience an increase in its capital
expenditures and lease commitments consistent with its anticipated growth in
operations, infrastructure and personnel. The Company expects that capital
expenditures for 1998 will be at least $2 million. In particular, the Company
anticipates incurring capital expenditures in connection with its expansion of
its California, New York and Asia facilities in 1998, and its Europe facilities
in 1999. The Company currently anticipates that it will continue to experience
significant growth in its operating expenses for the foreseeable future and that
its operating expenses will be a material use of the Company's cash resources.
The Company believes that the net proceeds of the offering, together with its
existing cash and cash equivalents and available borrowings, will be sufficient
to meet its anticipated cash needs for working capital and capital expenditures
for at least the next twelve months.
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BUSINESS
THE FOLLOWING DISCUSSION OF THE COMPANY'S BUSINESS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
NetGravity is the leading provider of online advertising and direct
marketing software solutions. A pioneer in the online advertising management
software market, the Company believes that it was the first company to provide
such commercial software to major online content publishers and has recently
expanded into the market for online direct marketing software solutions. The
Company develops, markets and supports its mission-critical AdServer family of
software products which, together with its full range of professional services
and support capabilities, are designed to enhance the effectiveness and
efficiency of each constituent in the online advertising and direct marketing
supply chain: merchants (vendors of products and services), advertising agencies
and content publishers (including advertising networks). In particular, AdServer
is designed to enable customers to increase their revenue from online
advertising and direct marketing by improving response rates through consumer
targeting and to enable customers to reduce their administrative expenses by
automating certain advertising and direct marketing business processes. The
Company markets and sells its products and services primarily through its field
sales and telesales organizations and maintains sales and support operations in
North America, Europe and Asia Pacific. To date, the Company has sold its
software and services to over 225 customers, including 37 of the content
publishers listed in CMR's Interwatch (formerly Jupiter's AdSpend) list of the
top 100 revenue-generating online content publishers for the eight months ended
August 31, 1997. The Company's customers include @Home Network, CNN Interactive,
E*TRADE, J. Walter Thompson, Netscape Communications, ONSALE, Real Cities
(Knight-Ridder New Media), Time Inc. New Media, Virgin Net and WhoWhere?.
INDUSTRY BACKGROUND
The competitive nature of the global marketplace requires merchants to
continually seek out and obtain new customers while preserving their
relationships with existing customers. Historically, merchants have communicated
with consumers through advertising in traditional media (such as print,
television and radio) and through traditional direct marketing channels (such as
telemarketing and direct mail) to establish and maintain their brand identities,
introduce new products, announce improved product features and target offers to
potential and current customers. International Data Corporation ("IDC") has
estimated that $175 billion would be spent on traditional media advertising in
the United States during 1997. The Direct Marketing Association has estimated
that $153 billion would be spent on direct marketing in the United States during
1997.
ADVERTISING AND DIRECT MARKETING SUPPLY CHAIN. The traditional advertising
and direct marketing industries together can be viewed as a supply chain with
three primary constituents: merchants (vendors of products and services),
advertising agencies and content publishers (including advertising networks). As
the driving force in the supply chain, merchants seek to increase their sales
and brand awareness by targeting advertisements and offers to current and
prospective consumers of their products and services. To build relationships
with new and existing customers, merchants work with advertising agencies to
purchase advertising space targeted at the types of consumers that the merchants
desire. Advertising agencies, in turn, identify and secure advertising space
from content publishers that meets the merchants' criteria. Content publishers,
such as magazines, newspapers, radio stations and television programs, attract
audiences of consumers by offering them compelling entertainment and information
and deliver these audiences to merchants. Established, larger content publishers
generally work directly with advertising agencies in order to retain greater
control over their advertising inventories, which, in turn, allows them to
maintain and enhance the long-term value of their advertising space to
advertising agencies and merchants. Smaller, less established content providers
generally work with advertising agencies through advertising representatives or
networks which provide these content publishers with an outsourced sales force
for their advertising space.
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As depicted below, advertising and direct marketing expenditures flow down the
supply chain from merchants to advertising agencies and then to content
publishers. In turn, audiences of consumers attracted by content publishers flow
up to merchants as prospective customers.
ADVERTISING AND DIRECT MARKETING SUPPLY CHAIN
[GRAPHIC: SUPPLY CHAIN]
The dramatic growth of the Internet in recent years has led, and continues
to lead, merchants, advertising agencies and content publishers to devote
increasing resources toward developing and improving their utilization of the
Internet as a medium for advertising and direct marketing.
GROWTH OF THE WEB AND WEB COMMERCE. IDC estimates that by the end of 1998
there will be over 51 million users of the World Wide Web (the "Web") in the
United States and over 97 million users worldwide. IDC projects that, by the end
of 2001, the number of Web users will increase to over 106 million in the United
States and over 227 million worldwide. The Company believes that the number of
Web users and the amount of time users spend on the Web will continue to
increase as Internet access becomes more widely available, as Internet bandwidth
and reliability are enhanced and as Internet content improves and becomes more
multimedia intensive.
Because online transactions can be faster, less expensive and more
convenient than transactions conducted via traditional means, a growing number
of consumers are transacting business over the Web. Examples of such
transactions include buying consumer goods, trading securities, purchasing
airline tickets and paying bills. Jupiter Communications has estimated that 27%
of adult Web users made online purchases in 1997 and that 50% of adult Web users
will make online purchases in 2000. IDC estimates that purchases of goods and
services over the Internet will increase from $32.4 billion in 1998 to $237.2
billion in 2001. The Company believes that as electronic commerce expands,
advertisers and direct marketers will increasingly seek to use the Web to locate
customers, advertise their products and services and facilitate transactions.
ONLINE ADVERTISING AND DIRECT MARKETING. The Web continues to emerge as a
promising new medium for advertisers due to the growth in the number of Web
users, the attractive demographic profiles of Web users, the ability to quickly
gather response data and other feedback, the interactive nature of the Web, the
potential for reduced costs-per-transaction, the Web's global reach and a
variety of other factors. The Web provides advertisers with the opportunity to
cost-effectively reach broad, global audiences and to target their advertising
based on consumers' demographic characteristics, specific interests and
geographic location. Online advertising also has the
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potential to allow advertisers to measure, in real time, the number of times
that a particular advertisement has been viewed, the responses to the
advertisement and certain characteristics of the viewers of the advertisement.
In addition, the interactive nature of the Web gives advertisers the potential
to establish dialogues and one-on-one relationships with consumers, receive
direct feedback on their advertising and quickly refine their advertising based
on such feedback. Accordingly, the Company believes that the Web has the
potential to become a more effective and efficient means for advertisers and
direct marketers to reach their target audiences as compared to traditional
media.
The unique characteristics of online advertising, combined with the growth
in the number of Internet users and their attractive demographic profiles, has
led to a significant increase in online advertising. IDC has estimated that
online advertising in the United States would increase from $551 million in 1997
to $4.0 billion in 2001, representing a 64% compounded annual growth rate.
Historically, the leading online advertisers have generally been technology
companies, Internet search engines and Web content publishers. However, many of
the largest advertisers on traditional media, including mass marketers such as
consumer products companies and automobile manufacturers, have recently expanded
their use of online advertising. The Company believes that online advertising
will become an increasing component of such merchants' advertising budgets and
that this trend will drive demand for sophisticated online advertising and
direct marketing solutions.
Because highly targeted product offers can be made to consumers at their
personal computers, the Company believes that the Internet represents an
attractive new medium for direct marketing, which has traditionally been
conducted through direct mail and telemarketing. The success of a direct
marketing campaign is generally measured by either an increase in response rate
(e.g., number of leads, sales or other transactions as a percentage of
impressions viewed) or a reduction in cost-per-transaction. The Internet has the
potential to enable direct marketers to increase response rates and reduce
cost-per-transaction by targeting and delivering direct marketing campaigns to
consumers based on their specific demographics, characteristics and interests.
Jupiter Communications estimates that expenditures on online direct marketing
will exceed $1.3 billion in 2002.
SUPPLY CHAIN CONSTITUENTS REQUIRE ENABLING TECHNOLOGY. As the constituents
of the advertising and direct marketing supply chain increase their online
presence, they seek technologies and solutions to allow them to exploit the
attractive demographics, highly-targeted messages, real-time feedback, business
process efficiencies and other potential advantages of online advertising and
direct marketing. Merchants, agencies and content publishers require
comprehensive, reliable and scalable solutions to allow them to effectively and
efficiently leverage the power of the Internet for advertising and direct
marketing. In particular, the Company believes that larger, more established
content publishers will generally require solutions that allow them to continue
to closely control their advertising inventory. Moreover, because the process of
directly managing the sale and delivery of online advertisements can generate
valuable consumer profile and behavioral data, the Company believes that the
desirability of maintaining direct control over consumer data may be even
greater than with respect to traditional media.
NETGRAVITY SOLUTION
NetGravity is the leading provider of online advertising and direct
marketing software solutions. A pioneer in the online advertising management
software market, the Company believes that it was the first company to provide
such commercial software to major online content publishers and has recently
expanded into the market for online direct marketing software solutions. The
Company develops, markets and supports its mission-critical AdServer family of
software products which, together with its full range of professional services
and support capabilities, are designed to enhance the effectiveness and
efficiency of each constituent in the online advertising and direct marketing
supply chain: merchants, advertising agencies and content publishers. In
particular, AdServer is designed to enable customers to increase revenue from
online advertising and direct marketing by improving response rates through
consumer targeting and to enable customers to reduce their administrative
expenses by automating certain advertising and direct marketing business
processes. In addition, as the Company's software delivers advertisements, it
gathers consumer viewing and response data. This data is retained by the
Company's customers and can be used to more precisely target future
advertisements.
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The Company's AdServer products provide benefits to each of the three
primary constituents in the online advertising and direct marketing supply
chain:
MERCHANTS. Merchants with an online presence are focused on attracting
consumers to their Web sites and on maximizing revenue per customer. The
Company's products are designed to allow merchants to gather consumer behavior
data on their sites and correlate this information with other information, such
as purchase history, to build detailed customer-profile databases using third
party technology. Merchants can then use AdServer to target advertisements
promoting new or complementary products to particular consumers based on their
profiles. Merchants can also use AdServer to centrally manage advertising
campaigns and place targeted advertisements on other Web sites in order to drive
interested consumers back to the merchant's Web site. For such campaigns,
AdServer can be used to track purchases made by consumers responding to
particular advertisements and thereby determine the cost-per-transaction for
each campaign.
ADVERTISING AGENCIES. Advertising agencies seek to maximize the impact of
their clients' online campaigns to promote brand awareness or to solicit
transactions. AdServer is designed to enable advertising agencies to manage
their clients' online campaigns, to make changes to campaigns in real-time and
to collect information about consumer behavior that can be mined to create
sophisticated profiles. These profiles can be used to improve targeting for both
current and future campaigns.
CONTENT PUBLISHERS. Content publishers seek to attract consumers to their
Web sites to maximize the value of their advertising space and/or to solicit
transactions. Using AdServer, content publishers can maintain control of their
own advertising inventory, consumer data, mission-critical advertising business
processes and relationships with advertisers and advertising agencies. AdServer
is designed to allow content publishers to predict inventory available for sale,
to deliver targeted advertisements to consumers, and to provide reports and
analysis back to their advertisers. Additionally, AdServer can be integrated
with content management, billing and commerce systems.
The Company's software is designed to be fault tolerant, scalable,
extensible and platform independent to meet the needs of even its largest
customers. For example, Netscape, which operates one of the most visited Web
sites on the Internet, has served up to 33 million impressions per day with the
Company's software. The Company's software also supports industry standard
operating environments including popular Unix systems, Microsoft Windows NT,
standard relational databases, Web servers from Netscape and Microsoft and
Java-enabled browsers.
STRATEGY
The Company's objective is to extend its leadership position in the online
advertising and direct marketing industry by establishing AdServer as the
standard customer acquisition and retention software solution for online
merchants, advertising agencies and content publishers. To achieve this
objective, the Company's strategy includes the following key elements:
EXTEND LEADERSHIP IN ONLINE ADVERTISING SOLUTIONS. The Company intends to
extend its leadership position in the market for online advertising solutions by
continuing to enhance its technology through investment in research and
development activities and by incorporating industry-leading components into its
products. The Company believes that maintaining and enhancing its products and
services is critical to its ability to solidify its market leadership,
strengthen its relationships with current customers and enable it to acquire new
customers.
ESTABLISH LEADERSHIP IN ONLINE DIRECT MARKETING SOLUTIONS. The Company
seeks to foster the growth of the emerging market for online direct marketing
and to establish leadership in this market. Recognizing the potential of the Web
as a direct marketing channel, many of the Company's customers are leveraging
AdServer's largely advertising-oriented features to deploy online direct
marketing systems. The Company believes that online direct marketing is emerging
as a distinct market from online advertising and that customers focusing on
online direct marketing will increasingly demand functionality tailored to their
specific requirements. Therefore, the Company intends to continue to add
features to AdServer designed to meet the specific requirements of direct
marketers as well as to enhance its sales, marketing, professional services and
support capabilities to promote these new features.
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The Company believes that this strategy will allow it to address the needs of
its direct marketing customers, to help foster the development of the overall
market for online direct marketing solutions and to establish itself as a leader
in this emerging market.
MAXIMIZE CUSTOMER VALUE. The Company seeks to continuously increase the
value of its solutions to its customers by offering customers additional and
improved products and services. In pursuit of this strategy, the Company intends
to enhance and extend AdServer to improve functionality through feature
refinement and through the addition of complementary product modules coupled
with value-added professional services. The Company believes its close
relationships with its customers will allow the Company to determine the
functionality its customers require. The Company believes that its focus on
delivering compelling, high-value solutions to customers will enhance its
opportunity to sell additional products and services to existing and future
customers, particularly as the requirements of these customers grow and evolve.
ENABLE EFFICIENT ADVERTISING BUYING ON THE INTERNET. The Company intends in
the future to develop products to link together its merchant, advertising agency
and content publisher customers to allow them to automate the process of buying
and selling online advertising space. One of the key limitations of the Internet
as compared to other media is the difficulty merchants and advertising agencies
experience when trying to create and manage a campaign across many selected
content publishers. Because online audiences tend to be less concentrated than
those in traditional media, advertisers seeking a given number of impressions
for a particular campaign will generally need to purchase advertising space from
comparatively more content publishers for online campaigns. By developing
technology to enable the Company's customers from each of the constituents of
the advertising and direct marketing supply chain to network with each other to
automate the buying and selling of advertising, the Company believes that
advertising agencies will be able to purchase online advertising as efficiently
as advertising on traditional media. The Company believes that its relationships
with existing customers will assist it in designing and developing such
technology.
EXPAND AND LEVERAGE ALLIANCES WITH KEY BUSINESS AND TECHNOLOGY
PARTNERS. The Company continues to develop cooperative alliances with leading
Internet systems integrators, Web hosting organizations and technology vendors
in order to accelerate the acceptance of the Company's products and to increase
operating leverage. The Company believes that these alliances will provide
additional marketing and sales channels for the Company's products and allow the
Company to leverage its professional services capacity by utilizing these third
parties to assist with AdServer deployment and support.
EXPAND INTERNATIONAL PRESENCE. The Company plans to aggressively expand its
international operations to address the global adoption of the Internet and the
international demand for online advertising and direct marketing solutions. The
Company believes that there are multiple international opportunities for its
AdServer products and has established sales and support operations in Europe and
Asia Pacific with regional headquarters in London and Tokyo. As part of this
expansion, the Company intends to create reselling and systems integration
relationships in Europe and Asia Pacific to leverage its sales and consulting
forces in these regions. The Company also intends to develop localized versions
of its product. The Company believes that an early presence in these markets
will enhance its long-term competitive position in these regions.
PRODUCTS
The Company develops, markets and supports its AdServer family of online
advertising and direct marketing management software solutions and offers
associated services. The following illustrates the role of AdServer in a typical
consumer interaction with a customer's Web site.
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[GRAPHIC: CONSUMER INTERACTION WITH WEB SITE THAT USES NETGRAVITY ADSERVER]
CAPTIONS:
1) CONSUMER VISITS WEB SITE THAT USES NETGRAVITY ADSERVER SOLUTION.
2) BROWSER REQUESTS PAGE FROM WEB SITE.
3) NETGRAVITY ADSERVER LOOKS UP CONSUMER PROFILE, AND CHOOSES MOST
APPROPRIATE ADVERTISEMENTS.
4) CONTENT PAGE WITH TARGETED ADVERTISEMENTS DELIVERED TO CONSUMER'S
BROWSER.
5) NETGRAVITY ADSERVER LOGS DELIVERY AND RESULTS FOR FUTURE ANALYSIS AND
REPORTING.
- SITE ADMINISTRATORS USE NETGRAVITY ADSERVER TO MANAGE FORECASTING, AD
INVENTORY, SCHEDULING, AND RESULTS ANALYSIS.
NetGravity markets software and services that support the needs of companies in
the online advertising and direct marketing industry: AdServer Enterprise,
AdServer Network and AdCenter. The Company's solutions are designed to be
extensible and robust systems for deploying advertising and direct marketing
management solutions on the Internet. They utilize a common fault-tolerant,
scalable architecture for real-time delivery of targeted advertisements, a
management system for tracking advertising inventory and a customizable
reporting and analysis system allowing AdServer users to better understand their
customers.
ADSERVER ENTERPRISE. AdServer Enterprise is designed to manage advertising
and direct marketing on individual Web sites. It allows tracking of consumer
action and movement on a Web site and captures consumer responses to
advertisements. AdServer Enterprise is designed to be integrated with other
systems, such as customer databases, to create rich consumer profiles for more
effective targeting. AdServer Enterprise comes pre-configured to address many
common targeting requirements and can be extended to perform more specific
targeting. AdServer Enterprise's scalable architecture allows Web sites to
reliably serve high volumes of targeted advertisements. AdServer Enterprise also
collects and summarizes user interaction data to allow detailed analysis and
reporting to advertisers and direct marketers.
ADSERVER NETWORK. AdServer Network is an enhanced version of AdServer
Enterprise designed to manage multi-site advertising and direct marketing.
AdServer Network is designed to allow central management of advertising
inventories of multiple Web sites, delivery of targeted advertisements to
multiple remote Web sites based on centralized targeting data, centralized
collection and analysis of user information and targeting of advertisements to
consumers on remote Web sites. These features make AdServer Network an
attractive solution for a variety of applications. For example, AdServer Network
can be used by content publishers to deliver targeted advertisements to a set of
affiliated Web sites or by agencies to manage campaigns for their clients across
all of the Web sites in the campaign.
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ADCENTER. AdCenter is a service designed to allow customers to outsource
advertising management to the Company. NetGravity works with Web hosting
partners to manage a centralized solution for customers who do not wish to hire
a technical staff or maintain their Internet systems.
<TABLE>
<S> <C> <C> <C>
PRODUCT MARKET BENEFITS INTRODUCTION DATES
AdServer Enterprise SINGLE-SITE Provides single-site Version 1.0 March 1996
merchants and management of user Version 2.0 September
content publishers information, targeting 1996
of advertisements, and Version 2.1 March 1997
analysis and reporting Version 3.0 June 1997
capabilities.
AdServer Network MULTI-SITE Provides the capability Version 2.1 March 1997
merchants, to target advertisements Version 3.0 June 1997
advertising to consumers on remote
agencies, content Web sites, while
publishers and aggregating all consumer
advertising information and
networks providing centralized
management capabilities.
AdCenter SINGLE AND Provides a service to Version 1.0 April 1998
MULTI-SITE allow customers to
merchants, outsource advertising
advertising management to the
agencies, content Company.
publishers and
advertising
networks
</TABLE>
PROFESSIONAL SERVICES
The Company's professional services organization as of March 31, 1998
consisted of 28 individuals, including 12 consultants, who provide the following
range of services:
CONSULTING. NetGravity offers consulting services to customers that address
each of the activities its customers require for the initial implementation and
long-term operation of their NetGravity products. NetGravity offers:
implementation services to assist its customers in deploying AdServer; system
extension services that enable customers to extend NetGravity's products to meet
their specific business needs or technical requirements; and migration services
that enable customers to migrate to NetGravity's current products from earlier
versions of NetGravity's products or from their in-house systems. A typical
AdServer implementation requires up to 10 days of professional services.
NetGravity also offers other consulting services, including project management,
requirements definition, business process re-engineering, system and solutions
design, technical architecture design, systems integration design, custom
reporting and software development.
TECHNICAL SUPPORT. The Company provides product support services, including
telephone support and upgrade rights to new minor releases, under its standard
maintenance agreements. All of the Company's license customers have entered into
standard maintenance agreements. The annual maintenance fee for these services
is payable in advance and is based upon a percentage of the then-current list
price for the licensed software. A team of dedicated engineers trained to answer
questions on the installation and usage of AdServer products provides telephone
support from 6:30 a.m. to 4:30 p.m., Pacific time, Monday through Friday, from
the Company's corporate office in San Mateo, California. The Company also offers
telephone support 24 hours a day, seven days a week through a call-back
procedure to certain customers who pay an additional fee for the service. The
Company believes that providing high quality customer service and technical
support is necessary to achieve rapid product implementation which, in turn, is
essential to customer satisfaction and revenue growth. Accordingly, the Company
is committed to continued recruiting and maintenance of a high-quality technical
support team.
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EDUCATION. NetGravity provides training for both the users of AdServer and
the technical staffs who maintain AdServer. NetGravity also offers training in
advertising on the Internet, managing advertising sales with AdServer, and
administering AdServer. NetGravity will soon be offering training in developing
custom extensions to the AdServer product line. All training is made available
at either the customer's location or at NetGravity's facilities in San Mateo,
California or New York, New York.
TECHNOLOGY
NetGravity's AdServer is designed to be a robust architecture for customers
to implement flexible, scalable and reliable online advertising and direct
marketing solutions, as well as to integrate these solutions with external
systems such as electronic commerce and dynamic content generation systems. The
AdServer architecture is also extensible through documented application
programming interfaces ("APIs") and through adherence to numerous industry
standards. In addition, the Company believes that the AdServer system
architecture is flexible enough to serve as the foundation for related future
products.
[GRAPHIC: ADSERVER SYSTEM MODULES]
CAPTIONS:
- ADMANAGER PROVIDES FORECASTING, INVENTORY MANAGEMENT, AND SCHEDULING.
- ADINSIGHT PROVIDES AUTOMATIC REPORT GENERATION AND PUBLISHING.
- ADCONSOLE PROVIDES SYSTEM STATUS AND CONTROL.
- SITE AND CONSUMER DATA IS USED FOR REPORTING AND ANALYSIS.
PRIMARY ADSERVER SUBSYSTEMS
ADSERVER ADVERTISING DELIVERY ENGINE. The Company's AdServer advertising
delivery engine performs the actual content delivery function for the AdServer
System. The AdServer engine was designed to deliver highly targeted messages
with low latency to browsers, web servers and proprietary content delivery
systems. The AdServer delivery engine architecture is designed to be highly
scalable, reliable and extensible. The Company has incorporated several
performance and reliability enhancing technologies into the AdServer engine,
including built-in load balancing, automatic fail-over, automatic restart and
monitoring tools that notify technicians in the event of system failure.
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ADMANAGER BUSINESS PROCESS MANAGEMENT APPLICATION. AdManager is a
three-tier application (comprised of user interface, application server and
database tiers) designed to allow customers to manage certain online advertising
and direct marketing business processes and associated data. In particular,
AdManager utilizes proprietary software to automate certain inventory
management, scheduling and availability functions that enable more efficient use
of available inventory.
ADINSIGHT ADVERTISING PERFORMANCE AND REPORTING SERVER. The Company
believes that the information resulting from online advertising and direct
marketing placements and consumer response is extremely valuable for
understanding consumer behavior and measuring return on investment. The
AdInsight measurement and reporting system has been designed to permit detailed
reporting and analysis for Web sites and networks. Because of the volume of data
gathered from high-traffic sites and networks, AdInsight offers customizable
summarization and reporting functions to reduce database size and storage
requirements. AdInsight also implements a scheduling system to generate reports
for automatic delivery to advertisers and others directly over the Internet.
ADCONSOLE SYSTEM MANAGEMENT APPLICATION. AdConsole is designed to simplify
the process of maintaining and administering the entire AdServer System by
providing system administrators with a user interface for common system
management tasks. For example, AdConsole permits centralized starting, stopping,
monitoring and administering of multiple AdServer engines. AdConsole allows
system administrators to schedule routine tasks and monitor and administer
AdServer engines across multiple CPUs which increases the reliability of the
entire system by reducing the chance of administration or configuration errors.
OPEN ARCHITECTURE AND EXTENSIBILITY
The Company designed the AdServer System with numerous extensibility
features to allow integration into existing systems and creation of new
functionality. The Company's open targeting architecture allows customers to
augment AdServer's standard targeting functionality through the addition of
external targeting capabilities. The Company's advertising delivery API allows
integration into custom electronic commerce systems, dynamic content delivery
systems and other kinds of advertising delivery mechanisms. In addition,
AdServer stores business process data, including advertisements, targeting
information, delivery statistics and reporting data in a standard relational
database management system (RDBMS) in documented data structures, allowing
industry standard reporting and query tools to be used to view and manipulate
this data. These open extensibility features allow AdServer to be integrated
with customers' legacy systems and/or third-party systems, such as sophisticated
targeting engines, content delivery systems and customized data mining and
analysis tools.
INDUSTRY STANDARDS
The Company uses many widely accepted standards in developing its products,
including SQL for accessing RDBMSs, HTTP for Internet access, NSAPI (Netscape
Application Programming Interface) for access to Netscape's Internet servers,
ISAPI (Internet Server Application Programming Interface) for access to
Microsoft's Internet servers and HTML for formatting advertisements. In
addition, an officer of the Company serves on the Board of Directors of the
Internet Advertising Bureau, a standards setting body for Web publishers, and
the Company is active in formulating standards for advertising measurement on
the Internet. Most of the Company's software is written in C++, a widely
accepted standard programming language for developing object-oriented
applications. Adherence to industry standards provides compatibility with
existing applications, enables ease of modification, and reduces the need for
software to be rewritten, thus protecting the customer's investment.
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CUSTOMERS AND MARKETS
As of March 31, 1998, the Company had licensed its AdServer products to over
225 customers in the areas of: merchants, advertising agencies, content
publishers and advertising networks. The following is a partial list of the
Company's customers:
MERCHANTS:
Cendant
Commercial Dynamics
Corbis Corporation
Didax Online
DIRECTV, Inc.
eOutlet
E*TRADE Group, Inc.
Ingram Micro, Inc.
International Billing Systems
Internet Travel Network
N2K Inc.
ONSALE
Planet Direct Corporation
Sallie Mae
SRDS
Ticketmaster Corporation
TUCOWS Interactive Limited
West Group
ADVERTISING AGENCIES:
Dentsu Inc. (CCI)
J. Walter Thompson
CONTENT PUBLISHERS:
Advanta (GoodCompany)
Alexa
Asahi Shimbun
Associated Media Base (Electronic Telegraph)
Associated Press
Big Network
Bloomberg
Blue Window
British Telecommunications
Cinetic GmbH
CondeNet
Continental Internet Services
Detroit Newspaper
EDS
Family Education Company
Forbes
Fujitsu
General Internet, Inc.
Geosystems (Map Quest)
GolfWeb
Hachette Filipacchi Interactions SA
Harris Publishing Systems Corporation
Healthgate Data Corp.
Hearst New Media and Technology
Hitachi Business International
Hollywood Online Inc.
Hollywood Stock Exchange
HotWired
Houston Chronicle
Inc. Online
InfoBeat
InfoSeek
IVI Publishing, Inc.
iVillage
Knight Ridder New Media
La Tribune Interactive
Las Vegas Review-Journal
Los Angeles Times
LiveWorld Productions
Matrix
Macroview Communications
MCA/Universal Studios
McGraw Hill (Business Week)
Medscape, Inc.
Merrill Lynch
Miller Freeman PLC
Minneapolis Star Tribune Interactive
Mirror Group
Motorola (audioSENSE)
Mpath Interactive
MTV Interactive
Netscape Communications Corporation
Nettavisen
New Media Publisher
News Corporation (TVgen)
Newsday
NewTimes, Inc.
Nihon Keizai Shimbun
Nikkei Business Publications, Inc.
Northern Telecom (Nortel)
Online Career Center
PC World Communications
Planet Internet
Quote.com, Inc.
Red Herring
relationships.com, Inc.
Reuters Ltd. (Europe)
Rodale Press
Scientific American Inc.
Straylight
Streamix Corporation
Telecom New Zealand
The AmerUS Group Inc.
The Boston Globe
The Weather Channel
Third Age Media, Inc.
Time Inc. New Media
Toronto Morning Star
Toshiba Corporation
Travel Channel
TriCast Media
Turner Broadcasting (CNN Interactive)
USA.NET
USA Today
U S West (Dex)
U S West (IRG)
ViewCall Canada Inc.
Wire Networks
Virgin Net
Warner Bros. Online
Worldview Systems
ADVERTISING NETWORKS:
Active Agent
@Home Network
AudioNet, Inc.
Canadian Broadcasting Company
Canoe, Canadian Online Explorer
CDA Investment Technology
China Internet Corp.
Clickthrough Canada
Cyberfirst, Inc.
Digital Skies
EMC(2)
GoGlobal.net
GTE Gov't Sys. Corp.
HongKong Telecom IMS
Interealty Corp.
MediaLinx
Nippon Telegraph and Telephone Corporation
Overseas Connections
Riks New Media
Scandinavia Online
StarMedia Network, Inc.
Tele Danmark
Telstra Corporation Ltd.
WhoWhere?
www.yellowpages.com inc.
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SELECTED CUSTOMER CASE STUDIES
CNN INTERACTIVE. Since August 1995, Cable News Network, Inc. has operated
CNN Interactive, a family of Web sites which now includes CNN.com, CNNfn,
CNN-Time All Politics, CNN enEspanol, CNN emPortugues and CNN-Sports
Illustrated. CNN Interactive is consistently ranked as one of the most visited
families of sites on the Web, and currently averages over 75 million page views
per week. CNN Interactive initially relied on an internally developed system to
manage its online advertising. Daily advertisement rotations were done manually
by CNN Interactive personnel using spreadsheets to track advertising inventory.
As user traffic and advertising inventory grew dramatically, CNN Interactive
concluded that it needed to automate and streamline its online advertising
management activities to keep pace with such growth. CNN Interactive turned to
NetGravity and, in December 1996, deployed AdServer Enterprise to replace its
internal advertising management system. AdServer Enterprise now performs
automatic, real-time impression-based ad rotation on the CNN Interactive sites.
In addition, CNN Interactive uses AdServer's reporting features to generate
individualized weekly reports for each of its more than 150 advertisers.
KNIGHT RIDDER REAL CITIES. Knight Ridder, a major domestic newspaper
publisher, through its Knight Ridder New Media division, manages Real Cities, a
network of approximately 40 Web sites, each of which is affiliated with a local
newspaper. Real Cities sites include MercuryCenter.com from the San Jose Mercury
News, Freep.com from the Detroit Free Press and PhillyNews.com from the
Philadelphia Inquirer and Philadelphia Daily News. Together, the Real Cities
sites receive an average of more than 12.5 million page views per week. Knight
Ridder sells local advertising space on individual Real Cities sites and
national advertising space on multiple Real Cities sites. Knight Ridder
initially attempted to manage these multiple inventories manually. As the number
of Real Cities sites increased and as user traffic at each site grew, their
system began to fail. Unable to precisely and quickly determine the aggregate
impressions delivered for an advertisement across all Real Cities sites, Knight
Ridder often over-delivered advertisements, thereby effectively reducing salable
inventory. Using both AdServer Network and AdServer Enterprise, Knight Ridder is
now able to more precisely and efficiently manage national campaigns while at
the same time allowing local control over individual Real Cities sites. The
impression-based scheduling and other controls provided by AdServer have allowed
Knight Ridder to significantly increase salable inventory while at the same time
reducing the resources dedicated to advertising management. In addition, Knight
Ridder has a long-term strategy of increasing the value of its advertising
inventory through the use of AdServer's targeting capabilities.
NETNOIR ONLINE. NetNoir Online offers a variety of Afrocentric content on
its Web site designed to promote black cultural values and to create an
interactive online black "community." Initially, NetNoir attempted to manually
manage advertising placement and rotation for its site, which, at the time,
served approximately 100,000 advertisement impressions per month. This method
was time-consuming, prone to human error and did not allow dynamic targeting of
advertisements. NetNoir attempted to outsource tracking and reporting functions
to reduce the administrative burden of advertising management but was
unsatisfied with the infrequency of the monthly reports that the tracking and
reporting firm was providing it. As NetNoir prepared for anticipated growth, it
engaged a leading Web hosting organization to host the NetNoir site and to
assist NetNoir in upgrading its advertising management capabilities. Through
NetGravity's AdHost program, the Web hosting organization purchased an AdServer
Enterprise license from the Company, installed and configured the software at
the hosting organization's facilities and allowed NetNoir to pay for the use of
AdServer through a monthly fee, based on number of ads served. This arrangement
allowed NetNoir to access the sophisticated features of AdServer Enterprise
without a significant initial investment and without the need to hire additional
technical personnel to maintain its Internet systems. AdServer has significantly
reduced the administrative burdens of advertising placement, rotation, tracking
and reporting for NetNoir and has scaled smoothly with NetNoir's rapid growth.
NetNoir has also begun to use AdServer's targeting features and expects to
increase its use of targeting for advertisements and other content in the
future.
SALES AND MARKETING
The Company markets and sells its products and services primarily through
its field sales and telesales organizations and maintains sales and support
operations in North America, Europe and Asia Pacific. On
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March 31, 1998, the Company's sales organization consisted of 24 individuals.
The Company has sales offices in San Mateo, California and New York, New York.
The Company sells its products in Europe and Asia Pacific through its
subsidiaries in the United Kingdom and Japan. The Company intends to broaden its
presence in international markets by aggressively expanding its international
sales force and by entering into distribution agreements with foreign
distributors. See "Risk Factors--Dependence on Key Personnel; Need for
Additional Qualified Personnel" and "--Risks Associated With International
Expansion."
The Company's sales process begins with the generation of sales leads. Sales
leads are obtained primarily from telesales, customer referrals, the Company's
Web site, responses to the Company's public relations and marketing efforts and
through trade shows. The majority of the Company's sales leads to date have come
from content publishers seeking online advertising management software. Initial
sales activity normally includes a product demonstration of AdServer directly
over the Internet to the prospective customer. This demonstration is followed by
one or more technical discussions where the customer's issues and concerns are
addressed. For interested accounts, a field sales representative and a sales
engineer make an on-site visit where the needs of such customer are assessed.
Soon thereafter, a proposal is generated containing a statement of work for
NetGravity consulting and training services and a quote for the package of
software license and services to be delivered. In addition, the Company has
developed pre-configured packages suitable for many customers.
The Company uses a variety of marketing programs to: stimulate demand for
its products; build market awareness through the press and industry analysts;
produce and maintain marketing information and sales tools; generate and develop
customer leads; and establish and manage marketing alliances. As of March 31,
1998, nine employees were engaged in a variety of marketing activities,
including: preparing marketing research and collateral marketing materials;
product planning; managing press coverage and other public relations;
identifying potential customers; attending trade shows, seminars and
conferences; establishing and maintaining close relationships with recognized
industry analysts; and maintaining the Company's Web site.
Sales of the Company's software products often require the Company to engage
in a lengthy sales effort including significant education of prospective
customers regarding the use and benefits of the Company's products. As a result,
the sales cycle for the Company's products is long, currently averaging
approximately four months. In particular, the sales cycle for the Company's
online direct marketing solutions is likely to be comparatively longer than the
sales cycle for the online advertising solutions, since online direct marketing
is less established and will require more education of the Company's potential
customers. In addition, the implementation of the Company's products often
involves a significant commitment of resources by customers and/or the Company's
consultants over an extended period of time. The Company's sales and customer
implementation cycles are subject to a number of potential delays. These include
delays related to product defects or errors as well as delays over which the
Company has little or no control, including customers' budgetary constraints,
internal acceptance reviews and the complexity of customers' online advertising
or direct marketing needs. See "Risk Factors--Lengthy Sales and Implementation
Cycles."
MARKETING ALLIANCES
An important element of the Company's sales strategy is to form business
alliances to assist the Company in marketing and selling its products and
developing customer applications. This approach is intended to increase the
resources available to perform application design and development services for
the Company's customers and to enhance the Company's market credibility,
potential for lead generation and access to large accounts. Additionally,
business partners can provide online advertising and direct marketing expertise
in solving the business problems of the Company's customers. The Company has
relationships with the following organizations:
WEB HOSTING ORGANIZATIONS. Web hosting organizations centrally house and
maintain Internet connectivity equipment, server hardware and software for their
customers. Many Web sites utilize the services of hosting organizations and rely
on their advice and recommendations in selecting Internet software solutions.
Because of their influence in the market, the Company strives to maintain good
business relationships with these organizations.
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The following Web hosting organizations have provided hosting services to
NetGravity customers: ANS Communications Pty. Ltd., BBN Corporation, Digex
Incorporated, EUnet International B.V., Exodus Communications, Inc., Frontier
GlobalCenter, Inc., Proxicom, Inc. and TCG CERFnet, the data and Internet
service business unit of Teleport Communications Group Inc.
INTERNET SYSTEMS INTEGRATORS. Internet systems integrators assist online
content publishers and merchants in the design, procurement and deployment of
their Web sites. These Internet systems integrators often recommend advertising
management solutions to their clients. The following Internet systems
integrators have worked with NetGravity customers: CKS--Enterprise, a systems
integration and consulting organization within CKS Group, Inc., Fort Point
Partners, Horizon Technologies, Organic Inc. and Poppe Tyson Interactive.
PRODUCT DEVELOPMENT
The Company believes that its future success will depend in large part on
its ability to enhance the AdServer System, develop new products, maintain
technological leadership, and satisfy an evolving range of customer requirements
for large scale online advertising and direct marketing applications. The
Company's product development organization is responsible for product
architecture, core technology, product testing and quality assurance, writing
user documentation, and expanding the ability of NetGravity products to operate
with the leading hardware platforms, operating systems, database management
systems, content management systems and electronic commerce systems. Since
inception, the Company has made substantial investments in product development
and related activities. Certain technologies have been acquired and integrated
into NetGravity products through licensing arrangements. As of March 31, 1998,
there were 24 employees in the Company's product development organization. The
Company's research and development expenses were $39,000, $1.8 million, and $3.0
million in the period ended December 31, 1995 and the years ended December 31,
1996 and 1997, respectively. To date, the Company has not capitalized any
software development costs. The Company expects to continue to devote
substantial resources to its product development activities. The Company plans
to release its next major version of AdServer in 1999. The Company may also
release one or more less significant updates prior to the release of the next
major version.
The market in which the Company competes is characterized by: rapidly
changing technology; evolving industry standards; frequent new product and
service announcements, introductions and enhancements; and changing customer
demands. These market characteristics are heightened by the emerging nature of
the Web, in general, and online advertising and direct marketing in particular.
Accordingly, the Company is dependent upon its ability to adapt to rapidly
changing technologies, its ability to adapt its solutions to meet evolving
industry standards and its ability to continually improve the performance,
features and reliability of its solutions in response to both changing customer
demands and competitive product and service offerings. The failure of the
Company to successfully adapt to such changes in a timely manner could have a
material adverse effect on the Company's business, results of operations or
financial condition.
If the Company is unable, for technological or other reasons, to develop on
a timely basis the next release of AdServer or other new software products,
enhancements to existing products or corrections to errors in products, or if
such new products or enhancements do not achieve a significant degree of market
acceptance or if such products, in order to be released on a timely basis,
contain material defects or errors, the Company's business, results of
operations and financial condition would be materially adversely affected. In
addition, there can be no assurance that the introduction or announcement of new
product offerings by the Company or one or more of its competitors will not
cause customers to decline or defer licensing of existing Company products. Any
decline or deferral of purchases could have a material adverse effect on the
Company's business, results of operations or financial condition. Further, if
the Company's current or future products do not meet the scalability
requirements of its customers due to vastly increased use of the Internet, the
Company would have to incur substantial expenditures and resources to address
such issue and there can be no assurance that the Company will be successful in
scaling the capabilities of its products to such level.
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Although the Company sells products to each of the constituencies in the
advertising chain (including merchants, advertising agencies and content
publishers), it does not currently offer products automating the online
advertising purchasing process among such constituencies. If demand for a
comprehensive solution develops and the Company fails to develop such a solution
on a timely basis, or at all, it could have a material adverse effect on the
Company's business, results of operations or financial condition. In addition,
as more customers demand online advertising and direct marketing solutions, the
Company must tailor its products to the specific requirements of both online
advertisers and direct marketers and provide a solution for supplying
demographic and behavioral data. Specifically, the online direct marketing
market will require more narrowly targeted advertisements than the online
advertising market and will be even more reliant on demographic data than the
online advertising market. Although AdServer's largely advertising-oriented
features can be used for online direct marketing, the Company has not yet
developed products with the custom features required by online direct marketers.
If the Company does not develop a satisfactory product to address the online
direct marketing market, future growth of the Company could be impaired and the
Company could lose customers to competitors with more comprehensive solutions.
The occurrence of any such event could have a material adverse effect on the
Company's business, results of operations or financial condition.
The Company's products are designed to operate on a variety of hardware and
software platforms employed by its customers in their individual networks. The
Company must continually modify and enhance its products to keep pace with
changes in hardware and software platforms and database technology. As a result,
uncertainties related to the timing and nature of new product announcements,
introductions or modifications by operating systems vendors, particularly
Microsoft and Sun, by vendors of relational database software, particularly
Oracle and Microsoft, and browsers, particularly Netscape and Microsoft could
materially adversely impact the Company's business, results of operations or
financial condition.
COMPETITION
The market for online advertising and direct marketing products and related
products and services is relatively new, intensely competitive, rapidly evolving
and subject to rapid technological change. The Company expects competition to
continue to increase both from existing competitors and new market entrants.
There are no substantial barriers to entry in these markets and the Company
believes that its ability to compete is dependent upon many factors within and
beyond its control, including the timing and market acceptance of new solutions
and enhancements to existing solutions developed by the Company and its
competitors, customer service and support, sales and marketing efforts and the
ease of use, performance, features, price and reliability of the Company's
solutions.
Historically, participants in the advertising and direct marketing supply
chain have used internally developed systems to manage their own online
advertising and direct marketing functions. The Company believes that its
primary competition will increasingly come from vendors that provide online
advertising and direct marketing software or service solutions or service
solutions. In the online advertising market, the Company competes directly with
DoubleClick, CMG (through its Engage/Accipiter unit) and Excite (through its
MatchLogic unit), and a variety of other online advertising service providers.
Some of these companies (such as DoubleClick) have adopted a business model
focused on outsourcing of advertising and direct marketing management. If this
model increases in popularity for the Company's targeted markets, the Company
will be required to devote additional resources to keep its own outsourcing
solution competitive. Any failure by the Company to successfully design, develop
and market an advanced outsourced solution under such circumstances would have a
material adverse effect on the Company's business, results of operations and
financial condition. In the online direct marketing market, the Company expects
to face indirect competition from the vendors of electronic commerce systems
including BroadVision, Interworld and Open Market, among others. Additionally,
providers of electronic commerce could build online direct marketing solutions
that would obviate the need for any current or future products of the Company
targeted to the online direct marketing industry. The Company also encounters
competition from Netscape and Microsoft, which build or bundle advertising
management products with their Internet commerce solutions. Both Netscape and
Microsoft have significantly greater resources than the Company, and due to
their
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control of the browser market, if either of them offer online advertising and
direct marketing management solutions with comparable features to those offered
by the Company, there can be no assurance that the Company would be able to
compete effectively against any such product offerings.
Many of the Company's current and potential competitors have longer
operating histories and significantly greater financial, technical, marketing
and other resources than the Company and thus may be able to respond more
quickly to new or changing opportunities, technologies and customer
requirements. Also, many current and potential competitors have greater name
recognition, more extensive customer bases and larger proprietary consumer
databases that could be leveraged, thereby gaining market share to the Company's
detriment. Such competitors may be able to undertake more extensive promotional
activities, adopt more aggressive pricing policies, and offer more attractive
terms to purchasers than the Company. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to enhance their products. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, results of operations or financial condition.
There can be no assurance that the Company will be able to compete successfully
against existing or potential competitors or that competitive pressures will not
have a material adverse effect on the Company's business, results of operations
or financial condition.
The principal competitive factors affecting the market for the Company's
products are depth and breadth of functionality offered, ease of deployment,
expense of maintenance relative to service offerings, outsourcing capability,
control over consumer profile data, product quality, price, and consulting and
customer support. The Company believes it presently competes favorably with
respect to each of these factors. However, the Company's market is still
evolving, and there can be no assurance that the Company will be able to compete
successfully with current or future competitors, or that competitive pressures
faced by the Company will not have a material adverse effect on the Company's
business, results of operations or financial condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success and ability to compete are dependent in part upon its
proprietary technology. The Company relies on trademark, trade secret and
copyright law to protect its technology. Legal standards relating to the
validity, enforceability and scope of protection of certain proprietary rights
in Internet-related industries are uncertain and still evolving, and no
assurance can be given as to the future viability or value of any proprietary
rights of the Company or other companies within the industry. Furthermore, the
Company believes that factors such as the technological and creative skills of
its personnel, new product developments, product enhancements, name recognition
and reliable product maintenance are more essential to establishing and
maintaining its technology leadership position than the legal protection of its
technology. There can be no assurance that others will not develop technologies
that are similar or superior to the Company's technology.
The Company generally provides its products to end users under nonexclusive,
nontransferable licenses during the term of the agreement, which is usually in
perpetuity. Under the general terms and conditions of the Company's standard
license agreements, the licensed software may be used pursuant to NetGravity's
published licensing practices. The source code for the Company's proprietary
software is protected both as a trade secret and as a copyrighted work. In
addition, some of the Company's agreements with its customers contain provisions
requiring release of source code for limited, non-exclusive use by the customer
in the event that the Company ceases to do business or the Company fails to
support its products. This release of source code may increase the likelihood of
misappropriation by third parties. The Company's policy is to enter into
confidentiality and interim assignment agreements with its employees,
consultants, and vendors and generally to control access to and distribution of
its software, documentation, and other proprietary information. Notwithstanding
these precautions, it may be possible for a third party to copy or otherwise
obtain and use the Company's software or other proprietary information without
authorization or to develop similar software independently. Policing
unauthorized use of the Company's
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products is difficult, particularly because the global nature of the Internet
makes it difficult to control the ultimate destination or security of software
or other data transmitted. The laws of other countries may afford the Company
little or no effective protection of its intellectual property. There can be no
assurance that the steps taken by the Company will prevent misappropriation of
its technology or that agreements entered into for that purpose will be
enforceable. In addition, litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could have a material adverse
effect on the Company's business, results of operations or financial condition.
Although the Company believes that its products do not infringe the
proprietary rights of third parties, there can be no assurance that the
Company's products or business activities will not infringe upon the patent or
other proprietary rights of others, or that other parties will not assert or
prosecute infringement or invalidity claims (or claims for indemnification
resulting from infringement claims) against the Company or that any such
assertions or prosecutions will not materially adversely affect the Company's
business, results of operations or financial condition. From time to time the
Company has been, and expects to continue to be, subject to claims in the
ordinary course of its business, including claims of alleged infringement of the
copyrights, trade secrets and other intellectual property rights of third
parties by the Company. Although such claims have not resulted in litigation or
had a material adverse effect on the Company's business, results of operations
or financial condition, such claims and any resultant litigation, should they
occur, could subject the Company to significant liability for damages and could
result in invalidation of the Company's proprietary rights and, even if not
meritorious, could be time-consuming and expensive to defend, and could result
in the diversion of management time and attention, any of which could have a
material adverse effect on the Company's business, results of operations or
financial condition. If any such claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that under
such circumstances, a license would be available on reasonable terms or at all.
The Company's products are designed to operate on a variety of hardware and
software platforms employed by its customers in their networks. The Company must
continually modify and enhance its products to keep pace with changes in
hardware and software platforms and database technology. As a result,
uncertainties related to the timing and nature of new product announcements,
introductions or modifications by vendors of operating systems, particularly
Microsoft and Sun, by vendors of relational database management software,
particularly Oracle and Microsoft, and by vendors of browsers, particularly
Netscape and Microsoft, could materially adversely impact the Company's
business, results of operations or financial condition. The failure of the
Company's products to operate effectively across the various existing and
evolving versions of hardware and software platforms and database environments
employed by customers could have a material adverse effect on the Company's
business, results of operations or financial condition. The Company also relies
upon the licensing of certain software from third parties, including database
access technology and other tools from Rogue Wave, and there can be no assurance
that the Company's third-party technology licenses will continue to be available
to the Company on commercially reasonable terms, if at all. The loss or
inability to maintain any of these technology licenses could result in delays in
introduction of the Company's products and services until equivalent technology,
if available, is identified, licensed, and integrated, which could have a
material adverse effect on the Company's business, results of operations or
financial condition.
In order for the Company to provide adequate demographic data for its
customers without their own demographic data or without access to their
demographic data, the Company will need to partner with companies offering such
demographic data. The failure of the Company to form such partnerships could
have a material adverse effect on the business, results of operations or
financial condition of the Company.
51
<PAGE>
EMPLOYEES
As of March 31, 1998, the Company had 98 employees, including 33 in sales
and marketing, 24 in research and development, 28 in professional services,
customer support and education, and 13 in finance and administration. Of these,
five are located in Asia, nine are located in Europe and the remainder are
located in North America. None of the Company's employees is represented by a
labor union. The Company has experienced no work stoppages and believes its
relationship with its employees is good.
FACILITIES
The Company is headquartered in San Mateo, California where it leases
approximately 13,000 square feet pursuant to a term lease that expires on May
31, 1998. The Company is seeking to lease a larger facility in the San Mateo
area for its headquaters and expects to occupy its current San Mateo facility on
a month-to-month basis until a new facility is leased and prepared for
occupancy. In the event the Company's month-to-month lease is terminated on
short notice, there can be no assurance that the Company will be able to find
alternate facilities on a timely basis or at reasonable cost. In addition, the
Company maintains a regional office in New York, New York where it leases
approximately 3,000 square feet of office space pursuant to a lease that expires
in 2003. The Company also leases space in London and Tokyo to support its
international operations. See Note 6 of Notes to Consolidated Financial
Statements.
LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings. The
Company may from time to time become a party to various legal proceedings
arising in the ordinary course of its business.
52
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES, KEY CONSULTANTS AND DIRECTORS
The executive officers, key employees, key consultants and directors of the
Company, and their ages as of March 31, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------- --- -------------------------------------------------------
<S> <C> <C>
John W. Danner..................................... 31 Chairman of the Board and Chief Executive Officer
Stephen E. Recht................................... 46 Chief Financial Officer and Secretary
Susan Atherton..................................... 41 Vice President of Sales
Rick E. D. Jackson IV.............................. 37 Vice President of Marketing
Douglas S. Kaplan.................................. 32 Vice President and General Manager of Asia Pacific
Martin G. Lane-Smith............................... 50 Vice President of Engineering
Thomas A. Shields.................................. 30 Vice President, Chief Technology Officer
Jitendra Valera(1)................................. 40 Vice President and General Manager of Europe
Larry C. Wear...................................... 32 Vice President of Support and Service
John D. D. Kohler(2)............................... 44 Director
Jonathan D. Lazarus(3)............................. 47 Director
Alexander R. Slusky(2)(3).......................... 30 Director
</TABLE>
- ----------
(1) Mr. Valera is an employee of Protege Software (Holdings) Limited, a
consulting firm providing management services to NetGravity Europe Ltd., and
is not directly employed by the Company or by NetGravity Europe Ltd. See
"Certain Transactions."
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
JOHN W. DANNER co-founded the Company in 1995, served as its President from
inception until April 1998, and has served as Chief Executive Officer and
Director since inception. In April 1998, Mr. Danner was elected Chairman of the
Board. From 1994 to 1995, Mr. Danner was a technical lead/architect for Silicon
Graphics, Inc. ("Silicon Graphics"), where he architected the set-top and server
side of a component of Silicon Graphics' interactive television system. From
1990 to 1994, Mr. Danner was a development manager at Oracle Corporation
("Oracle"), where he oversaw product development for Oracle Book, a multimedia
browser. Since January 1998, Mr. Danner has served on the Board of Directors of
Internet Advertising Bureau, a standards-setting body for online content
publishers. Mr. Danner received B.S.E.E. and M.S.E.E. degrees from Stanford
University.
STEPHEN E. RECHT has served as the Chief Financial Officer and Secretary of
the Company since 1996. From 1995 to 1996, Mr. Recht was the Chief Financial
Officer of AuraVision Corporation, a fabless, multimedia semiconductor company,
where Mr. Recht was responsible for all financial operations, investor
relations, contract administration, human resources and facilities. From 1992 to
1995, Mr. Recht was the Vice President, Finance and Administration and the Chief
Financial Officer of ViewStar Corporation, a client/server, business process
automation software company, where Mr. Recht directed all financial operations
and investor relations. Mr. Recht received a B.A. degree in Economics from
Stanford University and an M.B.A. degree from the Wharton School at the
University of Pennsylvania.
SUSAN ATHERTON has served as the Company's Vice President of Sales since
April 1998. From 1996 to 1998, Ms. Atherton was the Vice President, Worldwide
Sales, of Datamind Corporation, a developer of data mining client/server and
Web-enhanced products, where Ms. Atherton managed the company's direct and
indirect channels sales organization worldwide and helped develop key strategic
relationships with several technology companies. From 1995 to 1996, Ms. Atherton
was the Vice President, Worldwide Sales, of Red Pepper Software, a supply chain
management software developer, where Ms. Atherton managed the company's direct
and indirect channels sales organization worldwide. From 1993 to 1995, Ms.
Atherton was the Area Vice President of Ross Systems, Inc., a
53
<PAGE>
provider of supply chain management solutions and client/server business
software for enterprise resource planning, where Ms. Atherton helped manage the
company's Western U.S. sales force. Ms. Atherton received a B.S. degree in
Economics from the University of California, Riverside.
RICK E. D. JACKSON IV has served as the Company's Vice President of
Marketing since 1997. From 1996 to 1997, Mr. Jackson was the Vice President,
Marketing for mFactory, Inc., an advanced multimedia authoring tool company,
where Mr. Jackson built and led a team of professionals responsible for all
aspects of product and corporate marketing. From 1994 to 1996, Mr. Jackson was
the Director of Product Marketing for Taligent, Inc. ("Taligent"), a software
company, where Mr. Jackson managed the marketing organization responsible for
various Taligent products. From 1990 to 1994, Mr. Jackson was the Director of
Product Marketing for NeXT Computer, Inc., a desktop computer and software
manufacturer, where Mr. Jackson assembled, managed and led the company's product
marketing team. Mr. Jackson received a B.S. degree in Computer Science from
California State University, Northridge.
DOUGLAS S. KAPLAN has served as the Company's Vice President and General
Manager of Asia Pacific since 1997. From 1995 to 1997, Mr. Kaplan was the Vice
President of Nikkei BP BizTech Inc. ("Nikkei"), a Japanese business and
technology publisher, which Mr. Kaplan founded. At Nikkei, Mr. Kaplan defined
the company's business plan and developed Nikkei as a consulting and research
company. From 1990 to 1995, Mr. Kaplan was a Representative Director and a
co-founder of CMP Japan, the Japanese subsidiary of CMP Media, Inc., a
technology publisher. At CMP Japan, Mr. Kaplan developed the company's business
plan and implemented the business of consulting with U.S. technology companies
interested in conducting business in Japan. Mr. Kaplan received a B.A. degree in
Asian Studies and Economics from the University of California, Berkeley.
MARTIN G. LANE-SMITH has served as the Company's Vice President of
Engineering since 1997. From 1991 to 1997, Mr. Lane-Smith was the Vice
President, Engineering of Edify Corporation, a provider of software solutions
for interactive online services, where Mr. Lane-Smith was responsible for all
aspects of product development, product support and the management of the
Company's engineering team. Mr. Lane-Smith received a B.A. degree and an M.S.
degree, each in Natural Sciences (Math and Physics), from the University of
Cambridge.
THOMAS A. SHIELDS co-founded the Company in 1995 and served as the Company's
Vice President of Engineering and Secretary until 1996. Since 1996 Mr. Shields
has served as the Company's Vice President, Chief Technology Officer. From 1992
to 1995, Mr. Shields was a Development Manager and a Project Lead for Oracle,
where he led the Oracle Book project through two release cycles and designed the
entire feature set of Oracle Book version 2. Mr. Shields received a A.B. degree
in Computer Science from Harvard University.
JITENDRA VALERA, a non-employee consultant to the Company, has served as the
Company's Vice President and General Manager of Europe since 1997. Mr. Valera is
an employee of Protege Software (Holdings) Limited, a consulting firm providing
management services to NetGravity Europe Ltd. From 1994 to 1996, Mr. Valera was
the Managing Director of Applix (UK) Ltd., the United Kingdom subsidiary of
Applix Inc., a producer and marketer of enterprise software, where Mr. Valera
was responsible for management of the company. From 1989 to 1993, Mr. Valera
held various positions with Data Logic Ltd. ("Data Logic"), a computer services
company, including most recently Director of Sales, Professional Services
Division (International Territory) and Director, International Sales and
Marketing, Professional Services Division. Among Mr. Valera's responsibilities
at Data Logic was establishing sales groups and strategies. Mr. Valera received
a Business Studies degree from Havering Technical College and an HND degree in
Business Studies from Hatfield Polytechnic.
LARRY C. WEAR has served as the Company's Vice President of Support and
Service since 1995. From 1994 to 1995, Mr. Wear was the Director of Customer
Support for Mercury Interactive Corporation, an automated client/ server testing
software company, where Mr. Wear was responsible for all customer support,
training, consulting and pre-sales engineering in North America. From 1992 to
1993, Mr. Wear was the Vice President of Software Development for XALT Software
Corporation, a producer of personal and group productivity tools, where he
oversaw the design, development, testing, porting and release of a suite of
products. Mr. Wear received a B.S.E.E. degree from the University of California,
Davis, and an M.S.E.E. degree from Stanford University.
54
<PAGE>
JOHN D. D. KOHLER has served as a Director of the Company since inception.
In 1996, Mr. Kohler founded Redleaf Venture Management, LLC, a venture
management firm, of which he is currently a Principal. From 1994 to 1995, Mr.
Kohler was Vice President and General Manager, Customer Solutions, at Netscape
Communications Corporation. From 1991 to 1993, Mr. Kohler was a Vice President
and General Manager at Silicon Graphics. Over the previous 15 years, Mr. Kohler
held executive positions at Hewlett Packard Company, Convergent Technologies and
Unisys Corporation. Mr. Kohler received a B.A. degree in International Relations
and Economics from the University of California, Los Angeles.
JONATHAN D. LAZARUS has served as a Director of the Company since 1996. From
1985 to 1996, Mr. Lazarus worked at Microsoft Corporation ("Microsoft"), where
he served most recently as Vice President, Strategic Relations. Mr. Lazarus is
an advisor to Microsoft, the Universal Studios New Media Group and ZDTV. Mr.
Lazarus currently serves on the boards of directors of Ziff-Davis, Inc. and
several private companies. Mr. Lazarus received a B.S. degree in Communications
from Temple University.
ALEXANDER R. SLUSKY has served as a Director of the Company since March
1997. Since April 1998, Mr. Slusky has been the Managing Member of Vector
Capital Partners, L.L.C., the General Partner of Vector Capital, L.P. ("Vector
Capital"), a technology equity fund affiliated with Ziff Brothers Investments
("ZBI"). Since 1995, Mr. Slusky has been a Principal of ZBI and from 1996 to
April 1998 was a General Partner of Vector Capital. From 1992 to 1995, Mr.
Slusky was an Associate at New Enterprise Associates ("NEA"), a venture capital
fund, and from 1993 until 1995 a Special Limited Partner of NEA VI, an entity
affiliated with NEA. Mr. Slusky serves on the boards of directors of several
private companies. Mr. Slusky received an A.B. degree in Economics from Harvard
University and an M.B.A. from the Harvard Business School.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee and an Audit Committee.
COMPENSATION COMMITTEE. The Compensation Committee of the Board of
Directors reviews and makes recommendations to the Board regarding all forms of
compensation to be provided to the executive officers and directors of the
Company and its subsidiaries including stock compensation and loans. In
addition, the Compensation Committee reviews and makes recommendations on bonus
and stock compensation arrangements for all employees of the Company. As part of
the foregoing, the Compensation Committee also administers the Company's 1995
Stock Option Plan, 1998 Stock Plan and 1998 Employee Stock Purchase Plan. The
current members of the Compensation Committee are Messrs. Lazarus and Slusky.
AUDIT COMMITTEE. The Audit Committee of the Board of Directors reviews and
monitors the corporate financial reporting and the internal and external audits
of the Company and its subsidiaries, including, among other things, the
Company's internal audit and control functions, the results and scope of the
annual audit and other services provided by the Company's independent auditors
and the Company's compliance with legal matters that have a significant impact
on the Company's financial reports. The Audit Committee also consults with the
Company's management and the Company's independent auditors prior to the
presentation of financial statements to stockholders and, as appropriate,
initiates inquiries into aspects of the Company's financial affairs. In
addition, the Audit Committee has the responsibility to consider and recommend
the appointment of, and to review fee arrangements with, the Company's
independent auditors. The current members of the Audit Committee are Messrs.
Kohler and Slusky.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
Directors of the Company do not receive cash compensation for their service
as directors. Each new non-employee director will automatically receive an
option to purchase 25,000 shares of Common Stock upon joining the Board of
Directors. Each incumbent director will automatically be granted an option to
purchase an additional 5,000 shares of Common Stock annually. See
"Management--Employee Benefit Plans."
55
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Lazarus and Slusky. No interlocking relationship exists between any
member of the Company's Board of Directors or the Company's Compensation
Committee and any member of the board of directors or compensation committee of
any other company, and no such interlocking relationship has existed in the
past.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
Pursuant to the Founder's Stock Purchase Agreements entered into in
September 1995 between the Company and each of John W. Danner, the Company's
Chairman of the Board and Chief Executive Officer, and Thomas A. Shields, the
Company's Vice President, Chief Technology Officer, the vesting of the stock
purchased under such agreements will accelerate upon certain changes of control
of the Company. See "Certain Transactions."
In March 1998, Stephen E. Recht, the Company's Chief Financial Officer and
Secretary, entered into an employment and severance agreement with the Company
that provides Mr. Recht with certain benefits upon Mr. Recht's involuntary
termination by the Company in connection with a change of control of the
Company. See "Certain Transactions."
In April 1998, Susan Atherton, the Company's Vice President of Sales,
entered into an employment agreement with the Company that provides Ms. Atherton
with certain benefits upon the termination of Ms. Atherton's employment with the
Company under certain circumstances. See "Certain Transactions."
EXECUTIVE COMPENSATION
The following table sets forth in summary form information concerning the
compensation awarded to, earned by or paid for services rendered to the Company
in all capacities during fiscal 1997 by (i) the Company's Chief Executive
Officer; (ii) the Company's four other most highly compensated executive
officers whose salary and bonus for such year exceeded $100,000, including one
former officer; and (iii) two other executive officers whose salary and bonus
for fiscal 1997 would have exceeded $100,000, had they served as officers during
the entire fiscal 1997 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
FISCAL 1997
-------------
LONG-TERM
COMPENSATION
-------------
FISCAL 1997
--------------------- AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
- ---------------------------------------------------------------------------- ---------- --------- -------------
<S> <C> <C> <C>
John W. Danner, Chairman of the Board and Chief Executive Officer........... $ 124,280 $ -- --
Stephen E. Recht, Chief Financial Officer and Secretary..................... 154,517 -- 187,500
Rick E. D. Jackson IV, Vice President of Marketing (1)...................... 78,462 -- 150,000
Martin G. Lane-Smith, Vice President of Engineering (2)..................... 21,346 25,000 214,603
Thomas A. Shields, Vice President, Chief Technology Officer................. 100,500 -- --
Larry C. Wear, Vice President of Support and Service........................ 137,922 -- 81,817
Stephen Reade, former Vice President of Sales (3)........................... 104,000 149,876 79,545
</TABLE>
- ----------
(1) Mr. Jackson joined the Company in June 1997; his annualized base salary for
fiscal 1997 was $150,000.
(2) Mr. Lane-Smith joined the Company in November 1997; his annualized base
salary for fiscal 1997 was $185,000.
(3) Mr. Reade resigned as an employee of the Company in January 1998 and has
been retained as a consultant by the Company since that time. See "Certain
Transactions."
56
<PAGE>
OPTION GRANTS IN FISCAL 1997
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the fiscal year ended December
31, 1997. All such options were awarded under the Company's 1995 Stock Option
Plan. No stock appreciation rights were granted to these individuals during such
year.
<TABLE>
<CAPTION>
POTENTIAL REALIZED
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------
NAME GRANTED FISCAL 1997(%) SHARE($)(2)(3) DATE(4) 5%($) 10%($)
- ---------------------------------- ----------- ----------------- --------------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
John W. Danner, Chairman of the
Board and Chief Executive
Officer......................... -- -- -- -- -- --
Stephen E. Recht, Chief Financial
Officer and Secretary........... 72,727 5.5% $ 0.22 3/20/2007 $ 10,062 $ 25,500
5,681 0.4 0.22 11/20/2007 786 1,992
Rick E. D. Jackson IV, Vice
President of Marketing.......... 150,000 11.2 0.22 6/16/2007 20,754 52,594
Martin G. Lane-Smith, Vice
President of Engineering........ 214,603 16.1 0.22 11/3/2007 29,692 75,245
Thomas A. Shields, Vice President,
Chief Technology Officer........ -- -- -- -- -- --
Larry C. Wear, Vice President of
Support and Service............. 34,090 2.6 0.22 3/20/2007 4,717 11,953
47,727 3.6 0.22 11/20/2007 6,603 16,734
Stephen Reade, former Vice
President of Sales (5).......... 79,545 6.0 0.22 3/20/2007 11,006 27,890
</TABLE>
- ----------
(1) The 5% and 10% assumed rates of appreciation are prescribed by the rules and
regulations of the Securities and Exchange Commission and do not represent
the Company's estimate or projection of the future trading prices of its
Common Stock. There can be no assurance that any of the values reflected in
this table will be achieved. Actual gains, if any, on stock option exercises
are dependent on numerous factors, including the future performance of the
Company, overall market conditions and the option holder's continued
employment with the Company throughout the entire vesting period and option
term, which factors are not reflected in this table.
(2) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock, as determined by the Board of Directors on the
date of grant.
(3) Exercise price may be paid in (i) cash, (ii) check, (iii) promissory note,
(iv) by delivery of already-owned shares of the Company's Common Stock
subject to certain conditions, (v) by delivery of a properly executed
exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company the amount of sale or loan proceeds required
to pay the exercise price or (vi) any combination of the foregoing methods
of payment under applicable law.
(4) Twenty-five percent (25%) of the shares issuable upon exercise of options
granted under the Company's 1995 Stock Option Plan become vested on the
first anniversary of the vesting commencement date and the balance vests at
the rate of 1/48th of such shares for each month thereafter.
(5) Mr. Reade resigned as an employee of the Company in January 1998 and has
been retained as a consultant by the Company since that time. See "Certain
Transactions."
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<PAGE>
AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND DECEMBER 31, 1997 OPTION VALUES
The following table provides information with respect to the Named Executive
Officers concerning unexercised options held as of December 31, 1997. No options
were exercised by the Named Executive Officers during the last fiscal year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED
AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997(#) DECEMBER 31, 1997($)(1)
-------------------------------- ------------------------------
NAME EXERCISABLE(2) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------- ------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
John W. Danner, Chairman of the Board and Chief Executive
Officer................................................... -- -- -- --
Stephen E. Recht, Chief Financial Officer and Secretary.... 187,500 -- $ 61,875 --
Rick E. D. Jackson IV, Vice President of Marketing......... 150,000 -- 49,500 --
Martin G. Lane-Smith, Vice President of Engineering........ 214,603 -- 70,819 --
Thomas A. Shields, Vice President, Chief Technology
Officer................................................... -- -- -- --
Larry C. Wear, Vice President of Support and Service....... 81,818 -- 27,000 --
Stephen Reade, former Vice President of Sales (3).......... 79,545 -- 17,500 --
</TABLE>
- ----------
(1) Represents the difference between the fair market value of the shares of
Common Stock underlying the options at December 31, 1997 ($0.55 per share,
as determined by the Board of Directors) less the exercise price of such
options ($0.22 per share).
(2) The option shares are immediately exercisable, subject to the Company's
repurchase option at the original exercise price upon the optionee's
cessation of service prior to vesting in such option shares. The repurchase
option lapses or the option shares become vested as follows: 25% of the
option shares vest upon the completion of one year of service from the
vesting commencement date and an additional 1/48th of such shares become
exercisable each month thereafter.
(3) Mr. Reade resigned as an employee from the Company in January 1998 and has
been retained as a consultant by the Company since such time. See "Certain
Transactions."
EMPLOYEE BENEFIT PLANS
1995 STOCK OPTION PLAN. The Company's 1995 Stock Option Plan (the "1995
Plan") was adopted by the Board of Directors in September 1995 and was approved
by the Company's stockholders in October 1995. At March 31, 1998, a total of
2,727,570 shares of Common Stock had been reserved for issuance under the 1995
Plan. The 1995 Plan provides for grants of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), to employees (including officers and employee directors) and
nonstatutory stock options to employees (including officers and employee
directors) and consultants of the Company. Directors who are not also employees
are not eligible to receive grants under the 1995 Plan once the Company
registers any class of any equity security pursuant to the Exchange Act. The
purposes of the 1995 Plan are to attract and retain the best available personnel
for positions of substantial responsibility, to provide additional incentive to
employees and consultants of the Company and its subsidiaries and to promote the
success of the Company's business. The 1995 Plan is administered by the Board of
Directors or by a committee appointed by the Board which identifies optionees
and determines the terms of options granted, including the exercise price,
number of shares subject to the option and the exercisability thereof.
The terms of options granted under the 1995 Plan may not exceed ten years.
The term of all incentive stock options granted to an optionee who, at the time
of grant, owns stock representing more than 10% of the voting power of all
classes of stock of the Company or a parent or subsidiary of the Company (a "Ten
Percent Stockholder"), may not exceed five years, however. Generally, options
granted under the 1995 Plan vest and
58
<PAGE>
become exercisable starting one year after the date of grant, with 25% of the
shares subject to the option becoming exercisable at that time and an additional
1/48th of such shares becoming exercisable each month thereafter. Holders of
options granted under the 1995 Plan may exercise their options prior to complete
vesting of shares, provided that such holders enter into a restricted stock
purchase agreement granting the Company an option to repurchase any unvested
shares at a price per share equal to the original exercise price per share for
the option in the event of a termination of the optionee's employment or
consulting relationship. The exercise price of incentive stock options granted
to an employee under the 1995 Plan must be at least equal to the fair market
value of the shares on the date of grant. The exercise price of any incentive
stock option granted to a Ten Percent Stockholder must equal at least 110% of
the fair market value of the Common Stock on the date of grant. The exercise
price of nonstatutory stock options granted to a Ten Percent Stockholder under
the 1995 Plan must be no less than 110% of the fair market value of the Common
Stock on the date of grant. The exercise price of nonstatutory stock options
granted to a non-Ten Percent Stockholder may be no less than 85% of the fair
market value of the Common Stock on the date of grant for non-Ten Percent
Stockholder employees and consultants. The consideration for exercising any
incentive stock option or any nonstatutory stock option is determined by the
Board of Directors and may consist of (i) cash, (ii) check, (iii) promissory
note, (iv) delivery of already-owned shares of the Company's Common Stock
subject to certain conditions, (v) delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to promptly deliver to
the Company the amount of sale or loan proceeds required to pay the exercise
price or (vi) any combination of the foregoing methods of payment under
applicable law.
No option granted under the 1995 Plan may be transferred by the optionee
other than by will or the laws of descent or distribution, and each option may
be exercised, during the lifetime of the optionee, only by such optionee. An
optionee whose relationship with the Company or any related corporation ceases
for any reason (other than death or permanent and total disability) may exercise
options in the three-month period following such cessation (unless such options
terminate or expire sooner by their terms) or in such longer period as is
determined by the Board of Directors. In the event of a proposed sale of all or
substantially all of the Company's assets or merger of the Company with or into
another corporation, all outstanding options may either be assumed or an
equivalent option may be substituted by the surviving entity. If such options
are not assumed or substituted, each optionee may exercise options as to all of
the shares subject to the option agreement, including shares as to which such
options would not otherwise be exercisable and the options become fully vested,
or to the extent such options have been exercised and unvested shares remain
subject to a restricted stock purchase agreement, the Company's repurchase
option will lapse entirely. In the event that the options become fully vested in
connection with a sale of assets or merger of the Company, the optionees will be
notified that the options are fully vested for a period of fifteen (15) days
from the date of such notice, and that the options will terminate upon the
expiration of such period.
As of March 31, 1998, 1,208,865 shares of Common Stock had been issued upon
exercise of options outstanding under the 1995 Plan. Options to purchase
1,329,408 shares of Common Stock at a weighted average exercise price of $0.27
were also outstanding.
1998 STOCK PLAN. The Company's 1998 Stock Plan (the "1998 Plan") was
adopted by the Board of Directors on April 23, 1998, subject to stockholder
approval. As of the date of this Prospectus, no shares had been issued and no
stock options had been granted under the 1998 Plan.
The 1998 Plan provides for the grant of incentive stock options, within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, (the
"Code") to employees (including officers and employee directors) and for the
grant of nonstatutory stock options and stock purchase rights ("SPRs") to
employees, directors and consultants. A total of 2,000,000 shares of Common
Stock, plus annual increases equal to the lesser of (i) 1,000,000 shares, (ii)
5% of the outstanding shares, or (iii) a lesser amount determined by the Board
of Directors, are currently reserved for issuance pursuant to the 1998 Plan.
Unless terminated sooner, the 1998 Plan will terminate automatically in April
2008.
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The 1998 Plan may be administered by the Board of Directors or a committee
of the Board (as applicable, the "Administrator"). The Administrator has the
power to determine the terms of the options or SPRs granted, including the
exercise price of the option or SPR, the number of shares subject to each option
or SPR, the exercisability thereof, and the form of consideration payable upon
such exercise. In addition, the Administrator has the authority to amend,
suspend or terminate the 1998 Plan, provided that no such action may affect any
share of Common Stock previously issued and sold or any option previously
granted under the 1998 Plan.
Options and SPRs granted under the 1998 Plan are generally not transferable
by the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1998 Plan must
generally be exercised within three months after the end of optionee's status as
an employee, director or consultant of the Company, or within twelve months
after such optionee's termination by death or disability, but in no event later
than the expiration of the option's term.
In the case of SPRs, unless the Administrator determines otherwise, the
Restricted Stock Purchase Agreement shall grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment or consulting relationship with the Company for any reason (including
death or disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
The exercise price of all incentive stock options granted under the 1998
Plan must be at least equal to the fair market value of the Common Stock on the
date of grant. The exercise price of nonstatutory stock options and SPRs granted
under the 1998 Plan is determined by the Administrator, but with respect to
nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must be at least equal to the fair market value of the Common Stock on the
date of grant. With respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of the Company's outstanding capital
stock, the exercise price of any incentive stock option granted must be at least
equal 110% of the fair market value on the grant date and the term of such
incentive stock option must not exceed five years. The term of all other options
granted under the 1998 Plan may not exceed ten years.
The 1998 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each option and SPR shall be assumed or an equivalent option substituted
for by the successor corporation. If the outstanding options and SPRs are not
assumed or substituted for by the successor corporation, the Administrator shall
provide for the optionee to have the right to exercise the option or SPR as to
all of the optioned stock, including shares as to which it would not otherwise
be exercisable. If an option or SPR becomes exercisable in full in connection
with a merger or sale of assets, the Administrator shall notify the optionee
that the option or SPR shall be fully exercisable for a period of fifteen (15)
days from the date of such notice, and the option or SPR will terminate upon the
expiration of such period.
1998 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1998 Employee Stock
Purchase Plan (the "1998 Purchase Plan") was adopted by the Board of Directors
on April 23, 1998, subject to stockholder approval. A total of 200,000 shares of
Common Stock have been reserved for issuance under the 1998 Purchase Plan, plus
annual increases equal to the lesser of (i) 750,000 shares, (ii) 4% of the
outstanding shares on such date or (iii) a lesser amount determined by the
Board.
The 1998 Purchase Plan, which is intended to qualify under Section 423 of
the Code, contains consecutive, overlapping, twenty-four month offering periods.
Each offering period includes four six-month purchase periods. The offering
periods generally start on the first trading day on or after February 1 and
August 1 of each year, except for the first such offering period which commences
on the first trading day on or after the effective date of this Offering and
ends on the last trading day on or before July 31, 2000.
Employees are eligible to participate if they are customarily employed by
the Company or any participating subsidiary for at least 20 hours per week and
more than five months in any calendar year. However, any employee who (i)
immediately after grant owns stock possessing 5% or more of the total combined
voting power or value of all classes of the capital stock of the Company, or
(ii) whose rights to purchase stock under all employee stock purchase plans of
the Company accrues at a rate which exceeds $25,000 worth of stock for each
calendar year may
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not be granted an option to purchase stock under the 1998 Purchase Plan. The
1998 Purchase Plan permits participants to purchase Common Stock through payroll
deductions of up to 10% of the participant's "compensation." Compensation is
defined as the participant's base straight time gross earnings and commissions
but excludes payments for overtime, shift premium, incentive compensation,
incentive payments, bonuses and other compensation. The maximum number of shares
a participant may purchase during a single purchase period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of Common Stock at the end of each purchase period. The price of stock
purchased under the 1998 Purchase Plan is 85% of the lower of the fair market
value of the Common Stock (i) at the beginning of the offering period or (ii) at
the end of the purchase period; provided, however, that under certain
circumstances, the purchase price may be adjusted to a price not less than 85%
of the lower of the fair market value on the Common Stock on (i) the date the
Company's stockholders approve an increase in shares reserved for issuance under
the 1998 Purchase Plan or (ii) at the end of the purchase period. In the event
the fair market value at the end of a purchase period is less than the fair
market value at the beginning of the offering period, the participants will be
withdrawn from the current offering period following exercise and automatically
re-enrolled in a new offering period. The new offering period will use the lower
fair market value as of the first date of the new offering period to determine
the purchase price for future purchase periods. Participants may end their
participation at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with the Company.
Rights granted under the 1998 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1998 Purchase Plan. The 1998 Purchase Plan provides
that, in the event of a merger of the Company with or into another corporation
or a sale of substantially all of the Company's assets, each outstanding option
may be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date will
be set that is before the date of the Company's proposed sale or merger. The
1998 Purchase Plan will terminate in April 2008. The Board of Directors has the
authority to amend or terminate the 1998 Purchase Plan, except that no such
action may adversely affect any outstanding options under the 1998 Purchase
Plan.
1998 DIRECTOR OPTION PLAN. The 1998 Director Option Plan (the "Director
Plan") was adopted by the Board of Directors on April 23, 1998, subject to
stockholder approval. The Director Plan provides for the grant of nonstatutory
stock options to non-employee directors. The Director Plan has a term of ten
years, unless terminated sooner by the Board. A total of 200,000 shares of
Common Stock have been reserved for issuance under the Director Plan.
The Director Plan provides that each non-employee director shall
automatically be granted an option to purchase 25,000 shares of Common Stock
(the "First Option") on the later of (i) the effective date of the Director Plan
or (ii) the date which such person first becomes a non-employee director. In
addition to the First Option, each non-employee director shall automatically be
granted an option to purchase 5,000 shares (a "Subsequent Option") on the date
of each of the Company's annual meeting of stockholders, if on such date he or
she shall have served on the Board for at least six months. Each First Option
and Subsequent Option shall have a term of 10 years. The shares subject to the
First Option and Subsequent Option shall vest as to 25% of the optioned stock
one year from the date of grant, and 1/48 of the optioned stock shall vest each
month thereafter, provided the person continues to serve as a director on such
dates. Holders of options granted under the 1998 Plan may exercise their options
prior to complete vesting of shares, subject to such holder's entering a
restricted stock purchase agreement granting the Company an option to
repurchase, any unvested shares at a price per share equal to the original
exercise price per share for the option in the event of a termination of the
optionee's directorship. The exercise price of each First Option and each
Subsequent Option shall be 100% of the fair market value per share of the Common
Stock.
In the event of a merger of the Company or the sale of substantially all of
the assets of the Company, each option may be assumed or an equivalent option
substituted for by the successor corporation. If an option is assumed or
substituted for by the successor corporation, it shall continue to vest as
provided in the Director Plan. However, if a non-employee director's status as a
director of the Company or the successor corporation, as applicable, is
terminated other than upon a voluntary resignation by the non-employee director,
each option granted to such non-
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employee director shall become fully vested and exercisable upon such
termination date. If the successor corporation does not agree to assume or
substitute for the option, each option shall become fully vested and exercisable
for a period of fifteen days from the date the Board notifies the optionee of
the option's full exercisability, after which period the option shall terminate.
Options granted under the Director Plan must be exercised within three months of
the end of the optionee's tenure as a director of the Company, or within twelve
months after such director's termination by death or disability, but in no event
later than the expiration of the option's ten-year term. No option granted under
the Director Plan is transferable by the optionee other than by will or the laws
of descent and distribution, and each option is exercisable, during the lifetime
of the optionee, only by such optionee.
401(K) PLAN. The Company participates in a tax-qualified employee savings
and retirement plan (the "401(k) Plan") which covers all of the Company's
full-time employees who are at least 21 years of age. Pursuant to the 401(k)
Plan, eligible employees may defer up to 20% of their pre-tax earnings, subject
to the Internal Revenue Service's annual contribution limit. The 401(k) Plan
permits additional discretionary matching contributions by the Company on behalf
of all participants in the 401(k) Plan in such a percentage amount as may be
determined annually by the Board of Directors. To date, the Company has made no
such matching contributions. The 401(k) Plan is intended to qualify under
Section 401 of the Internal Revenue Code of 1986, as amended, so that
contributions by employees or by the Company to the 401(k) Plan, and income
earned on plan contributions, are not taxable to employees until withdrawn from
the 401(k) Plan, and so that contributions by the Company, if any, will be
deductible by the Company when made. The trustee under the 401(k) Plan, at the
direction of each participant, invests the assets of the 401(k) Plan in any of a
number of investment options.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated Certificate of Incorporation, as amended,
limits the liability of directors to the maximum extent not prohibited by
Delaware law. Delaware law provides that a corporation's certificate of
incorporation may contain a provision eliminating or limiting the personal
liability of a director for monetary damages for breach of their fiduciary
duties as directors, except for liability (i) for any breach of their 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) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law
or (iv) for any transaction from which the director derived an improper personal
benefit.
The Company's Amended and Restated Bylaws provide that the Company shall
indemnify its directors, officers and employee benefit plan fiduciaries, and may
indemnify its employees and agents to the fullest extent permitted by law. The
Company believes that indemnification under its Amended and Restated Bylaws
covers at least negligence and gross negligence on the part of indemnified
parties. The Company's Amended and Restated Bylaws also permit the Company to
advance expenses incurred by an indemnified director or officer in connection
with the defense of any action or proceeding arising out of such director's or
officer's status or service as a director or officer of the Company upon an
undertaking by such director or officer to repay such advances if it is
ultimately determined that such director or officer is not entitled to such
indemnification.
The Company has entered into agreements to indemnify its directors and
officers, in addition to the indemnification provided for in the Company's
Amended and Restated Bylaws. These agreements, among other things, indemnify the
Company's directors and officers for certain expenses (including attorneys' fees
and associated legal expenses), judgments, fines and amounts paid in settlement
amounts if such settlement is approved in advance by the Company, which approval
shall not be unreasonably withheld, actually and reasonably incurred by any such
person in any action, suit, proceeding or alternative dispute resolution
mechanism arising out of such person's services as a director or officer of the
Company, any subsidiary of the Company or any other company or enterprise to
which the person provides services at the request of the Company. The Company
believes that these provisions and agreements are necessary to attract and
retain qualified directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee benefit plan fiduciary, employee or agent of the
Company where indemnification will be required or permitted. The Company is not
aware of any threatened litigation or proceeding that might result in a claim
for such indemnification.
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CERTAIN TRANSACTIONS
Since the Company's inception in September 1995, there has not been any
transaction or series of similar transactions to which the Company was or is a
party in which the amount involved exceeded or exceeds $60,000 and in which any
Director, executive officer, holder of more than 5% of any class of the
Company's voting securities or any member of the immediate family of any of the
foregoing persons had or will have a direct or indirect material interest, other
than the transactions described below.
EQUITY AND CONVERTIBLE DEBT FINANCINGS
INITIAL SALES OF COMMON STOCK TO FOUNDERS. On September 29, 1995, the
Company issued and sold 1,636,363 shares of Common Stock to John W. Danner, the
Company's Chairman of the Board and Chief Executive Officer, and 818,181 shares
of Common Stock to Thomas A. Shields, the Company's Vice President, Chief
Technology Officer, for an aggregate purchase price of $150,000 or approximately
$0.061 per share. Such shares are subject to pro-rata monthly vesting over the
four-year period commencing on the purchase date. This vesting will accelerate
in full upon certain changes of control of the Company. On February 20, 1997,
the Company repurchased 89,212 and 356,850 shares of such Common Stock from
Messrs. Danner and Shields, respectively, at a price of $0.22 per share.
COMMON STOCK AND BRIDGE NOTE FINANCING. From September through November
1995, the Company issued and sold an aggregate of 818,181 shares of Common Stock
for an aggregate purchase price of $49,999.98, or $0.06 per share, and issued
bridge notes in the aggregate amount of $450,000, the principal and interest of
which were convertible into Preferred Stock (the "Common Stock and Bridge Note
Financing"). The investors in the Common Stock and Bridge Note Financing
included, among others, (1) a trust controlled by Alden E. and Ann Danner,
relatives of John W. Danner, which trust purchased 163,636 shares of Common
Stock and lent the Company $90,000 at an annual simple interest rate of 5.91%,
the principal and interest on which converted into Series A Preferred Stock in
the Company's Series A Preferred Stock financing (the "Series A Preferred Stock
Financing"); (2) Thomas A. Shields, Sr., the father of the Company's Vice
President, Chief Technology Officer, who purchased 81,818 shares of Common Stock
and lent to the Company $45,000 at an annual simple interest rate of 5.91%,
which principal and interest converted into Series A Preferred Stock in the
Series A Preferred Stock Financing; and (3) a trust controlled by John D. D.
Kohler, a Director of the Company, which trust purchased 163,636 shares of
Common Stock and lent the Company $90,000 at an annual simple interest rate of
5.91%, which principal and interest converted into Series A Preferred Stock in
the Series A Preferred Stock Financing.
SERIES A PREFERRED STOCK FINANCING. In January and April 1996, the Company
issued and sold an aggregate of 4,404,578 shares of Series A Preferred Stock for
an aggregate purchase price of $4,448,620.78, or $1.01 per share. The investors
in such shares included, among others, (1) Vector Capital, L.P. ("Vector
Capital"), a General Partner of which is Vector Capital Partners, L.L.C., of
which Alexander R. Slusky, a Director of the Company, is the Managing Member,
which limited partnership purchased 500,000 shares of convertible Series A
Preferred Stock; (2) a trust controlled by Alden E. and Ann Danner, parents of
John W. Danner, which trust purchased 90,623 shares of Series A Preferred Stock;
(3) a trust controlled by Thomas A. Shields, Sr., which trust purchased 45,117
shares of Series A Preferred Stock; (4) a trust controlled by John D. D. Kohler,
which trust purchased 90,609 shares of Series A Preferred Stock; (5) Larry C.
Wear, Vice President of Support and Services, who purchased 49,504 shares of
Series A Preferred Stock; and (6) certain entities affiliated with an
institutional investor that was a holder of more than 5% of the Company's
securities and that held a seat on the Board of Directors of the Company until
March 1998, which entities purchased 3,073,738 shares of Series A Preferred
Stock, all of which stock was sold by such investor and its affiliated entities
in March 1998 for an aggregate selling price of approximately $3,688,485. Upon
consummation of this offering, the outstanding shares of Series A Preferred
Stock will automatically convert into an aggregate of 2,494,172 shares of Common
Stock.
SERIES B PREFERRED STOCK FINANCING. In March 1997, the Company issued and
sold an aggregate of 4,307,969 shares of Series B Preferred Stock at an
aggregate purchase price of $4,299,999.24, or $1.01 per share. The investors in
such shares included, among others, (1) Vector Capital which purchased 3,506,487
shares of Series B Preferred Stock; (2) Redleaf Venture I, L.P. and Redleaf
Associates I, L.P. (together, "Redleaf"), the general
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partner of which is Redleaf Venture Management, L.L.C. of which John D. D.
Kohler, a Director of the Company, is a Managing Member, which limited
partnerships purchased an aggregate of 300,556 shares of Series B Preferred
Stock; (3) Jonathan D. Lazarus, a Director of the Company, who purchased 75,139
shares of Series B Preferred Stock; and (4) certain entities affiliated with an
institutional investor that was a holder of more than 5% of the Company's
securities and that held a seat on the Board of Directors of the Company until
March 1998, which entities purchased 400,741 shares of Series B Preferred Stock,
all of which stock was sold by such investor and its affiliated entities in
March 1998 for an aggregate selling price of approximately $480,889. Upon
consummation of this offering, the outstanding shares of Series B Preferred
Stock will automatically convert into an aggregate of 1,958,168 shares of Common
Stock.
SERIES C PREFERRED STOCK FINANCING. In November 1997 and March 1998, the
Company issued and sold an aggregate of 3,887,978 shares of Series C Preferred
Stock for aggregate net proceeds to the Company of $8,710,003, or approximately
$2.24 per share. The investors in such shares included, among others, (1) London
Pacific Life & Annuity Company, which, upon consummation of this offering, shall
own more than 5% of the Common Stock, and which purchased 2,437,241 shares of
convertible Series C Preferred Stock and (2) Vector Capital, which purchased
669,571 shares of Series C Preferred Stock. Upon consummation of this offering,
the outstanding shares of Series C Preferred Stock will automatically convert
into an aggregate of 1,767,263 shares of Common Stock.
REGISTRATION RIGHTS AGREEMENT
Certain holders of Preferred Stock have certain registration rights with
respect to their shares of Common Stock issuable upon conversion of their
Preferred Stock. See "Description of Capital Stock--Registration Rights."
EMPLOYMENT AND SEVERANCE AGREEMENTS
SUSAN ATHERTON EMPLOYMENT AGREEMENT. In April 1998, the Company and Ms.
Atherton, the Company's Vice President of Sales, entered into an employment
agreement under which Ms. Atherton is entitled to receive severance benefits
under certain circumstances. Pursuant to her employment agreement, Ms. Atherton
was granted an option to purchase up to 176,802 shares of the Company's Common
Stock, subject to the Company's standard vesting provisions. In the event that
Ms. Atherton's employment with the Company terminates prior to October 23, 1998
other than voluntarily or for cause, such option would become immediately vested
as to 22,100 shares of Common Stock. In the event Ms. Atherton is involuntarily
terminated by the Company or a successor company without cause (i) upon the
acquisition of the Company, (ii) upon the merger or consolidation of the Company
with any other corporation (each a "Change of Control") or (iii) within 12
months of a Change of Control, Ms. Atherton would be entitled to a lump sum
payment equal to 18 months of Ms. Atherton's base salary as in effect
immediately prior to the Change of Control, which lump sum payment would equal
approximately $225,000, based on Ms. Atherton's current base salary.
STEPHEN E. RECHT EMPLOYMENT AND SEVERANCE AGREEMENT. In March 1998, the
Company and Mr. Recht, Chief Financial Officer and Secretary of the Company,
entered into an employment and severance agreement under which Mr. Recht is
entitled to receive certain benefits generally in the event Mr. Recht is
involuntarily terminated by the Company or a successor company without cause (i)
upon the acquisition of the Company, (ii) upon the merger or consolidation of
the Company with any other corporation (each a "Change of Control") or (iii)
within 12 months of a Change of Control. Upon such a termination, Mr. Recht
would be entitled to (i) a total of 18 monthly payments equal to Mr. Recht's
monthly base salary, currently at approximately $247,500, as in effect
immediately prior to the Change of Control, and (ii) reimbursements for a period
of 18 months for the cost of Mr. Recht's group health and dental plan coverage.
STEPHEN READE SEPARATION AGREEMENT. In March 1998, the Company and Mr.
Reade, the Company's former Vice President of Sales, entered into a separation
agreement and release of all claims with the Company. Pursuant to such
agreement, Mr. Reade agreed to provide consulting services to the Company for a
six-month period following his resignation date (the "Consulting Period"), to
continue to be subject to certain competitive restrictions during
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the Consulting Period and to release the Company from all claims related to his
employment; and the Company agreed to pay Mr. Reade $50,000 for his consulting
services, to allow the continue vesting of his outstanding stock options during
the Consulting Period and to release Mr. Reade from all claims related to his
employment.
MARTIN LANE-SMITH EMPLOYMENT AGREEMENT. In October 1997, the Company and
Mr. Lane-Smith, the Company's Vice President of Engineering, entered into an
employment agreement under which Mr. Lane-Smith was granted an option covering
an aggregate of 214,603 shares of Common Stock. The employment agreement, as
amended, also provides for the grant of an additional option to purchase up to
78,021 additional shares of the Company's Common Stock, which option will be
granted in October 1998 in the event Mr. Lane-Smith meets certain performance
criteria established by the Company.
The Company also has granted options to certain of its executive officers
pursuant to at-will employment agreements. Such options are described further in
the Management section under "Executive Compensation" and "Option Grants in
Fiscal 1997."
PROTEGE SOFTWARE PROFESSIONAL SERVICES AGREEMENT. In March 1997, the
Company and Protege Software (Holdings) Limited ("Protege") entered into a
professional services agreement (the "Professional Services Agreement") under
which Protege agreed to act as general manager for the Company in Europe. In
addition, Protege agreed to perform certain professional services for the
Company. In connection with the Professional Services Agreement, Jitendra
Valera, an employee of Protege, serves as the Company's Vice President and
General Manager of Europe. See "Management--Executive Officers, Key Employees,
Key Consultants and Directors."
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1998 and as adjusted to
reflect the sale of the shares of Common Stock offered hereby by (i)
each person or entity who is known by the Company to own beneficially 5% or more
of the Company's outstanding Common Stock, (ii) each director of the Company,
(iii) each of the Named Executive Officers and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED(1)
SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED(1) OFFERING OFFERING
- -------------------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
Vector Capital, L.P.(2) ........................................................ 3,449,510 33.6%
c/o Ziff Brothers Investments
153 East 53rd Street, 43rd Floor
New York, NY 10022
London Pacific Life & Annuity Company .......................................... 1,377,467 13.4
3109 Poplarwood Court, Suite 108
Raleigh, NC 27604
John W. Danner(3)(8)............................................................ 1,545,810 15.1
John D. D. Kohler(4)............................................................ 621,192 6.1
Alexander R. Slusky(2).......................................................... 3,449,510 33.6
Jonathan D. Lazarus(5).......................................................... 52,336 *
Stephen E. Recht(6)............................................................. 187,614 1.8
Rick E. D. Jackson IV(7)........................................................ 150,114 1.5
Thomas A. Shields(3)(8)......................................................... 461,445 4.5
Martin G. Lane-Smith(9)......................................................... 214,717 2.0
Larry C. Wear(10)............................................................... 172,483 1.7
All directors and executive officers as a group (11 people)(11)................. 6,889,424 63.2
</TABLE>
- ----------
* Represents beneficial ownership of less than 1% of the outstanding shares of
Common Stock.
(1) Applicable percentage ownership is based on 10,261,842 shares of Common
Stock and Preferred Stock outstanding as of March 31, 1998 and
shares immediately following the completion of this offering (assuming no
exercise of the Underwriters' over-allotment option). Beneficial ownership
is determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities, subject to community property laws, where applicable. Shares of
Common Stock subject to options that are presently exercisable or
exercisable within 60 days of March 31, 1998 are deemed to be beneficially
owned by the person holding such options for the purpose of computing the
percentage ownership of such person but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person.
(2) Includes all shares held by Vector Capital, L.P. Vector Capital Partners,
L.L.C. is the General Partner of Vector Capital, L.P. Mr. Slusky, a Director
of the Company, is the Managing Member of Vector Capital Partners, L.L.C.
Mr. Slusky disclaims beneficial ownership of the shares held by Vector
Capital, L.P. except to the extent of his pecuniary interests therein from
his membership interest in Vector Capital Partners, L.L.C.
(3) Messrs. Danner and Shields, and certain other stockholders of the Company
have granted the Underwriters an over-allotment option, exercisable not
later than 30 days after the date of this Prospectus, to purchase an
aggregate of shares of Common Stock at the public offering price set
forth on the cover page of this Propectus, less underwriting discounts and
commissions. See "Underwriting." If the Underwriters exercise the
over-allotment option in full, Mr. Danner will sell shares of Common
Stock, resulting in his ownership of shares %, Mr. Shields will
sell shares of Common Stock, resulting in his ownership of
shares %, and all directors and executive officers as a group will
sell shares of Common Stock, resulting in ownership of shares
% after the closing of the offering. Additionally, in the event of
exercise of the Underwriters' over-allotment option in full, will sell
shares resulting in his ownership of shares %.
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(4) Includes 161,174 shares held by the Kohler Family Trust, of which Mr. Kohler
is a trustee. Also includes 8,380 shares held by Redleaf Associates I, L.P.
and 451,638 shares held by Redleaf Venture I, L.P. (collectively, the
"Redleaf Limited Partnerships"). Mr. Kohler, a Director of the Company, is
the Managing Member of Redleaf Venture Management, L.L.C., the General
Partner of the Redleaf Limited Partnerships.
(5) Consists of 52,336 shares held by Lazarus Family Investments LLC, of which
Mr. Lazarus is a Managing Member.
(6) Includes 187,500 shares issuable upon the exercise of stock options
exercisable within 60 days of March 31, 1998.
(7) Consists of 150,114 shares of Common Stock issuable upon the exercise of
stock options exercisable within 60 days of March 31, 1998.
(8) Includes 114 shares of Common Stock issuable upon the exercise of stock
options exercisable within 60 days of March 31, 1998.
(9) Consists of 214,717 shares of Common Stock issuable upon the exercise of
stock options exercisable within 60 days of March 31, 1998.
(10) Includes 81,931 shares of Common Stock issuable upon the exercise of stock
options exercisable within 60 days of March 31, 1998.
(11) Includes 634,603 shares of Common Stock issuable upon the exercise of stock
options exercisable within 60 days of March 31, 1998.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, the Company will be authorized to
issue 50,000,000 shares of Common Stock, $0.001 par value, and 5,000,000 shares
of undesignated Preferred Stock, $0.001 par value. Immediately after the
completion of this offering and assuming no exercise of the Underwriters'
over-allotment option, there will be an aggregate of shares of Common
Stock outstanding, shares of Common Stock will be issuable upon exercise
of outstanding options and no shares of Preferred Stock will be issued and
outstanding.
The following description of the Company's capital stock and certain
provisions of the Company's Amended and Restated Certificate of Incorporation,
as amended, and Amended and Restated Bylaws does not purport to be complete and
is subject to and qualified in its entirety by the Company's Amended and
Restated Certificate of Incorporation and Bylaws, which are included as exhibits
to the Registration Statement of which this Prospectus forms a part, and by the
provisions of applicable Delaware law.
COMMON STOCK
As of March 31, 1998, there were 4,042,240 shares of Common Stock
outstanding that were held of record by approximately 77 stockholders. There
will be shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and no exercise of options then outstanding)
after giving effect to the sale of Common Stock offered to the public hereby.
The holders of Common Stock are entitled to one vote per share held of record on
all matters submitted to a vote of stockholders. Holders of Common Stock do not
have cumulative voting rights, and, therefore, holders of a majority of the
shares voting for the election of directors can elect all of the directors. In
such event, the holders of the remaining shares will not be able to elect any
directors.
Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between the Company and its debtholders. The Company has never declared or paid
cash dividends on its capital stock, expects to retain future earnings, if any,
for use in the operation and expansion of its business, and does not anticipate
paying any cash dividends in the foreseeable future. In addition, the Company's
bank line of credit agreement contains a restrictive covenant that limits the
Company's ability to pay cash dividends or make stock repurchases without the
prior written consent of the lender. See "Dividend Policy." In the event of the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets legally available for
distribution after payment of all debts and other liabilities and subject to the
prior rights of any holders of Preferred Stock then outstanding.
PREFERRED STOCK
Effective upon the closing of this offering, the Company will be authorized
to issue 5,000,000 shares of undesignated Preferred Stock. The Board of
Directors has the authority to issue the Preferred Stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting a series or the designation of such series, without any
further vote or action by the Company's stockholders. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders and may adversely affect the market price of, and the
voting and other rights of, the holders of Common Stock. The issuance of
Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others. The Company has no current plans to issue any shares of
Preferred Stock.
68
<PAGE>
ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION, BYLAWS AND
DELAWARE LAW
The Company's Amended and Restated Certificate of Incorporation, as amended
(the "Certificate") provides that all stockholder actions must be effected at a
duly called annual or special meeting and may not be effected by written
consent. The Company's Amended and Restated Bylaws provide that, except as
otherwise required by law, special meetings of the stockholders can only be
called pursuant to a resolution adopted by a majority of the Board of Directors
or by the chief executive officer of the Company. In addition, the Amended and
Restated Bylaws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders, including proposed
nominations of persons for election to the Board. Stockholders at an annual
meeting may only consider proposals or nominations specified in the notice of
meeting or brought before the meeting by or at the direction of the Board of
Directors or by a stockholder who was a stockholder of record on the record date
for the meeting, who is entitled to vote at the meeting and who has delivered
timely written notice in proper form to the Company's Secretary of the
stockholder's intention to bring such business before the meeting. The
Certificate and the Amended and Restated Bylaws provide that the affirmative
vote of holders of at least a majority of the total votes eligible to be cast in
the election of directors is required to amend, alter, change or repeal certain
of their provisions.
The foregoing provisions of the Company's Certificate and Amended and
Restated Bylaws are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions which may involve an actual or threatened change of control of the
Company. Such provisions are designed to reduce the vulnerability of the Company
to an unsolicited acquisition proposal and, accordingly, could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions are also intended to discourage certain tactics
that may be used in proxy fights but could, however, have the effect of
discouraging others from making tender offers for the Company's shares and,
consequently, may also inhibit fluctuations in the market price of the Company's
shares that could result from actual or rumored takeover attempts. These
provisions may also have the effect of preventing changes in the management of
the Company. See "Risk Factors--Antitakeover Effects of Certain Charter
Provisions, Bylaws and Delaware Law."
EFFECT OF DELAWARE ANTITAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by the employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or (iii) on or
subsequent to such date, the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition involving the interested stockholder
of 10% or more of the assets of the corporation; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other
69
<PAGE>
financial benefits provided by or through the corporation. In general, Section
203 defines an interested stockholder as any entity or person beneficially
owning 15% or more of the outstanding voting stock of the corporation and any
entity or person affiliated with or controlling or controlled by such entity or
person. See "Risk Factors--Anti-Takeover Effects of Certain Charter Provisions,
Bylaws and Delaware Law."
REGISTRATION RIGHTS
After this offering, the holders of 9,305,110 shares of Common Stock will be
entitled upon expiration of lock-up agreements with the Underwriters to certain
rights with respect to the registration of such shares under the Securities Act.
Under the terms of the agreement between the Company and the holders of such
registrable securities, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other securities holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled to include shares
of such Common Stock therein. Holders of registration rights may also require
the Company to file a registration statement under the Securities Act at the
Company's expense with respect to their shares of Common Stock, and the Company
is required to use its best efforts to effect such registration. Further,
holders may require the Company to file registration statements on Form S-3 at
the Company's expense when such form becomes available for use to the Company.
All such registration rights are subject to certain conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares to be included in such registration.
TRANSFER AGENT
The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer
Corporation. Its address is , and its telephone number at this location
is .
LISTING
The Common Stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "NETG."
70
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate of shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, the shares sold in this offering will be freely
tradeable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"), unless such shares are purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act (the "Affiliates"). The remaining shares of Common Stock
held by existing stockholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted
Shares may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144, 144(k) or 701 promulgated
under the Securities Act, which rules are summarized below. As a result of the
contractual restrictions described below and the provisions of Rules 144, 144(k)
and 701, additional shares will be available for sale in the public market as
follows: (i) shares will be eligible for immediate sale on the date of
this Prospectus, (ii) shares will be eligible for sale upon expiration
of the lock-up agreements 180 days after the date of this Prospectus and (iii)
shares will be eligible for sale upon expiration of their respective
two-year holding periods.
Upon completion of this offering, the holders of shares of Common
Stock, or their transferees, will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. See "Description of
Capital Stock--Registration Rights." Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by Affiliates)
immediately upon the effectiveness of such resignation.
All officers and directors, and stockholders and option
holders of the Company have agreed not to sell, make any short sale of, grant
any option for the purchase of, or otherwise transfer or dispose of, any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of 180 days after the date of this
Prospectus, without the prior written consent of BancAmerica Robertson Stephens.
BancAmerica Robertson Stephens currently has no plans to release any portion of
the securities subject to lock-up agreements. When determining whether or not to
release shares from the lock-up agreements, BancAmerica Robertson Stephens will
consider, among other factors, the stockholder's reasons for requesting the
release, the number of shares for which the release is being requested and
market conditions at the time.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately shares immediately after this
offering); or (ii) the average weekly trading volume of the Common Stock on the
Nasdaq National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an Affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner except an Affiliate), is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144; therefore, unless otherwise restricted, "144(k)
shares" may be sold immediately upon the completion
71
<PAGE>
of this offering. In general, under Rule 701 of the Securities Act as currently
in effect, any employee, consultant or advisor of the Company who purchased
shares from the Company in connection with a compensatory stock or option plan
or other written agreement is eligible to resell such shares 90 days after the
effective date of this offering in reliance on Rule 144, but without compliance
with certain restrictions, including the holding period, contained in Rule 144.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering shares of Common Stock reserved for issuance under the
Company's 1995 Plan, 1998 Plan, 1998 Director Plan and 1998 Purchase Plan. Based
on the number of options outstanding and options and shares reserved for
issuance at March 31, 1998 under the 1995 Plan, such registration statement
would cover approximately shares. Such registration statement is expected
to be filed and become effective as soon as practicable after the effective date
of this offering. Accordingly, shares registered under such registration
statement will, subject to Rule 144 volume limitations applicable to Affiliates,
be available for sale in the open market, unless such shares are subject to
vesting restrictions with the Company or the lock-up agreements described above.
As of March 31, 1998, options to purchase 1,329,408 shares of Common Stock were
issued and outstanding under the 1995 Plan, and no options to purchase shares
had been granted under the Company's 1998 Plan, 1998 Director Plan, and 1998
Purchase Plan. See "Management--Employee Benefit Plans."
72
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, NationsBanc Montgomery Securities LLC and First
Albany Corporation (the "Representatives"), have severally agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase from the
Company the numbers of shares of Common Stock set forth opposite their
respective names below. The Underwriters are committed to purchase and pay for
all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------------------------------------- -----------
<S> <C>
BancAmerica Robertson Stephens....................................................
NationsBanc Montgomery Securities LLC.............................................
First Albany Corporation..........................................................
-----------
Total.........................................................................
-----------
-----------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the price to the public set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession of not more than $ per share, of which $ may be reallowed
to other dealers. After the public offering, the public offering price,
concession and reallowance to dealers may be reduced by the Representatives. No
such reduction shall change the amount of proceeds to be received by the Company
as set forth on the cover page of this Prospectus.
The Company and the Selling Stockholders have granted to the Underwriters an
option, exercisable during the 30-day period after the date of this Prospectus,
to purchase up to an aggregate of additional shares of Common Stock at
the initial public offering price per share set forth on the cover of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
total number of shares offered hereby. If purchased, such additional shares will
be sold by the Underwriters on the same terms as those on which the shares
offered hereby are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
Underwriting Agreement.
Pursuant to the terms of lock-up agreements, the holders of shares of
the Company's Common Stock (including 13,683,126 shares of preferred stock that
are convertible into shares of Common Stock), have agreed, for a period of up to
180 days after the date of this Prospectus, that, subject to certain exceptions,
they will not contract to sell or otherwise dispose of any shares of Common
Stock, any options or warrants to purchase shares of Common Stock or any
securities convertible into, or exchangeable for, shares of Common Stock, owned
directly by such holders or with respect to which they have the power of
disposition, without the prior written consent of BancAmerica Robertson
Stephens. BancAmerica Robertson Stephens may, in its sole discretion, and at any
time without notice, release all or any portion of the securities subject to the
lock-up agreements. All of the shares of Common Stock subject to the lock-up
agreements will be eligible for sale in the public market upon the expiration of
the lock-up agreements, subject in the case of any restricted shares to Rule
144.
73
<PAGE>
In addition, the Company has agreed that until 180 days after the date of
this Prospectus, the Company will not, without the prior written consent of
BancAmerica Robertson Stephens, subject to certain exceptions, offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock, any options
or warrants to purchase any shares of Common Stock or any securities convertible
into, exercisable for or exchangeable for shares of Common Stock other than the
Company's sale of shares in this offering, the issuance of shares of Common
Stock upon the exercise of outstanding options and warrants and the conversion
of shares of preferred stock and the grant of options to purchase shares of
Common Stock under existing employee stock option or stock purchase plans. See
"Shares Eligible for Future Sale."
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby was determined through negotiations among the Company and
the Representatives. Among the factors considered in such negotiations were
prevailing market conditions, certain financial information of the Company,
market valuations of other companies that the Company and the Representatives
believe to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
74
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California, is acting as counsel for the Underwriters in connection
with certain legal matters relating to the shares of Common Stock offered
hereby. Certain members of Wilson Sonsini Goodrich & Rosati beneficially own an
aggregate of 14,016 shares of Common Stock through an investment trust. In
addition, a member of Wilson Sonsini Goodrich & Rosati beneficially owns an
additional 164,486 shares which were issued to the spouse of such member in
connection with such spouse's former employment with the Company. If the
Underwriters' over-allotment is exercised in full, of such shares will be
sold in the offering.
EXPERTS
The consolidated financial statements and related schedule of NetGravity,
Inc. and subsidiary as of December 31, 1996 and 1997 and for the period from
September 5, 1995 (inception) to December 31, 1995 and each of the years in the
two-year period ended December 31, 1997, have been included herein and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities 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 thereto. For further
information with respect to the Company and the Common Stock, reference is made
to the Registration Statement and the exhibits and schedules filed as a part
thereof. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete. In each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, and each such statement is qualified in
all respects by such reference. The Registration Statement, including exhibits
and schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Northwestern Atrium
Center, 500 Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such materials may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates,
and through the National Association of Securities Dealers, Inc. located at 1735
K Street, N.W., Washington, D.C. 20006. The Commission maintains a World Wide
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's Web site is http://www.sec.gov.
75
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (unaudited)................ F-3
Consolidated Statements of Operations for the Period from September 5, 1995 (Inception) to December 31,
1995, and the Years ended December 31, 1996 and 1997, and Three Months ended March 31, 1997 and 1998
(unaudited).............................................................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Period from September 5, 1995 (Inception)
to December 31, 1995, and the Years ended December 31, 1996 and 1997, and Three Months ended March 31,
1998 (unaudited)......................................................................................... F-5
Consolidated Statements of Cash Flows for the Period from September 5, 1995 (Inception) to December 31,
1995, and the Years ended December 31, 1996 and 1997, and Three Months ended March 31, 1997 and 1998
(unaudited).............................................................................................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
The Board of Directors and Stockholders
NetGravity, Inc.:
When the reverse stock split referred to in Note 8 of the Notes to
Consolidated Financial Statements has been consummated, we will be in a position
to render the following report.
KPMG PEAT MARWICK LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
NetGravity, Inc.:
We have audited the accompanying consolidated balance sheets of NetGravity,
Inc. and subsidiary as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the period from September 5, 1995 (inception) to December 31, 1995 and
each of the years in the two-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NetGravity, Inc. and subsidiary as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for the period from September
5, 1995 (inception) to December 31, 1995 and for each of the years in the
two-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
San Francisco, California,
April 17, 1998, except as to Note 8,
which is as of May , 1998
F-2
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1998
-------------------- ----------------------
1996 1997 ACTUAL PRO FORMA
--------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 1,020 $ 5,637 $ 6,318 $ 6,318
Accounts receivable, net of allowances of $169, $223 and $137 at
December 31, 1996 and 1997, and as of March 31, 1998,
respectively....................................................... 1,218 2,739 3,812 3,812
Prepaid expenses and other current assets........................... 182 155 219 219
--------- --------- --------- -----------
Total current assets.............................................. 2,420 8,531 10,349 10,349
Property and equipment, net........................................... 695 1,356 1,483 1,483
Other assets.......................................................... 44 -- -- --
--------- --------- --------- -----------
$ 3,159 $ 9,887 $ 11,832 $ 11,832
--------- --------- --------- -----------
--------- --------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable.................................... $ -- $ 1,140 $ 1,139 $ 1,139
Accounts payable.................................................... 257 305 289 289
Accrued liabilities................................................. 666 1,344 1,612 1,612
Deferred revenue.................................................... 1,718 3,520 4,627 4,627
--------- --------- --------- -----------
Total current liabilities......................................... 2,641 6,309 7,667 7,667
Notes payable, less current portion................................... 682 727 606 606
Commitments
Stockholders' equity (deficit):
Convertible preferred stock; $0.001 par value; 26,540,194 shares
authorized; 4,404,578, 11,149,788 and 12,600,525 shares issued and
outstanding at December 31, 1996 and 1997, and as of March 31,
1998, respectively; aggregate liquidation preference of $14,216 as
of December 31, 1997; 5,000,000 shares authorized, none outstanding
on a pro forma basis as of March 31, 1998.......................... 4 11 13 --
Common stock, $0.001 par value; 35,000,000 shares authorized;
4,234,511, 3,979,125 and 4,042,240 shares issued and outstanding at
December 31, 1996, 1997, and March 31, 1998, respectively;
50,000,000 shares authorized; 10,261,842 shares issued and
outstanding on a pro forma basis as of March 31, 1998.............. 4 4 4 10
Additional paid-in capital.......................................... 4,650 16,209 19,859 19,866
Deferred stock compensation......................................... -- (1,669) (1,813) (1,813)
Accumulated deficit................................................. (4,822) (11,704) (14,504) (14,504)
--------- --------- --------- -----------
Total stockholders' equity (deficit).............................. (164) 2,851 3,559 3,559
--------- --------- --------- -----------
$ 3,159 $ 9,887 $ 11,832 $ 11,832
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 5, 1995 YEAR ENDED DECEMBER THREE MONTHS ENDED
(INCEPTION) TO 31, MARCH 31,
DECEMBER 31, -------------------- --------------------
1995 1996 1997 1997 1998
------------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses................................ $ -- $ 1,262 $ 2,901 $ 710 $ 775
Software upgrades................................ -- 107 1,123 185 402
Consulting and support........................... -- 570 2,334 458 826
------ --------- --------- --------- ---------
Total revenues................................. -- 1,939 6,358 1,353 2,003
------ --------- --------- --------- ---------
Cost of revenues:
Cost of software licenses........................ -- -- 76 7 15
Cost of consulting and support................... -- 702 2,496 240 1,158
------ --------- --------- --------- ---------
Total cost of revenues......................... -- 702 2,572 247 1,173
------ --------- --------- --------- ---------
Gross profit................................... -- 1,237 3,786 1,106 830
------ --------- --------- --------- ---------
Operating costs and expenses:
Research and development......................... 39 1,764 3,033 678 996
Selling and marketing............................ 21 2,839 6,073 1,341 1,956
General and administrative....................... 131 1,315 1,552 241 708
------ --------- --------- --------- ---------
Total operating costs and expenses............. 191 5,918 10,658 2,260 3,660
------ --------- --------- --------- ---------
Loss from operations........................... (191) (4,681) (6,872) (1,154) (2,830)
Other income (expense), net........................ (4) 54 (10) (6) 30
------ --------- --------- --------- ---------
Net loss....................................... $ (195) $ (4,627) $ (6,882) $ (1,160) $ (2,800)
------ --------- --------- --------- ---------
------ --------- --------- --------- ---------
Basic and diluted net loss per share............... $ (0.19) $ (2.19) $ (2.46) $ (0.55) $ (0.93)
------ --------- --------- --------- ---------
------ --------- --------- --------- ---------
Shares used in per share calculation............... 1,006 2,111 2,799 2,121 3,025
------ --------- --------- --------- ---------
------ --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ------------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock for cash.............................. -- $ -- 3,822 $ 4 $ 146
Issuance of common stock upon exercise of stock options........ -- -- 542 1 32
Net loss....................................................... -- -- -- -- --
--------- --- ----- --- -------------
Balances as of December 31, 1995............................... -- -- 4,364 5 178
Issuance of common stock upon exercise of stock options........ -- -- 310 -- 62
Repurchases of common stock.................................... -- -- (439) (1) (27)
Compensation expense related to non-employee option grants..... -- -- -- -- 8
Issuance of Series A preferred stock, net of issuance costs of
$15.......................................................... 4,405 4 -- -- 4,429
Net loss....................................................... -- -- -- -- --
--------- --- ----- --- -------------
Balances as of December 31, 1996............................... 4,405 4 4,235 4 4,650
Issuance of common stock for cash.............................. -- -- 17 -- 4
Issuance of common stock upon exercise of stock options........ -- -- 301 -- 67
Compensation expense related to non-employee option grants..... -- -- -- -- 120
Deferred compensation related to grants of stock options....... -- -- -- -- 1,784
Amortization of deferred compensation.......................... -- -- -- -- --
Repurchases of common stock in connection with revaluation..... -- -- (446) -- (98)
Repurchases of common stock.................................... -- -- (126) -- (26)
Issuance of Series B preferred stock, net of issuance costs of
$18.......................................................... 4,308 4 -- -- 4,277
Issuance of Series C preferred stock, net of issuance costs of
$566......................................................... 2,437 3 -- -- 5,431
Net loss....................................................... -- -- -- -- --
--------- --- ----- --- -------------
Balances as of December 31, 1997............................... 11,150 $ 11 3,979 $ 4 $ 16,209
Issuance of common stock for cash (unaudited).................. -- -- 11 -- 2
Issuance of common stock upon exercise of stock options
(unaudited).................................................. -- -- 56 -- 12
Repurchases of common stock (unaudited)........................ -- -- (4) -- (1)
Issuance of Series C preferred stock, net of issuance costs of
$1 (unaudited)............................................... 1,451 2 -- -- 3,247
Deferred compensation related to grants of stock options
(unaudited).................................................. -- -- -- -- 390
Amortization of deferred stock compensation (unaudited)........ -- -- -- -- --
Net loss (unaudited)........................................... -- -- --
--------- --- ----- --- -------------
Balances as of March 31, 1998 (unaudited)...................... 12,601 $ 13 4,042 $ 4 $ 19,859
--------- --- ----- --- -------------
--------- --- ----- --- -------------
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
STOCK ACCUMULATED EQUITY
COMPENSATION DEFICIT (DEFICIT)
------------- ------------ --------------
<S> <C> <C> <C>
Issuance of common stock for cash.............................. $ -- $ -- $ 150
Issuance of common stock upon exercise of stock options........ -- -- 33
Net loss....................................................... -- (195) (195)
------------- ------------ -------
Balances as of December 31, 1995............................... -- (195) (12)
Issuance of common stock upon exercise of stock options........ -- -- 62
Repurchases of common stock.................................... -- -- (28)
Compensation expense related to non-employee option grants..... -- -- 8
Issuance of Series A preferred stock, net of issuance costs of
$15.......................................................... -- -- 4,433
Net loss....................................................... -- (4,627) (4,627)
------------- ------------ -------
Balances as of December 31, 1996............................... -- (4,822) (164)
Issuance of common stock for cash.............................. -- -- 4
Issuance of common stock upon exercise of stock options........ -- -- 67
Compensation expense related to non-employee option grants..... -- -- 120
Deferred compensation related to grants of stock options....... (1,784) -- --
Amortization of deferred compensation.......................... 115 -- 115
Repurchases of common stock in connection with revaluation..... -- -- (98)
Repurchases of common stock.................................... -- -- (26)
Issuance of Series B preferred stock, net of issuance costs of
$18.......................................................... -- -- 4,281
Issuance of Series C preferred stock, net of issuance costs of
$566......................................................... -- -- 5,434
Net loss....................................................... -- (6,882) (6,882)
------------- ------------ -------
Balances as of December 31, 1997............................... $ (1,669) $ (11,704) $ 2,851
Issuance of common stock for cash (unaudited).................. -- -- 2
Issuance of common stock upon exercise of stock options
(unaudited).................................................. -- -- 12
Repurchases of common stock (unaudited)........................ -- -- (1)
Issuance of Series C preferred stock, net of issuance costs of
$1 (unaudited)............................................... -- -- 3,249
Deferred compensation related to grants of stock options
(unaudited).................................................. (390) -- --
Amortization of deferred stock compensation (unaudited)........ 246 -- 246
Net loss (unaudited)........................................... -- (2,800) (2,800)
------------- ------------ -------
Balances as of March 31, 1998 (unaudited)...................... $ (1,813) $ (14,504) $ 3,559
------------- ------------ -------
------------- ------------ -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 5, 1995 YEAR ENDED DECEMBER THREE MONTHS ENDED
(INCEPTION) TO 31, MARCH 31,
DECEMBER 31, -------------------- --------------------
1995 1996 1997 1997 1998
------------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $ (195) $ (4,627) $ (6,882) $ (1,160) $ (2,800)
Adjustments to reconcile net loss to net cash used in
operating activities:........................................
Depreciation................................................ 5 172 540 86 231
Amortization of deferred stock compensation................. -- -- 115 -- 246
Compensation from grant of non-employee stock options....... -- 8 120 -- --
Changes in operating assets and liabilities:
Accounts receivable, net.................................. -- (1,218) (1,521) (897) (1,073)
Prepaid expenses and other assets......................... (4) (178) 27 135 (64)
Accounts payable.......................................... 18 239 48 (94) (16)
Accrued liabilities....................................... 30 635 678 114 268
Deferred revenue.......................................... -- 1,718 1,802 718 1,107
----- --------- --------- --------- ---------
Net cash used in operating activities................... (146) (3,251) (5,073) (1,098) (2,101)
----- --------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures.......................................... (62) (810) (1,201) (261) (358)
Purchases of short-term investments........................... -- (2,705) (2,466) (2,466) --
Proceeds from maturities of short-term investments............ -- 2,705 2,466 -- --
Other assets.................................................. -- (44) 44 -- --
----- --------- --------- --------- ---------
Net cash used in investing activities................... (62) (854) (1,157) (2,727) (358)
----- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from notes payable................................... 450 233 1,185 173 (122)
Proceeds from issuance of preferred stock, net................ -- 4,433 9,715 4,281 3,249
Proceeds from issuance of common stock........................ 183 62 71 -- 14
Repurchases of common stock................................... -- (28) (124) -- (1)
----- --------- --------- --------- ---------
Net cash provided by financing activities............... 633 4,700 10,847 4,454 3,140
----- --------- --------- --------- ---------
Net increase in cash and cash equivalents....................... 425 595 4,617 629 681
Cash and cash equivalents at beginning of year/period........... -- 425 1,020 1,020 5,637
----- --------- --------- --------- ---------
Cash and cash equivalents at end of year/period................. $ 425 $ 1,020 $ 5,637 $ 1,649 $ 6,318
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid for interest........................................ $ -- $ 18 $ 91 $ 15 $ 41
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
Non-cash financing activities:
Deferred compensation cost on employee stock option
grants..................................................... $ -- $ -- $ 1,784 $ -- $ 390
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
NetGravity, Inc. (the Company), a Delaware corporation, was incorporated in
September 1995. The Company is the leading provider of online advertising and
direct marketing software solutions. The Company maintains its US headquarters
in California and incorporated a subsidiary in the UK in April 1997 for its
European operations. The Company incorporated a subsidiary in Japan in April
1998 for its Asia Pacific operations.
LIQUIDITY
The Company has experienced operating losses and negative cash flows from
operating activities since inception. The Company currently expects that it will
have sufficient cash and investments and available credit facilities to fund its
projected operations through at least December 31, 1998; however, if the Company
is unable to achieve projected operating results and/or obtain sufficient
financing, management will be required to curtail growth plans and implement
cost controls. Management believes that achievement of the Company's growth
goals beyond December 31, 1998 will require additional financing. No assurances
can be given that the Company will be successful in maintaining its available
credit facilities or raising additional financing.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid investments with remaining maturities of
three months or less at the date of purchase.
INVESTMENTS
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. SFAS
No. 115 requires entities to classify investments in debt and equity securities
with readily determined fair values as "held-to-maturity," "available-for-sale"
or "trading" and establishes accounting and reporting requirements for each
classification. The Company has generally classified all securities it has
purchased as available-for-sale and accounts for them at estimated fair value.
Realized and unrealized gains and losses were not significant for all periods
presented. As of December 31, 1996 and 1997, the Company did not hold any
marketable equity securities.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation of property and equipment is provided over the estimated useful
lives of the respective assets, estimated to be three years on a straight-line
method.
F-7
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
SOFTWARE DEVELOPMENT COSTS
In accordance with SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED, development costs related to
the software products are expensed as incurred until the technological
feasibility of the product has been established. Technological feasibility in
the Company's circumstances occurs when a working model is completed. The
Company believes its process for developing software is essentially completed
concurrent with the establishment of technological feasibility, and,
accordingly, no research and development costs have been capitalized to date.
REVENUE RECOGNITION
The Company records an account receivable and deferred revenue upon shipment
and invoicing of a software license to a customer. The Company recognizes
software license revenue upon completion of the product installation provided
that no significant vendor obligations exist, which the Company's management has
generally determined to occur at the point in time at which customers begin
"serving ads" utilizing the Company's software. A portion of the initial
software license fee is attributed to the customer's right to receive, at no
additional charge, significant software upgrades released during the subsequent
twelve months. Revenues attributable to significant software upgrades are
deferred and recognized ratably over the period covered by the software license
agreement, generally one year. Revenue from consulting services are recognized
as the services are performed. Customer-support revenue is deferred and
recognized ratably over the period covered by the customer support agreement,
generally one year.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, SOFTWARE REVENUE RECOGNITION (SOP 97-2).
Effective January 1, 1998, the Company adopted SOP 97-2. SOP 97-2 generally
requires revenue earned on software arrangements involving multiple elements
such as software products, upgrades, enhancements, post-contract customer
support, installation and training to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be based
on evidence which is specific to the vendor. The revenue allocated to software
products, including specified upgrades or enhancements, generally is recognized
upon delivery of the products. The revenue allocated to unspecified upgrades and
updates and post contract customer support generally is recognized as the
services are performed. If evidence of the fair value for all elements of the
arrangement do not exist, all revenue from the arrangement is deferred until
such evidence exists or until all elements are delivered. There was no material
change to the Company's accounting for revenues as a result of the adoption of
SOP 97-2.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount 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.
F-8
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CONCENTRATION OF CREDIT RISK
Accounts receivable potentially subject the Company to concentrations of
credit risk. The Company performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral for accounts
receivable. When required, the Company maintains allowances for credit losses,
and to date such losses have been within management's expectations.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of their carrying amount or fair value less cost to
sell.
USE OF ESTIMATES
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.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation arrangements using the
intrinsic-value method pursuant to APB Opinion No. 25. As such, compensation
expense is recorded when on the date of grant the fair value of the underlying
common stock exceeds the exercise price for stock options or the purchase price
for issuance or sales of common stock. Pursuant to SFAS No. 123, the Company
discloses the pro forma effects of using the fair value method of accounting for
stock-based compensation arrangements.
ADVERTISING EXPENSE
The cost of advertising is generally expensed as incurred. Such costs are
included in selling and marketing expense and totalled approximately $37,000,
$783,000, $494,000, $225,000 and $266,000 during the period from September 5,
1995 (inception) to December 31, 1995, for the years ended December 31, 1996 and
1997, and for the three-month periods ended March 31, 1997 and 1998,
respectively.
FOREIGN CURRENCY TRANSACTIONS
The functional currency of the Company's UK subsidiary is the US dollar.
Resulting foreign exchange gains and losses are included in operating results
and have not been significant to the Company's consolidated operating results in
any period.
F-9
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
which establishes standards for reporting and disclosure of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997 and requires reclassification of financial
statements for earlier periods to be provided for comparative purposes. The
Company has not determined the manner in which it will present the information
required by SFAS No. 130 in its annual financial statements for the year ending
December 31, 1998. The Company's total comprehensive income (loss) for all
periods presented herein would not have differed from those amounts reported as
net loss in the consolidated statements of operations.
PER SHARE INFORMATION
Basic and diluted net loss per share are computed using the weighted average
number of outstanding shares of common stock. Pursuant to SEC Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued for nominal
consideration, prior to the anticipated effective date of the IPO, are included
in the calculation of basic and diluted net loss per share as if they were
outstanding for all periods presented. To date, the Company has not had any
issuances or grants for nominal consideration.
Net loss per share for the year ended December 31, 1997 does not include the
effect of approximately 11,150,000 (5,563,000 on an as-if converted basis)
shares of convertible preferred stock outstanding, 1,312,399 stock options with
a weighted average exercise price of $0.22 per share, 15,909 common stock
warrants with a weighted average exercise price of $0.22 per share, or 1,171,546
shares of common stock issued and subject to repurchase by the Company at a
weighted average price of $0.22 per share, because their effects are
anti-dilutive.
Net loss per share for the quarter ended March 31, 1998 does not include the
effect of approximately 12,601,000 (6,220,000 on an as-if converted basis)
shares of convertible preferred stock outstanding, 1,329,408 stock options with
a weighted average exercise price of $0.27 per share, 27,273 common stock
warrants with a weighted average exercise price of $0.22 per share, or 1,017,229
shares of common stock issued and subject to repurchase by the Company at a
weighted average price of $0.22 per share, because their effects are
anti-dilutive.
Unaudited pro forma basic and diluted net loss per share is presented below
to reflect per share data assuming the conversion of all outstanding shares of
convertible preferred stock into common stock as if the conversion had taken
place at the beginning of 1997 or at the date of issuance, if later.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, 1997 MARCH 31, 1998
------------------- ---------------------
<S> <C> <C>
Pro forma basic and diluted net loss per share....... $ (1.00) $ (0.32)
------ ------
------ ------
Shares used in pro forma per share calculation (in
thousands)......................................... 6,856 8,807
------ ------
------ ------
</TABLE>
F-10
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The following table sets forth the reconciliation of shares used in
calculating basic and diluted, and pro forma basic and diluted net loss per
share (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, 1997 MARCH 31, 1998
------------------- ---------------------
<S> <C> <C>
Shares used in basic and diluted per share
calculation........................................ 2,799 3,025
Conversion of preferred stock--weighted average (pro
forma)............................................. 4,057 5,782
------ ------
Shares used in pro forma basic and diluted per share
calculation........................................ 6,856 8,807
------ ------
------ ------
</TABLE>
UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated financial information as of March 31, 1998 and for the
three months ended March 31, 1997 and 1998 is unaudited, but includes all
adjustments (consisting only of normal recurring adjustments) that the Company
considers necessary for fair presentation of the financial position at such
dates and the operations and cash flows for the periods then ended. Operating
results for the three months ended March 31, 1998 are not necessarily indicative
of results that may be expected for the entire year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for the
way public business enterprises report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for financial statements for periods
beginning after December 31, 1997. The Company has not yet determined the manner
in which it will present the information required by SFAS No. 131.
(2) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 1996
and 1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Computer equipment and software............................................. $ 817 $ 1,837
Furniture and fixtures...................................................... 55 236
--------- ---------
872 2,073
Accumulated depreciation.................................................... (177) (717)
--------- ---------
Property and equipment, net............................................... $ 695 $ 1,356
--------- ---------
--------- ---------
</TABLE>
F-11
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(3) NOTES PAYABLE
The Company has a revolving credit facility with a bank in the amount of
$1,000,000 which bears interest at the prime rate (8.50% as of December 31,
1997) plus 0.75%, and expires in May 1998. Borrowings are limited to the lesser
of $1,000,000 or 70% of the net amount of eligible accounts receivable and are
secured by the Company's accounts receivable. As of December 31, 1997 and March
31, 1998, borrowings under this credit facility were $655,000 and $655,000,
respectively.
The Company has an equipment line of credit with the same bank that provides
up to $1,000,000, bears interest at the prime rate, and expires in June 2000.
The line of credit is secured by the Company's fixed assets. As of December 31,
1996 and 1997, and March 31, 1998, $682,000, $584,000 and $524,000,
respectively, had been advanced under this agreement with the principal amount
due in 30 monthly installments of $19,467 beginning December 31, 1997.
The Company also has a second equipment line of credit with the same bank
that provides up to $1,200,000, bears interest at the prime rate, and expires in
June 2000. The line of credit is secured by the Company's fixed assets. As of
December 31, 1997 and March 31, 1998, $628,000 and $566,000, respectively, had
been advanced under this agreement with the principal amount due in 30 monthly
installments of $20,933 beginning December 31, 1997.
As of December 31, 1997 and March 31, 1998, the Company was not in
compliance with certain financial covenants on all of the aforementioned credit
facilities. The Company has received a waiver of such non-compliance from the
bank.
The aggregate maturities of long-term debt for each of the three years
subsequent to December 31, 1997 are as follows: 1998, $1,140,000; 1999,
$485,000; and 2000, $242,000.
(4) INCOME TAXES
The domestic and foreign components of loss before income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER
SEPTEMBER 5, 1995 31,
(INCEPTION) TO --------------------
DECEMBER 31, 1995 1996 1997
------------------- --------- ---------
<S> <C> <C> <C>
Domestic............................................. $ (195) $ (4,627) $ (6,244)
Foreign.............................................. -- -- (638)
----- --------- ---------
Loss before income taxes......................... $ (195) $ (4,627) $ (6,882)
----- --------- ---------
----- --------- ---------
</TABLE>
The difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the U.S. federal statutory rate of
34% is due to net operating losses not being benefited.
F-12
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(4) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets as of December 31, 1996 and 1997 are
presented below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Various accruals and reserves not deductible for tax purposes............ $ 113 $ 228
Property and equipment................................................... 34 134
Capitalized start-up expenditures........................................ 117 89
Net operating loss carryforward.......................................... 1,855 4,446
Research and development credit carryforward............................. 86 265
--------- ---------
Total deferred tax assets............................................ 2,205 5,163
Valuation allowance...................................................... (2,205) (5,163)
--------- ---------
Net deferred tax assets.............................................. $ -- $ --
--------- ---------
--------- ---------
</TABLE>
As of December 31, 1997, NetGravity Europe Limited had net operating loss
carryforwards in the UK of approximately $600,000, which can be used to offset
NetGravity Europe Limited's future income. The UK net operating loss
carryforward can be carried forward indefinitely.
As of December 31, 1997, the Company has a net operating loss carryforward
for federal and state income tax purposes of approximately $9,800,000. In
addition, the Company had federal and state research and development credit
carryforwards of approximately $145,000 and $120,000, respectively. The
Company's federal net operating loss and research and development credit
carryforwards will expire in the years 2010 through 2012, if not utilized. The
Company's state net operating loss carryforwards will expire in the year 2003.
The state research and development credit can be carried forward indefinitely.
Federal and California tax laws impose substantial restrictions on the
utilization of net operating loss and tax credit carryforwards in the event of
an "ownership change" as defined in Section 382 of the Internal Revenue Code.
The Company has not yet determined whether an ownership change has occurred.
(5) STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
As of December 31, 1997, the Company had authorized 8,809,156, 8,615,938 and
4,874,482 shares of Series A, B and C convertible preferred stock, respectively.
On March 13, 1998, the Company increased the authorized shares of Series C
convertible preferred stock to 9,115,100.
F-13
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
Convertible preferred stock outstanding consisted of the following numbers
of shares (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------
PRO FORMA NUMBER
DECEMBER 31, OF COMMON SHARES
-------------------- ISSUABLE UPON
SERIES 1996 1997 ACTUAL CONVERSION
- ------------------------------------------------ --------- --------- --------- -----------------
<S> <C> <C> <C> <C>
A............................................... 4,405 4,405 4,405 2,495
B............................................... -- 4,308 4,308 1,958
C............................................... -- 2,437 3,888 1,767
--------- --------- --------- -----
4,405 11,150 12,601 6,220
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>
The rights, preferences and privileges of the holders of preferred stock are
as follows:
- The holders of Series A, B and C convertible preferred stock are entitled
to non-cumulative dividends, if and when declared by the Board of
Directors, of $0.08, $0.08 and $0.18 per share, respectively.
- Shares of convertible preferred stock are convertible to common stock at
any time at the conversion prices of $1.78, $2.20 and $4.93 per share, for
Series A, B and C convertible preferred stock, respectively (as adjusted
for the reverse stock split) (See Note 8). The preferred stock
automatically converts to common stock upon the closing of an underwritten
public offering of the Company's common stock at a per share price of not
less than $8.78 per share and gross proceeds of not less than $10,000,000.
- The holders of convertible preferred stock are protected by certain
anti-dilutive provisions.
- Shares of Series A, B and C convertible preferred stock have a liquidation
preference of $1.01, $1.00 and $2.24 per share, respectively, plus any
declared and unpaid dividends.
- The convertible preferred stock votes equally with shares of common stock
on an "as if converted" basis.
No dividends have been declared or paid on the convertible preferred stock
or common stock since inception of the Company.
COMMON STOCK
In connection with the Board of Directors' revaluation of the Company's fair
value in March 1997, the Company repurchased and retired approximately 446,000
shares of common stock previously held by two of the Company's founders, at an
average purchase price of $0.22 per share. Additionally, the Company adjusted
the conversion price of Series A convertible preferred stock to $1.78 per share
of common stock; previously the conversion price was $2.22 per share of common
stock. The fair value of the additional shares of common stock that would be
issued to the holders of Series A convertible preferred stock upon conversion,
due to the reduction in the conversion price, was not significant.
Common stock issued to certain individuals is subject to repurchase at the
option of the Company, at the original issuance price, in the event an
individual ceases to be employed by the Company. Such shares are subject to
repurchase on a pro rata basis over a four-year period from the date of
issuance. As of December 31, 1996 and 1997
F-14
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
and March 31, 1998, there were approximately 1,688,000, 628,000 and 524,000
shares, respectively, subject to repurchase, at a weighted average price of
$0.07 per share. During 1996 and 1997, and the three months ended March 31,
1998, approximately 439,000, 126,000 and 4,000 shares, respectively, were
repurchased.
As of December 31, 1997, a total of 2,727,570 shares of common stock were
authorized for issuance under the 1995 Stock Option Plan (the Plan). Options may
be granted at an exercise price not less than 100% of the fair market value, as
determined by the Board of Directors, for incentive stock options and 85% of
fair market value for nonqualified stock options at the grant date. All options
are granted at the discretion of the Company's Board of Directors and have a
term not greater than 10 years from the date of grant. Options issued are
generally immediately exercisable and generally vest 25% on the first
anniversary date and 1/48th of the shares each month thereafter, so that all the
shares are vested 48 months after the vesting commencement date.
As of December 31, 1996 and 1997 and March 31, 1998, approximately 155,000,
569,000, and 742,000, shares, respectively, with weighted-average exercise
prices of $0.22 per share, were fully vested.
A summary of the status of the Company's options under the Plan is as
follows:
<TABLE>
<CAPTION>
PERIOD FROM SEPTEMBER
5, 1995 (INCEPTION) TO YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
DECEMBER 31, 1995 1996 1997 MARCH 31, 1998
----------------------- ----------------------- ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period..................... -- $ -- 5,000 $ -- 456,509 $ 0.22 1,312,399 $ 0.22
Granted at market value...... 547,426 0.07 833,418 0.22 475,193 0.22 17,045 6.60
Granted at less than market
value...................... -- -- -- -- 845,092 0.22 88,750 0.51
Exercised.................... (542,426) 0.07 (309,418) 0.22 (301,009) 0.22 (56,011) 0.22
Canceled..................... -- -- (72,491) -- (163,386) 0.22 (32,775) 0.22
---------- ---------- ---------- ----------
Options at end of period..... 5,000 0.07 456,509 0.22 1,312,399 0.22 1,329,408 0.27
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Options vested at
period-end................. -- 154,540 569,086 741,953
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted-average fair value
of options granted during
the period with exercise
prices equal to market
value at date of grant..... $ 0.02 $ 0.07 $ 0.07 $ 1.78
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted-average fair value
of options granted during
the period with exercise
prices less than market
value at date of grant..... -- -- $ 2.05 $ 4.55
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
F-15
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- -----------------------------------------------
WEIGHTED-AVERAGE
REMAINING
CONTRACTUAL LIFE OPTIONS
EXERCISE PRICE NUMBER (YEARS) VESTED
- -------------- ---------- ------------------- -------------
<S> <C> <C> <C>
$0.22 1,311,717 9.36 569,086
$0.55 682 9.92 --
- -------------- ---------- -------------
$0.22 - $0.55 1,312,399 569,086
- -------------- ---------- -------------
- -------------- ---------- -------------
</TABLE>
The Company uses the intrinsic value-based method to account for all its
employee stock-based compensation arrangements. Accordingly, no compensation
cost has been recognized for its stock options in the accompanying consolidated
financial statements because the fair value of the underlying common stock
equals or exceeds the exercise price of the stock options at the date of grant,
except with respect to certain options granted in 1997 and during the first
three months of 1998. The Company has recorded deferred stock compensation
expense of $1,784,000 and $390,000 for the difference at the grant date between
the exercise price and the fair value of the common stock underlying the options
granted in 1997 and the first three months of 1998, respectively. Amortization
of deferred compensation of approximately $115,000 and $246,000 was recognized
in 1997 and the first three months of 1998, respectively.
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with the fair value approach set forth in SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company's net losses for the period
from September 5, 1995 (inception) to December 31, 1995 and the years ended
December 31, 1996 and 1997, would have been as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER
SEPTEMBER 5, 1995 31,
(INCEPTION) TO --------------------
DECEMBER 31, 1995 1996 1997
------------------- --------- ---------
<S> <C> <C> <C>
Net loss--as reported........................................... $ (195) $ (4,627) $ (6,882)
Net loss--pro forma............................................. $ (195) $ (4,635) $ (6,883)
Basic and diluted net loss per share--as reported............... $ (0.19) $ (2.19) $ (2.46)
Basic and diluted net loss per share--pro forma................. $ (0.19) $ (2.20) $ (2.46)
</TABLE>
The fair value of options granted during the period from September 5, 1995
(inception) to December 31, 1995 and the years ended December 31, 1996 and 1997
is estimated on the date of grant using the minimum value method with the
following weighted-average assumptions: no dividend yield, risk-free interest
rates of 5.6%, 6.0% and 6.1%, respectively, and expected lives of 5 years.
F-16
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
In March 1997, in connection with a lease termination agreement, the Company
issued the building landlord a warrant to purchase 6,818 shares of common stock
at a purchase price of $0.22 per share. The warrant expires upon the earlier of
(i) five years from the date of issuance or (ii) the closing of an IPO by the
Company. The value of the warrant was not significant at the date of grant.
In October 1997, in connection with certain consulting activities, the
Company committed to deliver a warrant to purchase 9,091 shares of common stock
at a purchase price of $0.22 per share. The value of the warrant was not
significant at the date of grant.
In January 1998, in connection with a non-employee compensation matter, the
Company committed to deliver a warrant to purchase 11,742 shares of common stock
at a purchase price of $0.22 per share. The value of the warrant was not
significant at the date of grant.
(6) COMMITMENTS
The Company leases its facilities under various operating lease agreements
that expire on various dates through May 1998. As of December 31, 1997, the
remaining future minimum payments for these facilities total $147,000. Total
rent expense, including month to month arrangements, was $13,000, $149,000 and
$313,000 for the period from September 5, 1995 (inception) to December 31, 1995
and for the years ended December 31, 1996 and 1997, respectively.
F-17
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(7) GEOGRAPHIC AND SEGMENT INFORMATION
The Company licenses and markets its products primarily from its operations
in the United States, and operates in a single industry segment. Information
regarding operations in different geographic regions is as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Export sales to customers located in:
Europe................................................................. $ -- $ 307
Asia................................................................... -- 237
--------- ---------
Total................................................................ $ -- $ 544
--------- ---------
--------- ---------
Loss from operations:
United States.......................................................... $ (4,681) $ (6,072)
Europe................................................................. -- (800)
--------- ---------
Total................................................................ $ (4,681) $ (6,872)
--------- ---------
--------- ---------
Identifiable assets:
United States.......................................................... $ 3,159 $ 9,139
Europe................................................................. -- 748
--------- ---------
Total................................................................ $ 3,159 $ 9,887
--------- ---------
--------- ---------
</TABLE>
For the period from September 5, 1995 (inception) to December 31, 1995,
there were no significant export sales or operations in Europe or Asia. The
Company began operations in Japan in April 1998.
No single customer accounted for greater than 10% of revenues in any period
reported.
(8) SUBSEQUENT EVENTS
On April 23, 1998, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission (SEC)
permitting the Company to sell shares of the Company's common stock in
connection with a proposed initial public offering (IPO). If the offering is
consummated under the terms presently anticipated, all currently outstanding
shares of preferred stock will automatically convert into approximately
6,220,000 shares of common stock upon the closing of the proposed IPO. The
conversion of the preferred stock has been reflected in the pro forma balance
sheet as of March 31, 1998. Effective upon the closing of the IPO, the Company
will be authorized to issue 5,000,000 shares of undesignated preferred stock.
The Company's Board of Directors approved a 1-for-2.2 reverse split of the
Company's common stock (subject to stockholder approval) to be effected at or
prior to the effectiveness of the IPO. All common share amounts in the
accompanying consolidated financial statements have been adjusted retroactively.
The Company's Board of Directors adopted the 1998 Stock Plan (the "1998
Plan") on April 23, 1998 (subject to stockholder approval). The 1998 Plan
provides for the grant of incentive and nonstatutory stock options and stock
F-18
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(8) SUBSEQUENT EVENTS (CONTINUED)
purchase rights to employees, directors and consultants. A total of 2,000,000
shares of common stock, plus annual increases equal to the lesser of (i)
1,000,000 shares, (ii) 5% of the outstanding shares, or (iii) a lesser amount
determined by the Board of Directors, are proposed to be reserved for issuance
pursuant to the 1998 Plan.
The Company's Board of Directors adopted the 1998 Employee Stock Purchase
Plan (the "1998 Purchase Plan") on April 23, 1998 (subject to stockholder
approval). A total of 200,000 shares of common stock are proposed to be reserved
for issuance under the 1998 Purchase Plan, plus annual increases equal to the
lesser of (i) 750,000 shares, (ii) 4% of the outstanding shares on such date, or
(iii) a lesser amount determined by the Board of Directors.
The Company's Board of Directors also adopted the 1998 Director Option Plan
(the "Director Plan") on April 23, 1998 (subject to stockholder approval). The
Director Plan provides for the grant of nonstatutory stock options to
non-employee directors of the Company or affiliates thereof. A total of 200,000
shares of common stock have been proposed to be reserved for issuance under the
Director Plan plus annual increases to maintain 200,000 shares of common stock
reserved for additional option grants.
F-19
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts, commissions and certain accountable expenses, payable by
the Company in connection with the sale of Common Stock being registered. All
amounts are estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 11,196
NASD Filing Fee.................................................... 4,295
Nasdaq National Market Listing Fee................................. *
Printing Fees and Expenses......................................... *
Legal Fees and Expenses............................................ *
Accounting Fees and Expenses....................................... *
Blue Sky Fees and Expenses......................................... *
Transfer Agent and Registrar Fees.................................. *
Miscellaneous...................................................... *
---------
Total.......................................................... $ *
---------
---------
</TABLE>
- ---------
* To be disclosed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article Nine of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors, officers or
employee benefit plan fiduciaries, to the fullest extent not prohibited by
Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
directors and officers if such person acted in good faith and in a manner
reasonably believed to be in and not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding, the
indemnified party had no reasonable cause to believe his conduct was unlawful.
Article VI also permits the Company to advance expenses incurred by indemnified
directors or officers in connection with the defense of any action or proceeding
arising out of such directors' or officers' status or service as directors or
officers of the Company upon an undertaking by such directors or officers to
repay such advances if it is ultimately determined that such directors or
officers are not entitled to such indemnification.
The Registrant has entered into agreements to indemnify its directors and
officers, in addition to the indemnification provided for in the Registrant's
Amended and Restated Bylaws. These agreements, among other things, indemnify the
Registrant's directors and officers for certain expenses (including attorneys'
fees and associated legal expenses), judgments, fines and amounts paid in
settlement amounts if such settlement is approved in advance by the Registrant,
which approval shall not be unreasonably withheld, actually and reasonably
incurred by any such person in any action, suit, proceeding or alternative
dispute resolution mechanism arising out of such person's services as a director
or officer of the Registrant, any subsidiary of the Registrant or any other
company or enterprise to which the person provides services at the request of
the Registrant.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
1. In September 1995 the Registrant issued and sold an aggregate of
2,454,545 shares of Common Stock to two founders of the Registrant at a purchase
price of approximately $0.061 per share for an aggregate purchase price of
$149,580. In October 1995 the Registrant issued 548,590 shares of Common Stock
to another founder in consideration of such founder accepting employment with
the Registrant.
2. In September 1995 the Registrant issued and sold an aggregate of 818,181
shares of Common Stock at a purchase price of $0.061 per share for an aggregate
purchase price of $49,860 and issued promissory notes for an aggregate amount of
$450,000.
3. Between January 1996 and April 1996 the Registrant issued and sold an
aggregate of 4,404,578 shares of Series A Preferred Stock convertible into
2,494,172 shares of Common Stock for consideration consisting of cash in the
aggregate amount of $3,556,348.37 and the cancellation of Promissory Notes
referred to above.
4. In March 1997 the Registrant issued and sold an aggregate of 4,307,969
shares of Series B Preferred Stock convertible into 1,958,168 shares of Common
Stock at a purchase price of $0.9982 per share for an aggregate purchase price
of $4,299,999.24.
5. In October 1997 the Registrant issued 11,362 shares of Common Stock to
consultants in consideration for services rendered.
6. In November 1997 and March 1998 the Registrant issued and sold an
aggregate of 3,887,978 shares of Series C Preferred Stock convertible into
1,767,263 shares of Common Stock at a purchase price of $2.2402 per share for
aggregate net proceeds to the Registrant of $8,710,003.
7. In November 1997 the Registrant issued 15,909 shares of Common Stock to
a former employee in connection with the termination of such employee's
employment with the Registrant.
8. From September 1995 through March 31, 1998 the Registrant granted
options under the 1995 Stock Plan to purchase an aggregate of 2,806,925 shares
of the Registrant's Common Stock at exercise prices ranging from $0.06 to $6.60
to 140 employees, directors and consultants.
9. From September 1995 through March 31, 1998 an aggregate of 1,208,865
shares of Common Stock were issued pursuant to option exercises at exercise
prices ranging from $0.0277 to $0.22 to 61 employees, directors and consultants.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
*3.2 Form of Amendment to Amended and Restated Certificate of Incorporation.
*3.3 Amended and Restated Bylaws of the Registrant.
*4.1 Specimen certificate representing shares of Common Stock of the
Registrant.
4.2 Second Amended and Restated Registration and Information Rights Agreement.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
*5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
*10.1 Form of Indemnification Agreement for Directors and Officers of the
Registrant.
*10.2 1995 Stock Option Plan.
*10.3 1998 Stock Option Plan, together with form of Stock Option Agreement and
form of Stock Issuance Agreement.
*10.4 1998 Employee Stock Purchase Plan.
*10.5 1998 Directors' Option Plan.
10.6 Lease dated September 29, 1995 for the Registrant's headquarters in San
Mateo, CA.
10.7 Lease dated March 2, 1998 for the Registrant's offices in New York, NY.
10.8 Employment and Severance Agreement dated March 31, 1998 by and between the
Registrant and Stephen E. Recht.
10.9 Professional Services Agreement dated March 27, 1997 between the
Registrant and Protege Software (Holdings) Limited.
10.10 Common Stock Repurchase Agreement and Clarification of Founder's Stock
Purchase Agreement dated March 12, 1997 by and between the Registrant
and John W. Danner.
10.11 Common Stock Repurchase Agreement and Clarification of Founder's Stock
Purchase Agreement dated March 12, 1997 by and between the Registrant
and Thomas A. Shields.
10.12 Employment Agreement dated April 22, 1998 by and between the Registrant
and Susan Atherton.
11.1 Statement Regarding Computation of Earnings Per Share (contained in Note 1
of the Notes to Financial Statements).
21.1 List of Subsidiaries of the Registrant.
24.1 Consent of Independent Auditors.
*24.2 Consent of Counsel (included in Exhibit 5.1).
25.1 Power of Attorney (contained on signature page on II-5).
27.1 Financial Data Schedule (Fiscal 1997).
27.2 Financial Data Schedule (First Quarter 1998)
</TABLE>
- ---------
* To be filed by amendment.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not, applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
II-3
<PAGE>
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereto which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement; and (iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of this offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Mateo, State of California, on the 24th day of April, 1998.
<TABLE>
<S> <C> <C>
NETGRAVITY, INC.
By: /s/ JOHN W. DANNER
-----------------------------------------
John W. Danner
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints each of John W. Danner and Stephen E.
Recht, and each of the acting alone, his true and lawful attorney-in-fact and
agent, each with full power of substitution and resubstitution, for such person
and in his name, place and stead, in any and all capacities, in connection with
this Registration Statement, including to sign and file in the name and on
behalf of the undersigned as director or officer of the Registrant (i) any and
all amendments or supplements (including any and all stickers and post-effective
amendments) to this Registration Statement, with all exhibits thereto, and other
documents in connection therewith, and (ii) any and all additional registration
statements, and any and all amendments thereto, relating to the same offering of
securities as those that are covered by this Registration Statement that are
filed pursuant to Rule 462(b) under the Securities Act of 1933, with the
Securities and Exchange Commission and any applicable securities exchange or
securities self-regulatory body, granting unto said attorneys-in-fact and
agents, and each of them acting alone, 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 each of said
attorneys-in-fact and agents or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
President, Chief Executive
/s/ JOHN W. DANNER Officer and Director
- ------------------------------ (principal executive April 24, 1998
John W. Danner officer)
Chief Financial Officer
/s/ STEPHEN E. RECHT and Secretary (principal
- ------------------------------ financial and accounting April 24, 1998
Stephen E. Recht officer)
/s/ JOHN D. D. KOHLER
- ------------------------------ Director April 24, 1998
John D. D. Kohler
/s/ JONATHAN D. LAZARUS
- ------------------------------ Director April 24, 1998
Jonathan D. Lazarus
/s/ ALEXANDER R. SLUSKY
- ------------------------------ Director April 24, 1998
Alexander R. Slusky
II-5
<PAGE>
The Board of Directors and Stockholders
NetGravity, Inc.:
When the reverse stock split referred to in Note 8 of the Notes to
Consolidated Financial Statements has been consummated, we will be in a position
to render the following report.
KPMG PEAT MARWICK LLP
INDEPENDENT AUDITOR'S REPORT ON SCHEDULE
The Board of Directors and Stockholders
NetGravity, Inc.:
Under date of April 17, 1998, except as to Note 8, which is as of May , 1998,
we reported on the consolidated balance sheets of NetGravity, Inc. and
subsidiary as of December 31, 1997, and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
period from September 5, 1995 (inception) through December 31, 1995 and for each
of the years in the two-year period ended December 31, 1997, as contained in the
Registration Statement. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule as listed in the accompanying index. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
San Francisco, California
April 17, 1998
S-1
<PAGE>
SCHEDULE II
NETGRAVITY, INC.
VALUATION AND QUALIFYING ACCOUNTS--
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT BEGINNING CHARGED TO BALANCE AT END
OF PERIOD EXPENSE DEDUCTIONS OF PERIOD
--------------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995 $ -- $ -- $ -- $ --
Year ended December 31, 1996 -- 197 28 169
Year ended December 31, 1997 169 67 13 223
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<C> <S>
*1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
*3.2 Form of Amendment to Amended and Restated Certificate of Incorporation.
*3.3 Amended and Restated Bylaws of the Registrant.
*4.1 Specimen certificate representing shares of Common Stock of the
Registrant.
4.2 Second Amended and Restated Registration and Information Rights Agreement.
*5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
*10.1 Form of Indemnification Agreement for Directors and Officers of the
Registrant.
*10.2 1995 Stock Option Plan.
*10.3 1998 Stock Option Plan, together with form of Stock Option Agreement and
form of Stock Issuance Agreement.
*10.4 1998 Employee Stock Purchase Plan.
*10.5 1998 Directors' Option Plan.
10.6 Lease dated September 29, 1995 for the Registrant's headquarters in San
Mateo, CA.
10.7 Lease dated March 2, 1998 for the Registrant's offices in New York, NY.
10.8 Employment and Severance Agreement dated March 31, 1998 by and between the
Registrant and Stephen E. Recht.
10.9 Professional Services Agreement dated March 27, 1997 between the
Registrant and Protege Software (Holdings) Limited.
10.10 Common Stock Repurchase Agreement and Clarification of Founder's Stock
Purchase Agreement dated March 12, 1997 by and between the Registrant
and John W. Danner.
10.11 Common Stock Repurchase Agreement and Clarification of Founder's Stock
Purchase Agreement dated March 12, 1997 by and between the Registrant
and Thomas A. Shields.
10.12 Employment Agreement dated April 22, 1998 by and between the Registrant
and Susan Atherton.
11.1 Statement Regarding Computation of Earnings Per Share (contained in Note 1
of the Notes to Financial Statements).
21.1 List of Subsidiaries of the Registrant.
24.1 Consent of Independent Auditors.
*24.2 Consent of Counsel (included in Exhibit 5.1).
25.1 Power of Attorney (contained on signature page on II-5).
27.1 Financial Data Schedule (Fiscal 1997).
27.2 Financial Data Schedule (First Quarter 1998).
</TABLE>
- ---------
* To be filed by amendment.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
NETGRAVITY, INC.
(In accordance with Sections 242 and 245
of the Delaware General Corporation Law)
The undersigned, John W. Danner and Stephen E. Recht, do hereby verify
that:
I. They are the duly elected and acting President and Secretary, respectively,
of NetGravity, Inc. (formerly "Netvertiser, Inc."), a Delaware corporation (the
"corporation").
II. The Certificate of Incorporation of the corporation, originally filed
September 5, 1995, with the Delaware Secretary of State, is hereby amended and
restated to read in its entirety as follows:
"ONE. The name of this corporation is:
NetGravity, Inc.
TWO. The address of the corporation's registered office in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle, Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
THREE. 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.
FOUR. The corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares of Common Stock that the corporation is authorized to issue is
35,000,000, with a par value of $0.001 per share. The total number of shares of
Preferred Stock that the corporation is authorized to issue is 26,540,194 with a
par value of $0.001 per share, of which 4,404,578 are designated "Series A
Preferred Stock," 4,404,578 are designated "Series A-1 Preferred Stock,"
4,307,969 are designated "Series B Preferred Stock," 4,307,969 are designated
"Series B-1 Preferred Stock," 4,557,550 are designated Series C Preferred Stock"
and 4,557,550 are designated "Series C-1 Preferred Stock," subject to an
automatic change in designation pursuant to Section 3(c).
The corporation shall from time to time in accordance with the laws of the
State of Delaware increase the authorized amount of its Common Stock if at any
time the number of shares
<PAGE>
of Common Stock remaining unissued and available for issuance upon conversion of
the Preferred Stock shall not be sufficient to permit conversion of the
Preferred Stock.
The relative rights, preferences, privileges and restrictions granted to or
imposed upon the respective classes and series of the shares of capital stock or
the holders thereof are as set forth below.
SECTION 1. DIVIDENDS. The holders of the Series A Preferred Stock,
Series A-1 Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock and Series C-1 Preferred Stock shall be entitled
to receive, out of any funds legally available therefor, noncumulative dividends
in an amount equal to $0.08, $0.08, $0.08, $0.08, $0.18 and $0.18 per share per
annum, respectively, when and if declared by the corporation's board of
directors (such annual amounts, the "Preferential Dividend"). No dividend shall
be paid on the Common Stock in any year, other than dividends payable solely in
capital stock, until the Preferential Dividend for such year has been declared
and paid on the Preferred Stock, and no dividends on the Common Stock shall be
paid unless, in addition to the Preferential Dividend, the amount of such
dividend on the Common Stock is also paid on the Preferred Stock on an
as-converted to Common Stock basis. All other dividends on the Preferred Stock
shall be declared and paid on the outstanding shares of each series of Preferred
Stock pro rata on an as-converted to Common Stock basis.
SECTION 2. DISTRIBUTION OF ASSETS UPON LIQUIDATION.
(a) LIQUIDATION PREFERENCE. The total amounts payable by the
corporation to the holders of outstanding Preferred Stock in the event of any
liquidation, dissolution or winding up of the corporation (any such event,
a "Liquidation") in respect of their ownership of shares of Preferred Stock
shall be determined by this Section 2. Such amounts, on a per-share basis, with
respect to a particular series of Preferred Stock shall be referred to herein as
the "Per Share Liquidation Amount." Subject to Section 2(b), in the event of
any Liquidation, prior and in preference to any distribution of any of the
assets or funds of the corporation to the holders of the Common Stock by reason
of their ownership of such stock, the holders of Preferred Stock shall be
entitled to receive for each outstanding share of each series of Preferred Stock
then held by them an amount equal to the Original Issue Price (as defined in
Section 3(a), below) applicable to such share plus declared but unpaid dividends
on such share (in each case, as adjusted for any recapitalizations, stock
combinations, stock dividends, stock splits and the like). If, upon a
Liquidation, the assets and funds of the corporation legally available for
distribution to stockholders by reason of their ownership of stock of the
corporation shall be insufficient to permit the payment to such holders of
Preferred Stock of the full aforementioned preferential amounts, then the entire
assets and funds of the corporation legally available for distribution to
stockholders by reason of their ownership of stock of the corporation shall be
distributed ratably among the holders of Preferred Stock in proportion to the
aforementioned preferential amounts applicable to the shares of Preferred Stock
held by each such holder. If, upon a Liquidation, and after payment to the
holders of each series of Preferred Stock of the full amounts specified in the
third sentence
-2-
<PAGE>
of this Section 2(a) or in Section 2(b), as applicable, assets or funds of the
corporation remain legally available for distribution to stockholders by reason
of their ownership of stock of the corporation, then each holder of outstanding
shares of a series of Preferred Stock as to which the applicable Per Share
Liquidation Amount(s) are NOT determined by Section 2(b) shall, in respect of
such holder's ownership of such shares, also be entitled to receive a pro rata
share of such remaining assets and funds, calculated on an as-converted to
Common Stock basis and based on the total number of shares of Common Stock
outstanding or issuable upon conversion of all of the outstanding shares of each
series of Preferred Stock in respect of which assets and funds are distributed
pursuant to this sentence.
(b) LIQUIDATION PREFERENCE PHASE OUT. Notwithstanding the provisions
of Section 2(a), if the Per Share Liquidation Amount with respect to a
particular series of Preferred Stock determined under Section 2(a) (assuming
that this Section 2(b) did not apply), would otherwise exceed the applicable
Phase Out Amount (as defined below), then such Per Share Liquidation Amount
shall instead be determined exclusively by this Section 2(b) and shall be equal
to the greater of (i) the applicable Phase Out Amount plus the per-share amount
of declared but unpaid dividends on such series or (ii) the amount that would
have been distributable under Section 2(c) in respect of the share(s) of Common
Stock issuable upon the conversion of one outstanding share of such series,
assuming that such share and each other outstanding share of such series were
converted into Common Stock pursuant to Section 3(a) immediately prior to the
Liquidation. For purposes of this Section 2(b), the term "Phase Out Amount"
shall, with respect to each series of Preferred Stock be equal to two times the
Original Issue Price applicable to such series, except that the Phase Out Amount
for each of the Series A Preferred Stock, Series A-1 Preferred Stock, Series B
Preferred Stock and Series B-1 Preferred Stock shall instead be four times its
applicable Original Issue Price. The Phase Out Amounts shall be appropriately
adjusted for any recapitalizations, stock combinations, stock dividends, stock
splits and the like.
(c) REMAINING PROCEEDS TO COMMON STOCK. Upon a Liquidation, and
after payment to the holders of Preferred Stock of the amounts to which they are
entitled pursuant to Sections 2(a) and 2(b), all assets and funds of the
corporation that remain legally available for distribution to stockholders by
reason of their ownership of stock of the corporation shall be distributed
ratably among the holders of Common Stock in proportion to the number of shares
of Common Stock held by them.
(d) DEEMED LIQUIDATIONS. For purposes of this Section 2, a merger or
consolidation of this corporation with or into any other corporation or
corporations, or a sale of all or substantially all of the assets of this
corporation, shall be treated as a Liquidation unless the stockholders of this
corporation immediately prior to such transaction hold at least 50% of the
outstanding voting equity securities of the surviving corporation in such
merger, consolidation or sale of assets reorganization.
-3-
<PAGE>
SECTION 3. CONVERSION.
The holders of Preferred Stock shall have conversion rights as
follows:
(a) RIGHT TO CONVERT. Each share of Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the corporation or any transfer agent
for such Preferred Stock, into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing the applicable Original
Issue Price of such share of Preferred Stock by the Conversion Price at the time
in effect for a share of such series of Preferred Stock. The Original Issue
Price per share of Series A Preferred Stock and Series A-1 Preferred Stock is
$1.01. The Conversion Price per share of Series A Preferred Stock and
Series A-1 Preferred Stock shall be $0.810730869, subject to adjustment from
time to time as provided below. The Original Issue Price per share of Series B
Preferred Stock and Series B-1 Preferred Stock is $0.99815. The Conversion
Price per share of Series B Preferred Stock and Series B-1 Preferred Stock
initially shall be $0.99815, subject to adjustment from time to time as provided
below. The Original Issue Price per share of Series C Preferred Stock and
Series C-1 Preferred Stock is $2.24024. The Conversion Price per share of
Series C Preferred Stock and Series C-1 Preferred Stock initially shall be
$2.24024, and subject to further adjustment from time to time as provided below.
(b) AUTOMATIC CONVERSION. Each share of Preferred Stock shall
automatically be converted into shares of Common Stock at the then effective
Conversion Price upon the earlier of (i) the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
Common Stock to the public involving an aggregate offering price to the public
of not less than $10,000,000 at a per share offering price of $3.9926 or more
(as adjusted for any recapitalizations, stock combinations, stock dividends,
stock splits and the like) or (ii) the consent of holders of not less than
two-thirds of the then outstanding shares of Preferred Stock.
(c) SPECIAL MANDATORY CONVERSION.
(i) SERIES A PREFERRED STOCK.
(A) If at any time following the Original Issue Date (as
defined below), the holders of shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock are given the opportunity, upon at
least twenty (20) days advance written notice, to purchase shares of the
corporation's capital stock at a price per share (computed on an as-converted to
Common Stock basis) which is less than the Conversion Price then in effect for
the Series A Preferred Stock, and a holder of Series A Preferred Stock does not
purchase its pro rata share (based on the number of shares of Series A Preferred
Stock held by such holder and the total number of shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock then outstanding)
of the securities offered to the holders of Series A Preferred Stock, Series
-4-
<PAGE>
B Preferred Stock and Series C Preferred Stock in connection with such financing
(a "Nonparticipating Series A Holder"), then each share of Series A Preferred
Stock held by such Nonparticipating Series A Holder shall automatically and
without further action on the part of such Nonparticipating Series A Holder be
converted immediately prior to the consummation of such financing (and
immediately prior to any antidilution adjustment made to Conversion Prices in
connection with such financing) into one share of Series A-1 Preferred Stock.
Notwithstanding the foregoing, if a Nonparticipating Series A Holder purchases
some of the securities offered to the holders of Series A Preferred Stock in
such financing (but less than such Nonparticipating Series A Holder's full pro
rata share), then the percentage of such Nonparticipating Series A Holder's
Series A Preferred Stock that is converted to Series A-1 Preferred Stock
pursuant to this Section 3(c)(i)(A) shall only be equal to the percentage of
such Nonparticipating Series A Holder's pro rata share that such
Nonparticipating Series A Holder did not purchase.
(B) In the event any shares of Series A-1 Preferred Stock
are issued, concurrently with such issuance, the remaining authorized but
unissued shares of Series A-1 Preferred Stock shall resume the status of
undesignated shares of Preferred Stock, and shall thereafter be designated as
"Series A-2 Preferred Stock" as provided in this Section 3(c). The rights,
preferences, privileges and restrictions of the Series A-2 Preferred Stock shall
be identical to those of the Series A-1 Preferred Stock, except that the
Conversion Price of the Series A-2 Preferred Stock once issued shall be equal to
the Conversion Price of the Series A Preferred Stock in effect immediately prior
to such issuance (and immediately prior to any antidilution adjustment made to
Conversion Prices in connection with the financing to which the issuance of the
Series A-2 Preferred Stock is related). Such automatic redesignation shall be
repeated upon the issuance of shares of Series A-2 Preferred Stock and upon the
issuance of shares of each Series subsequently redesignated in accordance with
this Section 3(c)(i) (i.e., Series A-3 Preferred Stock, Series A-4 Preferred
Stock, etc.) and all references in this Certificate of Incorporation to Series
A-1 Preferred Stock shall include such redesignated shares to the extent
necessary to give effect to this Section 3(c)(i).
(ii) SERIES B PREFERRED STOCK.
(A) If at any time following the Original Issue Date (as
defined below), the holders of shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock are given the opportunity, upon at
least twenty (20) days advance written notice, to purchase shares of the
corporation's capital stock at a price per share (computed on an as-converted to
Common Stock basis) which is less than the Conversion Price then in effect for
the Series B Preferred Stock, and a holder of Series B Preferred Stock does not
purchase its pro rata share (based on the number of shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock held by such holder
and the total number of shares of Series B Preferred Stock then outstanding) of
the securities offered to the holders of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock in connection with such financing
(a "Nonparticipating Series B Holder"), then each share of Series B Preferred
Stock held by such
-5-
<PAGE>
Nonparticipating Series B Holder shall automatically and without further action
on the part of such Nonparticipating Series B Holder be converted immediately
prior to the consummation of such financing (and immediately prior to any
antidilution adjustment made to Conversion Prices in connection with such
financing) into one share of Series B-1 Preferred Stock. Notwithstanding the
foregoing, if a Nonparticipating Series B Holder purchases some of the
securities offered to the holders of Series B Preferred Stock in such financing
(but less than such Nonparticipating Series B Holder's full pro rata share),
then the percentage of such Nonparticipating Series B Holder's Series B
Preferred Stock that is converted to Series B-1 Preferred Stock pursuant to this
Section 3(c)(ii)(A) shall only be equal to the percentage of such
Nonparticipating Series B Holder's pro rata share that such Nonparticipating
Series B Holder did not purchase.
(B) In the event any shares of Series B-1 Preferred Stock
are issued, concurrently with such issuance, the remaining authorized but
unissued shares of Series B-1 Preferred Stock shall resume the status of
undesignated shares of Preferred Stock, and shall thereafter be designated as
"Series B-2 Preferred Stock" as provided in this Section 3(c). The rights,
preferences, privileges and restrictions of the Series B-2 Preferred Stock shall
be identical to those of the Series B-1 Preferred Stock, except that the
Conversion Price of the Series B-2 Preferred Stock once issued shall be equal to
the Conversion Price of the Series B Preferred Stock in effect immediately prior
to such issuance (and immediately prior to any antidilution adjustment made to
Conversion Prices in connection with the financing to which the issuance of the
Series B-2 Preferred Stock is related). Such automatic redesignation shall be
repeated upon the issuance of shares of Series B-2 Preferred Stock and upon the
issuance of shares of each Series subsequently redesignated in accordance with
this Section 3(c)(ii) (i.e., Series B-3 Preferred Stock, Series B-4 Preferred
Stock, etc.) and all references in this Certificate of Incorporation to Series
B-1 Preferred Stock shall include such redesignated series to the extent
necessary to give effect to this Section 3(c)(ii).
(iii) SERIES C PREFERRED STOCK.
(A) If at any time following the Original Issue Date (as
defined below), the holders of shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock are given the opportunity, upon at
least twenty (20) days advance written notice, to purchase shares of the
corporation's capital stock at a price per share (computed on an as-converted to
Common Stock basis) which is less than the Conversion Price then in effect for
the Series C Preferred Stock, and a holder of Series C Preferred Stock does not
purchase its pro rata share (based on the number of shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock held by such holder
and the total number of shares of Series C Preferred Stock then outstanding) of
the securities offered to the holders of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock in connection with such financing
(a "Nonparticipating Series C Holder"), then each share of Series C Preferred
Stock held by such Nonparticipating Series C Holder shall automatically and
without further action on the part of such Nonparticipating Series C Holder be
converted immediately prior to the consummation of such
-6-
<PAGE>
financing (and immediately prior to any antidilution adjustment made to
Conversion Prices in connection with such financing) into one share of Series C-
1 Preferred Stock. Notwithstanding the foregoing, if a Nonparticipating
Series C Holder purchases some of the securities offered to the holders of
Series C Preferred Stock in such financing (but less than such Nonparticipating
Series C Holder's full pro rata share), then the percentage of such
Nonparticipating Series C Holder's Series C Preferred Stock that is converted to
Series C-1 Preferred Stock pursuant to this Section 3(c)(iii)(A) shall only be
equal to the percentage of such Nonparticipating Series C Holder's pro rata
share that such Nonparticipating Series C Holder did not purchase.
(B) In the event any shares of Series C-1 Preferred Stock
are issued, concurrently with such issuance, the remaining authorized but
unissued shares of Series C-1 Preferred Stock shall resume the status of
undesignated shares of Preferred Stock, and shall thereafter be designated as
"Series C-2 Preferred Stock" as provided in this Section 3(c). The rights,
preferences, privileges and restrictions of the Series C-2 Preferred Stock shall
be identical to those of the Series C-1 Preferred Stock, except that the
Conversion Price of the Series C-2 Preferred Stock once issued shall be equal to
the Conversion Price of the Series C Preferred Stock in effect immediately prior
to such issuance (and immediately prior to any antidilution adjustment made to
Conversion Prices in connection with the financing to which the issuance of the
Series C-2 Preferred Stock is related). Such automatic redesignation shall be
repeated upon the issuance of shares of Series C-2 Preferred Stock and upon the
issuance of shares of each Series subsequently redesignated in accordance with
this Section 3(c)(iii) (i.e., Series C-3 Preferred Stock, Series C-4 Preferred
Stock, etc.) and all references in this Certificate of Incorporation to Series
C-1 Preferred Stock shall include such redesignated series to the extent
necessary to give effect to this Section 3(c)(iii).
(iv) For the purpose of effecting the provisions of this Section
3(c), the board of directors of the corporation is expressly authorized under
Section 151(g) of the General Corporation Law of Delaware to adopt a resolution
or resolutions reducing the number of authorized shares of any Series to be so
reduced pursuant to this Section 3(c) (but not below the number of shares
thereof then outstanding) and providing for the designation of any new Series of
shares to be established in accordance with this Section 3(c), and to cause to
be executed, acknowledged, filed and recorded a certificate of designation
reflecting such reduction in the authorized number of shares of the series so
reduced and setting forth the rights, preferences, privileges and restrictions
of such new series of shares.
(d) MECHANICS OF CONVERSION. No fractional shares of Common Stock
shall be issued upon conversion of Preferred Stock. In lieu of any fractional
shares to which the holder would otherwise be entitled, the corporation shall
pay cash equal to such fraction multiplied by the then effective Conversion
Price of such series of Preferred Stock. Before any holder of Preferred Stock
shall be entitled to convert the same into shares of Common Stock pursuant to
Section 3(a), such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the corporation or of any transfer
agent for such Preferred Stock, and shall give written notice by mail, postage
prepaid, to the corporation at its principal corporate office, of the election
to convert
-7-
<PAGE>
the same, and such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the shares of
Preferred Stock to be converted. In the event of an automatic conversion
pursuant to Section 3(b) or a special mandatory conversion pursuant to
Section 3(c), the outstanding shares of Preferred Stock shall be converted
automatically without any further action by the holder of such shares and
whether or not the certificates representing such shares are surrendered to the
corporation or the transfer agent for such Preferred Stock; and the corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such automatic or special mandatory conversion unless the
certificates evidencing such shares of Preferred Stock are either delivered to
the corporation or the transfer agent for such Preferred Stock as provided
above, or the holder notifies the corporation or the transfer agent for such
Preferred Stock that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the corporation to indemnify the
corporation from any loss incurred by it in connection with such certificates.
The corporation shall, as soon as practicable thereafter, issue and deliver to
such address as the holder may direct, a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled. If the
conversion is in connection with a public offering of securities described in
Section 3(b), the conversion shall be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, and the
conversion shall not be deemed to have occurred until immediately prior to the
closing of such sale of securities.
(e) STATUS OF CONVERTED STOCK. In the event any shares of Preferred
Stock shall be converted pursuant to this Section 3, the shares so converted
shall be canceled and shall not be reissued by the corporation.
(f) ADJUSTMENT OF CONVERSION PRICES OF PREFERRED STOCK. The
Conversion Prices shall be subject to adjustment from time to time as follows:
(i) ADJUSTMENTS FOR SUBDIVISIONS OR COMBINATIONS OF COMMON
STOCK. In the event the outstanding shares of Common Stock shall be subdivided
by stock split, stock dividend or otherwise, into a greater number of shares of
Common Stock, the Conversion Price of each series of Preferred Stock then in
effect shall, concurrently with the effectiveness of such subdivision, be
proportionately decreased. In the event the outstanding shares of Common Stock
shall be combined or consolidated into a lesser number of shares of Common
Stock, the Conversion Price of each series of Preferred Stock then in effect
shall, concurrently with the effectiveness of such combination or consolidation,
be proportionately increased.
(ii) ADJUSTMENTS FOR STOCK DIVIDENDS AND OTHER
DISTRIBUTIONS. In the event the corporation makes, or fixes a record date for
the determination of holders of Common Stock entitled to receive, any
distribution (excluding repurchases of securities by the corporation not made on
a pro rata basis) payable in property or in securities of the corporation other
than shares of Common Stock, and other than as otherwise adjusted for in this
Section 3 or as provided for in Section 1 in connection with a dividend, then
and in each such event the holders of Preferred
-8-
<PAGE>
Stock shall receive, at the time of such distribution, the amount of property or
the number of securities of the corporation that they would have received had
their Preferred Stock been converted into Common Stock on the date of such
event.
(iii) ADJUSTMENTS FOR REORGANIZATIONS, RECLASSIFICATIONS OR
SIMILAR EVENTS. Except as provided in Section 2 upon any liquidation,
dissolution or winding up of the corporation, if the Common Stock shall be
changed into the same or a different number of shares of any other class or
classes of stock or other securities or property, whether by capital
reorganization, reclassification or otherwise, then each share of Preferred
Stock shall thereafter be convertible into the number of shares of stock or
other securities or property to which a holder of the number of shares of Common
Stock of the corporation deliverable upon conversion of such shares of Preferred
Stock shall have been entitled upon such reorganization, reclassification or
other event.
(iv) ADJUSTMENTS FOR DILUTING ISSUES. In addition to the
adjustment of the Conversion Prices provided above, the Conversion Prices of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
and, only until such time as shares of such Series are issued, the Conversion
Prices of the Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series
C-1 Preferred Stock, shall be subject to further adjustment from time to time as
follows:
(A) SPECIAL DEFINITIONS.
(1) "Options" shall mean rights, options or warrants
to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(2) "Original Issue Date" shall mean the date on which
the first share of Series C Preferred Stock was first issued.
(3) "Convertible Securities" shall mean securities
convertible into or exchangeable for Common Stock, either directly or
indirectly.
(4) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued (or, pursuant to Section 3(f)(iv)(C) deemed to be
issued) by the corporation after the Original Issue Date other than shares of
Common Stock issued (or, pursuant to Section 3(f)(iv)(C) deemed to be issued):
i) upon conversion of shares of Preferred Stock;
ii) to employees, consultants, directors,
equipment lessors or banks or similar institutional credit financing sources
pursuant to plans or arrangements approved by the board of directors;
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iii) as a dividend or other distribution in
connection with which an adjustment to the Conversion Price is made pursuant to
Section 3(f)(i), (ii) or (iii); or
iv) upon the exercise of Options outstanding as of
the Original Issue Date.
(B) NO ADJUSTMENT OF CONVERSION PRICES. No adjustment in
the Conversion Price applicable to a series of Preferred Stock shall be made in
respect of the issuance of Additional Shares of Common Stock unless the
consideration per share for an Additional Share of Common Stock issued (or,
pursuant to Section 3(f)(iv)(C), deemed to be issued) by the corporation is less
than such Conversion Price as of the date of, and immediately prior to, such
issue.
(C) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK.
Except as otherwise provided in Section 3(f)(iv)(A) or 3(f)(iv)(B), in the event
the corporation at any time or from time to time after the Original Issue Date
shall issue any Options or Convertible Securities or shall fix a record date for
the determination of any holders of any class of securities entitled to receive
any such Options or Convertible Securities, then the maximum number of shares
(as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number) of
Common Stock issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock
issued as of the time of such issue or, in case such a record date shall have
been fixed, as of the close of business on such record date, provided that in
any such case in which additional shares of Common Stock are deemed to be
issued:
(1) no further adjustment in the Conversion Prices
shall be made upon the subsequent issue of Convertible Securities or shares of
Common Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the corporation, or increase or
decrease in the number of shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof, the Conversion Prices computed upon the original
issue thereof or upon the occurrence of a record date with respect thereto, and
any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or decrease;
(3) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities which shall
not have been exercised, the Conversion Prices computed upon the original issue
thereof or upon the occurrence of a record date
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with respect thereto, and any subsequent adjustments based thereon, shall, upon
such expiration, be recomputed as if:
i) in the case of Convertible Securities or
Options for Common Stock, the only additional shares of Common Stock issued were
shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities, and the
consideration received therefor was the consideration actually received by the
corporation for the issue of all such Options, whether or not exercised, plus
the consideration actually received by the corporation upon such exercise, or
for the issue of all such Convertible Securities, whether or not converted or
exchanged, plus the additional consideration, if any, actually received by the
corporation upon such conversion or exchange; and
ii) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options and the
consideration received by the corporation for the Additional Shares of Common
Stock deemed to have been then issued was the consideration actually received by
the corporation for the issue of all such Options, whether or not exercised,
plus the consideration deemed to have been received by the corporation upon the
issue of the Convertible Securities with respect to which such Options were
actually exercised;
(4) no readjustment pursuant to Section 3(f)(iv)(C)(2)
or (3) above shall have the effect of increasing any Conversion Price to an
amount which exceeds such Conversion Price on the original adjustment date with
respect to the issuance of such Options or Convertible Securities, as adjusted
for any Additional Shares of Common Stock issued (or, pursuant to
Section 3(f)(iv)(C), deemed to be issued) between such original adjustment date
and such readjustment date;
(5) in the case of any Options which expire by their
terms not more than 30 days after the date of issue thereof, no adjustment of
the Conversion Prices shall be made until the expiration or exercise of all such
Options; and
(6) in the case of any Option or Convertible Security
with respect to which the maximum number of shares of Common Stock issuable upon
exercise or conversion or exchange thereof is not determinable, no adjustment to
the Conversion Prices shall be made until such number becomes determinable.
(D) ADJUSTMENT OF CONVERSION PRICES UPON ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK. If Additional Shares of Common Stock are
issued (or, pursuant to Section 3(f)(iv)(C), deemed to be issued) without
consideration or for a consideration per share (computed on an as-converted to
Common Stock basis) less than a Conversion Price in effect on the date of, and
immediately prior to, such issue, then and in such event, such Conversion Price
shall be reduced, concurrently with such issue, to a price (calculated to the
nearest ten millionth of
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a cent) determined by multiplying such Conversion Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of shares of Common Stock which
the aggregate consideration received by the corporation (as determined in
accordance with Section 3(f)(iv)(E)) for the total number of Additional Shares
of Common Stock so issued (or, pursuant to Section 3(f)(iv)(C), deemed to be
issued) would purchase at such Conversion Price; and the denominator of which
shall be the number of shares of Common Stock outstanding immediately prior to
such issue plus the number of such Additional Shares of Common Stock so issued
(or, pursuant to Section 3(f)(iv)(C), deemed to be issued). For the purposes of
this Section 3(f)(iv)(D), all shares of Common Stock issuable upon exercise of
outstanding Options, upon conversion of outstanding Convertible Securities, or
upon conversion of Convertible Securities following exercise of outstanding
Options therefor, shall be deemed to be outstanding, and immediately after any
Additional Shares of Common Stock are deemed issued pursuant to
Section 3(f)(iv)(C), such Additional Shares of Common Stock shall be deemed to
be outstanding.
(E) DETERMINATION OF CONSIDERATION. For purposes of this
Section 3(f)(iv)(C) the consideration received by the corporation for any
Additional Shares of Common Stock issued (or, pursuant to Section 3(f)(iv)(C),
deemed to be issued) shall be computed as follows:
(1) CASH AND PROPERTY. Such consideration shall:
i) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the corporation after
deducting any commissions paid by the corporation with respect to such
issuance;
ii) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issuance, as
determined in good faith by the board of directors of the corporation; and
iii) if Additional Shares of Common Stock are
issued (or, pursuant to Section 3(f)(iv)(C), deemed to be issued) together with
other shares or securities or other assets of the corporation for consideration
which covers both, be the proportion of such consideration so received, computed
as provided in clauses (A) and (B) above, as determined in good faith by the
board of directors of the corporation.
(2) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration received by the corporation for Additional Shares of Common Stock
deemed to have been issued pursuant to Section 3(f)(iv)(C), relating to Options
and Convertible Securities, shall be the total amount, if any, received or
receivable by the corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein
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for a subsequent adjustment of such consideration) payable to the corporation
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities, or in the case of Options for Convertible Securities,
the exercise of such Options for Convertible Securities and the conversion or
exchange of such Convertible Securities.
(g) NO IMPAIRMENT. The corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 3 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Preferred Stock against impairment.
(h) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of a Conversion Price pursuant to this Section 3, the
corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The corporation shall, upon the written request at any time of any holder of
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Prices at the time in effect, and (iii) the number of shares of
Common Stock and the amount, if any, of other property which at the time would
be received upon the conversion of such holder's Preferred Stock.
(i) NOTICES OF RECORD DATE. In the event that the corporation
shall propose at any time:
(i) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(ii) to offer for subscription pro rata to the holders
of Common Stock any additional shares of stock of any class or series or other
rights;
(iii) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in the
Common Stock; or
(iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all of its property
or business, or to liquidate, dissolve or wind up;
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then, in connection with any such event, the corporation
shall send to the holders of Preferred Stock:
(A) in the case of the matters referred to in (i) and (ii)
above, at least ten (10) days prior written notice of the date on which a record
shall be taken for such dividend, distribution or subscription rights (and
specifying the date on which the holders of Common Stock shall be entitled
thereto) or for determining rights to vote in respect of the matters referred to
in (i) or (ii) above; and
(B) in the case of the matters referred to in (iii) and
(iv) above, at least ten (10) days prior written notice of the date when the
same shall take place (and specifying the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event) or for determining
rights to vote in respect of the maters referred to in (iii) or (iv) above.
Each such written notice shall be delivered personally
or given by first class mail, postage prepaid, addressed to the holders of the
Preferred Stock at the address for each such holder as shown on the books and
records of the corporation.
SECTION 4. VOTING.
(a) GENERAL. Except as otherwise required by law, each holder of
Common Stock shall have one vote for each share of Common Stock so held, and
each holder of Preferred Stock shall be entitled to the number of votes equal to
the number of shares of Common Stock into which the shares of Preferred Stock so
held could be converted at the record date for determination of the stockholders
entitled to vote, or, if no such record date is established, at the date such
vote is taken or any written consent of stockholders is solicited. Except as
required by law or as otherwise set forth herein, all shares of all series of
Preferred Stock and all shares of Common Stock shall vote together as a single
class. Fractional votes by the holders of Preferred Stock shall not, however,
be permitted, and any fractional voting rights shall (after aggregating all
shares into which shares of Preferred Stock held by each holder could be
converted) be rounded to the nearest whole number.
(b) ELECTION OF DIRECTORS. For so long as 2,202,289 or more shares,
in the aggregate, of Series A Preferred Stock and Series A-1 Preferred Stock
remain outstanding (as adjusted for any recapitalizations, stock combinations,
stock dividends, stock splits and the like), the holders of Series A Preferred
Stock and Series A-1 Preferred Stock, voting as a separate class on an
as-converted to Common Stock basis, shall be entitled to elect one director.
For so long as 2,153,985 or more shares, in the aggregate, of Series B Preferred
Stock and Series B-1 Preferred Stock remain outstanding (as adjusted for any
recapitalizations, stock combinations, stock dividends, stock splits and the
like), the holders of Series B Preferred Stock and Series B-1 Preferred Stock,
voting as a separate class on an as-converted to Common Stock basis, shall be
entitled to elect one director. The holders of the Common Stock, voting as a
separate class, shall be entitled to elect two directors. The holders of Common
Stock and Preferred Stock, voting as one class on an as-converted to Common
Stock basis, shall be
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entitled to elect the remaining directors. Any vacancy in the Board of
Directors occurring because of the death, resignation or removal of a director
shall be filled by the vote or written consent of the holders of the class
entitled to fill such seat as provided in this Section 4(b). Any amendment to
this Section 4(b) shall require the vote of a two-thirds of the outstanding
Preferred Stock (on an as-converted to Common Stock basis) and a majority of the
outstanding Common Stock, voting as two separate classes.
(c) APPROVAL BY PREFERRED STOCK. The corporation shall not, without
first obtaining the approval of the holders of not less than two-thirds of the
Preferred Stock then outstanding voting on an as-converted to Common Stock
basis:
(i) increase the number of authorized shares of Preferred Stock
or any series of Preferred Stock;
(ii) amend or repeal any provision of, or add any provision to,
the corporation's Certificate of Incorporation or Bylaws if such action would
adversely affect the rights, preferences, privileges, or restrictions of the
Preferred Stock;
(iii) authorize, create or issue shares of any class or series of
stock having any preference or priority superior to or on a parity with any such
preference or priority of the Series C Preferred Stock;
(iv) engage in any transaction that would be deemed to be a
liquidation event pursuant to Section 2(d);
(v) amend or repeal any provision of, or add any provision to,
the corporation's Certificate of Incorporation or Bylaws which has the effect of
increasing the authorized number of directors of this corporation; or
(vi) amend this Section 4(c).
SECTION 5. PREEMPTIVE RIGHTS.
(a) Each holder of Preferred Stock shall have the right to purchase
its Pro Rata Share of New Securities (as defined in this Section 5) which the
corporation may, from time to time, propose to sell and issue. A holder's "Pro
Rata Share" is the ratio that (i) the number of shares of Common Stock issuable
upon conversion of Preferred Stock held by such holder immediately prior to such
sale of New Securities bears to (ii) the sum of the total number of shares of
Common Stock issuable upon conversion of all outstanding Preferred Stock.
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(b) Except as set forth below, "New Securities" shall mean any shares
of capital stock, or rights to acquire shares of capital stock, of the
corporation proposed to be sold by the corporation in an offering or series of
related offerings with aggregate net proceeds to the corporation of $1,000,000
or more. Notwithstanding the foregoing, "New Securities" does not include
(i) the authorized Preferred Stock (including Series A-2 Preferred Stock,
Series B-2 Preferred Stock, Series C-2 Preferred Stock, etc.) and Common Stock
underlying such Preferred Stock, (ii) securities offered to the public generally
pursuant to a registration statement under the Securities Act of 1933, as
amended, (iii) securities issued pursuant to the acquisition of another
corporation by merger, purchase of all or substantially all of its assets, or
other similar reorganization or combination, (iv) shares of the corporation's
capital stock or related options, warrants or other rights to purchase such
capital stock issued to employees, consultants, directors, equipment lessors or
banks or similar institutional credit financing sources pursuant to plans or
arrangements approved by the board of directors, (v) capital stock issued
pursuant to any rights or agreements, including without limitation convertible
securities, options and warrants, provided that the preemptive rights
established by this Section 5 apply with respect to the initial sale or grant by
the corporation of such rights or agreements, (vi) stock issued in connection
with any stock split, stock dividend or recapitalization by the corporation, or
(vii) issuances of stock pursuant to a "Strategic Partnering Transaction" (as
defined below) where the stock so issued (x) represents less than ten percent of
the total outstanding capital stock of the corporation on an as-converted to
Common Stock basis measured immediately prior to such issuance and (y) involves
payments for such stock to the corporation of not more than $3 million. For
purposes of clause (vii) of the immediately preceding sentence, the term
"Strategic Partnering Transaction" shall mean a transaction approved by the
board of directors of the corporation involving the issuance of securities of
the corporation to an entity as an integral component of a larger business
relationship with such entity also involving material marketing, distribution,
product development and/or technology licensing arrangements.
(c) In the event the corporation proposes to undertake an issuance of
New Securities, it shall give each holder of Preferred Stock written notice of
its intention, describing the amount and type of New Securities, and the price
and terms upon which the corporation proposes to issue the same. Each holder of
Preferred Stock shall have twenty (20) days from the date of receipt of any such
notice to agree to purchase up to its respective Pro Rata Share of such New
Securities for the price and upon the terms specified in the notice by giving
written notice to the corporation and stating therein the quantity of New
Securities to be purchased.
(d) The corporation shall have ninety (90) days after such twenty
(20) day period to sell the New Securities not elected to be purchased by
holders of Preferred Stock at a price and upon terms no more favorable to the
purchasers of such securities than specified in the corporation's notice. In
the event the corporation has not sold the New Securities within said ninety
(90) day period, the corporation shall not thereafter issue or sell any New
Securities, without first offering such securities to the holders of Preferred
Stock in the manner provided above.
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(e) Notwithstanding the foregoing, the preemptive rights set forth
herein shall not prevent the corporation from offering and selling New
Securities at any time; provided that, if the corporation has not given notice
to holders of Preferred Stock prior to the issuance of New Securities as
provided in Section 5(c), then the corporation shall give notice to the holders
of Preferred Stock within fifteen (15) days after the issuance of New
Securities. Such notice shall describe the amount, type, price and terms of the
New Securities. Each holder of Preferred Stock shall have twenty (20) days from
the date of receipt of such notice to elect to purchase its Pro Rata Share of
New Securities. The closing of any such sale shall occur within thirty (30)
days of the date of notice to the holders of Preferred Stock.
SECTION 6. CONSENT TO DISTRIBUTIONS. Each holder of Preferred Stock shall
be deemed to have consented, for purposes of Sections 502, 503 and 506 of the
California Corporations Code and Sections 1 and 2 of this Article Four, to
distributions made by the Corporation in connection with the repurchase of
shares of Common Stock from employees, officers, directors or consultants of the
corporation in connection with the termination of their employment or services
pursuant to agreements or arrangements approved by the board of directors of the
corporation.
SECTION 7. WAIVER OF RIGHTS, PREFERENCES OR PRIVILEGES. Except as
otherwise required by law, any right, preference or privilege of the Preferred
Stock may be waived by a majority of the outstanding shares of Preferred Stock
voting on an as-converted to Common Stock basis, and such waiver shall be
binding on all holders of Preferred Stock; PROVIDED, HOWEVER, that provisions of
this Certificate requiring the consent of two-thirds of the Preferred Stock may
be waived only by the vote or consent of two-thirds of the Preferred Stock
voting on an as-converted to Common Stock basis.
FIVE. The corporation is to have perpetual existence.
SIX. In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the corporation is expressly authorized to
make, alter, amend or repeal the Bylaws of the corporation, subject to the
provisions of Article Four, Section 4(c).
SEVEN. Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the corporation shall so provide.
EIGHT. Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws of the corporation may provide. The books of the
corporation may be kept outside of the State of Delaware at such place or places
as may be designated from time to time by the board of directors of the
corporation or in the Bylaws of the corporation.
NINE.
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(a) LIMITATION OF DIRECTOR'S LIABILITY. To the fullest extent not
prohibited by the General Corporation Law of Delaware as the same exists or as
it may hereafter be amended, a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for conduct as a director.
(b) INDEMNIFICATION OF CORPORATE AGENTS. The corporation shall
indemnify to the fullest extent not prohibited by law any person made or
threatened to be made a party to an action or proceeding, whether criminal,
civil, administrative or investigative, by reason of the fact that such person,
such person's testator or intestate is or was a director, officer or employee
benefit plan fiduciary of the corporation or any predecessor of the corporation
or serves or served at the request of the corporation or any predecessor of the
corporation as a director, officer or employee benefit plan fiduciary of another
corporation, partnership, limited liability company, joint venture, trust or
other entity or enterprise. The board of directors of the corporation may, in
its discretion, extend such indemnification to former, current or future
employees and other agents of the corporation or any predecessor corporate.
(c) REPEAL OR MODIFICATION. Neither any amendment or repeal of this
Article Nine, nor the adoption of any provision of the corporation's Certificate
of Incorporation inconsistent with this Article Nine, shall eliminate or reduce
the effect of this Article Nine in respect of any matter occurring, or any
action or proceeding accruing or arising or that, but for this Article Nine,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision."
III. The foregoing amendment and restatement of the Certificate of Incorporation
has been duly approved by the Board of Directors of the corporation.
IV. The foregoing amendment and restatement of the Certificate of Incorporation
has been duly approved by the written consent of the stockholders in accordance
with Sections 228, 242 and 245 of the Delaware General Corporation Law. The
total number of outstanding shares of Common Stock of the corporation is
8,846,285. The total number of outstanding shares of Series A Preferred Stock,
Series A-1 Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock and Series C-1 Preferred Stock of the
corporation is 4,404,578, 0, 4,307,969, 0, 2,437,241 and 0, respectively. The
number of shares held by stockholders who consented to this amendment in writing
equaled or exceeded the required percentages. The percentages required were (i)
more than 50% of the outstanding Common Stock, (ii) more than two-thirds of the
outstanding Preferred Stock voting as a single class on an as-converted to
Common Stock basis, and (iii) more than 50% of the outstanding capital stock of
the corporation voting as one class on an as-converted to Common Stock basis.
Pursuant to Section 228 of the Delaware General Corporation Law, prompt written
notice of this amendment and restatement has been given to all stockholders who
did not consent to this amendment.
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We further declare under penalty of perjury under the laws of the State of
Delaware that the matters set forth in this certificate are true, correct and of
our own knowledge.
Executed at San Mateo, California, on March 13, 1998.
/s/ John W. Danner
------------------------
John W. Danner,
President
/s/ Stephen E. Recht
--------------------------
Stephen E. Recht,
Secretary
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NETGRAVITY, INC. EXHIBIT 4.2
SECOND AMENDED AND RESTATED
REGISTRATION AND INFORMATION RIGHTS AGREEMENT
This Second Amended and Restated Registration and Information Rights
Agreement (the "AGREEMENT") is made effective as of November 25, 1997.
RECITALS
A. In connection with the sale and issuance of its Series A Preferred
Stock (the "SERIES A FINANCING"), NetGravity, Inc. a Delaware corporation (the
"COMPANY"), entered into that certain Registration and Information Rights
Agreement dated January 12, 1996 (the "ORIGINAL AGREEMENT") with: John W.
Danner, Thomas A. Shields, Bradley V. Husick and Paul Nakada (the "FOUNDERS");
the purchasers of such Series A Preferred Stock (the "SERIES A INVESTORS") and
the holders of Common Stock (the "SEED INVESTORS") purchased from the Company
under Stock and Note Purchase Agreements between the Company and the Seed
Investors (the "STOCK AND NOTE PURCHASE AGREEMENTS").
B. In connection with the April 19, 1996 second closing of the Series A
Financing, additional purchasers of the Company's Series A Preferred Stock were
added as parties to the Original Agreement (the term "Series A Investors" shall
include such additional purchasers).
C. In connection with the sale of the Company's Series B Preferred Stock
to certain investors (the "SERIES B INVESTORS") on March 12, 1997, the Original
Agreement was amended and restated in its entirety as the Amended and Restated
Registration and Information Rights Agreement dated March 11, 1997 (the "PRIOR
AGREEMENT") in order to include the Series B Investors and to make certain other
changes.
D. The obligations of the Company and the purchasers of the Company's
Series C Preferred Stock (the "SERIES C INVESTORS") under that certain Series C
Stock Purchase Agreement of even date herewith (the "SERIES C STOCK PURCHASE
AGREEMENT") by and between the Company and the Series C Investors are
conditioned, among other things, upon the execution and delivery of this
Agreement by the Company and the Series C Investors.
E. Section 11 of the Prior Agreement provides that the consent of the
Company and a majority of the outstanding Registrable Securities is required to
amend the Prior Agreement.
F. The Company and the Series C Investors and the undersigned Founders,
Seed Investors, Series A Investors and Series B Investors who together hold not
less than a majority of the Registrable Securities (as defined under the Prior
Agreement) now desire to amend and restate
<PAGE>
the Prior Agreement in its entirety as set forth below in order to add the
Series C Investors as parties hereto and to make certain other changes.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, all parties hereto agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the following respective meanings:
"COMMISSION" means the Securities and Exchange Commission or any other
Federal agency at the time administering the Securities Act.
"CONSENT OF THE PREFERRED DIRECTORS" means the vote or written
consent of a majority of (i) the directors entitled to be elected by the holders
of Preferred Stock (voting without the Common Stock) under the Company's
Certificate of Incorporation and (ii) the director(s) nominated by the holders
of Preferred Stock under that certain Amended and Restated Right of First
Refusal, Co-Sale and Voting Agreement dated November 25, 1997 by and among the
Company and certain stockholders of the Company. If at any time the holders of
Preferred Stock, voting without the Common Stock, are no longer specifically
entitled to elect at least one director under the Company's Certificate of
Incorporation, any requirement hereunder to obtain the Consent of the Preferred
Directors shall be deemed to have been satisfied.
"CONVERSION STOCK" means the Common Stock issued or issuable pursuant
to conversion of the Preferred Stock.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
or any similar Federal rule or statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"FOUNDERS' STOCK" means the Common Stock acquired by the Founders
pursuant to Founder's Stock Purchase Agreements with the Company, and the Common
Stock issued or issuable upon the exercise of stock options granted to the
Founders by the Company prior to the date hereof; PROVIDED, HOWEVER, that, for
the purposes of Sections 5.1, 5.2 and 5.3, Founders' Stock shall not include any
Common Stock subject to a right of repurchase in favor of the Company pursuant
to a Founder's Stock Purchase Agreement or Stock Option Agreement between the
Company and a Founder unless, until, and to the extent that such right of
repurchase has lapsed.
"HOLDER" means any Founder, Seed Investor, Series A Investor, Series B
Investor or Series C Investor holding Registrable Securities, or any person
holding Registrable Securities to whom the rights under this Agreement have been
transferred either (i) in accordance with
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Section 5.10 hereof or, (ii) prior to the date hereof, in accordance with the
corresponding provision of the Original Agreement or the Prior Agreement.
"INITIATING HOLDERS" means any Holder or Holders (other than Founders)
who, in the aggregate, hold not less than the required percentage of the
Registrable Securities (other than Registrable Securities held by Founders) then
outstanding (the "REQUIRED PERCENTAGE"). The Required Percentage shall be (i)
40% for the purposes of Section 5.1 or (ii) 20% for the purposes of Section 5.3
hereof.
"INVESTOR" means any Series A Investor, Series B Investor or Series C
Investor.
"PREFERRED STOCK" shall mean the Series A Preferred Stock, the Series
A-1 Preferred Stock, the Series B Preferred Stock, the Series B-1 Preferred
Stock, the Series C Preferred Stock or the Series C-1 Preferred Stock of the
Company.
"REGISTRABLE SECURITIES" means (i) the Conversion Stock, (ii) the
Founders' Stock, (iii) the Common Stock purchased under the Stock and Note
Purchase Agreements and (iv) any Common Stock of the Company issued or issuable
in respect of any of the foregoing upon any conversion, stock split, stock
dividend, recapitalization, or similar event; PROVIDED, HOWEVER, that securities
shall only be treated as Registrable Securities if and for so long as (i) they
have not been registered or sold to or through a broker or dealer or underwriter
in a public distribution or a public securities transaction and (ii) the
registration rights with respect to such securities have not terminated pursuant
to Section 5.11.
The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"REGISTRATION EXPENSES" shall mean all expenses, except as otherwise
stated below, incurred by the Company in complying with Sections 5.1, 5.2 and
5.3 hereof, including without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Company, blue sky fees and expenses, the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company).
"RESTRICTED SECURITIES" shall mean the securities of the Company
required to bear the legends set forth in Section 3 hereof.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or
any similar Federal rule or statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
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"SELLING EXPENSES" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the Holders and all fees and disbursements of counsel for any Holder.
2. RESTRICTIONS ON TRANSFERABILITY. The Preferred Stock, the Conversion
Stock, the Founders' Stock, the Common Stock purchased in connection with the
Stock and Note Purchase Agreements and any other securities issued in respect of
such stock upon any stock split, stock dividend, recapitalization, merger, or
similar event, shall not be sold, assigned, transferred or pledged except upon
the conditions specified in this Agreement, which conditions are intended to
ensure compliance with the provisions of the Securities Act. Each Holder or
transferee will cause any proposed purchaser, assignee, transferee, or pledgee
of any such shares held by the Holder or transferee to agree to take and hold
such securities subject to the restrictions and upon the conditions specified in
this Agreement, including without limitation the restrictions set forth in
Section 9.
3. RESTRICTIVE LEGEND. Each certificate representing the Preferred
Stock, the Conversion Stock, the Founders' Stock, the Common Stock purchased in
connection with the Stock and Note Purchase Agreements or any other securities
issued in respect of such stock upon any stock split, stock dividend,
recapitalization, merger, or similar event, shall (unless otherwise permitted by
the provisions of Section 4 below) be stamped or otherwise imprinted with a
legend in substantially the following form (in addition to any legends required
by agreement or by applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED
FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE
OR DISTRIBUTION THEREOF. SUCH SHARES GENERALLY MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE COMPANY
RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING
THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A LOCKUP
PERIOD OF 180-DAYS FOLLOWING THE EFFECTIVE DATE OF A REGISTRATION
STATEMENT OF THE COMPANY FILED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AS SET FORTH IN AN AGREEMENT BETWEEN THE ISSUER AND THE
ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT
THE PRINCIPAL OFFICE OF THE ISSUER. SUCH LOCKUP PERIOD IS BINDING ON
TRANSFEREES OF THESE SHARES.
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Each Holder consents to the Company making a notation on its records
and giving instructions to any transfer agent of its capital stock in order to
implement the restrictions on transfer established in this Agreement.
4. NOTICE OF PROPOSED TRANSFERS. The holder of each certificate
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 4. Without in any way limiting the
immediately preceding sentence, no sale, assignment, transfer or pledge of
Restricted Securities shall be made by any holder thereof to any person unless
such person shall first agree in writing to be bound by the restrictions of this
Agreement including, without limitation, Section 9 and this Section 4. Prior to
any proposed sale, assignment, transfer or pledge of any Restricted Securities,
unless there is in effect a registration statement under the Securities Act
covering the proposed transfer, the holder thereof shall give written notice to
the Company of such holder's intention to effect such transfer, sale, assignment
or pledge. Each such notice shall describe the manner and circumstances of the
proposed transfer, sale, assignment or pledge in sufficient detail, and, if
requested by the Company, the holder shall also provide, at such holder's
expense, either (i) a written opinion of legal counsel who shall be, and whose
legal opinion shall be, reasonably satisfactory to the Company addressed to the
Company, to the effect that the proposed transfer of the Restricted Securities
may be effected without registration under the Securities Act, or (ii) a "no
action" letter from the Commission to the effect that the transfer of such
securities without registration will not result in a recommendation by the staff
of the Commission that action be taken with respect thereto, whereupon the
holder of such Restricted Securities shall be entitled to transfer such
Restricted Securities in accordance with the terms of the notice delivered by
the holder to the Company; PROVIDED, HOWEVER, that the Company shall not request
an opinion of counsel or "no action" letter with respect to (i) a transfer not
involving a change in beneficial ownership, (ii) a transaction involving the
distribution without consideration of Restricted Securities by the holder to any
of its constituent partners or members, or (iii) a transaction involving the
transfer without consideration of Restricted Securities by an individual holder
during such holder's lifetime by way of gift or on death by will or intestacy.
Each certificate evidencing the Restricted Securities transferred as above
provided shall bear, except if such transfer is made pursuant to Rule 144, the
appropriate restrictive legend set forth in Section 3 above, except that such
certificate shall not bear such restrictive legend if in the opinion of counsel
for such holder and counsel for the Company such legend is not required in order
to establish compliance with any provision of the Securities Act.
Notwithstanding the foregoing, each holder of Restricted Securities agrees that
it will not request that a transfer of the Restricted Securities be made or that
the legend set forth in Section 3 be removed from the certificate representing
the Restricted Securities, solely in reliance on Rule 144(k) if as a result
thereof, the Company would be rendered subject to the reporting requirements of
the Exchange Act.
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5. REGISTRATION.
5.1 REQUESTED REGISTRATION.
(a) REQUEST FOR REGISTRATION. In case the Company shall receive
from Initiating Holders a written request that the Company effect any
registration with respect to shares of Registrable Securities, the Company will:
(i) promptly give written notice of the proposed
registration to all other Holders; and
(ii) as soon as practicable, use its best efforts to
effect such registration as part of a firm commitment underwritten public
offering with underwriters reasonably acceptable to the Initiating Holders and
the Company (including, without limitation, appropriate qualification under
applicable state securities laws and appropriate compliance with applicable
regulations issued under the Securities Act and any other governmental
requirements or regulations) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Registrable
Securities as are specified in such request, together with all or such portion
of the Registrable Securities of any Holder or Holders joining in such request
by delivering a written notice to such effect to the Company within 20 days
after the date of such written notice from the Company.
Notwithstanding the foregoing, the Company shall not be obligated to take
any action to effect or complete any such registration pursuant to this
Section 5.1:
(A) Prior to the earlier of (i) six months after
the effective date of the Company's first registered public offering of its
Stock or (ii) March 11, 2001;
(B) Unless the aggregate offering price of all
Registrable Securities sought to be registered by all Holders, net of
underwriting discounts and commissions, would exceed $10,000,000;
(C) During the period starting with the date
sixty (60) days prior to the Company's estimated date of filing of, and ending
on the date six (6) months immediately following the effective date of, any
registration statement pertaining to securities of the Company (other than a
registration of securities in a Rule 145 transaction or with respect to an
employee benefit plan), provided that the Company is actively employing in good
faith all reasonable efforts to cause such registration statement to become
effective;
(D) After the Company has effected a registration
pursuant to this subparagraph 5.1(a), and such registration has been declared or
ordered effective; or
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(E) If the Company shall furnish to the
Initiating Holders a certificate signed by the President of the Company stating
that in the good faith judgment of the Board of Directors it would be seriously
detrimental to the Company or its stockholders for a registration statement to
be filed in the near future. In such case, the Company's obligation to use its
best efforts to register, qualify or comply under this Section 5.1(a) shall be
deferred for a period not to exceed 120 days from the date of receipt of the
written request from the Initiating Holders, provided that the Company may not
exercise this deferral right more than once per twelve month period or twice
during the term of this Agreement.
Subject to the foregoing clauses (A) through (E), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Initiating Holders.
(b) UNDERWRITING. In the event of a registration pursuant to
Section 5.1, the Company shall advise the Holders as part of the notice given
pursuant to Section 5.1(a)(i) that the right of any Holder to registration
pursuant to Section 5.1 shall be conditioned upon such Holder's participation in
the underwriting arrangements required by this Section 5.1, and the inclusion of
such Holder's Registrable Securities in the underwriting to the extent requested
shall be limited to the extent provided herein.
The Company shall, together with all Holders proposing to distribute their
securities through such underwriting, enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting by a
majority in interest of the Initiating Holders, but subject to the Company's
reasonable approval. Notwithstanding any other provision of this Section 5.1,
if the managing underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Company shall so advise all Holders requesting to be
included in the registration and underwriting and the number of shares of
Registrable Securities that may be included in the registration and underwriting
shall be allocated among all Holders requesting to be included in the
registration and underwriting in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities held by them at the time of filing
the registration statement. No Registrable Securities excluded from the
underwriting by reason of the underwriter's marketing limitation shall be
included in such registration. To facilitate the allocation of shares in
accordance with the above provisions, the Company or the underwriters may round
the number of shares allocated to any Holder to the nearest 100 shares. If any
Holder of Registrable Securities disapproves of the terms of the underwriting,
such person may elect to withdraw therefrom by written notice to the Company.
5.2 COMPANY REGISTRATION.
(a) NOTICE OF REGISTRATION. If at any time or from time to time
the Company shall determine to register any of its equity securities, either for
its own account or the account of a Holder or other holders, other than (i) a
registration relating solely to employee
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benefit plans, (ii) a registration relating solely to a Rule 145 transaction, or
(iii) a registration in which the only equity security being registered is
Common Stock issuable upon conversion of convertible debt securities which are
also being registered, the Company will:
(i) promptly give to each Holder written notice
thereof; and
(ii) include in such registration (and any related
qualifications including compliance with Blue Sky laws), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within 20 days after the date of such written notice from the
Company, by any Holder.
(b) UNDERWRITING. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 5.2(a)(i). In such event, the right of any Holder to
registration pursuant to Section 5.2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting shall be limited to the extent provided herein.
All Holders proposing to distribute their securities through such
underwriting shall (together with the Company and the other holders distributing
their securities through such underwriting) enter into an underwriting agreement
in customary form with the managing underwriter selected for such underwriting
by the Company. Notwithstanding any other provision of this Section 5.2, if the
managing underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, the managing underwriter may limit the
Registrable Securities to be included in such registration (i) in the case of
the Company's initial public offering, to zero, and (ii) in the case of any
other offering, to an amount no less than 30% of all shares to be included in
such offering. The Company shall so advise all Holders requesting to be
included in the registration and underwriting and the number of shares of
Registrable Securities that may be included in the registration and underwriting
shall be allocated among all the Holders requesting to be included in the
registration and underwriting in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities held by them at the time of filing
the registration statement. To facilitate the allocation of shares in
accordance with the above provisions, the Company or the underwriters may round
the number of shares allocated to any Holder to the nearest 100 shares. If any
Holder disapproves of the terms of any such underwriting, such person may elect
to withdraw therefrom by written notice to the Company.
(c) RIGHT TO TERMINATE REGISTRATION. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 5.2 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration.
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<PAGE>
5.3 REGISTRATION ON FORM S-3.
(a) REQUEST FOR REGISTRATION. In case the Company shall receive
from Initiating Holders a written request that the Company file a registration
statement on Form S-3 (or any successor form to Form S-3) for a public offering
of shares of the Registrable Securities the aggregate price to the public of
which, net of underwriting discounts and commissions, would exceed $5,000,000,
and the Company is a registrant entitled to use Form S-3 to register the
Registrable Securities for such an offering, the Company shall use its best
efforts to cause such Registrable Securities to be registered for the offering
on such form and to cause such Registrable Securities to be qualified in such
jurisdictions as such Holder or Holders may reasonably request; provided,
however, that the Company shall not be required to effect more than one
registration pursuant to this Section 5.3 in any twelve (12) month period. If
such offer is to be an underwritten offer, the underwriters must be acceptable
to both the Initiating Holders and the Company. The Company shall inform the
other Holders of the proposed registration and offer them upon at least 20 days
written notice the opportunity to participate. In the event the registration is
proposed to be part of a firm commitment underwritten public offering, the
substantive provisions of Section 5.1(b) shall be applicable to each such
registration initiated under this Section 5.3.
(b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action pursuant to this Section 5.3:
(i) If the Company, within ten (10) days of the
receipt of the request of the Initiating Holders, gives notice of its bona fide
intention to effect the filing of a registration statement with the Commission
within ninety (90) days of receipt of such request (other than with respect to a
registration statement relating to a Rule 145 transaction, an offering solely to
employees or any other registration which is not appropriate for the
registration of Registrable Securities);
(ii) During the period starting with the date sixty
(60) days prior to the Company's estimated date of filing of, and ending on the
date six (6) months immediately following the effective date of, any
registration statement pertaining to securities of the Company (other than a
registration of securities in a Rule 145 transaction or with respect to an
employee benefit plan), provided that the Company is actively employing in good
faith all reasonable efforts to cause such registration statement to become
effective; or
(iii) If the Company shall furnish to the Initiating
Holders a certificate signed by the President of the Company stating that, in
the good faith judgment of the Board of Directors, it would be seriously
detrimental to the Company or its stockholders for registration statements to be
filed in the near future, then the Company's obligation to use its best efforts
to file a registration statement shall be deferred for a period not to exceed
120 days from the receipt of the request to file such registration by such
Initiating Holder or Holders, provided that the Company may not exercise this
deferral right more than once per twelve month period.
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5.4 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. The Company shall
not enter into any agreement granting any holder or prospective holder of any
securities of the Company registration rights superior to or on a pari passu
basis with the rights granted hereunder without the written consent of the
holders of a majority of the Registrable Securities. Notwithstanding the
foregoing, the Company may, without obtaining any further consent of the holders
of Registrable Securities, amend this Agreement to the extent necessary to grant
rights and obligations on a pari passu basis with the rights and obligations of
the Series C Investors hereunder to investors in any subsequent round of
financing with respect to the securities purchased by such investors in such
financing, provided that such round of financing has an aggregate offering price
of at least $1,000,000 and an as-converted to Common Stock per share price of at
least $2.24024. Investors who purchase shares of Series C Preferred Stock in
Subsequent Closings (as such term is defined in the Series C Stock Purchase
Agreement) shall become parties to this Agreement by executing a counterpart
hereof.
5.5 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with (i) one registration pursuant to Section 5.1, (ii) all
registrations pursuant to Section 5.2, and (iii) two registrations pursuant to
Section 5.3 shall be borne by the Company. Notwithstanding the foregoing, in
the event that Initiating Holders cause the Company to begin a registration
pursuant to Section 5.1 or Section 5.3, and the request for such registration is
subsequently withdrawn by the Initiating Holders or such registration is not
completed due to failure to meet the net proceeds requirement set forth in such
section or is otherwise not successfully completed due to no fault of the
Company, all Holders shall be deemed to have forfeited their right to a
registration under Section 5.1, or a registration at the expense of the company
under Section 5.3, as applicable, unless the Initiating Holders pay for, or
reimburse the Company for, the Registration Expenses incurred in connection with
such withdrawn or incomplete registration. Unless otherwise stated, all Selling
Expenses relating to securities registered on behalf of the Holders and all
other registration expenses shall be borne by the Holders of such securities pro
rata on the basis of the number of shares so registered or proposed to be so
registered.
5.6 REGISTRATION PROCEDURES. In the case of each registration
effected by the Company pursuant to this Agreement, the Company will keep each
Holder advised in writing as to the initiation of such registration and as to
the completion thereof. The Company will:
(a) Prepare and file with the Commission a registration
statement and such amendments and supplements as may be necessary and use its
best efforts to cause such registration statement to become and remain effective
for at least 90 days or until the distribution described in the registration
statement has been completed, whichever first occurs;
(b) Furnish to the Holders participating in such registration
and to the underwriters of the securities being registered such reasonable
number of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such underwriters may reasonably request
in order to facilitate the public offering of such securities.
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5.7 INDEMNIFICATION.
(a) The Company will indemnify each Holder, each of its officers
and directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration
has been effected pursuant to this Agreement, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, or any violation by the Company of the Securities Act, the
Securities Exchange Act of 1934, as amended, state securities law or any rule or
regulation promulgated under the such laws applicable to the Company in
connection with any such registration, and the Company will reimburse each such
Holder, each of its officers and directors, and each person controlling such
Holder, for any legal and any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, provided that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission or alleged untrue statement or omission, made in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by such Holder or controlling person, and stated to be
specifically for use therein; provided, however, that the foregoing indemnity
Agreement is subject to the condition that, insofar as it relates to any such
untrue statement, alleged untrue statement, omission or alleged omission made in
a preliminary prospectus on file with the Commission at the time the
registration statement becomes effective or the amended prospectus filed with
the Commission pursuant to Rule 424(b) (the "FINAL PROSPECTUS"), such indemnity
Agreement shall not inure to the benefit of any Holder, if a copy of the Final
Prospectus was not furnished to the person asserting the loss, liability, claim
or damage at or prior to the time such action is required by the Securities Act,
and if the Final Prospectus would have cured the defect giving rise to the loss,
liability, claim or damage.
(b) Each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration is being
effected, indemnify the Company, each of its directors and officers, of the
Company's securities covered by such a registration statement, each person who
controls the Company within the meaning of Section 15 of the Securities Act, and
each other such Holder, each of its officers and directors and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Holders, such directors, officers,
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persons, underwriters or control persons for any legal or any other expenses
reasonably incurred, as such expenses are incurred, in connection with
investigating or defending any such claim, loss, damage, liability or action,
but in the case of the Company or the other Holders or their officers, directors
or controlling persons, only to the extent that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with information furnished to the Company by
such Holder. Notwithstanding the foregoing, the liability of each Holder under
this subsection 5.7(b) shall be limited in an amount equal to the initial public
offering price of the shares sold by such Holder, unless such liability arises
out of or is based on willful misconduct by such Holder.
(c) Each party entitled to indemnification under this
Section 5.7 (the "INDEMNIFIED PARTY") shall give notice to the party required to
provide indemnification (the "INDEMNIFYING PARTY") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement unless the failure to
give such notice is materially prejudicial to an Indemnifying Party's ability to
defend such action and provided further, that the Indemnifying Party shall not
assume the defense for matters as to which there is a conflict of interest or
there are separate and different defenses. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party (whose consent shall not be unreasonably withheld), consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
5.8 INFORMATION BY HOLDER. The Holder or Holders of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration
referred to in this Agreement.
5.9 RULE 144 REPORTING. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Restricted Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to use all reasonable efforts to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
after the effective date that
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the Company becomes subject to the reporting requirements of the Securities Act
or the Exchange Act;
(b) File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements); and
(c) So long as a Holder owns any Restricted Securities, to
furnish to the Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 (at any
time after 90 days after the effective date of the first registration statement
filed by the Company for an offering of its securities to the general public),
and of the Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements), a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company and other information in the possession of or reasonably obtainable by
the Company as the Holder may reasonably request in availing itself of any rule
or regulation of the Commission allowing the Holder to sell any such securities
without registration.
5.10 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company
to register securities granted Holders under Sections 5.1, 5.2 and 5.3 may be
assigned to a transferee or assignee reasonably acceptable to the Company in
connection with any transfer or assignment of Registrable Securities by the
Holder provided that: (i) such transfer is otherwise effected in accordance with
applicable securities laws and the terms of this Agreement, (ii) such assignee
or transferee acquires at least an amount equal to 10% of the Preferred Stock
and Conversion Stock, (iii) written notice is promptly given to the Company and
(iv) such transferee agrees to be bound by the provisions of this Agreement.
Notwithstanding the foregoing, the rights to cause the Company to register
securities may be assigned without compliance with item (ii) above to (w) any
constituent partner, member, or shareholder of a Holder which is a partnership,
limited liability company or corporation; (x) a family member of a Holder or
trust for the benefit of a Holder, the spouse of a Holder or issue of a Holder;
(y) any corporation, partnership, limited liability company or other entity of
which at least 75% in interest is owned or controlled, directly or indirectly,
by one or more of the persons described in (w) or (x); or (z) any affiliate of
Ziff Asset Management, L.P.
5.11 TERMINATION OF REGISTRATION RIGHTS. The rights granted pursuant
to Sections 5.1, 5.2 and 5.3 of this Agreement shall terminate as to any Holder
upon the earlier of (i) the date five years after the effective date of the
Company's initial public offering and (ii) such time as a public market for the
Company's Common Stock exists and the Holder may sell all Registrable Securities
held by the Holder within two successive three-month periods under Rule 144.
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6. FINANCIAL INFORMATION AND INSPECTION RIGHTS.
(a) The Company will provide the following reports to each
Investor who continues to hold at least 400,000 shares of Preferred Stock:
(i) As soon as practicable after the end of the fiscal
year ending March 31, 1998 and each fiscal year thereafter, and in any event
within 120 days after the end of each such fiscal year, consolidated balance
sheets of the Company and its subsidiaries, if any, as of the end of such fiscal
year, and consolidated statements of operations and consolidated statements of
cash flows and stockholders' equity of the Company and its subsidiaries, if any,
for such year, prepared in accordance with generally accepted accounting
principles and setting forth in each case in comparative form the figures for
the previous fiscal year, all in reasonable detail and audited by independent
public accountants of national standing selected by the Company, and a
capitalization table in reasonable detail for such fiscal year.
(ii) As soon as practicable after the end of each of
the first eleven months of each fiscal year of the Company and in any event
within 15 days thereafter, a consolidated balance sheet of the Company and its
subsidiaries, if any, as of the end of each such monthly period, and
consolidated statements of operations and consolidated statements of cash flows
of the Company and its subsidiaries, if any, for such period and for the current
fiscal year to date, prepared in accordance with generally accepted accounting
principles (other than accompanying notes), subject to changes resulting from
year-end audit adjustments, in reasonable detail and signed by the principal
financial or accounting officer of the Company, and a capitalization table in
reasonable detail for such monthly period; and
(iii) At least 30 days prior to the beginning of each
fiscal year, commencing with the fiscal year beginning April 1, 1998, a budget
as adopted by the Company's Board of Directors for the fiscal year.
(b) The Company will afford to each Investor who continues to
hold at least 400,000 shares of Preferred Stock (as adjusted for stock splits,
stock dividends, stock combinations and the like) reasonable access during
normal business hours to the Company's accounting books and records and minutes
of proceedings of the stockholders and the Board of Directors and committees of
the Board of Directors, and all information distributed to the Board of
Directors, for a purpose reasonably related to such Investor's interests as a
stockholder of the Company. The Company shall not be required to disclose
details of transactions where to do so would violate confidentiality obligations
of the Company. The Company will afford to each Investor who continues to hold
at least 400,000 shares of Preferred Stock (as adjusted for stock splits, stock
dividends, stock combinations and the like) the right to meet periodically with
the Company's executive officers during normal business hours to discuss and
make recommendations regarding the conduct of the Company's business and
affairs.
-14-
<PAGE>
(c) For purposes of determining the minimum holdings pursuant to
this Section 6, any Investor that is a partnership or limited liability company
shall be deemed to hold any Preferred Stock originally purchased by such
Investor and subsequently distributed to constituent partners or members of such
Investor, but which have not been resold by such partners or members. If the
partnership or limited liability company is still in existence, the Company may
satisfy any obligation to distribute reports to individual partners of the
partnership or members of a limited liability company by delivering a single
copy of each report to the partnership or limited liability company as agent for
the constituent partners or members.
(d) The rights granted pursuant to Section 6 may be assigned to
any transferee, other than a competitor or potential competitor of the Company
(as reasonably determined by the Company's Board of Directors), who (i) acquires
at least an amount equal to 10% of the shares of Preferred Stock and Conversion
Stock, (ii) is a member of the immediate family of the transferor or a trust for
the benefit of the transferor, (iii) if the transferor is a partnership, its
constituent partners or a retired partner of such partnership who retires after
the date hereof, or to the estate of any such partner or retired partner or
transfer by gift, will, or intestate succession to any such partner's spouse or
lineal descendants or ancestors, or (iv) is an affiliate of Ziff Asset
Management, L.P., so long as, in each case, such transferee agrees in writing to
be bound by the provisions of Section 6(e), below.
(e) Each Investor or transferee of rights under this Section 6
acknowledges and agrees that any information obtained pursuant to this Section 6
which may be considered nonpublic information will be maintained in confidence
by such Investor or transferee and will not be utilized by such Investor or
transferee in connection with purchases or sales of the Company's securities
except in compliance with applicable state and Federal securities laws.
7. TERMINATION OF COVENANTS. The covenants of the Company set forth
above in Sections 6 shall terminate and be of no further force or effect upon
the closing of a firm commitment underwritten public offering or at such time as
the Company is required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act, whichever shall occur first.
8. LOCKUP AGREEMENT. Each Investor, Seed Investor, Founder, Holder and
transferee hereby agrees that, in connection with the first two registrations of
the offering of any securities of the Company under the Securities Act for the
account of the Company, if so requested by the Company or any representative of
the underwriters (the "MANAGING UNDERWRITER"), such Investor, Seed Investor,
Founder, Holder or transferee shall not sell or otherwise transfer any
securities of the Company during the period specified by the Company's Board of
Directors at the request of the Managing Underwriter, with such period not to
exceed 180 days, (the "MARKET STANDOFF PERIOD") following the effective date of
a registration statement of the Company filed under the Securities Act;
PROVIDED, HOWEVER, that the restriction contained in this Section 8 shall not
apply to the Series B or Series C Preferred Stock (or Common Stock issuable on
conversion thereof) unless all officers and directors of the Company are bound
by similar lockup provisions as
-15-
<PAGE>
of the time of such registration. The Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such Market Standoff Period. The Company shall use its best
efforts to place similar contractual lockup restrictions on all capital stock
issued now or hereafter to (i) officers, directors, employees and consultants of
the Company, (ii) holders of one percent or more of the Company's outstanding
capital stock acquired prior to the closing of the Company's first registered
public offering and (iii) holders of registration rights with respect to capital
stock of the Company, in each case unless determined otherwise by the Company's
Board of Directors (including the Consent of the Preferred Directors).
Notwithstanding the foregoing, the provisions of this Section 8 shall not apply
to a registration relating solely to employee benefit plans on Form S-1 or Form
S-8 or similar forms which may be promulgated in the future, or a registration
relating solely to a transaction within Rule 145 of the Securities Act on Form
S-4 or similar form which may be promulgated in the future.
9. REQUIRED APPROVAL FOR CERTAIN ACTIONS. For so long as the holders of
Preferred Stock, voting without the Common Stock, are specifically entitled,
under the Company's Certificate of Incorporation, to elect at least one
director, the Board of Directors of the Company shall not take any of the
actions set forth below without the Consent of the Preferred Directors:
(a) amend or waive the terms of any agreement with any officer,
director, or Founder of the Company or take any other action primarily for the
purpose of accelerating either (i) the vesting of options granted to such person
or (ii) the lapsing of the Company's right to repurchase securities held by such
person;
(b) increase the level of salary or bonus compensation of any
officer or Founder of the Company beyond the level currently paid or the level
the Company has previously agreed to pay as disclosed on the Schedule of
Exceptions to the Series B Stock Purchase Agreement, if such increased level of
compensation would be deemed excessive by then current industry standards; or
(c) engage in any material transaction with any officer,
director, or Founder of the Company, or any family member or affiliate of such
officer, director, or Founder, unless the terms of such transaction are no less
favorable to the Company than terms available to the Company from unrelated
third parties.
For the purpose of Section 9(c), the issuance of securities of the
Company after the date hereof to any Founder or family member or affiliate of a
Founder shall be deemed to be a "material transaction" with such person unless
(i) such issuance is pursuant to an option outstanding as of the date hereof or
(ii) such issuance is pursuant to a stock split, stock dividend or the like in
which all holders of such securities participate on a pro rata basis.
10. EFFECTIVENESS; AMENDMENT AND RESTATEMENT OF PRIOR AGREEMENT. This
Agreement constitutes an amendment and restatement of the Prior Agreement
pursuant to Section 11 thereof and shall become effective and binding on all
parties thereto and persons bound by
-16-
<PAGE>
the terms thereof upon obtaining the consent, evidenced by execution of this
Agreement, of the Company and a majority of the outstanding Registrable
Securities (as such term is defined in the Prior Agreement).
11. AMENDMENT. Except as otherwise provided above, any provision of this
Agreement may be amended or the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Registrable Securities then outstanding. Notwithstanding the
foregoing, no amendment shall be made to this Agreement which by its terms
adversely affects, or which was motivated primarily by an intent to adversely
affect, a particular class of Holders (i.e., Founders, Seed Investors or
Investors) in a manner differently from the other Holders without the written
consent of a majority of the Registrable Securities held by the Holders in such
adversely affected class. Any amendment or waiver effected in accordance with
Section 5.4 or Section 11, as applicable, shall be binding upon each Investor,
Seed Investor, Founder, Holder of Registrable Securities at the time
outstanding, each future holder of any of such securities, and the Company.
12. GOVERNING LAW. This Agreement shall be governed in all respects by
the internal laws of the State of California without regard to conflict of laws
provisions.
13. ENTIRE AGREEMENT. This Agreement constitutes the full and entire
understanding and Agreement among the parties regarding the matters set forth
herein. Except as otherwise expressly provided herein, the provisions hereof
shall inure to the benefit of, and be binding upon the successors, assigns,
heirs, executors and administrators of the parties hereto.
14. NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by facsimile
transmission, by hand or by messenger, addressed:
(a) if to a Holder, at such Holder's address as set forth in EXHIBIT
A, or at such other address as such Holder shall have furnished to the Company.
(b) if to the Company, to:
NetGravity, Inc.
1700 S. Amphlett Blvd., Suite 350
San Mateo, CA 94402
Fax: (650) 655-4776
Attn: John W. Danner
-17-
<PAGE>
or at such other address as the Company shall have furnished to the Holders,
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, CA 94304-1050
Attn: Larry W. Sonsini, Esq.
James N. Strawbridge, Esq.
Fax: (650) 493-6811
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered if
delivered personally or by facsimile transmission, or, if sent by mail, at the
earlier of its receipt or 72 hours after the same has been deposited in a
regularly maintained receptacle for the deposit of the United States mail,
addressed and mailed as aforesaid.
15. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
-18-
<PAGE>
(COUNTERPART SIGNATURE PAGE TO REGISTRATION AND INFORMATION RIGHTS AGREEMENT)
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date written below.
NetGravity, Inc.
a Delaware corporation
By:
------------------------------
John W. Danner, President
London Pacific Life & Annuity Company
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
ZAM Venture Capital, L.P.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
Hummer Winblad Venture Partners II,
L.P., a Delaware limited partnership
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
Hummer Winblad Technology Fund II,
L.P., a Delaware limited partnership
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
<PAGE>
(COUNTERPART SIGNATURE PAGE TO REGISTRATION AND INFORMATION RIGHTS AGREEMENT)
Hummer Winblad Technology Fund IIA,
L.P., a Delaware limited partnership
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
Redleaf Venture I, L.P.,
a Delaware limited partnership
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
Jonathan Lazarus
- --------------------------------------
Richard Wood
- --------------------------------------
Kyra Bartlett
- --------------------------------------
Seth L. Bartlett
- --------------------------------------
Ann Burgraff
- --------------------------------------
<PAGE>
(COUNTERPART SIGNATURE PAGE TO REGISTRATION AND INFORMATION RIGHTS AGREEMENT)
Ivan Chong
- --------------------------------------
Alden E. Danner and Ann W. Danner, as
trustees of the Alden E. and Ann Danner
1989 Trust U/D/T dated May 8, 1989
- --------------------------------------
- --------------------------------------
John W. Danner
- --------------------------------------
Chris Doell
- --------------------------------------
Tamara Duke
- --------------------------------------
Ivan Fujihara
- --------------------------------------
Arthur L. Goldstein and Vida F. Goldstein
- --------------------------------------
- --------------------------------------
<PAGE>
(COUNTERPART SIGNATURE PAGE TO REGISTRATION AND INFORMATION RIGHTS AGREEMENT)
Bradley V. Husick and Gail Clayton Husick,
trustees of the Husick Family Trust U/D/T
dated February 7, 1996
- --------------------------------------
- --------------------------------------
John D.D. Kohler as trustee of The Kohler
Family Trust U/D/T dated February 12, 1993
- --------------------------------------
John Krystynak
- --------------------------------------
Lawrence G. Mohr Jr.
- --------------------------------------
Paul Nakada
- --------------------------------------
Peter Nakada
- --------------------------------------
Stephen Reade
- --------------------------------------
<PAGE>
(COUNTERPART SIGNATURE PAGE TO REGISTRATION AND INFORMATION RIGHTS AGREEMENT)
Russ Seligman
- --------------------------------------
Kira E. Shields
- --------------------------------------
Madelyn M. Shields
- --------------------------------------
Peter F. Shields
- --------------------------------------
Thomas A. Shields
- --------------------------------------
Thomas A. Shields, trustee of the Thomas
A. Shields Trust dated March 21, 1984
- --------------------------------------
Stanford University
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
Larry Wear
- --------------------------------------
<PAGE>
(COUNTERPART SIGNATURE PAGE TO REGISTRATION AND INFORMATION RIGHTS AGREEMENT)
WS Investment Company 95B
By:
---------------------------------
Name: Larry Sonsini
Title: General Partner
Chee Yu
- --------------------------------------
<PAGE>
EXHIBIT A
(to the Registration and Information Rights Agreement)
SCHEDULE OF HOLDERS
ZAM Venture Capital, L.P.
c/o Ziff Brothers Investments, LLC
153 East 53rd Street., 43rd Floor
New York, NY 10022
Thomson U.S. Inc.
c/o TTC Ventures
1 Main Street
Cambridge, MA 02142
London Pacific Life & Annuity Company
3109 Poplarwood Court, Suite #108
Raleigh, NC 27604
Ziff Asset Management, L.P.
3000 Sand Hill Road
Building 4, Suite 235
Menlo Park, CA 94025
Hummer Winblad Venture Partners II,
L.P., a Delaware limited partnership
2 South Park, Second Floor
San Francisco, CA 94107
Hummer Winblad Technology Fund,
L.P., a Delaware limited partnership
2 South Park, Second Floor
San Francisco, CA 94107
Hummer Winblad Technology Fund IIA,
L.P., a Delaware limited partnership
2 South Park, Second Floor
San Francisco, CA 94107
<PAGE>
Alden E. and Ann Danner 1989 Trust U/D/T dated May 8, 1989
14190 Woodview Lane
Saratoga, CA 05070
Thomas A. Shields Trust dated March 21, 1984
122 Hart Street
Beverly Farms, MA 01915
Madelyn M. Shields
122 Hart Street
Beverly Farms, MA 01915
Kira E. Shields
122 Hart Street
Beverly Farms, MA 01915
Seth L. Bartlett
122 Hart Street
Beverly Farms, MA 01915
Kyra Bartlett
122 Hart Street
Beverly Farms, MA 01915
The Kohler Family Trust U/D/T dated February 12, 1993
16033 Matilija Drive
Los Gatos, CA 95030
Shields Family Limited Partnership,
a Michigan limited partnership
Attn: Peter F. Shields
26601 West Huron River Drive
Flat Rock, MI 48134
Arthur & Vida Goldstein
24 Hubbard
Weston, MA 02193
Peter Nakada
c/o Oliver Wyman
666 5th Avenue
16th Floor
New York, NY 10103
-26-
<PAGE>
Thomas A. Shields
973 Pizarro Lane
Foster City, CA 94404
The Husick Family Trust U/D/T dated February 7, 1996
2033 Mills Avenue
Menlo Park, CA 94025
Paul Nakada
101 Rivoli Street #1
San Francisco, CA 94117
Larry Wear
1075 Yorkshire Drive
Los Altos, CA 94024
Russ Seligman
200 Irene Court, #24
Belmont, CA 94002
John Krystynak
538 Harrington Avenue
Los Altos, CA 94024
WS Investment Company 95B
650 Page Mill Road
Palo Alto, CA 94304
Chris Doell
15 El Quanito Way
Burlingame, CA 94010
Stephen Reade
2260 Dartmouth Street
Palo Alto, CA 94306
-27-
<PAGE>
Chee Yu
11404 Rothschild Place
Dublin, CA 94568
Stanford University
2770 Sand Hill Road
Menlo Park, CA 94025
Lawrence G. Mohr Jr.
399 Stevick Drive
Atherton, CA 94025
Ivan Chong
2279 Vista Del Mar
San Mateo, CA 94404
Ann Burgraff
428 Sausalito Blvd.
Sausalito, CA 94965
Tamara Duke
928 Wright Avenue, # 503
Mountain View, CA 94043
Ivan Fujihara
35960 Gaskell Court
Fremont, CA 94536
Richard Wood
4995 Paradise Dr.
Tiburon, CA 94920
Jonathan Lazarus
10 Holly Lane
Mercer Island, WA 98040
-28-
<PAGE>
BAYSHORE CORPORATE CENTER LEASE
<PAGE>
INDEX
<TABLE>
<C> <S> <C>
1. Leased Premises.....................................................1
2. Term................................................................1
3. Possession..........................................................1
4. Lease Year..........................................................1
5. Rent................................................................1
6. Rent Adjustment.....................................................1
7. Security Deposit....................................................2
8. Taxes...............................................................2
9. Lessor Services.....................................................3
10. Quiet Enjoyment.....................................................3
11. Repairs and Maintenance.............................................3
12. Assignment or Sublease..............................................3
13. Alterations and Improvements........................................3
14. Use.................................................................3
15. Compliance with Laws and Rules of the Building......................3
16. Lessor's Right to Entry.............................................4
17. Nuisance............................................................4
18. Condemnation........................................................4
19. Destruction.........................................................4
20. Insurance...........................................................4
21. Surrender of Leased Premises........................................4
22. Holding Over........................................................4
23. Default: Lessor's Remedies.........................................5
24. Waiver of Breach....................................................5
25. Attorney's Fees.....................................................5
26. Waiver of Subrogation...............................................5
27. Signs...............................................................5
28. Hold Harmless.......................................................5
29. Liens...............................................................5
30. Notices.............................................................5
31. Subordination: Attornment..........................................5
32. Estoppel Certificate................................................6
33. Transfer of Lessor's Interest.......................................6
34. Insolvency or Bankruptcy of Lessee..................................6
35. General.............................................................6
36. Rights Reserved to Lessor...........................................6
37. No Option...........................................................8
38. Rules and Regulations...............................................9
</TABLE>
<PAGE>
LEASE AGREEMENT
THIS Lease is made and entered into at San Mateo, California this 29th day
of September, 1995, by and between BAYSHORE CORPORATE CENTER, LLC, hereinafter
referred to as "Lessor" and NETVERTISER, hereinafter referred to as "Lessee,"
without regard to number or gender.
1. Leased Premises:
A. Premises: In consideration of the rents herein provided, and on the
terms, provisions and covenants hereof, Lessor hereby leases, lets and demises
to Lessee the following described premises (referred to in this lease as the
"leased premises") more particularly described in Exhibit "A," attached hereto,
located at 1670 So. Amphlett Blvd., Suite 314 in the City of San Mateo, County
of San Mateo, California (referred to in this lease as "the Building."
B. Parking: Throughout the term hereof, Lessee shall have the right
to use for its employees As Available ( ) parking spaces in the parking
areas in and about the Building, or in the event the Building is located in a
larger Office Complex (the land, buildings, common areas and parking areas of
which shall be referred to collectively in this lease as the "Office
Complex"), then in and about such Office Complex on the terms and conditions
as may be established by Lessor from time to time during the term of this
lease. Lessor shall have the right, but shall not be under any obligation,
to designate where such parking spaces shall be located. The parking area(s)
referred to herein shall be used on a non-exclusive basis with other tenants
of the Building, or where applicable, other tenants of the Office Complex.
Parking for Lessee's invitees shall be available in said parking area(s) on a
non-exclusive, first-come, first-serve basis with invitees of other tenants
of the Building, or where applicable, other tenants of the Office Complex
upon such conditions as Lessor may from time to time establish during the
term hereof.
2. Term: Subject to and upon the conditions set forth herein, the term of
this lease shall commence on the mo-to-mo, and shall end on the ____ day of
______, 19__, unless sooner terminated as hereinafter provided. Taking of
possession by Lessee shall be conclusively deemed to establish that the
leased premises have been accepted and that the leased premises are in good
and satisfactory condition as of the date possession was so taken by Lessee.
3. Possession: If Lessor, for any reason whatsoever, cannot deliver
possession of the leased premises to Lessee at the commencement of the term
hereof, this lease shall not be void or voidable, nor shall Lessor be liable
to Lessee for any loss or damage resulting therefrom, nor shall the
expiration date of the above term be in any way extended, but in that event,
all rent shall be abated during the period between the commencement of the
term as provided for in Paragraph 2 hereinabove and the time when Lessor
delivers possession. In the event that Lessor shall permit Lessee to occupy
the leased premises prior to the commencement date of the term, such
occupancy shall be subject to all the provisions of this lease. Such early
possession shall not advance the termination date hereinabove provided.
4. Lease Year: A lease year shall be considered to begin on the first day
of the first full calendar month following commencement of the term hereof,
or if the term shall commence on the first day of the month, on such date and
on each subsequent anniversary date of the beginning of the first lease year.
5. Rent:
A. Base Rent: Lessee agrees to pay a base rental for the leased
premises during the lease term in the amount of Three thousand eight hundred
and 45/100 ($3,800.45), payable in monthly installments of $3,800.45, without
deduction, offset, prior notice or demand, in advance on the first day of the
month to Lessor at the address shown in Paragraph 30 below. Such base rental
shall be subject to annual adjustment as hereinafter provided in Paragraph 6
below. The first monthly installment shall be due and payable on or before
the first day of each calendar month during the term hereof. If the
commencement date of the term hereof is not the first day of a month, a
prorated monthly installment shall be paid for the fractional month during
which the lease commences and/or terminates. In addition to any rental
payable hereunder, Lessee shall pay to Lessor his prorated share of real
property taxes as set forth in Paragraph 6 below, and any adjustments to the
base rental as set forth in Paragraph 6 below.
B. Prepaid Rent: Concurrently with Lessee's execution of this lease,
Lessee shall pay to Lessor the sum of $3,800.45 to be applied against rent for
the first month of the lease term.
C. Late Charges: Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent or other sums due hereunder will cause Lessor to incur costs
not contemplated by this lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, loss of
discounts offered by vendors for prompt payment of bills, processing and
accounting charges, and late charges which may be imposed upon Lessor by terms
of any ground lease (wherein the Lessor has leased the land on which the
Building is situated) or mortgage or trust deed covering the leased premises and
the Building. Accordingly, if any installment of rent or any sum due from
Lessee shall not be received by Lessor or Lessor's designee within five (5) days
after said amount is due, then Lessee shall pay to Lessor a late charge equal to
the maximum amount permitted by law (or in the absence of any governing law, ten
percent (10%) of such overdue amount), plus any attorneys' fees incurred by
Lessor by reason of Lessee's failure to pay rent and/or other charges when due
hereunder. The parties hereby agree that such late charges represent a fair and
reasonable estimate of the cost that Lessor will incur by reason of the late
payment by Lessee. Acceptance of such late charges by the Lessor shall in no
event constitute a waiver of Lessee's default with respect to such overdue
amount, nor prevent Lessor from exercising any of the other rights and remedies
granted hereunder.
6. Rent Adjustment: Consumer Price Index: The minimum monthly rent and
any other fixed charges shall be adjusted during the term of this lease
effective with the first day of the second (2nd) lease year and on the first
day of each lease year thereafter throughout the lease term (any lease year
other than the first lease year being referred to herein as a "succeeding
lease year" being defined as hereinafter provided). Any adjustment shall
reflect the percentage increase, if any, in the cost of living as shown in
the Consumer Price Index For Urban Wage Earners and Clerical Workers, San
Francisco-Oakland, California, all items (1967-100), as published by the U.S.
Department of Labor, Bureau of Labor Statistics, on a bi-monthly basis, from
the month closest to the month preceding the commencement of the first lease
year ("the base index month") to the month closest to the month immediately
preceding commencement of a succeeding lease year. By way of example only,
if the Consumer Price Index for a given month is 110 and the Consumer Price
Index for such month in the succeeding lease year is 132, then there would be
a 20% increase in the cost of living and the rental would be adjusted to
reflect such increase in calculating the rental commencing on the first day
of such succeeding lease year. If the index referred to above is changed
such that the base year (e.g. 1967-100) differs from that used as of the
month closest to the base index month, the index shall be converted in
accordance with the conversion factor published by the U.S. Department of
Labor, Bureau of Labor Statistics. If the described index shall no longer be
published, another index generally recognized as authoritative shall be
substituted by agreement of the parties. If the parties are unable to agree
with ten (10) days after demand by either party, the substitute index shall,
in application of either party, be selected by the Chief Officer of the San
Francisco regional office of the Bureau of Labor Statistics or its successor.
A. Operating Costs: Lessor and Lessee recognize that during the term
of this lease the operating costs incurred in the management, operation and
maintenance of the Building may increase in the years following the base period
hereinafter specified. Accordingly, Lessor and Lessee agree as hereinbelow set
forth to rent adjustment to accommodate the increases in operating costs so that
any such increases will be borne by lessees of the Building. The above
statement of principle is set forth as a general guide for the future and
particularly as a general guide to the accountants who may annually audit the
increases in operating costs.
Lessee shall pay to Lessor at the times set forth in this paragraph
Lessee's share of the increases in Lessor's operating costs for the Building
in which the leased premises are located over the operating costs for the
calendar year 1995 ("base cost year"). Lessee's proportionate share of the
increase in operating costs shall be .79 percent of the total increase in
Lessor's operating costs. The operating costs for both the base cost year and
succeeding years shall be adjusted to equal Lessor's reasonable estimate of
operating costs had the rentable area of the Building been occupied.
*Based upon 332,000 square feet.
<PAGE>
Lessor's operating costs include, without limitation, all costs of any kind
paid or incurred by Lessor in operating, cleaning, equipping, protecting,
lighting, repairing, replacing, heating, air conditioning and maintaining the
areas of the Building not leased or available for lease to lessees. The costs
shall include without limitation: (a) utilities, supplies and janitorial
services; (b) maintenance, repair and service contracts; (c) watchmen, guards
and personnel engaged in the management, operation, maintenance, repair and
protection of the Building together with wages, salaries, payroll burden,
taxes, unemployment and workmens' compensation insurance contributions, social
security contributions and employee and union benefits applicable thereto; (d)
rubbish removal; (e) maintenance and replacement of landscaping; (f) premiums
for public liability and property damage and fire and extended coverage
insurance; (g) all costs and expenses of contesting by appropriate legal
proceedings any matter concerning operating or managing the Building or the
amount or validity of any property taxes levied against the Building (except
that such costs and expenses shall in no event be included in the base cost
year); (h) depreciation on all personal property, fixtures and equipment used in
the management, operation, maintenance and repair of the Building; (i) the costs
and expenses (amortized over such reasonable period as Lessor shall determine
together with interest at the rate of 12% per annum on the unamortized balance)
of acquisition and installation by Lessor of any capital improvements after the
base cost year that reduce other operating costs; provided however that
operating costs shall not include taxes covered under Paragraph 8 hereinbelow,
depreciation on the Building (except as specified above), costs of Lessee's
improvements, real brokers' commissions, interest and capital items (except as
specified above). The determination of operating costs and their allocation
shall be in accordance with generally accepted accounting principles applied on
a consistent basis.
Within ninety (90) days after the close of each calendar year, or as soon
after such ninety (90) day period as practical, Lessor shall deliver to Lessee a
statement of additional rent (the "Statement") payable under this section for
such calendar year, showing the total operating costs for the calendar year just
ended, and Lessee's share of any increase. The failure of Lessor to deliver the
Statement to Lessee during the time period hereinabove set forth shall not
constitute a waiver by Lessor of its right to require an increase in rent.
Lessee shall pay to Lessor the amount of Lessee's share of the increases within
thirty (30) days after receipt of the Statement. Even though the term has
expired and Lessee has vacated the leased premises, when the final determination
is made of Lessee's share of such increases for the calendar year in which this
lease terminates, Lessee shall immediately pay its share of such increases upon
demand by Lessor. Alternatively, in such event, Lessor shall have the right, in
its sole option, to estimate Lessee's share of any increases in operating costs
for the calendar year in which this lease terminates and to deduct said amount
from Lessee's security deposit at the expiration of the lease term, Lessee
hereby waiving any contrary statutory provisions. Should Lessor's estimate of
such increase in operating costs be greater than Lessee's actual share as later
determined by Lessor, Lessor shall refund to Lessee such excess, without
interest, within sixty (60) days of the final determination of Lessee's actual
share of such increase in operating costs; however, should Lessee's actual share
of such increase in operating costs be in excess of the amount estimated by
Lessor and deducted from Lessee's security deposit, Lessee shall pay such excess
upon receipt of the Statement in accordance with the provisions of this
paragraph.
Lessor shall keep at the Building where the leased premises are located
full, accurate and separate books of account covering Lessor's operating costs
and the Statement to Lessee shall accurately reflect the total of operating
costs and Lessee's share thereof. The books of account shall be retained by
Lessor at the Building in which the leased premises are located for a period of
at least twelve (12) months after the expiration of each calendar year. Lessee
shall be entitled once during each calendar year to an independent audit of
Lessor's books of account to determine Lessor's operating costs by a certified
public accountant to be designated by Lessee, such audit to take place within
sixty (60) days of Lessee's receipt of the Statement. The audit shall be
limited to the determination of operating costs and shall be conducted during
usual business hours at the Building. The costs of the audit shall be paid by
Lessee unless the audit shows that Lessor overstated operating costs by more
than five percent 5% in which case Lessor shall pay all Lessee's costs of the
audit. In no event shall Lessee have the right to withhold payment of such
additional rent as set forth in the Statement pending the results of such audit
or the right to interest on such amounts should such audit indicate that Lessor
overstated operating costs in any amount.
7. Security Deposit: Concurrently with Lessee's execution of this lease,
Lessee shall deposit with Lessor $3,800.45 to be held by Lessor as a security
deposit for the faithful performance of all the terms, covenants, and conditions
of this lease to be kept and performed by Lessee during the term hereof. If
Lessee defaults with respect to any provisions of this lease, including but not
limited to provisions relating to the payment of rent, operating cost increases,
and other monetary sums due herewith, Lessor may use, apply or retain all or any
part of the security deposit for the payment of rent or any other amount which
Lessor may spend or become obligated to spend by reason of Lessee's default or
to compensate Lessor for any other loss or damage which Lessor may suffer by
reason of Lessee's default. If any portion of said security deposit is so used
or applied, Lessee shall, within ten (10) days after written demand therefor,
deposit cash with Lessor in an amount sufficient to restore the security deposit
to its original amount. Lessee's failure to do so shall be a material breach of
this lease. Lessor shall not be required to keep this security deposit separate
from its general funds and Lessee shall not be entitled to interest thereon.
Lessor's obligations with respect to the security deposit are those of a debtor
and not a trustee. If Lessee shall fully and faithfully perform every provision
of this lease to be kept by it, the security deposit or any balance thereof
shall be returned to Lessee (or, at Lessor's demand, to the last assignee of
Lessee's interest hereunder) within the following time periods after expiration
or earlier termination of the lease term: (a) when Lessor has no claims against
the security deposit or where the claim is only for defaults by Lessee in the
payment of rent, then the security deposit or the balance thereof, if any, shall
be returned no later than two (2) weeks after the date Lessor receives
possession of the leased premises, or (b) where Lessor's claim against the
security deposit includes amounts reasonably necessary to repair or clean the
leased premises, then the remaining balance thereof, if any, shall be returned
on or before thirty (30) days from the date Lessor receives possession of the
leased premises. In the event of a termination of Lessor's interest in this
lease, Lessor shall transfer said deposit to Lessor's successor in interest,
whereupon Lessee agrees to release Lessor from all liability for the return of
such deposit or the accounting thereof. In no event shall said security deposit
be applied to the rent due for the last month of the lease term except as
required by law.
8. Taxes:
A. Personal Property Taxes: Lessee shall pay prior to delinquency all
taxes assessed against and levied upon trade fixtures, furnishings, equipment
and all other personal property of Lessee contained in the leased premises or
elsewhere. When possible, Lessee shall cause said trade fixtures, furnishings,
equipment and all other personal property to be assessed and billed separately
from the real or personal property of Lessor.
B. (i) Real Estate Tax Defined: As used herein, the term "real
estate taxes" shall include any form of assessment, levy, penalty or tax
(other than estate, inheritance, net income, or franchise taxes) imposed on
the land and improvements on which the leased premises are situated by any
authority having the direct or indirect power to tax, including without
limitation, the Environmental Protection Agency, any city, county, state or
federal government, or any improvement or other district or division thereof,
whether or not such tax is (a) determined by the not rentable area or the
rent or other sums payable hereunder, or (b) upon or with respect to any
legal or equitable interest of Lessor in the leased premises, the Building,
or any part thereof, or (c) now customary or within the contemplation of the
parties.
(ii) Real Estate Tax: Lessor shall pay, as they become due, all real
estate taxes which accrue against the Building during the term of this lease.
If the real property taxes levied against the Building increase at any time for
any reason over the taxes payable for 1995/96 ("base year"), Lessee shall pay
his proportionate share of any such increase. In computing Lessee's share of
any increase in property taxes, Lessee's share thereof is fixed at .79%. It is
understood and agreed that Lessor will not know in advance the amount of
additional property taxes to be paid and that on determination of such amount a
lump sum will be paid by Lessee to Lessor and a pro rata share thereof shall be
added to the rental due each month for the succeeding years as hereinbelow
provided. The calculation of the additional rental due from Lessee under the
terms of this paragraph shall be made by Lessor as soon as possible after Lessor
is informed of said increase. Lessor shall then give notice to Lessee of (a)
the additional rent due each month and (b) the lump sum amount due from Lessee
for any prior months as to which Lessor has an obligation for increased real
property taxes. Lessee shall, within (10) days of the date of said notice, pay
to Lessor the full amount of additional rental due for prior months (including
the pro rata share of any increased real property taxes which would be payable
in addition to the rental payments made in the calendar year prior to the date
of receipt of the notice referred to hereinabove by Lessee from Lessor) and
shall pay on the first day of each following month in addition to the rent
described in Paragraph 5 above, the additional monthly amount due under this
paragraph.
*Based upon 332,000 square feet.
<PAGE>
9. Lessor Services: Lessor will pay for the electricity, gas and water
utilized in operating any and all facilities serving the leased premises, and,
in addition, Lessor will furnish Lessee, while occupying the leased premises:
A. Hot and cold water at those points of supply provided for general use
of other tenants in the Building, central heating and air conditioning, during
normal business hours on business days, and at such temperatures and in such
amounts as are considered by Lessor to be standard, janitor service on a five
(5) day week basis, electric current, routine maintenance and electric lighting
service for all public areas and special service areas, including elevators, of
the Building in the manner and to the extent deemed by the Lessor to be
standard. Failure by Lessor to any extent to furnish those defined services, or
any cessation thereof, resulting from causes beyond the control of Lessor, shall
not render Lessor liable in any respect for damages to either person or
property, nor shall such event be construed as an eviction of Lessee, nor work
an abatement of rent, or relieve Lessee from fulfillment of any covenant or
agreement hereof. Should any of the equipment or machinery break down, or for
any cause cease to function properly, Lessor shall use reasonable diligence to
repair the same promptly, but Lessee shall have no claim for rebate of rent or
damages on account of any interruption in service occasioned thereby or
resulting therefrom so long as Lessee shall have reasonable access to and use of
the leased premises.
B. Adequate electrical facilities to furnish power for typewriters, voice
writers, calculating machines and other machines of similar low electrical
consumption; provided, however, that Lessee shall bear any utility costs
occasioned by electro-data processing machines, including air conditioning costs
therefor and similar machines of high electrical consumption.
10. Quiet Enjoyment: Lessor warrants that it has full right to execute and to
perform this lease and to grant the estate demised herein and that Lessee, upon
payment of the rents herein required, and performing the terms, conditions,
covenants and agreements herein contained, shall peaceably and quietly have,
hold and enjoy the leased premises during the full term of this lease and any
extension or renewal thereof.
11. Repairs and Maintenance: Except as provided in paragraph 9 above, Lessee
shall, at all times during the term hereof at its sole cost and expense, keep
the premises and every part thereof in good condition and repair, except damage
thereto by fire, earthquake, act of God or the elements, Lessee hereby waiving
the right to make repairs at Lessor's expense under any law, statute or
ordinance with respect thereto now or hereafter in effect. Unless otherwise
expressly provided herein, Lessor shall not be required to make any improvements
or repairs of any kind or character on the leased premises during the term of
this lease. Lessee shall, at its own cost and expense, repair or replace any
damage or injury to the leased premises, or any part thereof, caused by Lessee
or Lessee's agents, employees, invitees, licensees or visitors; provided,
however, if Lessee fails to make such repairs or replacements promptly, Lessor
may, at its option, make such repairs or replacements, and lessee shall
reimburse the cost thereof to Lessor on demand, together with interest at the
maximum annual rate permitted by law from the date of such work.
Lessee shall not commit or allow any waste or damage to be committed on any
portion of the leased premises.
12. Assignment, Sublease, Mortgage, Change in Corporate Ownership, Right of
First Refusal: Lessee shall not, and shall not have the power to, transfer,
assign, sublet, enter into license or concession agreements, change ownership,
mortgage or hypothecate this lease or the Lessee's interest in and to the leased
premises without first procuring the written consent of the Lessor. Any
attempted or purported transfer, assignment, subletting, license or concession
agreement, change of ownership, mortgage or hypothecation without the Lessor's
written consent shall be void and confer no rights upon any third person.
Without in any way limiting Lessor's right to refuse to give such consent for
any other reason or reasons, Lessor reserves the right to refuse to give such
consent if, in Lessor's reasonable business judgment, the quality of the
Building's operation or tenant mix is or may be in any way adversely affected
during the term of the lease and/or the financial worth of the proposed new
tenant is loss that on the Lessee executing this lease or of Lessee and Lessee's
guarantor as the case may be. As a condition for granting its consent to any
subletting, Lessor may require that Lessee pay to Lessor, as additional rent,
all rents or other economic consideration received by Lessee from its Sublessees
in excess of the rents payable by Lessee to Lessor hereunder. Nothing herein
contained shall relieve Lessee or any guarantor from its covenants and
obligations for the term of this lease. Lessee agrees to reimburse Lessor for
Lessor's reasonable attorney's fees incurred in conjunction with the processing
and documentation of any such requested transfer, assignment, subletting,
license or concession agreement, change of ownership, mortgage or hypothecation
of this lease or Lessee's interest in and to the leased premises.
Each transfer, assignment, subletting, license, concession agreement,
mortgage or hypothecation to which there has been consent shall be by an
instrument in writing in form satisfactory to Lessor, and shall be executed by
the transferor, assignor, sublessor, licensor, concessionaire or mortgagee in
each instance, as the case may be; and each transferee, assignee, sublessee,
licensee, concessionaire or mortgagee shall agree in writing for the benefit of
the Lessor herein to assume, to be bound by, and to perform the terms, covenants
and conditions of this Lessee to be done, kept and performed by the Lessee,
including payment of all amounts due or to become due under this lease directly
to the Lessor. One executed copy of such written instrument shall be delivered
to the Lessor. Failure to first obtain in writing Lessor's consent or failure
to comply with the provisions of this Paragraph shall operate to prevent any
such transfer, assignment, subletting, license, concession, agreement or
hypothecation from becoming effective. No Assignee or Sublessee shall have a
right further to assign or sublet or a right to exercise any option hereunder to
extend the term of this lease.
If the Lessee hereunder is a corporation which is not deemed a public
corporation, or as an unincorporated association or partnership, the transfer,
assignment or hypothecation of any stock or interest in such corporation,
association or partnership in the aggregate in excess of twenty-five percent
(25%) shall be deemed an assignment within the meaning of provisions of this
Paragraph 12.
Notwithstanding anything to the contrary contained herein, if at any time
during the term of this lease Lessee shall receive a bona fide offer from any
third party seeking an assignment, sublet or other transfer of Lessee's interest
in this lease, Lessee shall serve on Lessor a written notice of the terms of
such offer from such third party and of Lessee's intention to accept the same.
Lessor shall have the right for a period of thirty (30) days from the date of
delivery of such notice to assume said assignment, sublease or other such
transfer of Lessee's interest in this lease on the same terms and conditions
specified in the notice. In the event that Lessor shall not within said thirty
(30) day period elect to assume said assignment, sublease or other such transfer
of Lessee's interest in this lease, the Lessee may, subject to obtaining
Lessor's prior written approval in accordance with this Paragraph 12, assign,
sublet or transfer Lessee's interest in this lease on the same terms and
conditions and to the third party specified in the notice; provided that if
Lessee does not assign, sublet, or otherwise transfer Lessee's interest in this
lease to said third party within sixty (60) days of the date of the delivery of
Lessee's notice to Lessor, any further transaction shall be deemed to be a new
determination by Lessee to assign, sublet or otherwise transfer Lessee's
interest in this lease and the provisions of this paragraph shall apply.
13. Alterations and Improvements: Lessee shall not make or allow to be made
any alterations or physical additions in or to the leased premises without first
obtaining the written consent of Lessor. Any and all such alterations, physical
additions or improvements to the leased premises shall be surrendered to Lessor
upon the termination of this lease, by lapse of time or otherwise and shall
become Lessor's property without compensation, allowance or credit to Lessee;
provided, however, this clause shall not apply to moveable equipment, trade
fixtures or furniture of Lessee, which may be removed by Lessee at the end of
the term of the lease if Lessee is not then in default. If prior to such
termination or within ten (10) days thereafter, Lessor so directs by notice,
Lessee shall promptly remove the installations, additions, hardware, non-trade
fixtures and improvements placed in the leased premises by Lessee and designed
in the notice, failing which Lessor may store or remove the same for Lessee's
account and Lessee shall pay the costs of such removal and storage and of any
necessary restoration of the leased premises.
14. Use: Lessee shall use and occupy the leased premises for business offices
and for no other purpose. Lessee shall not occupy or use, or permit any portion
of the leased premises to be occupied or used for any business or purpose which
is unlawful, or extra-hazardous, or permit anything to be done which would in
any way increase the rate of fire insurance coverage in said leased premises
and/or the contents of the Building, and in the event that, by reason of such
acts of Lessee, there shall be any increase in the insurance rates of the
building or contents above normal rates, or cancellation of the insurance.
Lessee agrees to pay to Lessor, as additional rental, an amount equal to all
such increases.
15. Compliance with Laws and Rules of Building: Lessee shall comply with all
laws, ordinances, orders, rules and regulations (state, federal, municipal and
other agencies or bodies having any jurisdiction thereof) relating to the use,
condition or occupancy of the leased premises. Lessee will comply with the
rules of the Building adopted by Lessor which are set forth on a schedule
attached hereto and made a part hereof as fully as though set forth herein.
Lessor shall have the right if necessary to change such rules and regulations or
to amend them in any reasonable manner for reasons including, without
limitation, maintaining the safety, care and cleanliness of the leased premises,
energy conservation, compliance with any and all regulatory orders, and the
preservation of good order therein, all of which changes and amendments will be
sent by Lessor to Lessee in writing and shall be thereafter carried out and
observed by Lessee.
<PAGE>
at all reasonable hours upon reasonable prior notice (except in the case of
emergencies), to inspect same, clean or make repairs, alterations or additions
thereto, as Lessor may deem necessary or desirable, or for the purpose of
determining Lessee's use thereof or whether an act of default under this lease
has occurred. Lessee shall not be entitled to any abatement or reduction of
rent or to any damages for any injury or inconvenience to or interference with
Lessee's business, any loss or occupancy or quiet enjoyment of the leased
premises by reason of any such repairs, alterations or additions reasonably
required to be made by Lessor hereunder.
17. Nuisance: Lessee shall conduct its business and control its agents,
employees, invitees and visitors in such a manner as not to create any nuisance
or interfere with, annoy, or disturb any other tenant or Lessor in its
management of the Building.
18. Condemnation: Should the whole or any part of the leased premises be
condemned and taken by any competent authority for any public or quasi-public
use or purpose, all awards payable on account of such condemnation and taking
shall be payable to Lessor, and Lessee hereby waives all interest in or claim
to said awards, or any part thereof. If the whole of the leased premises shall
be so condemned and taken, then this lease shall terminate. If a part only of
the leased premises is condemned and taken and the remaining portion thereof is
not suitable for the purposes for which Lessee had leased said premises, Lessee
shall have the right to terminate this lease. If by such condemnation and
taking part only of the leased premises is taken, and the remaining part thereof
is suitable for the purposes for which Lessee has leased said premises, this
lease shall continue, but the rental shall be reduced in an amount proportionate
to the value of the portion taken as it related to the total value of the leased
premises.
19. Destruction: If, during the term, the leased premises or the Building
and other improvements in which the leased premises are located are totally
or partially destroyed from any cause, rendering the leased premises totally
or partially inaccessible or unusable, Lessor shall restore the leased
premises or the Building and other improvements in which the leased premises
are located to substantially the same condition as they were in immediately
before destruction, if the restoration can be made under the existing laws
and can be completed within 90 working days after the date of the
destruction. Such destruction shall not terminate this lease. The
provisions of Section 1933, subparagraph 4, of the Civil Code of California
are hereby waived by Lessee.
If the restoration cannot be made in the time stated in this paragraph,
then within 21 working days after the parties determine that the restoration
cannot be made in the time stated in this paragraph, Lessee can terminate this
lease immediately by giving notice to Lessor. If Lessee fails to terminate this
lease and if restoration is permitted under the existing laws, Lessor, at its
election, can either terminate this lease or restore the leased premises or the
Building and other improvements in which the leased premises are located within
a reasonable time and this lease shall continue in full force and effect. If
the existing laws do not permit the restoration, either party can terminate this
lease immediately by giving notice to the other party.
In the event of restoration as herein provided, Lessee shall be entitled to
proportionate reduction of the rent while such restoration is being made, such
proportionate reduction to be based upon the extent to which the making of such
restoration shall materially interfere with the business carried on by the
Lessee in the leased premises. If the damage is due to the fault or neglect of
Lessee or its employees, there shall be no abatement of rent.
Notwithstanding anything to the contrary contained in this paragraph,
Lessor shall not have any obligation whatsoever to repair, reconstruct or
restore the leased premises when the damage resulting from any casualty covered
under this paragraph occurs during the last twelve (12) months of the term of
this lease or any extension thereof.
Lessor shall not be required to repair any injury or damage by fire or
other cause, or to make any repairs or replacements of any panels, decoration,
office fixtures, railings, floor covering, partitions, or any other property
installed in the leased premises by Lessee.
20. Insurance: From and after the date that Lessee enters into possession of
the leased premises as permitted by the terms hereof and throughout the term of
this lease, Lessee shall at its sole cost and expense provide and keep in full
force and effect the following insurance:
A. General liability insurance in standard form insuring Lessee and
Lessor as insureds against any liability whatsoever occasioned by accident or
disaster on, in or about the leased premises with limits of not less than
$500,000 for one person in one accident and $1,000,000 with respect to one
occurrence.
B. Property damage insurance in an amount not less than $100,000.
C. Fire and extended coverage insurance in all risk form insuring the
interest of the Lessee in the Lessee's improvements in the leased premises
and its interest in its office furniture, equipment and supplies. Lessee
hereby waives any rights of action against Lessor, including rights of
subrogation, for loss or damage covered by such insurance.
Insurance required hereunder shall be in companies rated A+, AAA or better
in "Best's Insurance Guide." In addition, the insurance required hereunder
shall be primary insurance and shall provide that the insurer shall be liable
for the full amount of the loss up to and including the total amount of
liability set forth above without the right of contribution from any other
insurance coverage of Lessor.
All premiums on all policies referred to in this section shall be paid by
Lessee. Duplicate originals or certificates of such policies shall be delivered
to Lessor and any others named pursuant to this section, immediately upon
receipt thereof from the insurance company or companies, but in no event later
than the commencement date of this lease. Duplicate originals or certificates
of renewal policies or new policies replacing any policies expiring during the
term hereof shall be delivered to Lessor at least twenty (20) days before the
date of expiration of the old or replaced policies, together with proof
satisfactory to Lessor that the full premiums have been paid by Lessee on the
new policies. Premiums on policies shall not be financed in any manner whereby
the lender, on default or otherwise, shall have the right or privilege of
surrendering or cancelling the policies. Each insurance policy required
hereunder shall by its terms provide that it shall not be modified without the
prior consent of Lessor and shall not be cancelled unless ten (10) days notice
thereof is given by the Insuror or Lessor.
On default by Lessee in obtaining any insurance required hereunder or
delivering any policies or paying the premiums or other charges thereon as
aforesaid, it shall be the privilege, though not the obligation, of Lessor to
effect fully such insurance and likewise to pay any premiums or charges thereon.
All sums so paid by Lessor and all costs and expenses incurred by Lessor in
connection therewith, together with interest thereon at the maximum annual rate
permitted under Section 1(2) of Article XV of the California Constitution, from
the respective dates of Lessor's making of each such payment, shall constitute
additional rent payable by Lessee under this lease and shall be paid by Lessee
to Lessor on demand, and Lessor shall not be limited to the proof of any damages
which Lessor may claim against Lessee arising out of or by reason of Lessee's
failure to provide and keep in force insurance as aforesaid, to the amount of
the insurance premium or premiums not paid or incurred by Lessee and which would
have been payable.
21. Surrender of Leased Premises: Lessee shall, at least ninety (90) days
before the last day of the term hereof, give to Lessor a written notice of
intention to surrender the leased premises on that date, but nothing contained
herein shall be construed as an extension of the term hereof or as consent of
Lessor to any holding over by Lessee.
At the end of the term or any renewal thereof or other sooner termination
of this lease, Lessee will peaceably deliver up to the Lessor possession of the
leased premises, together with all improvements or additions upon or belonging
to the same, by whomsoever made, in the same condition as received, or first
installed, ordinary wear and tear and damage by fire, earthquake, act of God or
the elements alone excepted. Lessee may, upon the termination of this lease,
remove, at Lessee's sole cost, all trade fixtures installed by Lessee, title to
which shall be in Lessee until such termination, repairing any damage to the
leased premises caused by such removal. Any of Lessee's personal property and
trade fixtures not removed by Lessee at the end of the term or other sooner
termination of this lease shall be deemed abandoned by the Lessee if Lessor so
elects, and Lessor shall remove, store and dispose of such personal property and
trade fixtures in accordance with law. Lessee shall be liable to Lessor for
Lessor's costs incurred in removing, storing and disposing of Lessee's abandoned
personal property and trade fixtures. Lessee shall indemnify Lessor against any
loss of liability resulting from delay by Lessee in so surrendering the leased
premises, including without limitation, any claims made by any succeeding lessee
founded on such delay.
The voluntary or other surrender of this lease by Lessee, or a mutual
cancellation thereof, shall not work a merger, and shall, at the option of
Lessor, terminate all or any existing subleases or subtenancies, or may, at the
option of Lessor, operate as an assignment to it of any or all such subleases or
subtenancies.
22. Holding Over: Lessee hereby acknowledges that any holding over after the
expiration of the lease term by Lessee will cause Lessor to incur damages not
contemplated by this lease, the exact amount of which will be extremely
difficult to ascertain. Such damages include, but are not limited to, loss of
rental income and claims for damages from a future tenant to whom the Lessor is
obligated to deliver possession during the holdover period, and costs incurred
in locating prospective new tenants. Accordingly, in the event of holding over
by Lessee, Lessee shall pay Lessor as rental for the period of such holdover an
amount equal to three hundred percent (300%) of the rent which would have been
payable by Lessee had such holdover period been a part of the original term of
this lease.
-4-
<PAGE>
23. Default Lessor's Remedies:
A. Default: The occurrence of any of the following shall constitute a
material breach of this lease by Lessee:
(i) Any failure by Lessee to pay rent or any other monetary sum
required to be paid hereunder (where such failure continues for three (3) days
after written notice thereof from Lessor to Lessee).
(ii) The abandonment or vacation of the leased premises by Lessee.
(iii) The failure by Lessee to observe the perform any other provision
of this lease to be observed or performed by Lessee, where such failure
continues for twenty (20) days after written notice thereof by Lessor to Lessee.
Provided, however, that if the nature of such default is such that it cannot
reasonably be cured within such twenty (20) day period, Lessee shall not be
deemed to be in default if Lessee shall within such period commence such cure
and thereafter diligently prosecute the same to completion.
B. Remedies: In the event of any such material default or breach by
Lessee, Lessor may at any time thereafter without limiting Lessor in the
exercise of any right or remedy at law or in equity which lessor may have by
reason of such default or breach:
(i) Maintain this lease in full force and effect and recovery the
rent and other monetary charges as they become due without terminating Lessee's
right to possession, irrespective of whether Lessee shall have abandoned the
leased premises. In the event Lessor elects not to terminate the lease, Lessor
shall have the right to attempt to relet the leased premises at such rent and
upon such conditions and for such a term, and to do all acts necessary to
maintain or preserve the leased premises as Lessor deems reasonable and
necessary without being deemed to have elected to terminate this lease,
including removal of all persons and property in the leased premises, such
property may be removed and stored in a public warehouse or elsewhere at the
cost of and for the account of Lessee. In the event any such reletting occurs,
this lease shall terminate automatically upon the new Lessee taking possession
of the leased premises. Notwithstanding that Lessor fails to elect to terminate
this lease initially, Lessor at any time during the term of this lease may elect
to terminate this lease by virtue of such previous default by Lessee.
(ii) Terminate Lessee's right to possession by any lawful means, in
which case this lease shall terminate and Lessee shall immediately surrender
possession of the leased premises to Lessor. In such event, Lessor shall be
entitled to recover from Lessee all damages incurred by Lessor by reason of
Lessee's default, including without limitation thereto, the following: (a) the
worth at the time of award of any unpaid rent which had been earned at the time
of such termination; plus (b) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of the award exceeds the amount of such rental loss that is proved could
have been reasonably avoided; plus (c) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceed the amount of such rental loss that is proved could be reasonably
avoided; plus (d) any other amount necessary to compensate Lessor for all the
detriment proximately caused by Lessee's failure to perform his obligations
under this lease or which in the ordinary course of events would be likely to
result therefrom; plus (e) at Lessor's election, such other amounts in addition
to or in lieu of the foregoing as may be permitted from time to time by
applicable state law. Upon such re-entry, Lessor shall have the right to make
any reasonable repairs, alterations, or modifications to the leased premises,
which Lessor, in its sole discretion, deems reasonable and necessary. As used
in subparagraph (a) above, the "worth at the time of award" is computed by
allowing interest at the maximum annual rate permitted by law from the date of
default. As used in subparagraphs (b) and (c) above, the "worth at the time of
award" is computed by discounting such amount at the discount rate of the U.S.
Federal Reserve Bank at the time of award plus one percent (1%). The term
"rent," as used in this Paragraph 23, shall be deemed to be and to mean the rent
to be paid pursuant to Paragraphs 5, 6, and 8 and all other monetary sums
required to be paid by Lessee pursuant to the terms of this lease.
24. Waiver of Breach: Failure of Lessor to declare any default immediately
upon occurrence thereof, or delay in taking any action in connection therewith,
shall not waive such default at any time and take such action as might be lawful
or authorized hereunder, either in law or in equity.
25. Attorney's Fees: In the event of any action or proceeding brought by
either party against the other under this lease, the prevailing party shall be
entitled to recover all costs and expenses, including the fees of its attorneys
in such action or proceeding in such amount as the court may adjudge reasonable
as attorneys' fees.
26. Waiver of Subrogation: Anything in this lease to the contrary
notwithstanding each party hereby waives any and all rights of recovery, claim,
action or cause of action against the other, its agents, officers and employees,
for any loss or damages that may occur to the leased premises or any
improvements thereto or the Building of which the leased premises are a part, or
any improvements thereto, by reason of fire, the elements or any other cause
which could be insured against under the terms of standard fire and extended
coverage insurance policies, regardless of cause or origin, including negligence
of the parties hereto, their agents, officers and employees.
27. Signs: Lessor has not conveyed to the Lessee any rights in or to the outer
side of the outside walls of the Building of which the leased premises forms a
part. The Lessee shall not display or erect any lettering, sign, advertisement,
awning, or other projection in or on the leased premises or in or on the
Building, or make any alteration, decoration, addition, or improvements in or to
the leased premises, or in or to the Building, without the prior written consent
of the Lessor. If such consent is granted, the Lessee, at its sole expense,
shall carry such workman's compensation and general liability insurance as the
Lessor may require.
28. Hold Harmless: Lessee shall hold Lessor harmless from all damages arising
out of any damage to any person or property occurring in, on, or about the
leased premises and the Building in which the leased premises are located,
except that Lessor shall be liable to Lessee for damage resulting from the acts
or omissions of Lessor or its authorized representatives. Lessor shall hold
Lessee harmless from all damages arising out of any such damage. A party's
obligation under this paragraph to indemnify and hold the other party harmless
shall be limited to the sum that exceeds the amount of insurance proceeds, if
any, received by the party being indemnified.
29. Liens: Lessee shall keep the leased premises and the Building of which the
leased premises are a part free from any liens arising out of work performed,
materials furnished, or obligations incurred by Lessee and shall indemnify, hold
harmless and defend Lessor from any liens and encumbrances arising out of any
work performed or materials furnished by or at the direction of Lessee. In the
event that Lessee shall not, within twenty (20) days following the imposition of
any such lien, cause such lien to be released of record by payment or posting of
a proper bond, Lessor shall have, in addition to all other remedies provided
herein and by law, the right but no obligation, to cause the same to be released
by such means as it shall deem proper, including payment of the claim giving
rise to such lien. All such sums paid by Lessor and all expenses incurred by it
in connection therewith, including attorneys' fees and costs, shall be payable
to Lessor by Lessee on demand with interest at the maximum annual rate permitted
by law. Lessor shall have the right at all times to post and keep posted on the
leased premises any notices permitted or required by law, or which Lessor shall
deem proper, for the protection of Lessor and the leased premises, and any other
party having an interest therein, for mechanics' and materialmen's liens, and
Lessee shall give to Lessor at least ten (10) business days' prior written
notice of the expected date of commencement of any work relating to alterations
or additions to the leased premises.
30. Notices: In every instance where it shall be necessary or desirable for
the Lessee to serve any notice or demand upon the Lessor, such notice or demand
shall be sent by United States Registered or Certified Mail, postage prepaid,
addressed to the Lessor at 1720 S. Amphlett, 110, San Mateo, Ca or at such other
address of Lessor as may appear on the records of Lessee. Any notice or demand
to be given by the Lessor to the Lessee shall be effective if mailed or
delivered to the office of the Lessee in the leased premises or at such other
address as may appear on the records of the Lessor. Notice mailed as aforesaid
shall be deemed to have been served at the time the same is posted. Rent shall
be mailed to 1720 South Amphlett Blvd., Suite 110, San Mateo, CA 94402.
31. Subordination Attornment: At Lessor's option, this lease shall be subject
and subordinate to all ground and underlying leases which now exist or may
hereinafter be executed affecting the Building or the land upon which the
Building is situated or both, and to the lien of any mortgages or deeds of trust
in any amount or amounts whatsoever now or hereafter placed on or against the
land or improvements of which the leased premises are a part, on or against
Lessor's interest or estate therein, or on or against any ground or underlying
lease, without the necessity of the execution and delivery of any further
instruments on the part of Lessee to effectuate such subordination. If any
mortgages, trustee or ground lessor shall elect to have this lease prior to the
lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Lessee, his lease shall be deemed prior to such mortgage, deed
of trust or ground lease, whether this lease is dated prior or subsequent to the
date of said mortgage, deed of trust or ground lease or the date of the
recording thereof. Lessee covenants and agrees to execute and deliver upon
demand without charge therefor, such further instruments evidencing such
subordination of this lease to such ground or underlying leases and to the lien
of any such mortgages or deeds of trust as may be required by Lessor. Lessee
hereby appoints Lessor as Lessee's attorney-in-fact, irrevocably, to execute and
delivery any such agreements, instruments, releases or other documents.
-5-
<PAGE>
In the event any proceedings are brought for default under any ground or
any underlying lease or in the event of foreclosure or the exercise of the power
of sale under any mortgage or deed of trust made by Lessor covering the
Building of which the leased premises are a part, Lessee shall attorn to the
purchaser upon any such foreclosure or sale and recognize such purchaser as
Lessor under this lease, provided such purchaser expressly agrees in writing to
be bound by the terms of the lease.
32. Estoppel Certificate: Lessee shall within ten (10) days after receipt of a
request therefor from Lessor, execute, acknowledge and deliver to Lessor a
statement in writing (a) certifying that this lease is unmodified and in full
force and effect (or, if modified, is in full force and effect) and the date to
which rent and other charges are paid in advance, if any and (b) acknowledging
that there are not, to Lessee's knowledge, any uncured defaults on the part of
Lessor hereunder, or specifying such defaults if any are claimed. Any such
statement may be conclusively relied upon by a prospective purchaser or
encumbrancer of the Building of which the leased premises are a part. Lessee's
failure to execute such statement within such time shall be conclusive upon
Lessee (i) that this lease is in full force and effect without modification
except as may be represented by Lessor, (ii) that there are no uncured defaults
in Lessor's performance, and (iii) that not more than one month's rent has been
paid in advance. If Lessor desires to finance or refinance said Building in
which the leased premises are a part, Lessee hereby agrees to deliver to any
lender designated by Lessor such financial statements of Lessee as may be
reasonably required by such lender. All such statements shall be received by
Lessor in confidence and shall be used only for the purpose herein set forth.
33. Transfer of Lessor's Interest: In the event of a sale or conveyance by
Lessor of Lessor's interest in the building of which the leased premises form a
part other than a transfer for security purposes only, Lessor shall be relieved,
from and after the date specified in such notice of transfer, of all obligations
and liabilities accruing thereafter on the part of Lessor, provided that any
funds in the hands of Lessor at the time of transfer in which Lessee has an
interest, shall be delivered to the successor of Lessor. This lease shall not
be affected by any such sale and Lessee agrees to attorn to the purchaser or
assignee provided all Lessor's obligations hereunder are assumed in writing by
the transferee.
34. Insolvency or Bankruptcy of Lessee: The insolvency of Lessee pursuant
to California law with respect to the appointment of a receiver to take
possession of all or substantially all of the property of Lessee, or the
making of a general assignment for the benefit of creditors by Lessee shall
terminate this lease and entitle Lessor to re-enter and regain possession of
the leased premises. In the event that there shall be filed by or against
Lessee a petition in bankruptcy or for reorganization pursuant to any statute
of the United States, the rights of Lessor and Lessee shall be determined, if
applicable, by the provisions of the Bankruptcy Reform Act of 1978 or any
successor statute hereafter in effect.
35. General:
A. This lease shall be binding and inure to the benefit of the parties
hereto and their respective heirs, personal representatives, successors and
assigns.
B. This agreement may not be altered, changed or amended, except by an
instrument in writing, signed by both parties.
C. This instrument along with any exhibits and attachments hereto
constitutes the entire agreement between Lessor and Lessee relative to the
leased premises. Lessor and Lessee agree hereby that all prior or
contemporaneous oral agreements between and among themselves and their agents or
representatives relative to the leasing of the leased premises are merged in or
revoked by this agreement.
D. If any term or provision of this lease shall, to any extent, be
determined by a court of competent jurisdiction to be invalid or unenforceable,
the remainder of this lease shall not be affected thereby, and each term and
provision of this lease shall be valid and enforceable to the fullest extent
permitted by law.
E. The captions of the paragraphs of this lease are for convenience only
and shall not be deemed to be relevant in resolving any question of
interpretation or construction of any paragraphs of this lease. Exhibits
attached hereto, and addendums and schedules initialed by the parties, are
deemed by attachment to constitute part of this lease and are incorporated
herein.
F. The words "Lessor" and "Lessee," as used herein, shall include the
plural as well as the singular. Words used in neuter gender include the
masculine and feminine and words in the masculine or feminine gender include the
neuter. If there be more than one Lessor or Lessee, the obligations hereunder
imposed upon Lessor or Lessee shall be joint and several. If the Lessees are
husband and wife, the obligations shall extend individually to their sole and
separate property as well as to their community property.
G. The word "rent" as used herein, shall include minimum monthly rent,
prepaid rent, percentage rent, if any, adjustments to rent, security deposit,
real property taxes and assessments, common area charges, operating costs and
any other similar charges payable by Lessee to Lessor.
H. Time is of the essence of this lease and each and every provision
hereof. All the terms, covenants, and conditions contained in this lease to
be performed by either party, if such party shall consist of more than one
person or organization, shall be deemed to be joint and several, and all
rights and remedies of the parties shall be cumulative and non-exclusive of
any other remedy at law or in equity.
I. No covenant, term or condition or the breach thereof shall be deemed
waived, except by written consent of the party against whom the waiver is
claimed, and any waiver or the breach of any covenant, term or condition shall
not be deemed to be a waiver of any proceeding or succeeding breach of the same
or any other covenant, term or condition. Acceptance by Lessor of any
performance by Lessee after the time the same shall have become due shall not
constitute a waiver by Lessor of the breach or default of any covenant, term or
condition or otherwise expressly agreed to by Lessor in writing.
J. Except as limited elsewhere in this lease, wherever in this lease
Lessor or Lessee is required to give its consent or approval to any action on
the part of the other, such consent or approval shall not be unreasonably
withheld. In the event of failure to give any such consent, the other party
shall be entitled to specific performance at law and shall have other remedies
as are reserved to it under this lease, but in no event shall Lessor or Lessee
be responsible in monetary damages for failure to give consent unless said
consent is withheld maliciously or in bad faith.
K. If Lessee is a corporation, each individual executing this lease on
behalf of said corporation represents and warrants that he/she is duly
authorized to execute and deliver this lease on behalf of said corporation in
accordance with a duly adopted resolution of the Board of Directors of said
corporation or in accordance with the Bylaws of said corporation, and that this
lease is binding upon said corporation in accordance with its terms. If Lessee
is a corporation, Lessee shall, within thirty (30) days after execution of this
lease, deliver to Lessor a certified copy of the resolution of the Board of
Directors of said corporation authorizing or ratifying the execution of this
lease.
L. All reference to the lease term shall include any extensions of such
term.
36. Rights Reserved to Lessor: Lessor shall have the following rights
exercisable without notice, unless otherwise herein provided, and without
liability to Lessor for damage or injury to property, person or business (all
claims for damage being hereby released), and without effecting an eviction or
disturbance of Lessee's use or possession or giving rise to any claim for
setoffs, or abatement of rent:
A. Lessor shall have the right to relocate the leased premises to another
part of the Office Complex in which the leased premises are located in
accordance with the following:
(i) The new premises shall be substantially the same in size,
dimensions, configuration, decor and nature as the leased premises described in
this lease and shall be placed in that condition by Lessor at its cost.
(ii) The physical relocation of the premises shall be accomplished by
Lessor at its cost.
(iii) Lessor shall give Lessee at least thirty (30) days notice of
Lessor's intention to relocate the leased premises.
(iv) The physical relocation of the leased premises shall take place
during evenings, weekends, or otherwise so as to incur the least inconvenience
to Lessee.
(v) All reasonable costs incurred by Lessee as a result of the
relocation shall be paid by Lessor.
(vi) If the relocated premises are smaller than the leased premises
as they existed before the relocation, rent shall be reduced to a sum computed
by multiplying the rent specified in Paragraphs 5 and 6 hereof by a fraction,
the numerator of which shall be the total number of net rentable square feet in
the relocated premises, and the denominator of which shall be the total number
of not rentable square feet in the leased premises before relocation.
(vii) The parties immediately shall execute an amendment to this lease
stating the relocation of the leased premises and the reduction of rent, if any.
(viii) Should Lessee refuse to permit Lessor to relocate Lessee to
such new premises at the end of the said thirty (30) day period, such refusal
shall constitute a default by Lessee pursuant to paragraph 23A (iii) of this
lease.
B. To change the name or street address of the Building in which the
leased premises are located.
C. To install and maintain signs on the exterior and interior of the
Building in which the leased premises are located.
D. To designate all sources furnishing sign paining and lettering, ice,
mineral or drinking water, beverages, foods, towels, vending machines or toilet
supplies used or consumed on the leased premises.
E. To have pass keys to the leased premises.
-6-
<PAGE>
F. To decorate, remodel, repair, alter or otherwise prepare the leased
premises for occupancy during the last six months of the term hereof, if during
or prior to such time Lessee vacates the leased premises, or at any time after
Lessee abandons the leased premises.
G. To enter the leased premises at reasonable hours to make inspections,
or to exhibit the leased premises to prospective tenants, purchasers or others,
or for other reasonable purposes.
H. To approve the weight, size and location of sales, computers, and
other heavy articles in and about the leased premises and the Building and to
require all such items and other office furniture and equipment to be moved in
and out of the Building and leased premises only at such times and in such
manner as Lessor shall direct and in all events at Lessee's sole risk and
responsibility.
I. At any time or times, to decorate and to make, at its own expense,
repairs, alterations, additions and improvements, structural or otherwise, in or
to the leased premises, the Building or part thereof, and to perform any acts
related to the safety, protection or preservation thereof, and during such
operations to take into and through the leased premises or any part of the
Building all material and equipment required to close or temporarily suspend
operation of entrances, doors, corridors, elevators or other facilities,
provided that Lessor shall cause as little inconvenience or annoyance to Lessee
as is reasonably necessary in the circumstances. Lessor may do any such work
during ordinary business hours and Lessee shall pay Lessor for overtime and for
any other expenses incurred if such work is done during other hours at Lessee's
request.
J. To do or permit to be done any work in or about the leased premises or
the Building or any adjacent or nearby building, land, street or alley.
K. To grant to anyone the exclusive right to conduct any business or
render any service in the Building, provided such exclusive right shall not
operate to exclude Lessee from the use expressly permitted by Paragraph 14 of
this lease.
<PAGE>
37. Lessee's phone service will be provided through Bayshore Corporate Center
under the below General Terms and Conditions. The attached cost sheet details
basic monthly charges and installation costs.
The attached Letter of Agency is to be signed, attached to Lessee's letterhead
and returned with this lease.
The attached Service Authorization form is to be filled out and returned with
the Lease.
GENERAL TERMS AND CONDITIONS
A. SUBSCRIBER RESPONSIBILITY: Subscriber assumes the responsibility for all
usage of the service, for all fees, charges, and taxes thereof, and for all the
use and security of subscriber's services rendered prior to notification of
misuse of authorization codes.
B. PAYMENT TERMS: Subscriber agrees to remit payment for all services
provided, including taxes as applicable, upon receipt of invoice. Bayshore
Corporate Center reserves the right to interrupt service to subscriber for late
payments of fees, charges, and taxes. Should subscriber fail to pay its bills
in a timely manner as required by this agreement, Bayshore Corporate Center has
the right to terminate subscriber's use of their service on two (2) days written
notice. Subscriber also agrees to reimburse Bayshore Corporate Center for all
reasonable expenses including reasonable attorneys' fees for expenses to
Bayshore Corporate Center in the collection of past due balances.
C. MISCELLANEOUS:
1. In no event shall Bayshore Corporate Center be liable for any special,
consequential, punitive or incidental damages, including loss of use, profit,
revenue or goodwill. Bayshore Corporate Center shall not be liable for any
failure of performance due to causes and/or circumstances beyond its control,
nor shall Bayshore Corporate Center be liable for any act or omission for any
other company furnishing any portion of service to subscriber, any equipment
supplied to subscriber (i.e. T1.5 channel banks, etc.) by Bayshore Corporate
Center or any other supplier of equipment to subscriber (under warranty, service
agreement, or otherwise), or any network service contracted by subscriber or
Bayshore Corporate Center. Subscriber acknowledges and understand that the
applicable AT&T/Netsafe tariff rates are subject to change.
2. This writing is intended by the parties as a final expression of their
agreement and as a complete and exclusive statement for the terms thereof. The
parties shall not be bound by any agent's or employee's representation, promise,
or inducement not set forth in this agreement.
3. Except as set forth in clause 2, this agreement shall remain in effect
until revoked in writing on ten (10) days notice.
4. This agreement is not effective until it is approved and signed by
Bayshore Corporate Center and shall be governed and controlled by the laws of
the State of California.
5. Should any provision of this agreement be found to be void or
unenforceable, it shall not affect the viability or enforceability of the other
provisions.
6. This agreement shall be binding on, and, inure to the benefits of the
parties successors, assigns, heirs and beneficiaries.
Name: John Danner Date: 9/29/95 Signature: /s/ John Danner
----------- --------- ----------------
8A
<PAGE>
38. The Bayshore Corporate Center has a plenum air return system and all phone
and computer wiring must be plenum rated. All penetration of one-hour walls by
phone and computer cables must be done per the one-hour fire code.
Lessor recommends Lessee's phone and computer contractors contact the
leasing office prior to installation, if there are any questions regarding what
meets code for plenum-rated cabling and penetration of one-hour walls. Lessee
is responsible for all installation costs for phones and computers.
39. HAZARDOUS MATERIALS: Lessee agrees not to bring any hazardous materials or
premises unless approved in writing by Lessor.
40. SQUARE FOOTAGE: The space consists of 2,621 square feet.
41. RENTAL RATE AND TERM: The term for the above-mentioned space shall be from
October 15, 1995 and shall continue on a month to month basis. Base rent shall
be $1.45 per square foot, full service, per month for 2,621 square feet for a
total monthly rent of $3,800.45 and will be due on the first of the month.
Rent for the month of November 1995 shall be 1/2 of $1,900.23 to adjust the
October 15, 1995 possession date.
42. EXPANSION: Upon not less than sixty (60) days prior written notice by
Lessee, Lessor to provide Lessee expansion space. Lessor will pay 50% of total
cabling costs which are estimated at $1,700.00 (50% = $850.00.) Lessor will pay
for stationary, business cards and staff movers.
43. TENANT IMPROVEMENTS: Lessor will touch up paint and steam clean carpets.
44. EARLY OCCUPANCY: Lessee may occupy the suite upon completion of Tenant
Improvements.
45. MOVE OUT: Lessee to give Lessor at least sixty (60) days written notice
prior to vacating the leased premises.
Dated: 10/5/95 Lessor: BAYSHORE CORPORATE CENTER, LCC
-------------- By: /s/ Steve Kaufman
-------------------------------
Steve Kaufman
Dated: 9/29/95 Lessee: NETVERTISER
-------------- By: /s/ John Danner
------------------------------
John Danner
8B
<PAGE>
RULES AND REGULATIONS
1. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside or
inside of the Building/Office Complex or the leased premises without the prior
written consent of Lessor and Lessor shall have the right to remove any such
sign, placard, picture, advertisement, name or notice without notice to and at
the expense of Lessee.
All approved signs or lettering on doors shall be printed, painted, affixed
or inscribed at the expense of Lessee by a person approved of by Lessor.
Lessee shall not place anything or allow anything to be placed near the
glass of any window, door, partition or wall which may appear unsightly from
outside the leased premises; provided, however, that Lessor may furnish and
install a Building standard window covering at all exterior windows. Lessee
shall not without prior written consent of Lessor cover or otherwise sunscreen
any window.
2. Lessor shall approve in writing, prior to installation, the method of
attachment of any objects affixed to walls, ceilings, or doors.
3. The bulletin board or directory of the Building/Office Complex will be
provided exclusively for the display of the name and location of Lessee only and
Lessor reserves the right to exclude any other names therefrom.
4. The sidewalks, halls, passages, exits, entrances, elevators and stairways
shall not be obstructed by Lessee or used by Lessee for any purpose other than
ingress to and egress from the leased premises. The halls, passages, exits,
entrances, elevators, stairways, balconies and roof are not for the use of the
general public and the Lessor shall in all cases retain the right to control and
prevent access thereto by all persons whose presence in the judgment of the
Lessor shall be prejudicial to the safety, character, reputation and interests
of the Building/Office Complex and its Lessees, provided that nothing herein
contained shall be construed to prevent such access to persons with whom the
Lessee normally deals in the ordinary course of Lessee's business unless such
persons are engaged in illegal activities. No Lessee and no employees or
invitees of any Lessee shall go upon the roof of the Building/Office Complex.
5. Locks - No additional locks or bolts of any kind shall be placed upon any
of the doors or windows by Lessee, nor shall nay changes be made in existing
locks or the mechanisms thereof without the prior written consent of the Lessor.
Lessee must, upon the termination of Lessee's tenancy, restore to Lessor all
keys of storage, offices and toilet rooms either furnished to or otherwise
procured by Lessee and in the event of the loss of any keys so furnished Lessee
shall pay to Lessor the cost thereof or of changing the lock or locks opened by
lost keys if Lessor deems it necessary to make a change.
6. The toilet rooms, urinals, wash bowls and other apparatus shall not be used
for any purpose other than that for which they were constructed and no foreign
substance of any kind whatsoever shall be thrown therein and the expense of any
breakage, stoppage or damage resulting from the violation of this rule shall be
borne by the Lessee who, or whose employees or invitees, shall have caused it.
7. Lessee shall not overload the floor of the leased premises or mark, drive
nails, screw or drill into the partitions, woodwork or plaster or in any way
deface the leased premises or any part thereof. No boring, cutting or stringing
of wires shall be permitted except with the prior written consent of the Lessor
and as the Lessor may direct.
8. No furniture, freight or equipment of any kind shall be brought into the
Building/Office Complex without the consent of Lessor and all moving the same
into or out of the Building/Office Complex shall be done at such time and in
such manner as Lessor shall designate. Lessor shall have the right to prescribe
the weight, size and position of all safes and other heavy equipment brought
into the Building/Office Complex and also the times and manner of moving the
same in and out of the Building/Office Complex. Safes or other heavy objects
shall, if considered necessary by Lessor, stand on wood strips of such thickness
as is necessary to properly distribute the weight. Lessor will not be
responsible for loss of or damage to any such safe or property from any cause
and all damage done to the Building/Office Complex by moving or maintaining any
such safe or other property shall be repaired at the expense of Lessee. There
shall not be used in any space, or in the public halls of the Building/Office
Complex, either by any Lessee or others, any hand trucks except those equipped
with rubber tires and side guards.
9. Janitorial Service - Lessee shall not employee any person or persons for
the purpose of cleaning the leased premises without the consent of Lessor.
Lessor shall be in nowise responsible to Lessee for any loss of property from
the leased premises, however occurring, or for any damage done to the effects of
Lessee by the Janitorial Service or any of Lessor's employees, or by any other
person. Janitorial service will not include the cleaning of carpets and rugs,
other than vacuuming. Lessee shall not cause unnecessary labor by reason of
Lessee's carelessness and indifference in the preservation of good order and
cleanliness.
10. Lessee shall not use, keep or permit to be used any food or noxious gas or
substance in the leased premises, or permit or suffer the leased premises to be
occupied or used in a manner offensive or objectionable to the Lessor or other
occupants of the Building/Office Complex by reason of noise, odors, and/or
vibrations, or interfere in any way with other Lessees or those having business
therein nor shall any animals or birds be brought in or kept in or about the
leased premises or the Building/Office Complex. No Lessee shall make or permit
to be made any unseemly or disturbing noises or disturb or interfere with
occupants of this or neighboring Buildings or leased premises or those having
business with them whether by the use of any musical instruments, radio,
phonograph, unusual noise, or in any other way. No Lessee shall throw anything
out of doors or down the passageways. No trash shall be put in the common areas
before 5:00 p.m.
11. The leased premises shall not be used for manufacturing or for the storage
of merchandise except as such storage may be incidental to use of the leased
premises for general office purposes. No Lessee shall occupy or permit any
portion of his leased premises to be occupied as an office for the manufacture
or sale of liquor, narcotics, or tobacco in any form, or as a medical office, or
as a barber shop or manicure shop. The leased premises shall not be used for
lodging or sleeping or for any illegal purposes.
12. Lessee shall not use or keep in the leased premises or the Building/Office
Complex any kerosene, gasoline, or inflammable or combustible fluid or material.
13. Lessor will direct electricians as to where and how telephone and telegraph
wires are to be introduced. No boring or cutting for wires will be allowed
without the consent of Lessor. The location of telephones, call boxes and other
office equipment affixed to the leased premises shall be subject to the approval
of Lessor.
14. Installation of Floor coverings - No Lessee shall lay linoleum or other
similar floor covering so that the same shall be affixed to the floor of the
leased premises in any manner except by a paste, or other material, which may
easily be removed with water, the use of cement or other similar adhesive
materials being expressly prohibited. The method of affixing any such linoleum
or other similar floor covering to the floor, as well as the method of affixing
carpets or rugs to the leased premises, shall be subject to approval by Lessor.
The expense of repairing any damage resulting from a violation of this rule
shall be borne by Lessee by whom, or by whose agents, employees, or visitors,
the damage shall have been caused.
15. Carpet/Floor Protection - Lessee shall provide and use chair pads and
carpet protectors at all desk and furniture locations.
16. No furniture, packages, supplies, equipment or merchandise will be received
in the Building/Office Complex or carried up or down in the elevators, except
between such hours and in such elevators as shall be designated by Lessor.
17. On Saturdays, Sundays and legal holidays and on other days between the
hours of 7:00 p.m. and 7:00 a.m. the following day, access to the
Building/Office Complex, or the halls, corridors, elevators or stairways in
the Building/Office Complex, or to the leased premises may be refused unless
the person seeking access is known to the person or employee of the
Building/Office Complex in charge and has a pass or is properly identified.
The Lessor shall in no case be liable for damages for any error with regard
to the admission to or exclusion from the Building/Office Complex of any
person, in case of invasion, mob, riot, public excitement, or other
commotion, the Lessor reserves right to prevent access to the Building/Office
Complex during the continuance of the same by closing the doors or otherwise,
for the safety of the Lessees and protection of property in the
Building/Office Complex. The Lessor reserves the right to close and keep
locked all entrance and exit doors of the Building/Office Complex on
Saturdays, Sundays and legal holidays and other days between the hours of
7:00 p.m. and 7:00 a.m., and during such further hours as Lessor may deem
advisable for the adequate protection of said Building/Office Complex and the
property of its Lessees.
18. All entrance doors in the leased premises shall be left locked when the
leased premises are not in use, and all doors opening to public corridors shall
be kept closed except for normal ingress and egress from the leased premises.
19. Lessor reserves the right to exclude or expel from the Building/Office
Complex any person who, in the judgment of Lessor, is intoxicated or under the
influence of liquor or drugs, or who shall in any manner do any act in violation
of any of the rules and regulations of the Building/Office Complex.
20. Employees of Lessor shall not perform any work or do anything outside of
their regular duties unless under special instructions from the Lessor, and no
employee will admit any person (Lessee or otherwise) to any office without
specific instructions from the Lessor.
21. No vending machine or machines of any description shall be installed,
maintained or operated upon the leased premises without the prior written
consent of the Lessor.
- 9 -
<PAGE>
22. Lessor shall have the right, exercisable without notice and without
liability to Lessee, to change the name and the street address of the
Building/Office Complex of which the leased premises are a part.
23. Lessee agrees that it shall comply with all fire and security regulations
that may be issued from time to time by Lessor and Lessee also shall provide
Lessor with the name of a designated responsible employee to represent Lessee in
all matters pertaining to such fire or security regulations.
24. Lessor reserves the right by written notice to Lessee to rescind, alter or
waive any rule or regulation at any time prescribed for the Building/Office
Complex when, in the Lessor's judgment, it is necessary, desirable or proper for
the best interest of the Building/Office Complex and its Lessees.
25. Lessee shall not disturb, solicit or canvass any occupant of the
Building/Office Complex and shall cooperate to prevent same.
26. Without the prior written consent of Lessor, Lessee shall not use the name
of the Building/Office Complex in connection with or in promoting or advertising
the business of Lessee except as Lessee's address.
27. Lessor shall furnish reasonable amounts of heating and air conditioning
during the hours of 7:00 a.m. to 5:00 p.m., Monday through Friday. In the event
Lessee requires heating and air conditioning during off hours, Saturdays,
Sundays or holidays, Lessor shall, on notice, provide such services at the rate
of $25 per hour.
28. Energy Conservation Measures - Lessee shall abide by all energy
conservation measures employed by Lessor, including but not limited to
requirements that lights be extinguished upon leaving the leased premises and
that draperies be closed at times specified by Lessor. Lessee shall not use any
method of heating or air conditioning other than that supplied by Lessor.
29. Equipment Defects - Lessee shall give Lessor prompt notice of any accidents
to or defects in the water pipes, gas pipes, electric lights and fixtures,
heating apparatus, or any other service equipment.
30. Parking - Cars are to park in properly marked spaces only. Under no
circumstances are cars to (a) back in. (b) park in spaces reserved for other
Lessees, (c) park in driveways, (d) park in front of entrances to the
Building/Office Complex, (e) park in unmarked areas, (f) park in loading zones,
(g) park in two or more spaces or (h) park in areas reserved for the
handicapped. Lessor shall have the right to cause improperly parked cars to be
towed at the owner's expense.
<PAGE>
TENANT: Netvertiser
-----------------------
SUITE #: 1670, Ste 314
----------------------
LETTER OF AGENCY
This is to advise you that we have retained AT&T and ALD Communications, Inc.
(ALD) to act as our communications Agents.
Through this Agency Agreement we grant ALD and AT&T the privilege of
obtaining duplicate copies of current and past telephone bills, copies of
orders for all network services and to coordinate the connection of services.
This includes arranging for disconnections or rearrangements of service as
appropriate. All recurring and nonrecurring charges made by the Local
Exchange Carrier Pacific Bell in providing the services, for service orders
on our behalf, are to be paid by us directly and are not the responsibility
of AT&T or ALD.
This does not preclude our ability to act on our own behalf when we deem it
necessary.
This letter of Agency has been placed directly on our company letterhead in my
presence.
/s/ John Danner
- --------------------------------------------------------------------------------
Authorized Signature
President 9/29/95
- -------------------------------------------------- ----------------------------
Title Date
<PAGE>
BAYSHORE CORPORATE CENTER
SAVINGS THROUGH PHONE
SERVICE ALTERNATIVES
Now Available to Bayshore Tenants Only!!
- -Full Featured Voice Mail
- -Conference Calling
- -On-site Customer Service
- -Guaranteed Savings on Comparable Local
and Long Distance Services!!
- ------------------------------------------------------------------
PRICING GUIDE FOR PBX SERVICE:
PBX Service to a Digital Phone $13.95 per month
Voice Mail to a Digital Phone(1) $ 9.95 per month
Lease Option for a Digital Phone(2) $ 9.95 per month
PBX Service to an Analog Phone $13.95 per month
Voice Mail on a PBX Analog Phone $15.00 per month
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Services: NetSave AT&T SDN AT&T ProWats MCI Prism Sprint Dial-1
-Registered -Registered -Registered -Registered -Registered
Trademark-* Trademark-* Trademark-* Trademark-* Trademark-*
- -------------------------------------------------------------------------------------------------------------------------------
Long Distance Services "We guarantee savings!"
-------------------------------
<S> <C> <C> <C> <C> <C>
(cost per minute)
Intrastate: 0.0975 0.11 0.15 0.14 0.14
Interstate:
(based as mileage)
56-292 0.1395 0.183 0.271 0.232 0.223
293-430 0.1395 0.183 0.288 0.268 0.233
431-925 0.1375 0.183 0.288 0.268 0.241
926+ 0.1195 0.183 0.301 0.28 0.241
Alaska/Hawaii/Puerto Rico/VI 0.165 0.183 0.301 0.28 0.241
- -------------------------------------------------------------------------------------------------------------------------------
800 Service NetSave 800 AT&T 800 Service AT&T 800 Headline AT&T Prism 800 Sprint Dial 800
Intrastate: 0.0773 0.123 0.21 0.20 0.20
Interstate:
(based as mileage)
56-292 0.1395 0.167 0.256 0.2443 0.25
293-430 0.1395 0.167 0.274 0.2393 0.25
431-295 0.1395 0.167 0.274 0.2593 0.205
926+ 0.1395 0.194 0.274 0.2591 0.205
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Discount ALD Pacific
Service Area Usage Service Area Average
Per Minute Per Min
------------------------------------------------------------------------------
<S> <C> <C> <C>
$0-$49.99 0% .08750 .097
------------------------------------------------------------------------------
$50.00-$99.99 10% .07875 .086
------------------------------------------------------------------------------
$100.00-$149.99 20% .07000 .073
------------------------------------------------------------------------------
$150.00-$2,000.00 25% .06563 .069
------------------------------------------------------------------------------
$2,000+ 35% .05687 .067
------------------------------------------------------------------------------
</TABLE>
New Installation Costs: Dial Tone (NEW LINE) $50.00 per new line service.
Phone Jacks (WIRING) $50.00 per jack / $35.00 for 6 or
more.
- -------------------------
(1) Receive an additional 10% discount on orders of 10 or more phones.
(2) This service is also eligible for a 10% discount on orders of 10 or
more.
<PAGE>
BAYSHORE CORPORATE CENTER
- -------------------- ------------------------------
Date / / NEW / / EXISTING
- -------------------- -------------------
/ / MOVE
-------------------
- --------------------------------------------------------------------------------
Company
- --------------------------------------------------------------------------------
Contact
- --------------------------------------------------------------------------------
Building/Suite
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Telephone No. Description Telephone No. Description
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE: ALL OTHER LINES TO BE DELETED PLEASE LIST 800 TERMINATION NUMBER
UNDER DESCRIPTION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
DESCRIPTION QTY. INSTALL MONTHLY
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Analog Line 50. 13.95
- --------------------------------------------------------------------------------
Digital Line 50. 13.95
- --------------------------------------------------------------------------------
Digital Phone w/Display* 50. 10.95
- --------------------------------------------------------------------------------
Digital Phone wo/Display* 50. 9.95
- --------------------------------------------------------------------------------
16 button Digital Add-on 9.95
- --------------------------------------------------------------------------------
Voice Mail (w/Analog Phone) 15.00
- --------------------------------------------------------------------------------
Voice Mail (w/Digital Phone) 9.95
- --------------------------------------------------------------------------------
Voice Mail Paging Service 3.50
- --------------------------------------------------------------------------------
Auto Attendent** 15.00/9.95
- --------------------------------------------------------------------------------
800 Directory Listing 15.00
- --------------------------------------------------------------------------------
Number Retention 50. 7.00
- --------------------------------------------------------------------------------
Phone/Network Wiring** 50./35.
- --------------------------------------------------------------------------------
TOTAL
- --------------------------------------------------------------------------------
</TABLE>
* 10% DISCOUNT ON 10 OR MORE PHONES
** AUTO ATTENDENT $15.00 FIRST 3 OPTIONS (EXCLUDING DIAL BY EXTENSION OR DIAL
BY NAME) AND $9.95 FOR EACH ADDITIONAL OPTION
*** PHONE AND NETWORK WIRING ARE CHARGED AT $50 FOR FIRST 6 JACKS, $35 FOR
JACKS 7+
- --------------------------------------------------------------------------------
Desired Install Date & Time
- --------------------------------------------------------------------------------
Current Long Distance Center / / TERM CONT
- --------------------------------------------------------------------------------
Existing Voice Mail Center
- --------------------------------------------------------------------------------
Phone System/Model
- --------------------------------------------------------------------------------
Alarm System in Suite
- --------------------------------------------------------------------------------
After Hours Contact and Phone No.
- --------------------------------------------------------------------------------
Yellow Page Directory Heading
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Remarks Comments
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE ATTACH: / / LETTER OF AGENCY / / FLOOR PLAN / / PHONE PROPOSAL
DOES USER HAVE: / / YELLOW PAGE ADVERTISING $_____/MTH / / PACBELL CALLING CARDS
/ / SPECIAL 800 NUMBER REQUIREMENTS
DESIRED LONG DISTANCE CARRIER: / / AT&T SDN / / ALD NETSAVE
- --------------------------------------------------------------------------------
GENERAL TERMS AND CONDITIONS:
1. SUBSCRIBER RESPONSIBILITY. SUBSCRIBER ASSUMES THE RESPONSIBILITY OF ALL
USAGE OF THE SERVICE, FOR ALL FEES, CHARGES, AND TAXES THEREOF, AND FOR ALL
THE USE AND SECURITY OF SUBSCRIBER'S ACCESS. SUBSCRIBER ACCEPTS LIABILITY OF
SERVICES RENDERED PRIOR TO NOTIFICATION OF MISUSE OF SERVICE.
2. PAYMENT TERMS. SUBSCRIBER AGREES TO REMIT PAYMENTS OF ALL SERVICE(S)
PROVIDED, INCLUDING TAXES AS APPLICABLE, UPON RECEIPT OF INVOICE. ALD
COMMUNICATIONS, INC. ("ALD") RESERVES THE RIGHT TO INTERRUPT SERVICE TO
SUBSCRIBER FOR LATE PAYMENTS OF FEES, CHARGES AND TAXES. SHOULD SUBSCRIBER
FAIL TO PAY ITS BILLS IN A TIMELY MANNER AS REQUIRED BY THIS AGREEMENT, ALD
HAS THE RIGHT TO TERMINATE SUBSCRIBER'S USE OF THEIR SERVICE ON TWO (2) DAYS
WRITTEN NOTICE. SUBSCRIBER ALSO AGREES TO REIMBURSE ("ALD") FOR ALL
REASONABLE ATTORNEY'S FEES FOR EXPENSES TO ("ALD") IN THE COLLECTION OF PAST
DUE BALANCES.
3. MISCELLANEOUS: IN NO EVENT SHALL ALD BE LIABLE FOR ANY SPECIAL,
CONSEQUENTIAL, PUNITIVE OR INCIDENTAL DAMAGES INCLUDING LOSS OF USE, PROFITS,
REVENUE OR GOODWILL. ALD SHALL NOT BE LIABLE FOR ANY FAILURE OF PERFORMANCE
DUE TO CAUSES AND/OR CIRCUMSTANCES BEYOND ITS CONTROL, NOR SHALL ALD BE
LIABLE FOR ANY ACT OR OMISSION FOR ANY OTHER COMPANY FURNISHING ANY PORTION
OF SERVICE TO SUBSCRIBER, ANY EQUIPMENT SUPPLIED TO SUBSCRIBER BY ALD OR ANY
OTHER SUPPLIER OF EQUIPMENT TO SUBSCRIBER (UNDER WARRANTY, SERVICE AGREEMENT
OR OTHERWISE), OR ANY NETWORK SERVICE CONTRACTED BY SUBSCRIBER OR ALD.
SUBSCRIBER ACKNOWLEDGES AND UNDERSTANDS THAT THE APPLICABLE NETSAVE TARIFF
RATES ARE SUBJECT TO CHANGE. THIS AGREEMENT IS INTENDED BY THE PARTIES AS A
FINAL EXPRESSION OF THEIR AGREEMENT AND AS A COMPLETE AND EXCLUSIVE STATEMENT
FOR THE TERMS THEREOF. THE PARTIES SHALL NOT BE BOUND BY ANY AGENT'S OR
EMPLOYEE'S REPRESENTATION, PROMISE, OR INDUCEMENT NOT SET FORTH IN THIS
AGREEMENT. SHOULD ANY PROVISION OF THIS AGREEMENT BE FOUND TO BE VOID OR
UNENFORCEABLE, IT SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF THE
OTHER PROVISIONS. THIS AGREEMENT SHALL BE BINDING ON, AND, INURE TO THE
BENEFIT OF THE PARTIES' SUCCESSORS, ASSIGNS, HEIRS AND BENEFICIARIES.
- --------------------------------------------------------------------------------
SIGNATURE: DATE:
--------------------------------------- -------------------------
THANK YOU FOR YOUR BUSINESS!
<PAGE>
BAYSHORE CORPORATE CENTER
[FLOOR PLAN]
RENTABLE SPACE 2,621 SQ. FT.
<PAGE>
#1 Amendment to Lease
Renewal
AMENDMENT, made this 25th day of June, 1996, between E.C. PROPERTIES, A
California General Partnership, having an office at 1720 So. Amphlett Blvd.,
Suite 110, San Mateo, California, 94402, "Lessor", and NETGRAVITY, having an
office at 1700 So. Amphlett Blvd., Suite 350, San Mateo, California, 94402,
"Lessee."
WHEREAS, BAYSHORE CORPORATE CENTER, and NETGRAVITY, entered into a Lease dated
September 29, 1995 covering Suite 314 in the building 1670 South Amphlett Blvd.,
San Mateo, California, 94402, at the rental and upon the terms and conditions
there more particularly set forth; and
WHEREAS E.C. PROPERTIES IS NOW BAYSHORE CORPORATE CENTER, LCC
WHEREAS, Lessor and Lessee are desirous of amending said Lease in the manner set
forth below.
SQUARE FOOTAGE: 1700 S. Amphlett Blvd., Suite 350 consists of 8,000 square
feet.
RENTAL TERM: The term for the above mentioned space shall be from August 1,
1996 and shall continue on a month to month basis.
RATE: From August 1, 1996 the rent will be $1.65 per square foot, full service
for 8,000 square feet for a total monthly rent of $13,200 due on the first of
each month.
EXCESS ELECTRIC: Lessee to pay $1,500 per month for excess electric charges in
addition to the base monthly rent of $13,200.00 for a total monthly payment of
$14,700.00.
RENT ADJUSTMENT: There will be an annual rental increase of at least 5%. The
rent may be adjusted upwards to reflect market conditions at any time upon 30
days prior written notice. The rental increase will occur no later than June
1997.
MOVE OUT: Lessee to give Lessor at least thirty (30) days written notice prior
to vacating the leased premises. Lessor has the right to terminate the Lease
with at least (30) days prior written notice.
OPERATING COSTS AND PROPERTY TAXES: As per the original Lease, Lessee will
continue to be billed for Operating Costs and Property Taxes at a proportionate
rate of 2.40%. The base year for Operating Costs shall be 1996. The base year
for Property Taxes shall be 1996/97. (Paragraph 6A and 8B of Lease.)
GENERAL TERMS: All other terms, covenants, provisions, and agreements of said
Lease dated September 29, 1995 and subsequent Amendments shall remain in full
force.
IN WITNESS WHEREOF, this Amendment to Lease has been duly executed by the
parties hereto.
Dated: Lessor: BAYSHORE CORPORATE CENTER, LCC
-------------------
By:
----------------------------------------
Steve Kaufman
Dated: 8/1/96 Lessee: NETGRAVITY
------------------- By: /s/ Ivan Fujihara
----------------------------------------
Ivan Fujihara
----------------------------------------
<PAGE>
#1 Amendment to Lease/Expansion and Relocation
AMENDMENT, made this 4th day of January, 1996, between BAYSHORE CORPORATE
CENTER, LLC, having an office at 1720 So. Amphlett Blvd., Suite 110, San Mateo,
California, 94402, "Lessor", and NETVERTISER, having an office at 1670 So.
Amphlett Blvd., Suite 314, San Mateo, California, 94402, "Lessee."
WHEREAS, BAYSHORE CORPORATE CENTER, LLC, and NETVERTISER, entered into a Lease
dated September 29, 1995 covering Suite 314 in the building 1670 South Amphlett
Blvd., San Mateo, California, 94402, at the rental and upon the terms and
conditions there more particularly set forth; and
WHEREAS, Lessor and Lessee are desirous of amending said Lease in the manner set
forth below.
NAME CHANGE: Netvertiser is now doing business as NetGravity.
RENTAL RATE AND TERM: The term for the above mentioned space shall be from
February 1, 1996 to August 1, 1996. Base rent shall be $1.45 per square foot,
full service, per month for 8,000 square feet for a monthly rent of $11,600 and
will be due on the first of the month.
PRORATED RENT: Lessee to pay rent in the amount of $11,968.82 for the month of
February 1996. ($11,600.00 per month divided by 30 days = $386.67 per day, move
in date will be February 3, 1996. $386.67 X 25 days = $9,666.75 + $2,302.07 for
Tenant Improvements = $11,968.82.)
CONSUMER PRICE INDEX INCREASE: As per the original Lease, Lessee will continue
to be billed for Consumer Price Index Increases. The anniversary month for
increases is November. (Paragraph 6 of Lease.)
OPERATING COSTS AND PROPERTY TAXES: As per the original Lease, Lessee will
continue to be billed for Operating Costs and Property Taxes at a proportionate
rate of 2.40%. The base year for Operating Costs shall be 1996. The base year
for Property Taxes shall be 1995/96. (Paragraph 6A and 8B of Lease.)
RELOCATION: Lessee will relocate from 1670 S. Amphlett Blvd., Suite 314 to
1700 S. Amphlett Blvd., Suite 350.
TENANT IMPROVEMENTS: Lessor will build to suite in accordance with the attached
floor plan.
Lessor Pays: $925.00 for demising wall and door fills. Carpet cleaning, carpet
patching and painting. New tile floor in new kitchen area.
Lessee Pays: All other construction costs at an estimated amount not to exceed
$12,724.00. All electrical costs at an estimated amount not to exceed
$2,100.00. All telephone, cabling and moving costs are the Lessee's sole
responsibility.
PAYMENT OF TENANT IMPROVEMENTS: The Tenant Improvements marked on Exhibit "A"
shall be paid by Lessee, net 30 days, as invoices are received by Lessee from
Lessor or Lessor's contractors. The estimated cost is $14,824.00. A 10% down
payment in the amount of $1,482.40 will be required upon signature of this
amendment.
Lessor is using the above figures as a "not to exceed" estimate, if the cost of
Tenant Improvements is less than the estimate listed above, the Tenant
Improvements payment will be re-computed and the new amount due will be invoiced
to the Lessee. Lessee will be provided all receipts upon completion of Tenant
Improvements.
GENERAL TERMS: All other terms, covenants, provisions, and agreements of
said Lease dated September 29, 1995 and subsequent Amendments shall remain in
full force.
IN WITNESS WHEREOF, this Amendment to Lease has been duly executed by the
parties hereto.
Dated: Lessor: BAYSHORE CORPORATE CENTER, LLC
-------------------
By:
----------------------------------------
Steve Kaufman
Dated: 1/7/96 Lessee: NETGRAVITY
------------------- By: /s/ John Danner
----------------------------------------
--------------------
Exhibit "A" Attached
<PAGE>
BAYSHORE CORPORATE CENTER BCC
[MAP]
5,000 Square Feet
<PAGE>
#2 Amendment to Lease
Expansion and Renewal
Page 1 of 2
AMENDMENT, made this 22nd day of October, 1996, between E.C. PROPERTIES, A
California General Partnership, having an office at 1720 So. Amphlett Blvd.,
Suite 110, San Mateo, California, 94402, "Lessor", and NETGRAVITY, having an
office at 1700 So. Amphlett Blvd., Suite 350, San Mateo, California, 94402,
"Lessee."
WHEREAS, BAYSHORE CORPORATE CENTER, and NETGRAVITY, entered into a Lease dated
September 29, 1995 covering Suite 314 in the building 1670 South Amphlett Blvd.,
San Mateo, California, 94402, at the rental and upon the terms and conditions
there more particularly set forth; and
WHEREAS E.C. PROPERTIES IS NOW CORNERSTONE PROPERTIES I, LLC
WHEREAS, Lessor and Lessee are desirous of amending said Lease in the manner set
forth below.
SQUARE FOOTAGE: Current square footage is 8,000 square feet. Expansion square
footage into suite #222 in building 1700 is 987 square feet. The total leased
square footage shall be 8,987 square feet starting November 1, 1996.
LEASE TERM: The term for the above mentioned space shall be from October 1,
1996 and shall continue on a monthly basis. MOVE OUT: Lessee to give Lessor at
least sixty (60) days written notice prior to vacating the leased premises.
Lessor has the right at any time to terminate the Lease with at least sixty (60)
days prior written notice.
RENT ADJUSTMENT: There will be an annual rental increase of at least 5%. The
next scheduled rent adjustment date shall be March 1997. However, the rent may
be adjusted upwards at any time to the current market rental rate upon not less
than thirty (30) days prior written notice.
RENT: From October 1, 1996 to October 31, 1996, the rent will be $1.75 per
square foot, full service, per month for 8,000 square feet for a total monthly
rent of $14,000.00 due on the first of each month.
EXCESS ELECTRIC: From October 1, 1996 to October 31, 1996, Lessee to pay
$1,500.00 per month for excess electric charges in addition to the base monthly
rent of $14,000.00 for a total monthly payment of $15,500.00.
RENT: From November 1, 1996 and continuing monthly, the rent will be $1.75 per
square foot, full service, per month for 8,987 square feet for a total monthly
rent of $15,727.25 due on the first of each month.
EXCESS ELECTRIC: From November 1, 1996 and continuing monthly, Lessee to pay
$1,500.00 per month for excess electric charges in addition to the base monthly
rent of $15,727.25 for a total monthly payment of $17,227.25.
OPERATING COSTS AND PROPERTY TAXES: Lessee will be billed for Operating Costs
and Property Taxes at a proportionate rate of 2.71%. The base year for
Operating Costs shall be 1996. The base year for Property Taxes shall be
1996/97.
SECURITY DEPOSIT: On December 1, 1996, Lessee shall increase the security
deposit from $3,800.45 to $15,727.25, an increase in the amount of $11,926.80.
TENANT IMPROVEMENTS: Costs paid by Lessor: Steam clean carpets, touch-up paint
and construct doorway. Costs paid by Lessee: Tenant Improvements as marked on
Exhibit "A" and listed on Exhibit "B." The estimated cost is $5,656.62 which
includes the 15% administrative charge. Cost of reconfiguring the space back to
original or a similar configuration.
1
<PAGE>
#2 Amendment to Lease
Expansion and Renewal
Page 2 of 2
DEFERRED TENANT IMPROVEMENT COSTS: Upon Lessee vacating the above mentioned
space or by June 30, 1997, Lessee shall pay to Lessor $1,897.50 for the expense
Lessor will incur to reconfigure the expansion space back to the original or a
similar configuration. This $1,897.50 includes the 15% administrative charge.
ADMINISTRATIVE CHARGE: Lessee to pay a 15% administrative charge based on the
final expansion and tenant improvement costs. Administrative charges are to be
paid with the invoice for expansion and tenant improvement costs within 15 days
from receipt of the invoice.
TENANT IMPROVEMENT PAYMENT: All charges for Tenant Improvements will be due
within 15 days of receipt of invoice. Lessee will be provided receipts for all
charges incurred and will be invoiced for the actual costs.
RELEASE: THIS AMENDMENT IS ONLY IN EFFECT UNTIL SUCH TIME AS NETGRAVITY IS
RELEASED FROM THE LIABILITY OF THE LEASE WITH CORNERSTONE PROPERTIES AT 2121
SOUTH EL CAMINO REAL. UPON SUCH TIME OF RELEASE, A NEW AMENDMENT WILL BE
PREPARED FOR THIS SPACE FOR A TERM OF NINE (9) MONTHS STARTING OCTOBER 1, 1996
UNTIL JUNE 30, 1997 AT THE RATE OF $1.75 PER SQUARE FOOT, FULL SERVICE, PER
MONTH. THERE WILL BE NO OTHER RENTAL RATE INCREASES DURING THIS NINE (9) MONTH
PERIOD.
GENERAL TERMS: All other terms, covenants, provisions, and agreements of said
Lease dated September 30, 1995 and subsequent Amendments shall remain in full
force.
IN WITNESS WHEREOF, this Amendment to Lease has been duly executed by the
parties hereto.
Dated: [illegible] Lessor: CORNERSTONE PROPERTIES I, LLC
-------------------
By: /s/ Steve Kaufman
----------------------------------------
Steve Kaufman
Dated: Lessee: NETGRAVITY
------------------- By: /s/ Ivan Fujihara
-----------------------------------------
---------------------
Exhibit "A" Attached
2
<PAGE>
Page 1
BAYSHORE CORPORATE CENTER
COST ESTIMATE WORKSHEET
TENANT NAME: NETGRAVITY
SUITE #NO. 1700/222
Construction: $4,070.00
Demo, build out, install doors, ceiling repair, and door units complete
hardware.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Electrical: $750.00
To replace electrical outlets that will be remove in demo work.
- --------------------------------------------------------------------------------
Carpet: $98.80
Carpet patch
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Paint: $ Lessor pays
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Free Rent: $ None
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Other: $ None
- -----------------------------------------------------------------
Subtotal $4,918.80 + 15% Admin. 737.82 = $5,656.62
$1,897.50 to reconfigure the space has been deferred to payment in June 1997.
NOTES:
1. Administration fee of 15% will be added to all charges.
<PAGE>
BAYSHORE CORPORATE CENTER
[FLOOR PLAN]
RENTABLE SPACE: 987 SQ. FT.
<PAGE>
[FLOOR PLAN]
<PAGE>
[FLOOR PLAN]
<PAGE>
BAYSHORE CORPORATE CENTER
[FLOOR PLAN]
5,000 Square Feet
<PAGE>
#3 Amendment to Lease
Extension and Expansion
Page 1 of 2
AMENDMENT, made this 30th day of May, 1997, between E.C. PROPERTIES, A
California General Partnership, having an office at 1720 So. Amphlett Blvd.,
Suite 110, San Mateo, California, 94402, "Lessor", and NETGRAVITY, having an
office at 1700 So. Amphlett Blvd., Suite 350, San Mateo, California, 94402,
"Lessee."
WHEREAS, BAYSHORE CORPORATE CENTER, and NETGRAVITY, entered into a Lease dated
September 29, 1995 covering Suite 314 in the building 1670 South Amphlett Blvd.,
San Mateo, California, 94402, at the rental and upon the terms and conditions
there more particularly set forth; and
WHEREAS E.C. PROPERTIES IS NOW BAYSHORE CORPORATE CENTER, LLC
WHEREAS, Lessor and Lessee are desirous of amending said Lease in the manner set
forth below.
SQUARE FOOTAGE: Lessee currently occupies 8,987 square feet consisting of
suites 1700 S. Amphlett Blvd., Suite 350 (8,000 SF) and 1700 S. Amphlett Blvd.,
Suite 222 (987 SF).
Effective 4/15/97, Lessee will lease an additional 2,209 square feet. See
Exhibit "A", 1660 S. Amphlett Blvd., Suite 205 (2,209 San Francisco).
From 4/15/97 to 8/14/97 the total leased square footage shall be 11,196 square
feet.
Effective 8/15/97, Lessee will lease an additional 3,948 square feet. See
Exhibit "B", 1700 S. Amphlett Blvd., Suite 221.
Effective 8/15/97, Lessee will release the space at 1660 S. Amphlett Blvd.,
Suite 205 consisting of 2,209 square feet.
From 8/15/97 to 5/31/98 the total lease square footage shall be 12,935 square
feet.
LEASE TERM: The term of the above mentioned space shall be from April 15, 1997
to May 31, 1998.
RENT: From April 15, 1997 to August 14, 1997 the rent will be $2.05 per square
foot, full service, per month for 11,196 square feet for a monthly rent of
$22,951.80 due on the first of each month.
EXCESS ELECTRIC: FROM APRIL 15, 1997 TO AUGUST 14, 1997, in addition to the
base monthly rent, Lessee shall pay $2,239.00 per month for excess electric for
a total monthly rent of $25,190.80 due on the first of each month.
RENT: From August 15, 1997 to May 31, 1998 the rent will be $2.05 per square
foot, full service per month for 12,935 square feet for a monthly rent of
$26,516.75 due on the first of each month.
EXCESS ELECTRIC: FROM AUGUST 15, 1997 TO MAY 31, 1998, in addition to the base
monthly rent, Lessee shall pay $2,587.00 per month for excess electric for a
total monthly rent of $29,103.75 due on the first of each month.
EXCESS ELECTRIC: Lessee to pay .20 cents per square foot, per month for excess
electric charges.
SECURITY DEPOSIT: Upon execution of this amendment, Lessee shall increase the
security deposit from $20,290.40 to $29.103.75. An increase in the amount of
$8,813.35.
OPERATING COSTS AND PROPERTY TAXES: From 4/15/97 to 8/14/97, Lessee will be
billed for Operating Costs and Property Taxes at a proportionate rate of 3.72%.
The base year for Operating Costs shall be 1996. The base year for Property
Taxes will be 1996/97.
<PAGE>
#3 Amendment to Lease
Extension and Expansion
Page 2 of 2
OPERATING COSTS AND PROPERTY TAXES: From 8/15/97 to 5/31/98, Lessee will be
billed for Operating Costs and Property Taxes at a proportionate rate of 3.90%.
the base year for Operating Costs shall be 1996. The base year for Property
Taxes shall be 1996/97.
TENANT IMPROVEMENTS: Lessor Pays: Steam clean carpets and paint in suites
1660/205, 1660/250 & 1700/221. Lessee Pays: Any other tenant improvement costs
in suites 1660/205, 1660/250 & 1700/221. Lessee to pay a 15% administrative
charge based on the final tenant improvement costs. Lessee shall have the
option to amortize the tenant improvements over the term of the lease at a rate
of 12% per year or costs are to be paid within 15 days from invoice.
MOVING/RELOCATION COSTS: Lessee Pays: All costs associated with the move and
relocation.
EARLY OCCUPANCY: Lessee may have occupancy of the suite upon completion of
Tenant improvements.
GENERAL TERMS: All other terms, covenants, provisions, and agreements of said
Lease dated September 29, 1995 and subsequent Amendments shall remain in full
force.
IN WITNESS WHEREOF, this Amendment to Lease has been duly executed by the
parties hereto.
Dated: 6/19/97 Lessor: BAYSHORE CORPORATE CENTER, LLC
-------------------
By: /s/ Steve Kaufman
-------------------------------------
Steve Kaufman
Dated: Lessee: NETGRAVITY
-------------------
By: /s/ Stephen E. Recht
-------------------------------------
Stephen E. Recht
Vice President
Exhibit "A", "B" and "C" Attached Finance & Administration
Chief Financial Officer
<PAGE>
BAYSHORE CORPORATE CENTER
1700 S. Amphlett Blvd. 2 nd floor, SAN MATEO, CA 94402
[FLOOR PLAN]
<PAGE>
BAYSHORE CORPORATE CENTER
[FLOOR PLAN]
5,000 Square Feet
Lessee approves the Tenant Improvements
as shown on this floor plan. Any changes
will be at Lessee's cost.
/s/ John Danner
----------------------------------------
<PAGE>
BAYSHORE CORPORATE CENTER
[FLOOR PLAN]
RENTABLE SPACE 2,209 SQ. FT.
<PAGE>
BAYSHORE CORPORATE CENTER
[FLOOR PLAN]
3,9848 Square Feet
<PAGE>
Exhibit 10.7
MANHATTAN PACIFIC MANAGEMENT CO., INC.
A Macklowe Organization
Company April 15, 1997
515 East 72nd Street
New York, New York 10021
142 West 57th Street
New York, New York 10019
212/265.5900 Re: Renewal Lease
Fax: 212/554.5894
Dear Tenant:
Enclosed please find your renewal lease. In
accordance with paragraph #33 of the lease rider
to the original lease, please note that effective
July 1, 1997, Riverterrace's rent stabilized
status expires and at the expiration of your
lease, your apartment is no longer subject to Rent
Stabilization Regulations.
Should you have any questions in this regard
please contact Joanie Schumacher in the Rental
Office at 988-5551.
Looking forward to your continued residency.
Sincerely yours,
/s/ Ronnie Rosen
Ronnie Rosen
Leasing Administrator
<PAGE>
YORK 72 ASSOCIATES
MANHATTAN PACIFIC MANAGEMENT CO., INC.
142 WEST 57TH STREET
NEW YORK, NEW YORK 10019
*LEASE RENEWAL AGREEMENT*
DATE: April 15, 1997 LEASE EXPIRATION August 31, 1997
------------------------- ------------------
John K. Donnelly APT.# 16F CURRENT RENT $3865.00
- ------------------------------ ----------------------
515 East 72nd Street CURRENT SECURITY $3865.00
- ------------------------------ -------------------
New York, New York 10021
- ------------------------------
Dear Tenant:
As you know, your lease will expire on the date shown above. Manhattan Pacific
Management is pleased to offer you a renewal on one of the following terms to be
selected by you:
<TABLE>
<CAPTION>
NEW ADDITIONAL TENANTS
RENT SECURITY INITIALS
<S> <C> <C> <C>
1) ONE YEAR LEASE @ 6% INCREASE $4096.90 $231,90
-------- ------- --------
2) TWO YEAR LEASE @ 8% INCREASE $4174.20 $309.20
-------- ------- --------
</TABLE>
To indicate your renewal term, please circle and initial the new rent amount.
Return all signed copies of this letter to us together with the additional
security 60 days of receipt of this letter. If you do not return this letter to
us within 60 days together with the additional security your lease shall expire
on 8/31/97, and we will expect you to vacate your apartment by the date your
lease expires.
This Lease Renewal Agreement constitutes a binding agreement between us and
incorporates all of the terms of the existing lease except any reference to the
Rent Stabilization Code shall be hereby deemed deleted and except where
otherwise specifically modified, changed or amended hereby.
Thank you for giving this your prompt attention. We look forward to your
continued tenancy.
Very truly yours,
MANHATTAN PACIFIC MANAGEMENT
TENANT'S SIGNATURE /s/ [Illegible]
------------------------------------
LEASE AMOUNT ACCEPTED
----------------------------------
OWNER'S SIGNATURE
--------------------------------------
<PAGE>
WINDOW GUARDS REQUIRED
LEASE NOTICE TO TENANT
YOU ARE REQUIRED BY LAW to have window guards installed if a child 10 years
of age or younger lives in your apartment.
YOUR LANDLORD IS REQUIRED BY LAW to install window guards in your
apartment:
* if you ASK him to put in window guards at any time (you need not give
a reason)
OR
* if a child 10 years of age or younger lives in your apartment.
IT IS A VIOLATION OF LAW to refuse, interfere with installation, or remove
window guards where required.
CHECK ONE
/ / CHILDREN 10 YEARS OF AGE
OR YOUNGER LIVE IN MY APARTMENT
/ / NO CHILDREN 10 YEARS OF AGE OR
YOUNGER LIVE IN MY APARTMENT
/ / I WANT WINDOW GUARDS EVEN
THOUGH I HAVE NO CHILDREN
10 YEARS OF AGE OR YOUNGER
/s/ John R. Donnelly
------------------------------
TENANT (PRINT)
/s/ John R. Donnelly
------------------------------
TENANT SIGNATURE
FOR FURTHER INFORMATION CALL:
Window Falls Prevention Program
New York City Department of Health
125 Worth Street, Room 222A
New York, New York 10013
(212) 788-4270
<PAGE>
------------------------------
STANDARD FORM OF OFFICE LEASE
------------------------------
The Real Estate Board of New York, Inc.
AGREEMENT OF LEASE, made as of this 2nd day of March 1998, between ROYAL REALTY
CORP., agent for Owner, having an address at 1155 Avenue of the Americas, 9th
Floor, New York, New York 10036 party of the first part, hereinafter referred to
as OWNER, and NET GRAVITY, INC., having an address at 1700 So. Amphlett Blvd.,
Ste. 350, San Mateo, CA party of the second part, hereinafter referred to as
TENANT,
WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from Owner
a portion of the third floor known as room 315-25 and shown on the cross-hatched
floor plan attached hereto as Exhibit "A" in the building known as 675 Third
Avenue, in the Borough of Manhattan, City of New York, for the term and at an
annual rental rate as set forth in the rider annexed hereto and made part
hereof, which rental Tenant agrees to pay 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, in equal monthly installments in advance on the
first day of each month during said term, at the office of Owner or such other
place as Owner may designate, without any set off or deduction whatsoever,
except that Tenant shall pay one monthly installment of rent ($10,571.79), to
be applied against rent due after the end of the "free rent" period specified in
Article 37, on the execution hereof (unless this lease be a renewal).
In the event that, at the commencement of the term of this lease, or
thereafter, Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installment of rent payable hereunder and
the same shall be payable to Owner as additional rent.
The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby covenant
as follows:
Rent: 1. Tenant shall pay the rent as above and as herein-
after provided.
Occupancy: 2. Tenant shall use and occupy demised premises for
executive and general offices, including software
research and development, and for no other purpose.
Tenant Alterations: 3. Tenant shall make no changes in or to the demised
premises of any nature without Owner's prior written
consent. Subject to the prior written consent of Owner which consent will not
be unreasonably withheld, and to the provisions of this article, Tenant, at
Tenant's expense, may make alterations, installations, additions or improvements
which are non-structural and which do not affect utility services or plumbing
and electrical lines, in or to the interior of the demised premises by using
contractors or mechanics first approved in each instance by Owner. Tenant
shall, before making any alterations, additions, installations or improvements,
at its expense, obtain all permits, approvals and certificates required by any
governmental or quasi-governmental bodies and (upon completion) certificates of
final approval thereof and shall deliver promptly duplicates of all such
permits, approvals and certificates to Owner and Tenant agrees to carry and will
cause Tenant's contractors and sub-contractors to carry such workman's
compensation, general liability, personal and property damage insurance as Owner
may require. If any mechanic's lien is filed against the demised premises, or
the building of which the same forms a part, for work claimed to have been done
for, or materials furnished to, Tenant, whether or not done pursuant to this
article, the same shall be discharged by Tenant within thirty days thereafter at
Tenant's expense, by payment or filing the bond required by law. All fixtures
and all paneling, partitions, railings and like installations, installed in the
premises at any time, either by Tenant or by Owner on Tenant's behalf, shall,
upon installation, become the property of Owner and shall remain upon and be
surrendered with the demised premises unless Owner, by notice to Tenant no later
than twenty days prior to the date fixed as the termination of this lease,
elects to relinquish Owner's right thereto and to have them removed by Tenant,
in which event the same shall be removed from the premises by Tenant prior to
the expiration of the lease, at Tenant's expense. Nothing in this Article shall
be construed to give Owner title to or to prevent Tenant's removal of trade
fixtures, moveable office furniture and equipment, but upon removal of any such
from the premises or upon removal of other installations as may be required by
Owner, Tenant shall immediately and at its expense, repair and restore the
premises to the condition existing prior to installation and repair any damage
to the demised premises or the building due to such removal. All property
permitted or required to be removed by Tenant at the end of the term remaining
in the premises after Tenant's removal shall be deemed abandoned and may, at the
election of Owner, either be retained as Owner's property or may be removed from
the premises by Owner, at Tenant's expense.
Maintenance and 4. Tenant shall throughout the term of this lease, take
Repairs: good care of the demand premises and the fixtures and
appurtenances therein; however, Owner shall provide the
cleaning services described in EXHIBIT B attached to this lease. Tenant shall be
responsible for all damage or injury to the demised premises or any other part
of the building and the system and equipment thereof, whether requiring
structural or nonstructural repairs caused by or resulting from carelessness,
omission, neglect or improper conduct of Tenant. Tenant's subtenants, agents,
employees, invitees or licensees, or which arise out of any work, labor, service
or equipment done for or supplied to Tenant or any subtenant or arising out of
the installation, use or operation of the property or equipment of Tenant or any
subtenant. Tenant shall also repair all damage to the building and the demised
premises caused by the moving of Tenant's fixtures, furniture and equipment.
Tenant shall promptly make, at Tenant's expense, all repairs in and to the
demised premises for which Tenant is responsible, using only the contractor for
the trade or trades in question, selected from a list of at least two
contractors per trade submitted by Owner. Any other repairs in or to the
building or the facilities and systems thereof for which Tenant is responsible
shall be performed by Owner at the Tenant's expense. Owner shall maintain in
good working order and repair the exterior and the structural portions of the
building, including the structural portions of its demised premises, and the
public portions of the building interior and the building plumbing, electrical,
heating and ventilating systems (to the extent such systems presently exist)
serving the demised premises. Tenant agrees to give prompt notice of any
defective condition in the premises for which Owner may be responsible
hereunder. There shall be no allowance to Tenant for diminution of rental
value and no liability on the part of Owner by reason of inconvenience,
annoyance or injury to business arising from Owner or others making repairs,
alterations, additions or improvements in or to any portion of the building or
the demised premises or in and to the fixtures, appurtenances or equipment
thereof. It is specifically agreed that that Tenant shall not be entitled to
any setoff or reduction of rent by reason of any failure of Owner to comply with
the covenants of this or any other article of this Lease. Tenant agrees that
Tenant's sole remedy at law in such instance will be by way of an action for
damages for breach of contract. The provisions of this Article 4 shall not
apply in the case of fire or other casualty which are dealt with in Article 9
hereof.
Window Cleaning: 5. Tenant will not clean nor require, permit, suffer or
allow any window in the demised premises to be cleaned
from the outside in violation of Section 202 of the Labor Law or any other
applicable law or of the Rules of the Board of Standards and Appeals, or of any
other Board or body having or asserting jurisdiction.
Requirements of 6. Prior to the commencement of the lease term, if Tenant
Law, Fire is then in possession, and at all times thereafter,
Insurance, Floor Tenant, at Tenant's sole cost and expense, shall
Loads: promptly comply with all present and future laws,
orders and regulations of all state, federal, municipal
and local governments, departments, commissions and boards and any direction of
any public officer pursuant to law, and all orders, rules and regulations of the
New York Board of Fire Underwriters, Insurance Services Office, or any similar
body which shall impose any violation order or duty upon Owner or Tenant with
respect to the demised premises, whether or not arising out of Tenant's use or
manner of use thereof, (including Tenant's permitted use) or, with respect to
the building if arising out of Tenant's use or manner of use of the premises or
the building (including the use permitted under the lease). Nothing herein
shall require Tenant to make structural repairs or alterations unless Tenant
has, by its manner of use of the demised premises or method of operation
therein, violated any such laws, ordinances, orders, rules, regulations or
requirements with respect thereto. Tenant may, after securing Owner to
<PAGE>
Owner's satisfaction against all damages, interest, penalties and expenses,
including, but not limited to, reasonable attorney's fees, by cash deposit or
by surety bond in an amount and to a company satisfactory to Owner, contest
and appeal any such laws, ordinances, orders, rules, regulations or
requirements provided same is done with all reasonable promptness and
provided such appeal shall not subject Owner to prosecution for a criminal
offense or constitute a default under any lease or mortgage under which Owner
may be obligated, or cause the demised premises or any part thereof to be
condemned or vacated. Tenant shall not do or permit any act or thing to be
done in or to the demised premises which is contrary to law, or which will
invalidate or be in conflict with public liability, fire or other policies of
insurance at any time carried by or for the benefit of Owner with respect to
the demised premises of the building of which the demised premises form a
part, or which shall or might subject Owner to any liability or
responsibility to any person or for property damage. Tenant shall not keep
anything in the demised premises except as now or hereafter permitted by the
Fire Department, Board of Fire Underwriters, Fire Insurance Rating
Organization or other authority having jurisdiction, and then only in such
manner and such quantity so as not to increase the rate for fire insurance
applicable to the building, nor use the premises in a manner which will
increase the insurance rate for the building or any property located therein
over that in effect prior to the commencement of Tenant's occupancy. Tenant
shall pay all costs, expenses, fines, penalties, or damages, which may be
imposed upon Owner by reason of Tenant's failure to comply with the
provisions of this article and if by reason of such failure the fire
insurance rate shall, at the beginning of this lease or at any time
thereafter, be higher than it otherwise would be, then Tenant shall reimburse
Owner, as additional rent hereunder, for that portion of all fire insurance
premiums thereafter paid by Owner which shall have been charged because of
such failure by Tenant. In any action or proceeding wherein Owner and Tenant
are parties, a schedule or "make-up" of rate for the building or demised
premises issued by the New York Fire Insurance Exchange, or other body making
fire insurance rates applicable to said premises shall be conclusive evidence
of the facts therein stated and of the several items and charges to the fire
insurance rates then applicable to said premises. Tenant shall not place a
load upon any floor of the demised premises exceeding the floor load per
square foot area which it was designed to carry and which is allowed by law.
Owner reserves the right to prescribe the weight and position of all safes,
business machines and mechanical equipment. Such installations shall be
placed and maintained by Tenant, at Tenant's expense, in settings sufficient,
in Owner's judgement, to absorb and prevent vibration, noise and annoyance.
Subordination: 7. This lease is subject and subordinate to all ground or
underlying leases and to all mortgages which may now
or hereafter affect such leases or the real property of which demised premises
are a part and to all renewals, modifications, consolidations, replacements and
extensions of any such underlying leases and mortgages. This clause shall be
self-operative and no further instrument of subordination shall be required by
any ground or underlying lessor or by any mortgagee, affecting any lease or the
real property of which the demised premises are a part. In confirmation of such
subordination, Tenant shall from time to time execute promptly any certificate
that Owner may request.
Property Loss, 8. Owner or its agents shall not be liable for any damage
Damage to property of Tenant or of others entrusted to
Reimbursement employees of the building, nor for loss of or damage to
Indemnity: any property of Tenant by theft or otherwise, nor for
any injury or damage to persons or property resulting
from any cause of whatsoever nature, unless caused by or due to the negligence
of Owner, its agents, servants or employees. Owner or its agents will not be
liable for any such damage caused by other tenants or persons in, upon or about
said building or caused by operations in construction of any private, public or
quasi-public work. If at any time any windows of the demised premises are
temporarily closed, darkened or bricked up (or permanently closed, darkened or
bricked up, if required by law) for any reason whatsoever including, but not
limited to Owner's own acts, Owner shall not be liable for any damage Tenant may
sustain thereby and Tenant shall not be entitled to any compensation therefor
nor abatement of diminution of rent nor shall the same release Tenant from its
obligations hereunder nor constitute an eviction. Tenant shall indemnify and
save harmless Owner against and from all liabilities, obligations, damages,
penalties, claims, costs and expenses for which Owner shall not be reimbursed by
insurance, including reasonable attorneys fees, paid, suffered or incurred as a
result of any breach by Tenant, Tenant's agents, contractors, employees,
invitees, or licensees, of any covenant or condition of this lease, or the
carelessness, negligence or improper conduct of the Tenant, Tenant's agents,
contractors, employees, invitees or licensees. Tenant's liability under this
lease extends to the acts and omissions of any sub-tenant, and any agent,
contractor, employee, invitee or licensee of any sub-tenant. In case any action
or proceeding is brought against Owner by reason of any such claim, Tenant, upon
written notice from Owner, will, at Tenant's expense, resist or defend such
action or proceeding by counsel approved by Owner in writing, such approval not
to be unreasonable withheld.
Destruction, Fire 9. (a) If the demised premises or any part thereof shall
and Other Casualty: be damaged by fire or other casualty, Tenant shall give
immediate notice thereof to Owner and this lease shall
continue in full force and effect except as hereinafter set forth. (b) If the
demised premises are partially damaged or rendered partially unusable by fire or
other casualty, the damages thereto shall be repaired by and at the expense of
Owner and the rent and other items of additional rent, until such repair shall
be substantially completed, shall be apportioned from the day following the
casualty according to the part of the premises which is usable. (c) If the
demised premises are totally damaged or rendered wholly unusable by fire or
other casualty, then the rent and other items of additional rent as hereinafter
expressly provided shall be proportionately paid up to the time of the casualty
and thenceforth shall cease until the date when the premises shall have been
repaired and restored by Owner (or sooner reoccupied in part by Tenant then rent
shall be apportioned as provided in subsection (b) above), subject to Owner's
right to elect not to restore the same as hereinafter provided. (d) If the
demised premises are rendered wholly unusable or (whether or not the demised
premises are damaged in whole or in part) if the building shall be so damaged
that Owner shall decide to demolish it or to rebuild it, then, in any of such
events, Owner may elect to terminate this lease by written notice to Tenant,
given within 90 days after such fire or casualty, or 30 days after adjustment of
the insurance claim for such fire or casualty, whichever is sooner, specifying a
date for the expiration of the lease, which date shall not be more than 60 days
after the giving of such notice, and upon the date specified in such notice the
term of this lease shall expire as fully and completely as if such date were the
date set forth above for the termination of this lease and Tenant shall
forthwith quit, surrender and vacate the premises without prejudice however, to
Landlord's rights and remedies against the Tenant under the lease provisions in
effect prior to such termination, and any rent owing shall be paid up to such
date and any payments of rent made by Tenant which were on account of any period
subsequent to such date shall be returned to Tenant. Unless Owner shall serve a
termination notice as provided for herein, Owner shall make the repairs and
restorations under the conditions of (b) and (c) hereof, with all reasonable
expedition, subject to delays due to adjustments of insurance claims, labor
troubles and causes beyond Owner's control. After any such casualty, Tenant
shall cooperate with Owner's restoration by removing from the premises as
promptly as reasonably possible, all of Tenant's salvageable inventory and
moveable equipment, furniture, and other property. Tenant's liability for rent
shall resume five (5) days after written notice from Owner that the premises are
substantially ready for Tenant's occupancy. (e) Nothing contained hereinabove
shall relieve Tenant from liability that may exist as a result of damage from
fire or other casualty. Notwithstanding the foregoing, including Owner's
obligation to restore under subparagraph (b) above, each party shall look first
to any insurance in its favor before making any claim against the other party
for recovery for loss or damage resulting from fire or other casualty, and to
the extent that such insurance is in force and collectible and to the extent
permitted by law. Owner and Tenant each hereby releases and waives all right of
recovery with respect to subparagraphs (b), (d), and (e) above, against the
other or any one claiming through or under each of them by way of subrogation or
otherwise. The release and waiver herein referred to shall be deemed to include
any loss or damage to the demised premises and/or to any personal property,
equipment, trade fixtures, goods and merchandise located therein. The foregoing
release and waiver shall be in force only if both releasors' insurance policies
contain a clause providing that such release or waiver shall not invalidate the
insurance. If, and to the extent, that such waiver can be obtained only by the
payment of additional premiums, then the party benefiting from the waiver shall
pay such premium within ten days after written demand or shall be deemed to have
agreed that the party obtaining insurance coverage shall be free of any further
obligation under the provisions hereof with respect to waiver of subrogation.
Tenant acknowledges that Owner will not carry insurance on Tenant's furniture
and/or furnishings or any fixtures or equipment, improvements, or appurtenances
removable by Tenant and agrees that Owner will not be obligated to repair any
damage thereto or replace the same. (f) Tenant hereby waives the provisions of
Section 227 of the Real Property Law and agrees that the provisions of this
article shall govern and control in lieu thereof.
Eminent Domain: 10. If the whole or any part of the demised premises shall
be acquired or condemned by Eminent Domain for any
public or quasi public use or purpose, then and in that event, the term of this
lease shall cease and terminate from the date of title vesting in such
proceeding and Tenant shall have no claim for the value of any unexpired term of
said lease and assigns to Owner, Tenant's entire interest in any such award.
Tenant shall have the right to make an independent claim to the condemning
authority for the value of Tenant's moving expenses and personal property, trade
fixtures and equipment, provided Tenant is entitled pursuant to the terms of the
lease to remove such property, trade fixtures and equipment at the end of the
term and provided further such claim does not reduce Owner's award.
Assignment, 11. Subject to Article 46 of this Lease, Tenant, for
Mortgage, Etc.: itself, its heirs, distributees, executors,
administrators, legal representative, successor and
assigns, expressly covenants that it shall not assign, mortgage or encumber this
agreement, nor underlet or suffer or permit the demised premises or any part
thereof to be used by others, without the prior written consent of Owner in each
instance. Transfer of the majority of the stock of a corporate Tenant or the
majority partnership interest of a partnership Tenant shall be deemed an
assignment. If this lease be assigned, or if the demised premises or any part
thereof be underlet or occupied by anybody other than Tenant, Owner may, after
default by Tenant, collect rent from the assignee, under-tenant or occupant, and
apply the net amount collected to the rent herein reserved, but no such
assignment, underletting, occupancy or collection shall be deemed a waiver of
this covenant, or the acceptance of the assignee, under-tenant or occupant as
tenant, or a release of Tenant from the further performance by Tenant of
covenants on the part of Tenant herein contained. The consent by Owner to an
assignment or underletting shall not in any wise be construed to relieve Tenant
from obtaining the express consent in writing of Owner to any further assignment
or underletting.
Electric Current: 12. Rates and conditions in respect to submetering or rent
inclusion, as the case may be are as set forth in
Article 38 of this Lease. Tenant covenants and agrees that at all times its use
of electric current shall not exceed the capacity of existing feeders to the
building or the risers or wiring installation and Tenant may not use any
electrical equipment which, in Owner's opinion, reasonably exercised, will
overload such installations or interfere with the use thereof by other tenants
of the building. The change at any time of the character of electric service
shall in no wise make Owner liable or responsible to Tenant, for any loss,
damages or expenses which Tenant may sustain.
Access to Premises: 13. Owner or Owner's agents shall have the right (but shall
not be obligated) to enter the demised premises in any
emergency at any time, and, at other reasonable times, to examine the same and
to make such repairs, replacements and improvements as Owner may deem necessary
and reasonably desirable to the demised premises or to any other portion of the
building or which Owner may elect to perform. Tenant shall permit Owner to use
and maintain and replace pipes and conduits in and through the demised premises
and to erect new pipes and conduits therein provided they are concealed within
the walls, floor, or ceiling. Owner may, during the progress of any work in the
demised premises, take all necessary materials and equipment into said premises
without the same constituting an eviction nor shall the Tenant be entitled to
any abatement of rent while such work is in progress nor to any damages by
reason of loss or interruption of business or otherwise. Owner will use
reasonable efforts to minimize interference with the conduct of tenant's
business; however, in no event will Owner be obligated to incur any form of
overtime costs or expenses. Throughout the term hereof Owner shall have the
right to enter the demised premises at reasonable hours and upon reasonable
oral, written, telephonic or other notice (except no notice shall be required in
an emergency) for the purpose of showing the same to prospective purchasers or
mortgagees of the building, and during the last six months of the term for the
purpose of showing the
<PAGE>
same to prospective tenants. If Tenant is not present to open and permit an
entry into the demised premises, Owner or Owner's agents may enter the same
whenever such entry may be necessary or permissible by master key or forcibly
and provided reasonable care is exercised to safeguard Tenant's property, such
entry shall not render Owner or its agents liable therefor, nor in any event
shall the obligations of Tenant hereunder be affected. If during the last month
of the term Tenant shall have removed all or substantially all of Tenant's
property therefrom Owner may immediately enter, alter, renovate or redecorate
the demised premises without limitation or abatement of rent, or incurring
liability to Tenant for any compensation and such act shall have no effect on
this lease or Tenant's obligations hereunder.
Vault, Vault 14. No Vaults, vault space or area, whether or not enclosed
Space, Area: or covered, not within the property line of the
building is leased hereunder, anything contained in or
indicated on any sketch, blue print or plan, or anything contained elsewhere in
this lease to the contrary notwithstanding. Owner makes no representation as to
the location of the property line of the building. All vaults and vault space
and all such areas not within the property line of the building, which Tenant
may be permitted to use and/or occupy, is to be used and/or occupied under a
revocable license, and if any such license be revoked, or if the amount of such
space or area be diminished or required by any federal, state or municipal
authority or public utility, Owner shall not be subject to any liability nor
shall Tenant be entitled to any compensation or diminution or abatement of rent,
nor shall such revocation, diminution or requisition be deemed constructive or
actual eviction. Any tax, fee or charge of municipal authorities for such vault
or area shall be paid by Tenant.
Occupancy: 15. Tenant will not at any time use or occupy the demised
premises in violation of the certificate of occupancy
issued for the building of which the demised premises are a part. Tenant has
inspected the premises and accepts them as is, subject to Article 43 of this
Lease. In any event, Owner makes no representation as to the condition of the
premises and Tenant agrees to accept the same subject to violations, whether or
not of record.
Bankruptcy: 16. (a) Anything elsewhere in this lease to the contrary
notwithstanding, this lease may be cancelled by Owner
by the sending of a written notice to Tenant within a reasonable time after the
happening of any one or more of the following events: (1) the commencement of a
case in bankruptcy or under the laws of any state naming Tenant as the debtor;
or (2) the making by Tenant of an assignment or any other arrangement for the
benefit of creditors under any state statute. Neither tenant nor any person
claiming through or under Tenant, or by reason of any statute or order of court,
shall thereafter be entitled to possession of the premises demised but shall
forthwith quit and surrender the premises. If this lease shall be assigned in
accordance with its terms, the provisions of this Article 16 shall be applicable
only to the party then owning Tenant's interest in this lease
(b) It is stipulated and agreed that in the event of the
termination of this lease pursuant to (a) hereof, Owner shall forthwith,
notwithstanding any other provisions of this lease to the contrary, be entitled
to recover from Tenant as and for liquidated damages an amount equal to the
difference between the rent reserved hereunder for the unexpired portion of the
term demised and the fair and reasonable rental value of the demised premises
for the same period. In the computation of such damages the difference between
any installment of rent becoming due hereunder after the date of termination and
the fair and reasonable rental value of the demised premises for the period for
which such installment was payable shall be discounted to the date of
termination at the rate of four percent (4%) per annum. If such premises or any
part thereof be re-let by the Owner for the unexpired term of said lease, or any
part thereof, before presentation of proof of such liquidated damages to any
court, commission or tribunal, the amount of rent reserved upon such re-letting
shall be deemed to be the fair and reasonable rental value for the part or the
whole of the premises so re-let during the term of the re-letting. Nothing
herein contained shall limit or prejudice the right of the Owner to prove for
and obtain as liquidated damages by reason of such termination, an amount equal
to the maximum allowed by any statute or rule of law in effect at the time when,
and governing the proceedings in which, such damages are to be proved, whether
or not such amount be greater, equal to, or less than the amount of the
difference referred to above.
Default: 17. (1) If Tenant defaults in fulfilling any of the
covenants of this lease other than the covenants for
the payment of rent or additional rent, or if the demised premises become vacant
or deserted, or if any execution or attachment shall be issued against Tenant or
any of Tenant's property whereupon the demised premises shall be taken or
occupied by someone other than Tenant, or if this lease be rejected under
Section 235 of Title 11 of the U.S. Code (bankruptcy code), or if Tenant shall
fail to move into or take possession of the premises within thirty (30) days
after the commencement of the term of this lease, then, in any one or more of
such events, upon Owner serving a written fifteen (15) days notice upon Tenant
specifying the nature of said default and upon the expiration of said fifteen
(15) days, if Tenant shall have failed to comply with or remedy such default,
or if the said default or omission complained of shall be of a nature that the
same cannot be completely cured or remedied within said fifteen (15) day period,
and if Tenant shall not have diligently commenced curing such default within
such fifteen (15) day period, and shall not thereafter with reasonable diligence
and in good faith, proceed to remedy or cure such default, then Owner may serve
a written five (5) days' notice of cancellation of this lease upon Tenant, and
upon the expiration of said five (5) days this lease and the term thereunder
shall end and expire as fully and completely as if the expiration of such five
(5) day period were the day herein definitely fixed to the end and expiration of
this lease and the term thereof and Tenant shall then quit and surrender the
demised premises to Owner but Tenant shall remain liable as hereinafter
provided.
(2) If the notice provided for in (1) hereof shall have
been given and the term shall expire as aforesaid, or if Tenant shall make
default in the payment of the rent reserved herein or any item of additional
rent herein mentioned or any part of either or in making any other payments
herein required, then and in any of such events Owner may, without notice,
re-enter the demised premises either by force or otherwise, and dispossess
Tenant by summary proceedings or otherwise, and the legal representative of
Tenant or other occupant of demised premises and remove their effects and hold
the premises as if this lease had not been made and Tenant hereby waives the
service of notice of (illegible) to re-enter or to institute legal proceedings
to that end. If Tenant shall make default hereunder prior to the date filed as
the commencement of any renewal or extension of this lease, Owner may cancel and
terminate such renewal or extension agreement by written notice.
Remedies of Owner 18. In case of any such default, re-entry, expiration,
and Waiver of and/or dispossess by summary proceedings or otherwise,
Redemption: (a) the rent shall become due thereupon and be paid up
to the time of such re-entry, dispossess and/or
expiration, (b) Owner may re-let the premises or any part or parts thereof,
either in the name of Owner or otherwise, for a term or terms, which may at
Owner's option be less than or exceed the period which would otherwise have
constituted the balance of the term of this lease and may grant concessions or
free rent or charge a higher rental than that in this lease, and/or (c) Tenant
or the legal representatives of Tenant shall also pay Owner as liquidated
damages for the failure of Tenant to observe and perform said Tenant's covenants
herein contained, any deficiency between the rent hereby reserved and/or
covenanted to be paid and the net amount, if any, of the rents collected on
account of the lease or leases of the demised premises for each month of the
period which would otherwise have constituted the balance of the term of this
lease. The failure of Owner to re-let the premises or any part or parts thereof
shall not release or affect Tenant's liability for damages. In computing such
liquidated damages there shall be added to the said deficiency such expenses as
Owner may incur in connection with re-letting, such as legal expenses,
reasonable attorneys' fees, brokerage, advertising and for keeping the demised
premises in good order or for preparing the same for re-letting. Any such
liquidated damages shall be paid in monthly installments by Tenant on the rent
day specified in this lease and any suit brought to collect the amount of the
deficiency for any month shall not prejudice in any way the rights of Owner to
collect the deficiency for any subsequent month by a similar proceeding. Owner,
in putting the demised premises in good order or preparing the same for
re-rental may, at Owner's option, make such alterations, repairs, replacements,
and/or decorations in the demised premises as Owner, in Owner's sole judgement,
considers advisable and necessary for the purpose of re-letting the demised
premises, and the making of such alterations, repairs, replacements, and/or
decorations shall not operate or be construed to release Tenant from liability
hereunder as aforesaid. Owner shall in no event be liable in any way whatsoever
for failure to re-let the demised premises, or in the event that the demised
premises are re-let, for failure to collect the rent thereof under such
re-letting, and in no event shall Tenant be entitled to receive any excess, if
any, of such net rents collected over the sums payable by Tenant to Owner
hereunder. In the event of a breach or threatened breach by Tenant of any of
the covenants or provisions hereof, Owner shall have the right of injunction and
the right to invoke any remedy allowed at law or in equity as if re-entry,
summary proceedings and other remedies were not herein provided for. Mention in
this lease of any particular remedy shall not preclude Owner from any other
remedy, in law or in equity. Tenant hereby expressly waives any and all rights
of redemption granted by or under any present or future laws in the event of
Tenant being evicted or dispossessed for any cause or in the event of Owner
obtaining possession of demised premises, by reason of the violation by Tenant
of any of the convenants and conditions of this lease, or otherwise.
Fees and Expenses: 19. If Tenant shall default in the observance or
performance of any term or covenant on Tenant's part to
be observed or performed under or by virtue of any of the terms or provisions in
any article of this lease, after notice if required and upon expiration of any
applicable grace period if any, (except in an emergency), then, unless otherwise
provided elsewhere in this lease, Owner may immediately or at any time
thereafter and without notice perform the obligation of Tenant thereunder. If
Owner, in connection with the foregoing or in connection with any default by
Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs
any obligations for the payment of money, including but not limited to
reasonable attorneys' fees, in instituting, prosecuting or defending any action
or proceeding, and prevails in any such action or proceeding then Tenant will
reimburse Owner for such sums so paid or obligations incurred with interest and
costs. The foregoing expenses incurred by reason of Tenant's default shall be
deemed to be additional rent hereunder and shall be paid by Tenant to owner
within fifteen (15) days of rendition of any bill or statement to Tenant
therefor. If Tenant's lease term shall have expired at the time of making of
such expenditures or incurring of such obligations, such sums shall be
recoverable by Owner, as damages.
Building 20. Owner shall have the right at any time without the same
Alterations and constituting an eviction and without incurring
Management: liability to Tenant therefor to change the arrangement
and/or location of public entrances, passageways,
doors, doorways, corridors, elevators, stairs, toilets or other public parts
of the building and to change the name, number or designation by which the
building may be known. There shall be no allowance to Tenant for diminution
of rental value and no liability on the part of Owner by reason of
inconvenience, annoyance or injury to business arising from Owner or other
Tenants making any repairs in the building or any such alterations, additions
and improvements. Furthermore, Tenant shall not have any claim against Owner
by reason of Owner's imposition of such controls of the manner of access to
the building by Tenant's social or business visitors as the Owner may deem
necessary for the security of the building and its occupants.
No Representations 21. Neither Owner nor Owner's agents have made any
by Owner: representations or promises with respect to the
physical condition of the building, the land upon which
it is erected or the demised premises, the rents, leases, expenses of operation
or any other matter or thing affecting or related to the premises except as
herein expressly set forth and no rights, easements or licenses are acquired by
Tenant by implication or otherwise except as expressly set forth in the
provisions of this lease. Tenant has inspected the building and the demised
premises and is thoroughly acquainted with their condition and agrees to take
the same "as is" and acknowledges that the taking of possession of the demised
premises by Tenant shall be conclusive evidence that the said premises and the
building of which the same form a part were in good and satisfactory condition
at the time such possession was so taken, except as to latent defects. All
understandings and agreements heretofore made between the parties hereto are
merged in this contract, which alone fully and completely expresses the
agreements between Owner and Tenant and any executory agreement
<PAGE>
hereafter made shall be ineffective to change, modify, discharge or effect an
abandonment of it in whole or in part, unless such executory agreement is in
writing and signed by the party against whom enforcement of the change,
modification, discharge or abandonment is sought.
End of Term: 22. Upon the expiration or other termination of the term of
this lease, Tenant shall quit and surrender to Owner
the demised premises, broom clean, in good order and condition, ordinary wear
and damages which Tenant is not required to repair as provided elsewhere in
this lease excepted, and Tenant shall remove all its property. Tenant's
obligation to observe or perform this covenant shall survive the expiration
or other termination of this lease. If the last day of the term of this
Lease or any renewal thereof, falls on Sunday, this lease shall expire at
noon on the preceding Saturday unless it be a legal holiday in which case it
shall expire at noon on the preceding business day.
Quiet Enjoyment: 23. Owner covenants and agrees with Tenant that upon Tenant
paying the rent and additional rent and observing and
performing all the terms, covenants and conditions, on Tenant's part to be
observed and performed, Tenant may peaceably and quietly enjoy the premises
hereby demised, subject nevertheless, to the terms and conditions of this lease
including, but not limited to, Article 31 hereof and to the ground leases,
underlying leases and mortgages hereinbefore mentioned.
Failure to Give 24. If Owner is unable to give possession of the demised
Possession: premises on the date of the commencement of the term
hereof, because of the holding-over or removal of
possession of any tenant, undertenant or occupant or if the demised premises
are located in a building being constructed because such building has not
been sufficiently completed to make the premises ready for occupancy or
because of the fact that a certificate of occupancy has not been procured or
for any other reason, Owner shall not be subject to any liability for failure
to give possession on said date and the validity of the lease shall not be
impaired under such circumstances, nor shall the same be construed to any
wise to extend the term of this lease, but the rent payable hereunder shall
be abated (provided Tenant is not responsible for Owner's inability to obtain
possession of complete construction) until after Owner shall have given Tenant
written notice that the Owner is able to deliver possession in condition
required by this lease. If permission is given to Tenant to enter into the
possession of the demised premises or to occupy premises other than the
demised premises prior to the date specified as the commencement of the term
of this lease, Tenant covenants and agrees that such possession and/or
occupancy shall be deemed to be under all the terms, covenants, conditions
and provisions of this lease except the obligation to pay the fixed annual
rent set forth in the preamble to this lease. The provisions of this article
are intended to constitute "an express provision to the contrary" within the
meaning of Section 223.a of the New York Real Property Law.
The Waiver: 25. The failure of Owner to seek redress for violation
of, or to insist upon the strict performance of any
covenant or condition of this lease or of any of the Rules and Regulations set
forth or hereafter adopted by Owner, shall not prevent a subsequent act which
would have originally constituted a violation from having all the force and
effect of an original violation. The receipt by Owner of rent and/or additional
rent with knowledge of the breach of any covenant of this lease shall not be
deemed a waiver of such breach and no provision of this lease shall be deemed to
have been waived by Owner unless such waiver be in writing signed by Owner. No
payment by Tenant or receipt by Owner of a lesser amount than the monthly rent
herein stipulated shall be deemed to be other than the account of the earliest
stipulated rent, nor shall any endorsement or statement of any check or any
letter accompanying any check or payment as rent be deemed an accord and
satisfaction, and Owner may accept such check or payment without prejudice to
Owner's right to recover the balance of such rent or pursue any other remedy in
this lease provided no act or thing done by Owner or Owner's agents during the
term hereby demised shall be deemed an acceptance of a surrender of said
premises, and no agreement to accept such surrender shall be valid unless in
writing signed by Owner. No employee of Owner or Owner's agent shall have any
power to accept the keys of said premises prior to the termination of the lease
and the delivery of keys to any such agent or employee shall not operate as a
termination of the lease or a surrender of the premises.
Waiver of Trial 26. It is mutually agreed by and between Owner and
Tenant by Jury: that the respective parties hereto shall and they
hereby do waiver trial by jury in any action
proceeding or counterclaim brought by either of the parties hereto against
the other (except for personal injury or property damage on any matters
whatsoever arising out of or in any way connected with this lease, the
relationship of Owner and Tenant, Tenant's use of or occupancy of said
premises, and any emergency statutory or any other statutory remedy. It is
further mutually agreed that in the event Owner commences any proceeding or
action for possession including a summary proceeding for possession of the
premises, Tenant will not interpose any counterclaim of whatever nature or
description in any such proceeding including a counterclaim under Article 4
except for statutory mandatory counterclaims.
Inability to 27. This Lease and the obligation of Tenant to pay rent
Perform: hereunder and perform all of the other covenants and
agreements hereunder on part of Tenant to be performed
shall in no wise be affected, impaired or excused because Owner is unable to
fulfill any of its obligations under this lease or to supply or is delayed in
supplying any service expressly or impliedly to be supplied or is unable to
make, or is delayed in making any repair, additions, alterations or decorations
or is unable to supply or is delayed in supplying any equipment, fixtures, or
other materials if Owner is prevented or delayed from so doing by reason of
strike or labor troubles or any cause whatsoever including, but not limited to,
government preemption or restrictions or by reason of any rule, order or
regulation of any department or subdivision thereof of any government agency or
by reason of the conditions which have been or are affected, either directly or
indirectly, by war or other emergency.
Bills and Notices: 28. Except as otherwise in this lease provided, a bill,
statement, notice or communication which Owner may
desire or be required to give to Tenant, shall be deemed sufficiently given
or rendered if, in writing, delivered to Tenant personally or sent by
registered or certified mail or by recognized overnight courier addressed to
Tenant at the building of which the demised premises form a part or at the
last known residence address or business address of Tenant or left at any of
the aforesaid premises addressed to Tenant and the time of the [ILLEGIBLE] of
such bill or statements and of the giving of such notice or communication
shall be deemed to be the time when the same is delivered to Tenant, mailed,
or left at the premises as herein provided. Any notice by Tenant to Owner
must be served by registered or certified mail addressed to Owner at the
address first hereinabove given or as such other address as Owner shall
designate by written notice.
Services Provided 29. As long as Tenant is not in default under any of the
by Owners: covenants of this lease beyond the applicable grace
period provided in this lease for the curing of such
defaults, Owner shall provide: (a) necessary elevator facilities on business
days from 8 a.m. to 6 p.m. and have one elevator subject to call at all other
times; (b) heat to the demised premises when and as required by law, on
business days from 8 a.m. to 6 p.m.; (c) water for ordinary lavatory
purposes, but if Tenant uses or consumes water for any other purposes or in
unusual quantities (of which fact Owner shall be the sole judge), Owner may
install a water meter at Tenant's expense which Tenant shall thereafter
maintain at Tenant's expense in good working order and repair to register
such water consumption and Tenant shall pay for water consumed as shown on
said meter as additional rent as and when bills are rendered; (d) cleaning
service for the demised premises on business days at Owner's expense provided
that the same are kept in order by Tenant; (e) if the demised premises are
serviced by Owner's air conditioning/cooling and ventilating system, air
conditioning/cooling will be furnished to Tenant from May 15th through
September 30th on business days (Mondays through Fridays, holidays excepted)
from 8:00 a.m. to 6:00 p.m. and ventilation will be furnished on business
days during the aforesaid hours except when air conditioning/cooling is being
furnished as aforesaid. If Tenant requires air conditioning/cooling or
ventilation for more extended hours or on Saturdays, Sundays or on holidays,
as defined under Owner's contract with Operating Engineers Local 94-94A,
Owner will furnish the same at Tenant's expense. RIDER to be added in
respect to rates and conditions for such additional service: (f) Owner
reserves the right to stop services of the heating, elevators, plumbing, air
conditioning, electric, power systems or cleaning or other services, if any,
when necessary by reason of accident or for repairs, alterations,
replacements or improvements necessary or desirable in the judgment of Owner
for as long as may be reasonably required by reason thereof. If the building
of which the demised premises are a part supplies manually operated elevator
service, Owner at any time may substitute automatic control elevator service
and proceed diligently with alterations necessary therefor without in any
wise affecting this lease or the obligation of Tenant hereunder.
Captions: 30. The Captions are inserted only as a matter of
convenience and for reference and in no way define,
limit or describe the scope of this lease nor the intent of any provisions
thereof.
Definitions: 31. The term "office", or "offices", wherever used in this
lease, shall not be construed to mean premises used as
a store or stores, for the sale or display, at any time, of goods, wares or
merchandise, of any kind, or as a restaurant, shop, booth, bootblack or other
stand, barber shop, or for other similar purposes or for manufacturing. The
term "Owner" means a landlord or lessor, and as used in this lease means only
the owner, or the mortgagee in possession, for the time being of the land and
building (or the owner of a lease of the building or of the land and
building) of which the demised premises form a part, so that in the event of
any sale or sales of said land and building or of said lease, or in the event
of a lease of said building, or of the land and building, the said Owner
shall be and hereby is enurely freed and relieved of all covenants and
obligations of Owner hereunder, and it shall be deemed and construed without
further agreement between the parties or their successors in interest, or
between the parties and the purchaser, at any such sale, or the said lessee
of the building, or of the land and building that the purchaser or the lessee
of the building has assumed and agreed to carry out any and all covenants and
obligations of Owner, hereunder. The words "re-enter" and "re-entry" as used
in this lease are not restricted to their technical legal meaning. The term
"business days" as used in this lease shall exclude Saturdays, Sundays and
all days as observed by the State or Federal Government as legal holidays and
those designated as holidays by the applicable building service union
employees service contract or by the applicable Operating Engineers contract
with respect to HVAC service. Wherever it is expressly provided in this
lease that consent shall not be unreasonably withheld, such consent shall not
be unreasonably delayed.
Adjacent 32. If an excavation shall be made upon land adjacent to
Excavation-Shoring: the demised premises, 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 wall or the building of which demised premises form a part from
injury or damages and to support the same by proper foundations without any
claim for damages or indemnity against Owner, or diminution or abatement of
rent.
Rules and 33. Tenant and Tenant's servants, employees, agents,
Regulations: visitors and licensees shall observe faithfully, and
comply strictly with, the Rules and Regulations and
such other and further reasonable Rules and Regulations as Owner or Owner's
agents may from time to time adopt. Notice of any additional rules or
regulations shall be given in such manner as Owner may elect. In case Tenant
disputes the reasonableness of any additional Rule or Regulation hereafter
made or adopted by Owner or Owner's agents, the parties hereto agree to
submit the question of the reasonableness of such Rule or Regulation for
decision to the New York office of the American Arbitration Association,
whose determination shall be final and conclusive upon the parties hereto.
The right to dispute the reasonableness of any additional Rule or Regulation
upon Tenant's part shall be deemed waived unless the same shall be asserted
by service of a notice, in writing upon Owner within fifteen (15) days after
the giving of notice thereof. Nothing
<PAGE>
in this lease contained shall be construed to impose upon Owner any duty or
obligation to enforce the Rules and Regulations or terms, covenants or
conditions in any other lease, as against any other tenant and Owner shall not
be liable to Tenant for violation of the same by any other tenant, its servants,
employees, agents, visitors or licensees.
Security: 34. Tenant has deposited with Owner the sum of $42,287.16
as security for the faithful performance and observance
by Tenant of the terms, provisions and conditions of this lease; it is agreed
that in the event Tenant defaults in respect of any of the terms, provisions and
conditions of this lease, including, but not limited to, the payments of rent
and additional rent, Owner may use, apply or retain the whole or any part of the
security so deposited to the extent required for the payment of any rent and
additional rent or any other sum as to which Tenant is in default or for any sum
which Owner may expend or may be required to expend by reason of Tenant's
default in respect of any of the terms, covenants and conditions of this lease,
including but not limited to, any damages or deficiency in the re-letting of the
premises, whether such damages or deficiency accrued before or after summary
proceedings or other re-entry by Owner. In the event that Tenant shall fully
and faithfully comply with all of the terms, provisions, covenants and
conditions of this lease, the security shall be returned to Tenant after the
date fixed as the end of the Lease and after delivery of entire possession of
the demised premises to Owner except that if after twenty four (24) months from
the Commencement Date Tenant has faithfully performed and observed the
provisions and conditions of this Lease and has not defaulted in respect of any
of the terms, provisions and conditions of this Lease, including, but not
limited to, the payment of rent and additional rent, then Owner will at that
time refund to Tenant security in an amount equal to one monthly installment of
rent; and except that if after fourty eight (48) months from the Commencement
Date Tenant has faithfully performed and observed the provisions and conditions
of this Lease and has not defaulted in respect of any of the terms, provisions
and conditions of this Lease, including, but not limited to, the payment of rent
and additional rent, and Tenant has provided to Owner its audited financial
statements for all the years in which it has been a party to this Lease and said
financial statements reflect a net operating profit, then Owner will at that
time refund to Tenant additional security in an amount equal to one monthly
installment of rent. In the event of a sale of the land and building or leasing
of the building, of which the demised premises form a part, Owner shall have the
right to transfer the security to the vendee or lessee and Owner shall thereupon
be released by Tenant from all liability for the return of such security; and
Tenant agrees to look to the new Owner solely for the return of said security,
and it is agreed that the provisions hereof shall apply to every transfer or
assignment made of the security to a new Owner. Tenant further covenants that
it will not assign or encumber or attempt to encumber the monies deposited
herein as security and that neither Owner nor its successors or assigns shall be
bound by any such assignment, encumbrance, attempted assignment or attempted
encumbrance.
Estoppel 35. Tenant, at any time, and from time to time, upon at
Certificate: least twenty (20) days prior notice by Owner, shall
execute, acknowledge and deliver to Owner and/or to any
other person, firm or corporation specified by Owner, a statement certifying
that this Lease is unmodified and in full force and effect (or if there
have been modifications, that the same is in full force and effect as modified
and stating the modifications), stating the dates to which the rent and
additional rent have been paid, and stating whether or not there exists any
default by Owner under this Lease, and, if so, specifying each such default.
Successors and 36. The covenants, conditions and agreements contained in
Assigns: this lease shall bind and inure to the benefit of Owner
and Tenant and their respective heirs, distributees,
executors, administrators, successors, and except as otherwise provided in
this lease, their assigns. Tenant shall look only to Owner's estate and
interest in the land and building, for the satisfaction of Tenant's remedies
for the collection of a judgment (or other judicial process) against Owner in
the event of any default by Owner hereunder, and no other property or assets
by such Owner (or any partner, member, officer or director thereof disclosed
or undisclosed), shall be subject to (illegibly) execution or other
enforcement procedure for the satisfaction of Tenant's remedies under or with
respect to this lease, the relationship of Owner and Tenant hereunder, or
Tenant's use and occupancy of the demised premises.
- --------------------
- - Space to be filled in or deleted.
IN WITNESS WHEREOF, Owner and Tenant have respectively signed and sealed this
lease as of the day and year first above written.
Witness for Owner: ROYAL REALTY CORP., Agent
-----------------------------------
By: /s/ Douglas Durst
- ----------------------------------- -----------------------------------
Name: Douglas Durst
Title: President
Witness for Tenant: NET GRAVITY, INC.
-----------------------------------
By: /s/ Stephen E. Recht
- ----------------------------------- -----------------------------------
Name: Stephen E. Recht
Title: Vice President
Finance & Administration
Chief Financial Officer
ACKNOWLEDGMENTS
CORPORATE OWNER
STATE OF NEW YORK
County of New York
On this 2nd day of March 1998, before me personally came Douglas Durst
to me known, who being by me duly sworn, did depose and say that: he resides
in NY, NY that he is the President of Royal Realty Corp. the corporation
described in and which executed the foregoing instrument, as OWNER, that he
knows the seal of said corporation; the seal affixed to said instrument is
such corporate seal; that it was so affixed by order of the Board of
Directors of said corporation, and that he signed his name thereto by like
order.
/s/ Bobbie Martowicz
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BOBBIE MARTOWICZ
NOTARY PUBLIC State of New York
No. O1MAS016842
Qualified in New York County
Commission Expires August 23, 1999
CORPORATE TENANT
STATE OF NEW YORK
County of New York
On this day of 19 , before me personally came to me
know, who being by me duly sworn, did depose and say that he resides in
that he is the of the corporation described
in and which executed the foregoing instrument, as TENANT, that he knows the
seal of said corporation; the seal affixed to said instrument is such corporate
seal; that it was so affixed by order of the Board of Directors of said
corporation, and that he signed his name thereto by like order.
------------------------------
INDIVIDUAL OWNER
STATE OF NEW YORK
County of
On this day of 19 , before me personally came to be
known and known to me to be the individual described in and who, as OWNER,
executed the foregoing instrument and acknowledged to me that he
executed the same.
------------------------------
INDIVIDUAL TENANT
STATE OF NEW YORK
County of
On this day of 19 , before me personally came to be
known and known to me to be the individual described in and who, as TENANT,
executed the foregoing instrument and acknowledged to me that he
executed the same.
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<PAGE>
- IMPORTANT - PLEASE READ -
RULES AND REGULATIONS ATTACHED TO AND
MADE A PART OF THIS LEASE IN ACCORDANCE WITH ARTICLE 33.
1. The sidewalks, entrances, driveways, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or encumbered
by any Tenant or used for any purpose other than for ingress or egress from the
demised premises and for delivery of merchandise and equipment in a prompt and
efficient manner using elevators and passageways designated for such delivery by
Owner. There shall not be used in any space, or in the public hall of the
building, either by any Tenant or by jobbers or others in the delivery or
receipt of merchandise, any hand trucks except those equipped with rubber tires
and sideguards. If said premises are situated on the ground floor of the
building, Tenant thereof shall further, at Tenant's expense, keep the sidewalk
and curb in front of said premises clean and free from ice, snow, dirt or
rubbish.
2. The water and wash closets and plumbing fixtures shall not be used for any
purposes other than those for which they were designed or constructed and no
sweepings, rubbish, rags, acids or other substances shall be deposited therein,
and the expense of any breakage, stoppage, or damage resulting from the
violation of this rule shall be borne by the Tenant who, or whose clerks,
agents, employees or visitors shall have caused it.
3. No carpet, rug or other article shall be hung or shaken out of any window
of the building and no Tenant shall sweep or throw or permit to be swept or
thrown from the demised premises any dirt or other substances into any of the
corridors or halls, elevators or out of the doors or windows or stairways of the
building and Tenant shall not use, keep or permit to be used or kept any foul or
noxious gas or substance in the demised premises or permit or suffer the
demised premises to be occupied or used in a manner offensive or objectionable
to Owner or other occupants of the building by reason of noise, odors and/or
vibrations or interfere in any way with other Tenants or those having business
herein nor shall any business vehicles, animals, fish, or birds be kept in or
about the building. Smoking or carrying lighted cigars or cigarettes in the
elevators of the building is prohibited.
4. No awnings or other protections shall be attached to the outside walls of
the building without the prior written consent of Owner.
5. No sign, advertisements, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any Tenant on any part of the outside of the
demised premises or the building or on the inside of the demised premise if the
same is visible from the outside of the premises without the prior written
consent of Owner, except that the name of the Tenant may appear on the entrance
door of the premises. In the event of the violation of the foregoing by any
Tenant, Owner may remove same without any liability and may charge the expense
incurred by such removal to Tenant or Tenants violating this rule. Interior
signs on doors and direction shall be inscribed, painted or affixed for each
Tenant by Owner at the expense of such Tenant and shall be of a size, color and
style acceptable to Owner.
6. No Tenant shall mark, paint, drill into or in any way deface any part of
the demised premises or the building of which they form a part. No boring,
cutting or stringing of wires shall be permitted except with the prior
written consent of the Owner and as Owner may direct. No Tenant shall lay
linoleum or other similar floor covering so that the same shall come in
direct contact with the floor of the demised premises and if linoleum or
other similar floor covering is desired to be used an (illegible) builder's
deadening felt shall be first affixed to the floor, by a paste or other
material, soluble in water; the use of cement or other similar adhesive
material being expressly prohibited.
7. No additional locks or bolts of any kind shall be placed upon any of the
doors or windows by any Tenant, nor shall any changes be made in existing locks
or mechanism thereof. Each Tenant must upon the termination of his Tenancy
restore to Owner all keys of stores, offices and toilet rooms, either furnished
to or otherwise procured by, such Tenant and in the event of the loss of any
keys so furnished such Tenant shall pay to Owner the cost thereof.
8. Freight, furniture, business equipment, merchandise and bulky matter of any
description shall be delivered to and removed from the premises only on the
freight elevators and through the service entrances and corridors, and only
during hours and in a manner approved by Owner. 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 these Rules and Regulations of the
lease of which these Rules and Regulations are a part.
9. Canvassing, soliciting and peddling in the building is prohibited and each
Tenant shall cooperate to prevent the same.
10. Owner reserves the right to exclude from the building 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 same in writing. Each Tenant shall be
responsible for all persons for whom he requests such pass and shall be liable
to Owner for all acts of such persons. Tenant shall not have a claim against
Owner by reason of Owner excluding from the building any person who does not
present such pass.
11. Owner shall have the right to prohibit any advertising by any Tenant which
in Owner's opinion, tends to impair the reputation of the building or its
desirability as a building for offices, and upon written notice from Owner,
Tenant shall refrain from or discontinue such advertising.
12. Tenant shall not bring or permit to be brought or kept in or on the demised
premises, any inflammable, combustible, explosive, or hazardous fluid, material,
chemical or substance, or cause or permit any odors of cooking or other
processes, or any unusual or other objectionable odors to permeate in or emanate
from the demised premises.
13. If the building contains central air conditioning and ventilation, Tenant
agrees to keep all windows closed at all times and to abide by all rules and
regulations used by Owner with respect to such services. If Tenant requires air
conditioning or ventilation after the usual hours, Tenant shall give notice in
writing to the building superintendent prior to 3:00 p.m. in the case of
services required on work days and prior to 3:00 p.m. on the day prior in case
of after hours service required on weekends or on holidays. Tenant shall
cooperate with Owner in obtaining maximum effectiveness of the cooling system by
lowering and closing venetian blinds and/or drapes and curtains when the sun's
rays fall directly on the windows of the demised premises.
14. Tenant shall not move any safe, heavy machinery, heavy equipment, bulky
matter, or fixtures into or out of the building without Owner's prior written
consent. If such safe, machinery, equipment, bulky matter or fixtures requires
special handling, all work in connection therewith shall comply with the
Administrative Code of the City of New York and all other laws and regulations
applicable thereto and shall be done during such hours as Owner may designate.
15. Refuse and Trash (1) Compliance by Tenant. Tenant covenants and agrees, as
its sole cost and expense, to comply with all present and future laws, orders,
and regulations of all state, federal, municipal and local governments,
departments, commissions and boards regarding the collection, sorting,
separation and recycling of waste products, garbage, refuse and trash. Tenant
shall sort and separate such waste products, garbage, refuse and trash into such
categories as provided by law. Each separately sorted category of waste
products, garbage, refuse and trash shall be placed in separate receptacles
reasonably approved by Owner. Such separate receptacles may, at Owner's option,
be removed from the demised premises in accordance with a collection schedule
prescribed by law. Tenant shall remove or cause to be removed by a contractor
acceptable to Owner, at Owner's sole discretion, such items as Owner may
expressly designate (2) Owner's Rights in Event of Noncompliance. Owner has the
option to refuse to collect or accept from Tenant waste products, garbage,
refuse or trash (a) that is not separated and sorted as required by law or (b)
which consists of such items as Owner may expressly designate for Tenant's
removal, and to require Tenant to arrange for such collection at Tenant's sole
cost and expense, utilizing a contractor satisfactory to Owner. Tenant shall
pay all costs, expenses, fines, penalties, or damages that may be imposed on
Owner or Tenant by reason of Tenant's failure to comply with the provisions of
this Building Rule 15, and, at Tenant's sole cost and expense, shall indemnify,
defend and hold Owner harmless (including reasonable legal fees and expenses)
from and against any actions, claims and suits arising from such noncompliance,
utilizing counsel reasonably satisfactory to Owner.
Address
Premises
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To
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STANDARD FOR OF
OFFICE
LEASE
The Real Estate Board of New York, Inc.
-C- Copyright 1994. All rights Reserved.
Reproduction in whole or in
part prohibited.
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Dated 19
Rent Per Year
Rent Per Month
Term
From
To
Drawn by
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Checked by
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Entered by
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Approved by
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<PAGE>
LEASE RIDER
THIS RIDER CONTAINS 36 PAGES, EACH AND EVERY ONE OF WHICH FORMS A PART OF THE
LEASE DATED 3-2, 1998 BETWEEN ROYAL REALTY CORP., AGENT, AS OWNER, AND NET
GRAVITY, INC., AS TENANT.
37: A. This Lease and the term hereof shall commence on the date (the
"Commencement Date") on which the work outlined in Article 43 is substantially
complete and the demised premises are ready for Tenant's occupancy, and shall
expire on August 31, 2003 (the "Expiration Date"), or on such earlier date upon
which said term may expire or be cancelled or terminated pursuant to any of the
conditions or covenants of this Lease or pursuant to law. Owner agrees to give
Tenant not less than ten (10) days advance written notice of the Commencement
Date. Following Tenant's receipt of such notice, Tenant's architect may inspect
the demised premises and may provide Owner with a "punch list" of items to be
completed by Owner. Owner shall promptly complete any such punch list items.
Tenant shall commence the payment of fixed annual rent ("Fixed Rent") on
the Commencement Date, in the amount of one hundred twenty six thousand eight
hundred sixty one and 50/100 ($ 126,861.50) Dollars per annum ($ 10,571.79 per
month) from the Commencement Date until and including the thirty-sixth (36th)
month thereafter; and one hundred thirty four thousand one hundred thirty one
and 50/100 ($ 134,131.50) Dollars per annum ($ 11,177.63 per month) from the
thirty-seventh (37th) month following the Commencement Date through and
including the remainder of the term of this Lease, which shall expire on August
31, 2003.
Fixed rent shall be payable in equal monthly installments (during the
applicable fiscal year) in advance on the first day of each month during the
term of this Lease at the office of Owner or such other place as Owner may
designate, without any offset or deduction whatsoever, except that in the event
the Lease shall commence on a day other than the first day of a calendar month,
the rental for that month shall be prorated.
All rent and additional rent payable under this Lease shall be paid by
check of Tenant drawn on a bank which is either (a) a member of or clears its
checks through the New York Clearing House Association (the "NYCHA"), or (b) a
bank with a New York City banking office which clears checks in the same period
of time as NYCHA bank. Failure to pay rent by such a check shall be deemed a
material default by Tenant under this Lease, except that Tenant may wire funds
constituting the Fixed Rent pursuant to any separate written agreement as may
exist from time to time between Tenant and Owner relating to such form of
payment.
Anything to the contrary provided for hereinabove notwithstanding, so long
as Tenant shall not be in breach or default of any of the terms and provisions
of this Lease beyond any applicable notice or grace periods, Tenant shall not be
obligated to pay $ 9,693.33 of each monthly payment of the Fixed Rent provided
for hereinabove for that period of time commencing on the Commencement Date and
ending on the sixtieth (60th) day thereafter, both dates inclusive; and (ii)
shall receive a rent credit equal to $ 9,087.50 to be used toward's Tenant's
third (3rd) monthly payment of the Fixed Rent. Tenant shall, however, continue
to be obligated to pay any and all additional rent (including, but not limited
to, ERIF under Article 38 and additional rent payable under Articles 38 and 39
hereof) and other charges payable by Tenant hereunder in accordance with the
terms of this Lease, commencing on the Commencement Date.
B. Except as set forth in the "punch list," the taking of possession of
the demised premises shall be deemed an acceptance of the same by Tenant and
shall be deemed substantial completion by
<PAGE>
Owner of all of Owner's work in accordance with Tenant's approved plans and
specifications for the purposes of determining the Commencement Date. For the
purposes of this Article, the work to be done by owner shall be deemed
substantially complete even though minor details or adjustments which shall not
materially interfere with Tenant's use of the demised premises may not then have
been completed, but which work Owner agrees will thereafter be completed with
due diligence. If there is a delay in the substantial completion of the demised
premises, or a portion thereof, due to (i) any act or omission by Tenant, its
contractors, subcontractors, architects, space designers, agents or employees,
(ii) special work, changes, alterations or additions in Tenant's plans required
or requested by Tenant or (iii) delays by Tenant in submitting any plans and/or
specifications, supplying information or estimates, giving authorizations or
other approvals, then the demised premises shall be deemed substantially
complete, and the Commencement Date shall be deemed to have occurred, on the
date on which the demised premises or such portion would have been substantially
complete but for such Tenant delay, even though work to be done by Owner has not
been commenced or completed.
C. Promptly after the Commencement Date, Owner and Tenant will execute an
agreement in recordable form, hereafter referred to as the "Commencement Date
Agreement," stating among other things the Commencement Date of the term of this
Lease. Tenant's failure or refusal to sign the same shall in no event affect
Owner's designation of the Commencement Date.
38: A. With reference to Article 12 hereof, Owner shall furnish to Tenant
electricity for normal business purposes as provided in Paragraph 38E in the
demised premises at no additional charge or rental, subject however to future
adjustments after the Commencement Date, in the event that there is an increase
or decrease in the public utility rate schedule or utility or sales taxes
thereon pursuant to which electricity shall be furnished to Owner by the public
utility company serving the Building in which the demised premises are located
and the Tenant shall have the right so long as it shall not be in default in the
performance of the terms of this Lease to use electricity on an unmetered basis
as an additional service. Each such adjustment shall be computed by multiplying
the electrical rent inclusion factor ("ERIF") set forth in Paragraph 38E, as
adjusted, by the percentage of increase or decrease, as the case may be, in the
public utility rate schedule or utility or sales taxes thereon applicable to the
Building and by adding or subtracting the product thereof to or from said ERIF
to determine the amount of the adjusted rent and the adjusted ERIF.
B. In order that personal safety and property of the tenants, occupants
and Owner of the demised premises may not be imperiled by overtaxing of the
capacity of the electrical distribution system of the demised premises or of the
Building, Tenant agrees that without the prior written consent of Owner, Tenant
shall not make any changes in, or alterations to the electrical system of the
demised premises as the installation of said system shall be indicated by the
final electrical plans submitted by the Tenant to Owner.
C. Owner shall not be liable to Tenant for any loss, damage or expense
resulting from change in the quantity or character of the electric service or
its being no longer suitable for Tenant's requirements or due to cessation or
interruption of the supply of electricity.
D. Owner, upon thirty (30) days' prior written notice to Tenant, may
discontinue the service of electricity to Tenant without affecting the tenancy,
this Lease or Tenant's liability hereunder and without liability for loss or
damage caused to Tenant by such discontinuance; except that, in the event of the
discontinuance of such service, Tenant shall be entitled to a monthly rent
reduction equal to the then ERIF and Owner shall thereafter have no obligation
to furnish electrical energy to Tenant. Owner, in that event, shall permit
Tenant to purchase
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<PAGE>
electricity directly from the public utility system servicing the Building and
shall permit Owner's electrical distribution system to be used for that purpose
to the extent that it is available and may safely be so used.
E. As of the date of this Lease, the ERIF is eight hundred seventy eight
and 46/100 ($ 878.46) Dollars per month, which factor is based upon Tenant's
use, during regular business hours, of lighting fixtures and electrically
operated equipment which operate on a standard 120 volt convenience receptacle
on a 15 Amp general purpose branch circuit with not less than eight (8) outlets
on such circuit. The use of electricity on other than regular business hours or
for fixtures or equipment which are not accommodated by such base receptacles
may be permitted within the limitation of Paragraph 38B provided that the ERIF
shall be increased in an amount to be determined from a survey made by a
reputable independent electrical engineer or consultant selected by Owner.
39: The annual rental rate hereinbefore set forth shall be adjusted from time
to time as in this Article provided to reflect increases in Owner's expenses
incurred in operating the Building and Tenant shall pay such rental, as adjusted
pursuant to the provisions hereof, as herein before provided. Owner shall have
all of the rights and remedies for Tenant's failure to make a payment under this
Article as Owner has for Tenant's failure to pay Fixed Rent.
A. For the purposes of this Article:
1. "BASE TAX" shall mean Taxes as finally determined for the Base Tax
Year.
2. "BASE TAX YEAR", shall mean the fiscal year July 1, 1997 to June 30,
1998, inclusive.
3. "TAX YEAR" shall mean each successive New York City real estate fiscal
year commencing on July 1st and expiring on June 30th. If the present use of
July 1 to June 30 real estate tax year shall change, then, such changed tax year
shall be used with appropriate adjustment for the transition.
4. "TAXES" shall mean the total of all real estate taxes, assessments,
special and extraordinary assessments, business improvements district charges
and assessments and government levies imposed upon or with respect to the land
and Building of which the demised premises are a part and any franchise, income,
profit, value added, use, or other tax imposed in addition to, in whole or
partial substitution for, or in lieu of an increase (in whole or part), in such
taxes, whether due to a change in the method of taxation or otherwise.
5. "TENANT'S PERCENTAGE" shall mean for purposes of this Lease and all
calculations in connection herewith one and twenty four hundredths percent
(1.24%), which percentage has been computed on the basis of a fraction, the
numerator of which is the agreed rentable square foot area of the demised
premises and the denominator of which is the agreed rentable square foot area of
the Building, both as set forth below. The parties agree that, for purposes of
this Article and the calculations to be made hereunder, the agreed rentable
square foot area of the demised premises shall be deemed to be 3,635 square
feet, and that the agreed rentable square foot area of the Building shall be
deemed to be 293,973 square feet.
6. (a) "BASE RATE" shall mean the minimum regular hourly wage rate for Porters
in Class A office buildings established by agreement between the Realty Advisory
Board on Labor Relations, Inc., ("Realty Advisory Board") and Local 32B-J of the
Building Service Employees International Union AFL-CIO ("Local 32B") in effect
as of January 1, 1998.
-3-
<PAGE>
(b) "Operating Expense Rate" shall mean, for any calendar year, the
minimum regular hourly wage rate for Porters in Class A office buildings then
established by agreement between the Realty Advisory Board and Local 32B or by
the successors to either or both of them. (This rate shall be used in
computations under this Article whether or not Porter's wages are actually paid
by or for Owner or by independent contractors who furnish such services to the
demised premises.)
If any such agreement shall require the regular employment of Porters on
days or hours when overtime or other premium pay rates are in effect, then the
term "minimum regular average hourly wage rate," as used to determine the
Operating Expense Rate, shall mean the average hourly wage rate for the hours in
a calendar week during which Porters are required to be regularly employed
(e.g., if as of February 1, 1987, an agreement between the Realty Advisory Board
and Local 32B required the regular employment of Porters for forty (40) hours
during a calendar week at a regularly hourly wage rate of $8.50 for the first
thirty (30) hours and at an overtime hourly average wage rate of $12.00 for the
remaining ten (10) hours, then the minimum regular average hourly wage rate
under this subsection as of February 1, 1987 would be the sum arrived at by
dividing the total weekly average wages of $375 by the total number of required
hours of employment which is forty (40), resulting in a minimum regular average
hourly wage rate of $9.375). The computation of the minimum regular average
hourly wage rate shall be on the same basis whether based on an hourly or other
pay scale but predicated on the number of required hours in a calendar week.
If the prescribed work week shall be less than forty (40) hours, then the
minimum regular average hourly wage rate shall be adjusted to an average amount
for forty (40) hours, taking into consideration the overtime hourly wage rate
for the number of hours between the prescribed work week and forty (40) hours
(in the same manner as above provided where the prescribed work week is forty
(40) hours, with a portion of the hours being subject to a regular hourly wage
rate and the balance subject to an overtime hourly wage rate). If length of
service shall be a factor in determining any element of wage, it shall be
conclusively presumed that all employees have at least five (5) years of
service.
Each reference to "the minimum regular hourly wage rate" in this Lease is
to such wage rate exclusive of so-called "fringe benefits."
7. The term "Porters" shall mean that classification of employee engaged
in the general maintenance and operation of Class A Office Buildings most nearly
comparable to the classification now applicable to porters in the current
agreements between the Realty Advisory Board and Local 32B (which classification
is presently termed "others" in said agreement).
8. The term "Class A Office Buildings" shall mean office buildings in the
same class or category as the Building under any building operation agreement
between the Realty Advisory Board and Local 32B, regardless of the designation
given to such office buildings in any such agreement.
B. If the Operating Expense Rate in effect as of January 1st of any
year of the term of this Lease shall be such as to constitute an increase above
the Base Rate, then Tenant shall pay to Owner, as additional rent, for such year
an amount equal to a sum computed at the rate of one cent per square foot of the
rentable area in the demised premises for each one cent or part thereof that the
Operating Expense Rate in effect as of January 1st of any year of the Lease
shall constitute an increase above the "Base Rate". For example, assuming the
area of the demised premises were 1,000 rentable square feet and assuming there
were a 15 cent increase in the Operating Expense Rate, there would be a $150.00
increase in the annual rent by reason thereof (1 cent x 15 x 1,000). Owner
shall advise Tenant by a written statement (an
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<PAGE>
"Operating Expense Rate Statement") by Owner's accountant or by Owner or its
agent, of any change in Operating Expense Rate and the effective date thereof.
Such Operating Expense Rate statement shall show the Tenant's new annual rental
rate caused by each change and the monthly installments which shall be
one-twelfth (1/12) thereof, and the manner in which the adjustment is computed
with appropriate adjustment if the Commencement Date shall not be the first day
of a calendar month. Any decrease in annual rental rate under this Paragraph B
can be applied only to reduce prior increases under this Paragraph.
Each Operating Expense Rate Statements furnished to Tenant shall constitute
a final determination as between Owner and Tenant of the Operating Expense Rates
for the periods represented thereby, unless Tenant, within fifteen (15) days
after they are furnished, shall give a notice to Owner, which notice shall
specify the particular respects in which the disputed Operating Expense Rate
Statement is alleged to be inaccurate or inappropriate. Pending the resolution
of such dispute, Tenant shall pay any increases above the Base Rate in
accordance with the Operating Expense Rate Statements furnished by Owner and
Paragraph B of this Article.
C. The annual rental rate shall be increased for each Tax Year during the
term of this Lease by Tenant's Percentage of the amount by which the Taxes Owner
is required to pay in each such Tax Year exceeds the Base Tax. Owner shall
advise Tenant, by a written statement (a "Tax Statement") by Owner's accountant
or by Owner or its agent, of any change in Taxes and the effective date thereof.
The Tax Statement shall show Tenant's new annual rental rate caused by each
change and the monthly installments shall be one-twelfth (1/12th) thereof, and
the manner in which the adjustment is computed, including any adjustments in
real estate tax assessments affecting the Taxes for any Tax Year. Said
one-twelfth (1/12th) of such increase shall be due and payable with monthly
installments of Fixed Rent.
Notwithstanding the foregoing, if Taxes are required to be paid prior to
the expiration of the appropriate calendar quarter or calendar half-year or
whatever other period by which Taxes must be paid or prior to the expiration of
any Tax Year to avoid a penalty or late charge, then Owner may immediately elect
to bill Tenant for its above specified percentage of any increase in Taxes in
excess of the Base Tax with respect to such calendar quarter, half-year or
other period of such Tax Year, as the case may be, and Tenant shall pay same
within fifteen(15) days thereafter. Any decrease in annual rental rate under
this Paragraph C can be applied only to reduce prior increases under this
Paragraph. To the extent that the change is relevant to a period for which
Tenant has paid its monthly installments of Fixed Rent, a retroactive lump sum
payment shall be made by Tenant within fifteen (15) days of being billed for the
same by Owner. If, prior to any increase in the annual rent pursuant to this
Paragraph C, Owner shall have obtained a reduction of the proposed assessed
valuation of the land and Building of which the demised premises are a part and
therefore of the Taxes, then the term "Taxes" for that Tax Year shall be deemed
to include the amount of Owner's expenses in obtaining such reduction of the
proposed assessed valuation, including attorneys' and appraisers, fees.
The Tax Statements furnished to Tenant shall constitute a final
determination as between Owner and Tenant of the Taxes for the periods
represented thereby, unless (i) the Taxes for any such period are subsequently
reduced by tax certiorari proceedings or otherwise, or (ii) Tenant, within
thirty (30) days after they are furnished, shall give a notice to Owner, which
notice shall specify the particular respects in which the disputed Tax Statement
is alleged to be inaccurate or inappropriate. Pending the resolution of such
dispute, Tenant shall pay Tenant's Percentage of the Taxes to Owner in
accordance with the Tax Statements furnished by Owner. Tenant shall have the
right to receive a copy of any tax bill or
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<PAGE>
statement upon which the disputed Tax Statement is based within twenty (20) days
after demand therefor.
D. Owner's failure to render a Tax Statement and/or an Operating Expense
Rate Statement with respect to any time period shall not prejudice Owner's right
to render such a statement retroactively with respect to such period. The
obligations of Tenant under the provisions of this Article with respect to any
increase in the rent shall survive the expiration or sooner termination of the
term. Following rendition of an Operating Expense Rate Statement which shows an
increase in the rent for any Operating Expense Rate year, Tenant shall pay to
Owner an the first day of each month during such Operating Expense Rate year a
sum equal to one-twelfth (1/12th) of the increase in the rent shown upon such
Operating Expense Rate Statement for such Operating Expense Rate year. If any
such Operating Expense Rate Statement shall be rendered after the commencement
of any operating Expense Rate year, Tenant shall pay to Owner on the first day
of the calendar month next following the rendition of such Operating Expense
Rate Statement (in addition to the payment required by the immediate preceding
sentence), a sum equal to one-twelfth (1/12th) of the increase in the rent for
such Operating Expense Rate year shown on such statement multiplied by the
number of months which may have elapsed between January 1st of such Operating
Expense Rate year and the month in which such payment is required to be made.
All sums payable by Tenant to Owner pursuant to the provisions of this Article
shall be collectible by Owner in the same manner as any installment of Fixed
Rent.
E. In the event that any controversy arises concerning: (i) the
designation under this Article of a successor to any of the organizations named
herein, in the event any or all shall no longer exist; or (ii) the proper
substitute for the "Operating Expense Rate" if a rate for or the category in
which Porters are presently classified shall cease to exist, then, such
controversy shall be determined by arbitration in accordance with the provisions
of Article 40 hereof. Pending the entry of a judgment confirming the award in
such arbitration, the annual rental rate shall be payable in accordance with
Owner's initial determination. The arbitrators shall not have the authority to
modify this Lease or substitute a different method of calculating rental
adjustments other than as expressly set forth herein.
40: Whenever in this Lease it is provided that a dispute shall be determined by
arbitration, the arbitration shall be conducted as provided in this Article.
The party desiring such arbitration shall give written notice to that effect to
the other, specifying the dispute to be arbitrated and the name and address of
the person designated to act as the arbitrator in its behalf. Within ten (10)
days after said notice is given, the other party shall give written notice to
the first party, specifying the name and address of the person designated to act
as arbitrator on its behalf. If the second party fails to notify the first
party of the appointment of its arbitrator as aforesaid by the time above
specified, then the appointment of the second arbitrator shall be made in the
same manner as hereinafter provided for the appointment of a third arbitrator.
The arbitrators so chosen shall meet within ten (10) days after the second
arbitrator is appointed and within thirty (30) days thereafter shall decide the
dispute. If within said period they cannot agree upon their decision, they
shall appoint a third arbitrator and if they cannot agree upon said appointment,
the third arbitrator shall be appointed upon their application or upon the
application of either party, by the American Arbitration Association in the City
of New York. The three arbitrators shall meet and decide the dispute. A
decision in which two of the three arbitrators concur shall be binding and
conclusive upon the parties. In designating arbitrators and in deciding the
dispute, the arbitrator shall act in accordance with the rules then in force of
the American Arbitration Association subject, however, to such limitations as
may be placed upon them by the provisions of this Lease. Each party shall pay
the fees and expenses of the arbitrator appointed by or on behalf of it, and
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each shall pay one-half of the fees and expenses of the third arbitrator, if
any.
The obligation of Owner and Tenant to submit a dispute to arbitration is
limited to disputes arising under those Articles of this Lease which
specifically provide for arbitration.
41: Each party covenants, warrants and represents to the other party that the
sole broker with whom such party has dealt in this transaction is The Staubach
Company of New York (the "Broker"), and that no conversations or negotiations
were had by such party with any broker or finder other than the Broker
concerning this Lease or the renting of the demised premises. Each party agrees
to indemnify, defend and hold the other party harmless from and against any and
all claims for fees and commissions and against any liability (including
reasonable attorneys' fees and disbursements) arising out of any conversations
or negotiations had by the indemnifying party with any broker or finder other
than the Broker concerning this Lease.
In reliance on the foregoing representation, Owner has agreed to pay the
Broker's commission, if any, pursuant to separate agreement.
42: This Lease is not to be considered binding upon Owner or Tenant, unless and
until it is signed by Owner and Tenant and duplicate originals hereof are
delivered to Owner and Tenant.
43: Notwithstanding anything to the contrary contained herein, Tenant
acknowledges that it has inspected the demised premises, is fully familiar with
the condition thereof, and agrees to take possession of the demised premises on
the Commencement Date in their present "as-is" condition. Owner shall not be
required to perform any alterations or decorations or furnish any materials in
or to the demised premises in order to suit them for Tenant's occupancy, except
that Owner at its sole cost and expense, shall make the following modifications
in a good and workmanlike manner in accordance with all applicable laws to the
premises using building standard materials:
1) Furnish and install new building standard carpet or vinyl composition
tile throughout the demised premises. Where carpeting is installed,
it shall be Shaw Contract Carpet Internet Collection, in colors
selected by Tenant from samples submitted by Owner. Furnish and
install 4" high vinyl base, cover or straight, on all partitions and
columns, in color selected by Tenant.
2) Paint all surfaces currently painted in the demised premises, not more
than one color per room, two coats, standard of the building, in
colors selected by Tenant.
3) Furnish and install pantry, adjacent to an existing wet column,
consisting of 6'0" plastic laminate countertop with upper and lower
cabinets, sink, faucet and under-counter refrigerator, per attached
plan attached as Exhibit "B-1" hereto.
4) Furnish existing entry door with lockset and two (2) sets of keys.
In no event, however, shall Owner be required to employ any "overtime"
labor or pay any "overtime" or other premium pay rate in connection with any of
the foregoing work set forth in this Article 43.
All work to be performed in the demised premises shall be in conformance
with the building standards attached hereto as Exhibit "C".
44: ADDENDUM to Article 29 (e) of printed form of Lease - If Tenant shall
require HVAC service at any time other than during
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business hours on business days, Owner shall furnish such service (herein called
"after hours air-conditioning service") upon advance written notice from Tenant
as specified below. Tenant shall pay to Owner the sum of $250.00 per hour for
overtime air-cooling and $225.00 per hour for overtime heat on Owner's demand as
additional rent. Such sums shall be increased over the term of this Lease as
Owner's cost for providing the service is increased including the cost of labor,
maintenance (including the cost of replacement parts), utilities, depreciation
and supplies used in providing such after hours air-conditioning service. If
Tenant shall not pay the same, Tenant shall also pay interest thereon at the
rate then announced by Citibank, N.A. (or The Chase Manhattan Bank, N.A. if
Citibank shall not then have an announced prime rate) as its prime rate (the
"PRIME RATE"). Requests for after hours service shall be submitted in writing
to the Building manager, by a person designated by Tenant as authorized to make
such requests, before 1:00 P.M. on a non-holiday weekday for such weekday and at
least thirty-six (36) hours prior to a holiday or weekend.
Owner shall furnish, if required and to the extent available (but in no
event to exceed one ton per year), condenser water for Tenant's supplemental
air-conditioning systems, at a cost of $630.00 per ton per year. If after the
date of this Lease, the cost to Owner of furnishing condenser water for such
air-conditioning system shall be increased, then the aforesaid cost to Tenant
shall be increased to fairly reflect the amount of the actual increase incurred
by Owner.
Tenant acknowledges that the base building HVAC system that will service
the demised premises has been designed to perform in accordance with the
specifications set forth on EXHIBIT "D" attached hereto.
45: ADDENDA to Rules and Regulations of printed form of Lease:
A. Because of requirements of Local Law 5 regarding certain fire safety
regulations, it is necessary that Owner know at all times the approximate number
of persons within the demised premises after normal business hours (i.e. after
6:00 P.M. on weekdays and on weekends and holidays). Accordingly, within thirty
(30) days after the date hereof, Tenant shall submit to owner its best estimate
of the number of Tenant's employees, agents, visitors and other persons which
Tenant expects to occupy the demised premises at any time after normal business
hours. Prior to 5:00 P.M. of each weekday or prior to 5:00 P.M. on the day
preceding a weekend or holiday, Tenant shall inform the building manager's
office whenever Tenant knows, or has reason to believe, that the number of its
employees, agents, visitors and other persons occupying the demised premises
after normal working or business hours that evening or the next day(s), as the
case may be, will exceed this estimate. Tenant also shall keep reasonable
records which indicate the number of persons entering and leaving the demised
premises after normal business hours, and shall provide copies of such records
to Owner at Owner's request.
B. At the expiration of the term of this Lease, if Owner shall not
require Tenant to remove any supplemental air-conditioning system which Tenant
has installed or utilized in its demised premises, Owner reserves the right to
require Tenant, at Tenant's own sole cost and expense, to (i) remove the
refrigerant from said supplemental air-conditioning system, in full compliance
with all applicable provisions of this Lease and with any and all applicable
laws, ordinances, orders, rules, and regulations relating to such removal and
(ii) promptly repair any and all damage caused by, or resulting from, such
removal.
46: A. Tenant or its legal representatives, will not by operation of law or
otherwise, assign (in whole or in part), mortgage or encumber this Lease, or
sublet or permit the demised premises or any part thereof to be used or occupied
by others,
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without Owner's prior written consent in each instance. The consent by Owner to
any assignment or subletting, whether by Tenant or by any other tenant in the
Building, shall not be waiver of or constitute a diminution of Owner's right to
withhold its consent to any other assignment or subletting and shall not be
construed to relieve Tenant from obtaining Owner's express written consent to
any other or further assignment or subletting. Such reasonable attorneys' fees
as may be incurred by Owner in connection with Tenant's request for consent to
an assignment or subletting shall be paid by Tenant.
B. If Tenant or its legal representatives desires to assign this Lease or
sublet all or any-portion of the demised premises, Tenant shall promptly notify
the then managing agent of the Building in writing of its desire to assign or
sublet. Upon obtaining a proposed assignee or subtenant upon acceptable terms,
Tenant shall submit to Owner in writing: (1) the name of the proposed assignee
or subtenant; (2) the terms of the proposed assignment or sublease; and (3) the
nature and character of the business which the proposed assignee or subtenant
will conduct in the demised premises, together with all financial data
concerning it; and thereafter Tenant shall submit to Owner any other information
concerning the assignment or sublease which Owner may request.
Owner shall have the option to be exercised within thirty (30) days from
the submission of the aforesaid information: (i) to cancel this Lease with
respect to the space to be sublet for the duration of the proposed sublease;
or (ii) to require the Tenant to execute and deliver an assignment or
sublease to Owner (or its designee) upon the same terms as submitted by
Tenant to Owner, except that Owner shall have the unrestricted right to
assign or sublet and/or alter the space. In the event of a proposed
assignment, or of a proposed sublease which, in the aggregate with all other
subleases, demises 50% or more of the demised premises, Owner shall have the
further option to be exercised within the said thirty (30) day period, to
cancel and terminate Tenant's Lease effective on the date of Tenant's
proposed assignment or sublease, in which event this Lease and the term
hereof shall expire and terminate on the date as if it was the date herein
fixed for the termination and expiration of the term of this Lease.
C. If Owner shall not exercise either of its foregoing options within the
time set forth above, its consent to the proposed assignment or subletting shall
not be unreasonably withheld; PROVIDED, HOWEVER, that, without limiting the
generality of the foregoing, in no event shall Owner be required to grant its
consent thereto if in the reasonable exercise of its judgment it determines
that:
1. The financial condition or general reputation for good character of
the proposed assignee or subtenant is insufficient or not consistent with the
obligations and responsibilities undertaken by the proposed assignment or
sublease; or
2. The proposed business to be conducted in the demised premises is not
appropriate for the Building or in keeping with the character of the existing
tenancies or permitted by this Lease, or the use is not expressly permitted by
this Lease; or
3. The nature of the occupancy of the proposed assignee or subtenant will
cause a greater density of employees or traffic or make greater demands on the
Building's services or facilities than that made by Tenant; or
4. Tenant has made assignments or sublettings, which have changed the
configuration of the demised premises; or
5. Tenant proposes to assign or sublet to one who at the time is a tenant
(or subsidiary or affiliate of a tenant) or a person in possession of premises
in the Building, or any of the
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buildings known as 205 East 42nd Street, 733 Third Avenue and 655 Third Avenue,
or to one with whom owner or a related entity is negotiating a lease or sublease
for space in the Building or any of said other buildings known as 205 East 42nd
Street, 733 Third Avenue and 655 Third Avenue; or
6. The assignee or subtenant shall have or enjoy diplomatic immunity; or
7. Such proposed subletting would result in the demised premises being
divided into more than two (2) rental units in the aggregate including Tenant's
premises; or
8. Tenant has advertised that its rental of the proposed space to be
assigned and/or sublet is less than the Fixed Rent plus escalations under
Articles 38 and 39 applicable to such space; or
9. Any combination of the foregoing conditions exists.
If this Lease shall be assigned or sublet in accordance with this Article,
such assignee or subtenant shall not be permitted to further assign or sublet in
whole or in part.
If this Lease shall be assigned, or it the demised premises or any part
thereof be sublet or occupied by any person or persons other than Tenant, Owners
may, after default by Tenant, collect rent from the assignee, subtenant or
occupant and apply the net amount collected to the rent herein reserved, but no
such assignment, subletting, occupancy or collection of rent shall be deemed a
waiver of the covenants in this Article, nor shall it be deemed acceptance of
the assignee, subtenant or occupant as a tenant or a release of Tenant from the
full performance by Tenant of all the terms, conditions and covenants of this
Lease.
Each permitted assignee or transferee shall assume and to deemed to have
assumed this Lease and shall be and remain liable jointly and severally with
Tenant for the payment of the rent and additional rent and for the due
performance of all the terms, covenants, conditions and agreement herein
contained on Tenant's part to be performed for the term of this Lease. No
assignment shall be effective unless Tenant shall promptly deliver to Owner a
duplicate original of the instrument of assignment, in form reasonably
satisfactory to Owner, containing a covenant of assumption by the assignee of
all of the obligations aforesaid and Tenant shall have obtained from Owner the
aforesaid written consent, prior thereto.
Notwithstanding any provision of this Lease to the contrary, 50% of any
rentals and/or consideration paid or payable by the subtenant or assignee in
excess of the rentals reserved and/or payable under this Lease shall be paid by
Tenant to Owner as and when received by Tenant, less expenses proven to have
been incurred by Tenant in assigning this Lease or subleasing its space. Such
expenses shall include, but not be limited to brokerage fees, attorneys' fees
and disbursements, advertising costs, reasonable concessions, including, without
limitation, free rent or work contributions, and the costs incurred in
connection with alterations, decorations and installations made by Tenant in the
space to be occupied.
47: If the demised premises become infested with vermin, Tenant, at its sole
cost and expense, shall cause the demised 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.
48: Owner represents that according to the current definition of friable
asbestos, as that term is used by the Environmental Protection Agency of the
United States, there is no friable
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asbestos within the demised premises. If at any time during the term of this
Lease it becomes apparent that there is any friable asbestos in the demised
premises (other than any occasioned by Tenant) , Tenant shall promptly advise
Owner of the same in writing, in which case, as Tenant's sole right, remedy and
recourse, Owner shall, with reasonable diligence, remove such friable asbestos.
49: Tenant shall not cause or permit any Hazardous Materials (as defined below)
to be used, transported, stored, released, handled, produced or installed in, on
or from, the Demised Premises or the Building, except for such Hazardous
Materials (such as cleaning and photocopying fluids) that are customarily used
in the operation of offices, provided that such Hazardous Materials are used in
compliance with all laws and/or requirements of public authorities. The term
"Hazardous Materials" shall mean any flammable, explosive, or radioactive
materials, or hazardous wastes, hazardous and toxic substances, or related
materials, asbestos or any material, containing asbestos, or any other such
substance or material, as defined by any federal, state or local environmental
law, ordinance, rule or regulation including, without limitation, the
Comprehensive Environmental Response Compensation and Liability Act of 1980, as
amended, the Hazardous Materials Transportation Act, as amended, the Resource
Conservation and Recovery Act, as amended, and in the regulations adopted and
publications promulgated pursuant to each of the foregoing. In the event of a
breach by Tenant of the provisions of this Article 49, Owner shall, in addition
to all of its rights and remedies under this Lease and pursuant to law, require
Tenant to remove any such Hazardous Materials from the demised premises or the
Building in the manner prescribed for such removal by all requirements of law.
The provisions of this Article 49 shall survive the expiration or sooner
termination of this Lease.
50: In the event of any conflict or inconsistency between the provisions of
this Rider and the provisions of the printed form of Lease to which the Rider is
annexed, the provisions of this Rider shall govern and control.
51: A. Tenant shall not violate, or permit the violation of, any condition
imposed by the standard fire insurance policy then issued for office buildings
in the Borough of Manhattan, City of New York, and shall not do, permit anything
to be done, keep, or permit anything to be kept, in the demised premises that
would: (i) subject Owner to any liability or responsibility for personal injury,
death, or property damage; (ii) increase the fire or other casualty insurance
rate on the building or the property therein over the rate that would otherwise
then be in effect (unless Tenant pays the resulting premium as provided in
Section F of this Article 51); or (iii) result in insurance companies of good
standing refusing to insure the building or any of such property in amounts
reasonably satisfactory to Owner.
B. Tenant covenants to provide on or before the Commencement Date, and to keep
in force during the term hereof, the following insurance coverage:
(i) for the benefit of Owner and Tenant, a comprehensive policy of
liability insurance protecting Owner and Tenant against any liability
whatsoever occasioned by accident on or about the demised premises or any
appurtenances thereto. Such policy is to be written by good and solvent
insurance companies authorized to do business in the State of New York, and
the limits of liability thereunder shall not be less than the respective
amounts of Three Million ($3,000,000.00) Dollars of combined single limit
coverage on a per occurrence basis and Three Hundred Thousand ($300,000.00)
Dollars in respect of property damage. Such insurance may be carried under
a
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blanket policy or policies covering the demised premises and other
locations of Tenant, if any; and
(ii) fire and extended coverage in an amount adequate to cover the cost of
replacement of all personal property, fixtures, furnishing and equipment,
including Tenant's Work, located in the demised premises. Such policy
shall be written by good and solvent insurance companies authorized to do
business in the State of New York.
Prior to the time that such insurance is first required to be carried by
Tenant, and thereafter, at least thirty (30) days prior to the expiration of any
such policies, Tenant agrees to deliver to Owner either duplicate originals of
the aforesaid policies or certificates evidencing such insurance, provided that
said certificate contains an endorsement that such insurance may not be amended
or otherwise modified or canceled except upon thirty (30) days' prior written
notice to Owner, together with evidence of payment for the policy. Attached
hereto as EXHIBIT "E" is a sample insurance certificate showing the lower
right-hand "Cancellation" section requirements which must be fulfilled to
conform the certificate to the provisions of this Section. Tenant's failure to
provide and keep in force the aforementioned insurance shall be regarded as a
material default hereunder, entitling Owner to exercise any or all of the
remedies as provided in this Lease in the event of Tenant's default.
C. Owner and Tenant shall each endeavor to secure an appropriate clause
in, or an endorsement upon, each fire or extended coverage policy obtained by it
and covering the building, the demised premises, or the personal property,
fixtures and equipment located therein or thereon, pursuant to which the
respective insurance companies waive subrogation or permit the insured, prior to
any loss, to agree with a third party to waive any claim it might have against
said third party. The waiver of subrogation or permission for waiver of any
claim hereinbefore referred to shall extend to the agents of each party and its
employees and, in the case of Tenant, shall also extend to all other persons
and entities occupying or using the demised premises in accordance with the
terms of this Lease. If. and to the extent that, such waiver or permission can
be obtained only upon payment of an additional charge, then, except as provided
in Sections D and E of this Article 51, the party benefiting from the waiver or
permission shall pay such charge upon demand, or shall be deemed to have agreed
that the party obtaining the insurance coverage in question shall be free of any
further obligations under the provisions hereof relating to such waiver or
permission.
D. In the event that Tenant shall be unable at any time to obtain one of
the provisions referred to in Section C above in any of its insurance policies,
Tenant shall cause Landlord to be named in such policy or policies as one of the
assureds, but if any additional premium shall be imposed for the inclusion of
Owner as such an assured, Owner shall pay such additional premium upon demand or
Tenant shall be excused from its obligations under Section C with respect to the
insurance policy or policies for which such additional premiums would be
imposed. In the event that Owner shall have been named as one of the assureds
in any of Tenant's policies in accordance with the foregoing, Owner shall
endorse promptly to the order of Tenant, without recourse, any check, draft, or
order for the payment of money representing the proceeds of any such policy, or
any other payment growing out of or connected with said policy, and Owner hereby
irrevocably waives any and all rights in and to such proceeds and payments.
E. In the event that owner shall be unable at any time to obtain one of
the provisions referred to in Section C above in any of its insurance policies,
Owner shall, at Tenant's option, cause Tenant to be named in such policy or
policies as one of the assureds, but if any additional premium shall be imposed
for the inclusion of Tenant as such an assured, Tenant shall pay such additional
premium upon demand. In the event that Tenant shall
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have been named as one of the assureds in any of Owner's policies in accordance
with the foregoing, Tenant shall endorse promptly to the order of Owner, without
recourse, any check, draft, or order for the payment of money representing the
proceeds of any such policy, or any other payment growing out of or connected
with said policy, and Tenant hereby irrevocably waives any and all rights in and
to such proceeds and payments.
F. Subject to the provisions of Sections C. D and E above, and insofar as
may be permitted by the terms of the insurance policies carried by it, each
party hereby releases the other with respect to any claim (including a claim for
negligence) that it might otherwise have against the other party for loss,
damages, or destruction with respect to its property by fire or other casualty
(including rental value or business interruption, as the case may be) occurring
during the term of this lease.
G. If, by reason of a failure of Tenant to comply with the provisions of
Section A, of this Article 51, the rate of fire insurance with extended
coverage on the building or equipment or other property of Owner shall be higher
than it otherwise would be, Tenant shall reimburse Owner, on demand, for that
part of the premiums for fire insurance and extended coverage paid by Owner
because of such failure on the part of Tenant.
H. If any dispute shall arise between Owner and Tenant with respect to
the incurrence or amount of any additional insurance premium referred to in
Section F above, the dispute shall be determined by arbitration.
I. A schedule or make-up of rates for the building or the demised
premises, as the case may be, issued by the New York Fire Insurance Rating
Organization or other similar body making rates for fire insurance and extended
coverage for the premises concerned, shall be conclusive evidence of the facts
therein stated and of the several items and charges in the fire insurance rate
with extended coverage then applicable to such premises.
52: A. Tenant hereby acknowledges and agrees that: (i) this Lease is expressly
subordinate to all of the following: (a) that certain Mortgage (the "Morgan
Mortgage Document") and that certain Consolidation, Modification, Spreader and
Extension Agreement (the "Spreader Agreement"), both dated as of January 18,
1994, by and among 205 Associates, L.P., The Durst Buildings Corporation, Durst.
Partners, 675 Associates, and David Durst, Richard Siegler, Douglas Durst,
Jonathan Durst and Seymour B. Durst, as trustees, collectively as mortgagors,
and Morgan Guaranty Trust Company of New York, as Trustee under Declaration of
Trust dated December 9, 1960 as Amended for the Commingled Pension Trust Fund
(Fixed Income - Mortgages) ("Morgan"), as mortgagee; (b) that certain Mortgage
(the "BNY Mortgage Document") and that certain Agreement of Consolidation and
Modification of Mortgage, Assignment of Leases and Rents and Security Agreement
(the "Consolidation Agreement"; the Morgan Mortgage Document; the Spreader
Agreement, the BNY Mortgage Document and the Consolidation Agreement are
sometimes collectively referred to herein as the "Mortgages"), both dated as of
February 3. 1997, by and among 205 Associates L.P., The Durst Buildings
Corporation, 675 Associates L.L.C., David Durst, Richard Siegler, Douglas Durst,
Jonathan Durst, Shirley Durst and Carola Durst, as trustees, Sendur Partners
L.L.C. and Durst Partners L.L.C., collectively as mortgagors (together with
mortgagors under the Spreader Agreement, "Mortgagors") and The Bank of New
York, as mortgagee (together with Morgan, "Mortgagees"); and (C) all amendments,
extensions, consolidations, modifications or replacements thereof; (ii) in the
event of a default under this Lease by Owner, Tenant shall promptly notify
Mortgagees in writing of such default and Mortgagees shall have the opportunity
(but not the obligation) to cure such default; and (iii) Tenant shall furnish to
Mortgagors and Mortgagees a certificate, within ten (10) days after the making
of a request therefor by Mortgagors or either of the Mortgagees, setting forth
(a) whether this Lease is in full
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force and effect; (b) stating whether or not any default or event which, with
notice or passage of time or both, would constitute a default, has occurred; (c)
listing all amendments, modifications, assignments or extensions of lease; and
(d) containing such other information as may be reasonably requested by such
Mortgagee; such certificates shall be furnished at Tenant's expense.
B. In addition to the foregoing and notwithstanding anything to the
contrary which may be contained in this Lease, Tenant agrees that in the event
of the enforcement by any Mortgagee of the remedies provided for by law or by
the Mortgages, Tenant will, on request of any person succeeding to the interest
of Mortgagors as a result of such enforcement, automatically attorn to said
successor in interest without change to this Lease, provided that any persons
succeeding to the interest of Mortgagors as a result of such enforcement shall
not be (w) bound by any payment of rent or additional rent for more than one (1)
month or regular billing period in advance; (x) bound by any alteration,
amendment, modification or amendment to this Lease which has not been consented
to by such Mortgagee; (y) liable for any act or omission of any prior lessor; or
(z) subject to any offset or defenses which Tenant may have against any prior
lessor.
Upon request by such successor in interest to Mortgagors, Tenant shall
execute and deliver an instrument confirming such attornment.
53: Owner shall in no event be subject to any claim for damages occasioned by
any default by Owner of any obligation to be performed by Owner under this Lease
so long as Owner, with due diligence after the receipt of written notice of such
default from Tenant, remedies such default as soon as practicable. With respect
to any provision of this Lease which specifically requires that Owner shall not
unreasonably withhold or delay its consent or approval, Tenant in no event shall
be entitled to make, nor shall Tenant make, any claim, and Tenant hereby waives
any claim, for any sum of money whatsoever as damages, costs, expenses,
attorneys' fees or disbursements, whether affirmatively or by way of setoff,
counterclaim or defense, based upon any claim or assertion by Tenant that Owner
has unreasonably withheld or delayed such consent or approval hereof, Tenant's
sole remedy for the claimed unreasonable withholding or delaying by Owner of its
consent or approval shall be an action or proceeding brought and prosecuted
solely at Tenant's own cost and expense to enforce such provision, for specific
performance, injunction or declaratory judgment.
54: A. No recourse shall be had on any of Owner's obligations under this
Lease or for any claim based thereon or otherwise in respect thereof against,
any incorporator of Owner, subscriber to Owner's capital stock, shareholder,
employee, agent, officer or director, past, present or future, of any
corporation or any partner or joint venturer of any partnership or joint venture
which shall be Owner hereunder or included in the term "Owner" or of any
successor of any such corporation, or against any principal, disclosed or
undisclosed, or any such corporation, or against any principal, disclosed or
undisclosed, of any affiliate of any party which shall be Owner or included in
the term "Owner," whether directly or through Owner or through any receiver,
assignee, agent, trustee in bankruptcy or through any other person, firm or
corporation, whether by virtue of any constitution, statute or rule of law or by
enforcement of any assessment or penalty or otherwise, all such liability being
expressly waived and released by Tenant.
B. Tenant shall look only and solely to Owner's estate and interest in
and to the Building and the rents and profits therefrom for the satisfaction of
any right of Tenant arising out of this Lease or for the collection of judgment
or other judicial process or arbitration award requiring the payment of money by
Owner, and no other property or assets of Owner, Owner's agents, incorporators,
shareholders, employees, officers, directors,
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partners, agents, principal (disclosed or undisclosed, joint venturers, or
affiliates shall be subject to levy, lien, execution, attachment, or other
enforcement procedure for the satisfaction of Tenant's rights and remedies under
or with respect to this Lease, the relationship of owner and Tenant hereunder or
under law, or Tenant's use and occupancy of the demised premises or any other
liability of Owner to Tenant.
55: Without limiting any of the foregoing provisions of this Article, if
pursuant to the Bankruptcy Code, as the same may be amended, Tenant is permitted
to assign or otherwise transfer this Lease (whether in whole or in part in
disregard of the restrictions contained in Article 46 and/or Article 16),
Tenant agrees that adequate assurance of future performance by the assignee or
transferee permitted under such Code shall mean the deposit of cash security
with Owner in an amount equal to the sum of one year's Fixed Rent then reserved
hereunder plus an amount equal to all additional rent payable by Tenant pursuant
to this Lease for the calendar year preceding the year in which such assignment
is intended to become effective, which deposit shall be held by Owner, without
interest, for the balance of the term as a security for the full and faithful
performance of all of the obligations under this Lease on the part of Tenant yet
to be performed. If Tenant receives or is to receive any valuable consideration
for such an assignment or transfer (in part or in whole) of this Lease, such
considerations, after deducting therefrom any portion of such consideration
reasonably designated by the assignee or transferee as paid for the purchase of
Tenant's personal property in the demised premises, shall be and become the sole
exclusive property of Owner and shall be paid over to Owner directly by such
assignee or transferee. Any such assignee or transferee may only use the
demised premises as executive offices for an assignee or transferee whose main
business is the same as Tenant's and such occupancy may not increase the number
of individuals occupying the demised premises at the time a petition for
bankruptcy (or reorganization) is filed by or against Tenant. In addition,
adequate assurance shall mean that any such assignee or transferee of this Lease
shall have a net worth (exclusive of good will) equal to at least fifteen (15)
times the aggregate of the annual Fixed Rent reserved hereunder plus all
additional rent for the preceding calendar year as aforesaid. Such assignee or
transferee shall expressly assume this Lease by an agreement in recordable form.
56: ADDENDA to Article 3 of the printed form of Lease:
Notwithstanding anything contained herein to the contrary, in the event
that Tenant makes, or causes, permits or authorizes to be made, any alterations,
modifications or decorations to the demised premises which in any manner affect
the existing or proposed Building standard security system, Tenant agrees that
concurrently with the making of any such alterations, modifications or
decorations, Tenant shall, at Tenant's sole cost and expense, modify such
existing or proposed system, or add any additional security devices to such
existing or proposed system, which nay be required in Owner's sole judgment.
In making any alterations, installations, additions or improvements to the
demised premises, Tenant must comply with the Building Rules and Regulations For
Tenant Alterations attached hereto as EXHIBIT "F".
57: Tenant acknowledges its understanding that Owner under this lease is the
Tenant under a ground lease dated April 30, 1964, affecting the property of
which the premises demised hereby form a part. Tenant agrees that
notwithstanding any cancellation or other termination of the ground lease this
lease shall remain in full force and effect and Tenant shall forthwith attorn to
the party or parties who may succeed to the interest of Owner under this Lease.
-15-
<PAGE>
58: Tenant and its employees, contractors, agents and invitees shall comply
with the Rules and Regulations in effect, from time to time, with regard to the
Building's security system. The current Rules and Regulation with regard
thereto are the following:
During the hours of 8 a.m. to 6 p.m. Monday through Friday ("NORMAL
BUSINESS HOURS") only persons displaying Kastle Systems "key tag"
identification ("KEYTAG") to the lobby attendant shall be granted access to
the Building. Landlord will provide a reasonable number of Keytags to
Tenant at no charge when Tenant takes possession of the demised premises.
Thereafter, Landlord will charge a rate to be specified by Owner for any
additional Keytags requested by Tenant. During Normal Business Hours,
anyone not displaying the Keytag to the lobby attendant shall obtain access
to the Building only (i) if that person's arrival was pre-arranged with the
lobby attendant with a list of anticipated visitors, or (ii) if not on a
pre-arranged list, the person's arrival to the Building can be announced
via telephone and then approved by Tenant. After Normal Business Hours,
access to the Building shall only be obtained by Keytag holders swiping
their Keytag on the Keytag reader outside the Building's front doors or by
utilizing the telephone link to Kastle Systems personnel, who will in turn
call the Tenant's premises to attempt to gain Tenant's approval for access
of persons not holding a Keytag.
59: In the event that, at any time during the term of this Lease, Owner and
Tenant shall be engaged in litigation of any nature relating to this Lease,
Owner shall have the right, during the entire period of such litigation, to
enter the demised premises at any time, whether or not Tenant or its agent or
representatives is present, for the purpose of showing the same to prospective
tenants.
60: Notwithstanding anything to the contrary in the printed form of Lease,
Owner shall have access to the demised premises upon reasonable oral, written,
telephonic or other notice during the last twelve (12) months of the term of
this Lease for the purpose of showing the demised premises to prospective
tenants.
OWNER:
ROYAL REALTY CORP.,
Agent
By: /s/ Douglas Durst
-------------------------
Name: Douglas Durst
Title: President
TENANT:
NET GRAVITY, INC.
By: /s/ Stephen E. Recht
-------------------------
Name: Stephen E. Recht
Title: Vice President
Finance & Administration
Chief Financial Officer
-16-
<PAGE>
EXHIBIT A
FLOOR PLAN
(follows immediately)
<PAGE>
[FLOOR PLAN]
<PAGE>
EXHIBIT B
CLEANING SPECIFICATIONS
OFFICE CLEANING ON BUSINESS DAYS
1. Desk and table tops are dusted nightly.
2. All horizontal and vertical surfaces are dusted nightly.
3. All glass top desks and tables are damp wiped nightly.
4. All composition tile flooring is thoroughly dust mopped nightly with
treated cloth. All corners are cleaned.
5. Carpeted areas thoroughly vacuumed weekly; additionally, high traffic areas
of floor vacuumed nightly.
6. Ash trays are emptied and damp wiped nightly.
7. Low dusting of furniture is done nightly.
8. All waste baskets are emptied nightly.
9. Desk trays are dusted nightly.
10. Hi-dusting - quarterly.
11. Window cleaning, both interior and exterior - approximately four times
annually.
LAVATORIES - PUBLIC - NIGHTLY - Monday through Friday, inclusive (excluding
holidays as described in Lease).
1. Sweep and wash and scrub all lavatory flooring, using germicide in the
water.
2. Wash and polish all mirrors, powder shelves, brightwork, etc., including
flushometers, piping toilet seat hinges.
3. Wash both sides of all toilet seats.
4. Wash and disinfect all basins, bowls and urinals.
5. Dust all partitions, tile walls, dispensers and receptacles.
6. Empty and clean paper towel and sanitary disposal receptacles.
7. Remove wastepaper to designated area in the loading dock.
8. Fill toilet tissue holders.
LAVATORIES - PUBLIC - PERIOD CLEANING
1. Machine scrub flooring monthly.
2. Wash all partitions, tile walls and enamel surfaces once a month, using
proper disinfectant monthly.
3. Wash all metal ceiling once per annum.
4. Dust all lighting fixtures once a month.
5. Do all high dusting once a month.
<PAGE>
EXHIBIT B-1
PLAN WITH MODIFICATIONS
(follows immediately)
<PAGE>
[FLOOR PLAN]
<PAGE>
EXHIBIT C
BUILDING STANDARDS
(follows immediately)
<PAGE>
BUILDING STANDARDS
PARTITIONS
Constructed of 2 1/2 steel studs and a layer of 5/8" gypsum board on
each side. Partitions are insulated to several inches above hung ceiling and
one layer of gypsum board is carried above the hung ceiling to the slab above.
DOORS & BUCKS
Bucks are 16 gauge steel, welded, with flat trim. Doors are 3'-0",
flush, fire proof, solid core, birch veneer, paint grade.
HARDWARE
Doors are hung with one and one half pairs of ball bearing butts and are
fitted with door bumpers and Schlage D series Rhodes design, dull chrome finish,
latch or lock sets. Where locks are required they are set up in a master key
system.
ACOUSTIC HUNG CEILING
A mechanically suspended push up type ceiling with exposed splines and
24" x 24" mineral fissured tegular edge tile, Armstrong Travertone or equal.
FLOOR COVERING
Carpeting, floor tile or other, durable floor covering with vinyl base.
ELECTRIC
Lighting: 2' x 4', recessed fixtures, with 3 T-8 32 watt fluorescent
lamps with acrylic lenses and Magne-Tex 3 lamp electronic ballasts, Lightolier
Ventilume 1 or equal. Silent type wall switches, not less than one per room.
Power: 110 volt duplex electrical receptacles located in partitions
or columns or in prefabricated knockouts in peripheral air conditioning
enclosure with not more than 8 outlets, initially on each circuit.
1
<PAGE>
TELEPHONE
Telephone and signal wiring shall be run in conduit or must be teflon
coated and run in cable trays in hung ceiling with conduit stub-ups into hung
ceiling. Stub-ups must terminate in an approved box in partitions. A maximum
of 25 feet of cable may run in hung ceiling between stub-ups and cable trays.
All loose wiring shall be neatly bundled and secured to black iron or steel
structure. No wiring shall be secured to ductwork.
AIR CONDITIONING
The air conditioning system will be a variable air volume system which
will be designed to:
Maintain indoor drybulb temperature of 75 degrees F., plus or minus 3
degrees F., when the outdoor temperature is between 15 degrees F. and 65 degrees
F. during the heating season.
Maintain indoor drybulb temperature of 75 degrees F., plus or minus 3
degrees F., and approximately 50% relative humidity when outside conditions
are not more than 89 degrees F. drybulb and 75 degrees F. wetbulb, during the
cooling season.
The above noted performance standards are based upon the following
conditions of internal heat and moisture gain:
a) one person per 100 square feet
b) a maximum of 3.5 watts per square foot for lighting and power
combined.
c) the use of internal shading devices (venetian blinds)
Landlord shall not be required to meet the above standards if directed
otherwise at any time by any governmental authority having jurisdiction.
VENETIAN BLINDS
All windows shall have 1" wide tapeless venetian blinds. Blinds shall have
polyester yarn braided ladders and dacron lift cords. Tilting mechanism shall
be controlled by a tilt rod of corrosion resistant steel, aluminum or lucite.
Blinds shall be installed in the pockets provided at the window head and shall
be in a color selected by the Landlord.
2
<PAGE>
PAINTING
All surfaces normally painted shall be painted in colors selected by
Tenant. Wall covering may be used.
SPRINKLES
Sprinkler heads shall be the concealed type installed in accordance with
the codes, rules and regulations established by the governmental authorities
having jurisdiction. All sprinkler piping-shall be concealed above the hung
ceiling.
3
<PAGE>
EXHIBIT D
HVAC SPECIFICATIONS
(follows immediately)
<PAGE>
EXHIBIT E
INSURANCE CERTIFICATE
(follows immediately)
<PAGE>
<TABLE>
<CAPTION>
<S><C>
- -----------------------------------------------------------------------------------------------------------------------------------
[LOGO] CERTIFICATE OF INSURANCE
- -----------------------------------------------------------------------------------------------------------------------------------
PRODUCER THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO
RIGHTS UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AMEND, EXTEND
OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW
---------------------------------------------------------------------------------
COMPANIES AFFORDING COVERAGE
---------------------------------------------------------------------------------
COMPANY
A
- -----------------------------------------------------------------------------------------------------------------------------------
INSURED COMPANY
B
---------------------------------------------------------------------------------
COMPANY
C
---------------------------------------------------------------------------------
COMPANY
D
---------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
COVERAGES
- -----------------------------------------------------------------------------------------------------------------------------------
THIS IS TO CERTIFY THAT THE POLICIES OF INSURANCE LISTED BELOW HAVE BEEN ISSUED TO THE INSURED NAMED ABOVE FOR THE POLICY
PERIOD INDICATED, NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH
THIS CERTIFICATE MAY BE ISSUED OR MAY PERTAIN. THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THE
TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES. LIMITS SHOWN MAY HAVE BEEN REDUCED BY PAID CLAIMS.
- -----------------------------------------------------------------------------------------------------------------------------------
CO TYPE OF INSURANCE POLICY NUMBER POLICY EFFECTIVE POLICY EXPIRATION LIMITS
LTR. DATE (MM/DD/YY) DATE (MM/DD/YY)
- -----------------------------------------------------------------------------------------------------------------------------------
A GENERAL LIABILITY
/X/ COMMERCIAL GENERAL LIABILITY GENERAL AGGREGATE $
/ / CLAIMS MADE /X/ OCCUR PRODUCTS - COMP/OF AOO $
/ / OWNER'S & CONTRACTOR'S PROT PERSONAL & ADV INJURY $
/X/ BROAD FORM VENDORS EACH OCCURRENCE $
------------------ FIRE DAMAGE (Any illegible) $
/ / M & D EXP (illegible) $
- -----------------------------------------------------------------------------------------------------------------------------------
AUTOMOBILE LIABILITY COMBINED SINGLE LIMIT $
A /X/ ANY AUTO
/ / ALL OWNED AUTOS BODILY INJURY $
/ / SCHEDULED AUTOS (Per person) $
/X/ HIRED AUTOS BODILY INJURY $
/X/ NON-OWNED AUTOS (Per instance) $
/ / PROPERTY DAMAGE $
---------------
- -----------------------------------------------------------------------------------------------------------------------------------
DAMAGE LIABILITY AUTO ONLY - EA ACCIDENT $
/ / ANY AUTO OTHER THAN AUTO ONLY:
/ / EACH ACCIDENT $
--------------- AGGREGATE $
- -----------------------------------------------------------------------------------------------------------------------------------
EXCESS LIABILITY EACH OCCURRENCE $
/ / UMBRELLA FORM AGGREGATE $
/ / OTHER THAN UMBRELLA FORM $
- -----------------------------------------------------------------------------------------------------------------------------------
WORKERS COMPENSATION AND /X/ STATUTORY LIMITS
A EMPLOYERS LIABILITY EACH ACCIDENT $
B THE PROPRIETOR/ /X/ INCL BEARER - POLICY LIMIT $
PARTNERS/EXECUTIVE / / EXCL BEARER - EACH EMPLOYEE $
OFFICERS ARE:
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER
- -----------------------------------------------------------------------------------------------------------------------------------
[ILLEGIBLE]
- -----------------------------------------------------------------------------------------------------------------------------------
CERTIFICATE HOLDER CANCELLATION
- -----------------------------------------------------------------------------------------------------------------------------------
SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE CANCELLED or amended BEFORE THE
EXPIRATION DATE THEREOF, THE [ILLEGIBLE] COMPANY WILL HAVE 30 DAYS WRITTEN NOTICE
TO THE CERTIFICATE HOLDER NAMED TO THE LEFT.
---------------------------------------------------------------------------------
AUTHORIZED REPRESENTATIVE
- -----------------------------------------------------------------------------------------------------------------------------------
ACORD [ILLEGIBLE]
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT F
BUILDING RULES AND REGULATIONS FOR TENANT ALTERATIONS
(follows immediately)
<PAGE>
BUILDING RULES & REGULATIONS FOR TENANT ALTERATIONS
I. GENERAL
A. All alterations, decorations, installations, repairs, improvements
and/or replacements (which shall hereinafter be called
"Alteration(s)" and which are sometimes referred to as "Tenant's
Work" in the lease) in, to or about the Demised Premises shall be
performed in accordance with all applicable provisions of the Lease.
B. Landlord reserves the right to withhold its consent of any Alteration
due to Tenant's non-compliance with any of the regulations or
guidelines contained in this Exhibit or in the Lease.
C. Landlord's review and approval of Tenant's drawings is for conformance
with the Building Standards only and is not a review for compliance
with any law, ordinance, code or insurance requirement, nor a review
of the adequacy of Tenant's design. No such approval or comments shall
constitute a waiver of the obligation that the Alteration complies
with all laws, ordinances or codes.
D. Landlord's approval or disapproval of the Alteration shall in no event
change or modify any provisions of the Lease.
II. SUBMISSION OF DRAWINGS
A. Tenant shall submit for Landlord's review and written approval, prior
to the commencement of work, three (3) sets of Tenant's complete
architectural and complete engineering drawings including but not
limited to mechanical, electrical, plumbing, sprinkler and structural
drawings.
B. All drawings submitted for Landlord's review and approval must be
signed and sealed by Tenant's Registered Architect and/or Professional
Engineer, licensed to conduct business in the State of New York.
<PAGE>
C. Where the Alteration appears to affect the Building's systems and/or
structure, Landlord reserves the right to refer Tenant's drawings to
Landlord's consulting engineers for review. The cost for such review,
approval and/or inspection of Tenant's Alteration shall be at Tenant's
cost and expense.
III. DEPARTMENT OF BUILDINGS FILING REQUIREMENTS
A. Prior to the commencement of the Alteration, Tenant's architect or
other representative designated by Tenant, shall file all drawings
relative to Tenant's Alterations with the N.Y.C. Department of
Buildings and all other governmental agencies having jurisdiction.
B. Tenant shall pay the cost of all filing and permit fees necessary to
secure all required approvals and permits from the N.Y.C. Department
of Buildings and all other governmental agencies having jurisdiction.
C. No work shall commence without a permit issued by the N.Y.C.
Department of Buildings. Copies of all N.Y.C. Department of Buildings
approved applications, permits and drawings are to be submitted to
Landlord prior to the start of the Alteration.
D. All work shall comply with all rules, regulations, codes, laws and
ordinances of the city, state and federal governmental agencies having
jurisdiction, including without limitation, those relative to the
Americans With Disabilities Act.
E. Upon the completion of the Alteration, Tenant shall submit to Landlord
copies of all final sign-offs from the N.Y.C. Department of Buildings
and all other governmental agencies having jurisdiction.
IV. INSURANCE
A. Tenant's general contractor and sub-contractor shall submit to
Landlord, or its agent, as a condition of Landlord's consent to
Tenant's use of such general contractor or sub-contractor, and prior
to the start of the Alteration, the following insurance certificates
which shall be maintained at their own expense, until the completion
of the Alteration:
2
<PAGE>
1) Certificates of Workers', Compensation insurance and of New York
Disability Benefits insurance covering all persons to be employed
in connection with such Alteration, including all those to be
employed by all contractors and sub-contractors.
2) Certificate of Comprehensive General Liability insurance
including Bodily Injury, Property Damage, Personal Injury, Broad
Form Contractual liability and Completed Operations, with a
minimum limit of $3,000,000 combined single limit per occurrence
and $5,000,000 in the aggregate unless higher limits are
expressed in the lease. The required limits may be provided by a
single policy or by a combination of primary and umbrella/excess
policies. Certificates must name the Landlord, its Managing
Agent, and any other party at interest as additional insureds.
A list of these parties can be obtained at the Building Office.
Such certificates shall also evidence a hold harmless and
indemnity agreement on the part of the contractors and sub-
contractors in favor of the certificate holder.
3. Certificate of automobile liability insurance with a combined
single limit (Bodily Injury & Property Damage) of at least
$1,000,000.
4. At the Landlord's option, "Builders Risk" coverage on the
Alterations may be required in an amount satisfactory to the
Landlord.
B. Unless otherwise agreed to by the Landlord, all insurance coverage is
to be provided by insurance carriers licensed to do business in the
State of New York. Certificates must provide for at least thirty (30)
days prior written notice to the certificate holder, on an unequivocal
basis, in the event of cancellation, non-renewal or material change.
V. BUILDING SERVICES
A. Any shutdown of any mechanical system or electric service required by
Tenant shall be requested through the Building Office in writing, at
least 48 hours prior to the requested shutdown date. Shutdowns shall
be scheduled on non-business days or on business days between 7:00PM
and 6:00AM with all work completed during this time. Shutdowns shall
be performed by
3
<PAGE>
Landlord's personnel or designated contractors at Tenant's cost and
expense.
B. The use of the elevators for hoisting materials, equipment and the
removal of rubbish shall only be permitted during non-business hours
or on non-business days and shall be arranged and scheduled through
the Building Office. Tenant shall be required to pay an hourly charge
for overtime elevator use.
C. Landlord will not assume any responsibility for any disturbance to
Tenant or deficiency created in any mechanical system or electrical
service to the Demised Premises by reason of the Alteration.
VI. DEMOLITION AND CONSTRUCTION
A. Tenant shall submit to Landlord for Landlord's approval, a complete
list of Tenant's general contractor and sub-contractors, including
name, business address and phone number, proposed to perform work
within the Demised Premises.
B. Tenant shall use only materials and employ labor which will not result
in labor difficulty or interruption of Landlord's operation of the
Building.
C. All work and materials shall be equal to the Building Standards.
D. All demolition work and other such work which creates disturbance or
annoyance to the Building operations or other tenants in the building
(including but not limited to chopping, coring, welding, sawing, etc.)
is to be scheduled with the Building Office and performed before 8:00
AM or after 6:00 PM on business days.
E. During any such times that Tenant's Alteration or demolition to,
within or about the Demised Premises require that the fire protection
afforded by the Class "E" system be temporarily disabled, Tenant's
contractors, at Tenant's cost and expense, shall maintain a fire watch
which is required by the trade or governmental authorities having
jurisdiction. In addition to the above required fire watch, Landlord
will provide a fire watch, at Tenant's cost and expense, for all work
which is performed outside the Demised Premises.
4
<PAGE>
F. Tenant shall cause its general contractor and subcontractors to keep
the Demised Premises clean and orderly at all times. All public areas
such as elevator lobbies, corridors, toilet rooms, etc. and all
equipment and property belonging to the Building shall be protected
from damage during the course of construction. The cleaning of the
public area affected by the Alteration will be performed by Building
personnel at Tenant's expense.
G. Tenant's general contractor and/or sub-contractors shall:
1. Protect and seal off the elevator lobby doors to prevent dust and
dirt from entering the elevator shafts and equipment.
2. Protect the perimeter HVAC or heating units from dust and dirt.
3. Seal off all supply and return grills, diffusers and ducts to
prevent dust from entering the Building air conditioning and
ventilating system.
4. Protect all Class "E" fire alarm devices and wiring.
H. Tenant shall only use the services of Landlord's contracted fire alarm
service vendor or other contractor designated by Landlord to adjust,
test, alter, relocate, add to, or remove equipment connected to the
Building Class "E" system required by or resulting from the
Alteration, at Tenant's cost and expense.
I. Tenant shall only use the services of Landlord's contracted Building
Management System vendor or other contractor designated by Landlord to
adjust, test, alter, relocate, add to, or remove equipment connected
to the Building Management System, required by or resulting from the
Alteration, at Tenant's cost and expense.
VII. MISCELLANEOUS
A. Tenant is not Permitted to mount any equipment in the Building
Electric Closets, Telephone Closets or Mechanical Equipment Rooms
without prior written approval from Landlord.
5
<PAGE>
B. All unused wiring, conduit, equipment, piping, materials and/or
previously installed work which is no longer being utilized is to be
removed back to its source.
C. Tenant shall not install any outside louvers or modify the existing
exterior facade of the Building in any way without the prior written
approval of Landlord.
D. All locking devices must be keyed and mastered to the Building Keying
system.
E. Tenant shall be responsible for all Alterations which impact existing
Building systems and shall ensure that such work is integrated so as
not to adversely affect the Building systems.
F. Access doors must be provided to all Building and Tenant equipment.
All valves, piping and equipment are to be tagged and clearly
identified.
G. No outlets, switches or other devices are to be chopped into any core
wall.
H. All toilet rooms, pantries with dishwasher, supplemental mechanical
rooms and other such rooms requiring the use of water shall be
provided with floor drains and shall be membrane waterproofed over the
entire room with the membrane run up a minimum of 4" on all partitions
and columns.
6
<PAGE>
State of California
County of San Mateo
On 2/24/98 before me, CATHERINE M. BYRNE personally appeared STEPHEN E. RECHT
personally known to me - or -
- --
X proved to me on the basis of satisfactory evidence to be the person(s) whose
- -- name(s) is/are subscribed to the within instrument and acknowledged to me
that he/she/they executed the same in his/her/their authorized capacity, and
that by his/her/their signature(s) on the instrument the person(s) or entity
upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal,
[SEAL]
/s/ Catherine M. Byrne
- ------------------------------
Catherine M. Byrne
NOTARY PUBLIC
<PAGE>
"WELCOME TO SERVCORP"
This Lease is made between the Landlord (1), the Tenant (2a)
and the Guarantor (2b) below.
- --------------------------------------------------------------------------------
DATE
- --------------------------------------------------------------------------------
1 SERVCORP OFFICE
- --------------------------------------------------------------------------------
CITY: Shinjuku, Tokyo
- --------------------------------------------------------------------------------
LANDLORD: Servcorp Japan K.K.
- --------------------------------------------------------------------------------
ACN:
- --------------------------------------------------------------------------------
ADDRESS: Level 11, Park West Building
- --------------------------------------------------------------------------------
6-12-1 Nishi Shinjuku
- --------------------------------------------------------------------------------
Shinjuku-ku, Tokyo
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2a TENANT
- --------------------------------------------------------------------------------
COMPANY NAME: Net Gravity
- --------------------------------------------------------------------------------
ACN:
- --------------------------------------------------------------------------------
ADDRESS: 1700 S. Amphlett Blvd. Suite 350
- --------------------------------------------------------------------------------
San Mateo, CA 94402-2715
- --------------------------------------------------------------------------------
USA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2b GUARANTOR
- --------------------------------------------------------------------------------
NAME: STEPHEN E. RECHT, CFO
- --------------------------------------------------------------------------------
RESIDENTIAL ADDRESS: 33 MONTICELLO AVE
- --------------------------------------------------------------------------------
PIEDMONT, CA 94611 USA
- --------------------------------------------------------------------------------
PASSPORT/DRIVERS LICENCE NO: 053707527
- --------------------------------------------------------------------------------
DATE ISSUE/ISSUING STATE OR COUNTRY:
1/27/94 USA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3 BANK
- --------------------------------------------------------------------------------
LANDLORD BANK:
Tokyo Mitsubishi Bank
Nishi Shinjuku Branch
- --------------------------------------------------------------------------------
LANDLORD ACCOUNT NAME:
Servcorp Japan K.K.
- --------------------------------------------------------------------------------
LANDLORD ACCOUNT NUMBER:
Saving 1102434
- --------------------------------------------------------------------------------
TENANT BANK
- --------------------------------------------------------------------------------
TENANT ACCOUNT NAME:
- --------------------------------------------------------------------------------
TENANT ACCOUNT NUMBER:
- --------------------------------------------------------------------------------
START DATE OF PERIODICAL PAYMENT: / /
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4 TENANT'S HEAD OFFICE
- --------------------------------------------------------------------------------
CONTACT NAME:
Jason A. Martin
- --------------------------------------------------------------------------------
ADDRESS:
1700 S. Amphlett Blvd. Suite 350
- --------------------------------------------------------------------------------
San Mateo, CA 94402-2715
- --------------------------------------------------------------------------------
TELEPHONE NO:
650-655-2069
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5 INITIAL INVOICE DETAILS
- --------------------------------------------------------------------------------
RENT FIRST MONTH: 420,000 - 1/2/98 TO 28/2/98
- --------------------------------------------------------------------------------
SECURITY DEPOSIT: 420,000 - 1 month rental
- --------------------------------------------------------------------------------
TELEPHONE CONNECTION:
13,500 -
- --------------------------------------------------------------------------------
FACSIMILE CONNECTION: -
- --------------------------------------------------------------------------------
PARKING: -
- --------------------------------------------------------------------------------
DIRECTORY BOARD: -
- --------------------------------------------------------------------------------
SUNDRIES: -
- --------------------------------------------------------------------------------
Consumption Tax 21,675
- --------------------------------------------------------------------------------
TOTAL AMOUNT DUE:
875,175
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6 FOR SERVCORP USE ONLY
- --------------------------------------------------------------------------------
THE LANDLORD HEREBY LEASES THE PREMISES KNOWN AS
SUITE NUMBER 18
- --------------------------------------------------------------------------------
TERM COMMENCEMENT DATE: 1/2/98
- --------------------------------------------------------------------------------
INITIAL TERM ENDING DATE: (Refer to Holding Over Clause) 31/3/98
- --------------------------------------------------------------------------------
TERM OF THE LEASE: 2 (moneys) OUTGOINGS: 2.5%
- --------------------------------------------------------------------------------
RENT PER MONTH 420,000 1/2/98 TO 31/3/98
- --------------------------------------------------------------------------------
RENT PER MONTH / / TO / /
- --------------------------------------------------------------------------------
FIRST SCHEDULE - INCLUDED IN RENTAL
- --------------------------------------------------------------------------------
EXECUTIVE DESKS: 3 EXECUTIVE CHAIRS: 1
VISITORS CHAIRS: 1 3 DRAWER FILING CABINET 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7 COMMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RENT [ILLEGIBLE]
- --------------------------------------------------------------------------------
SERVICES [ILLEGIBLE]
- --------------------------------------------------------------------------------
SECURITY DEPOSIT [ILLEGIBLE]
- --------------------------------------------------------------------------------
HOLDING OVER [ILLEGIBLE]
- --------------------------------------------------------------------------------
INSURANCE [ILLEGIBLE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Tenant and Guarantor confirm that the [ILLEGIBLE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We [ILLEGIBLE]
- --------------------------------------------------------------------------------
Signed for and on behalf of the Landlord
- --------------------------------------------------------------------------------
Name (printed)
- --------------------------------------------------------------------------------
Date
- --------------------------------------------------------------------------------
Signature
- --------------------------------------------------------------------------------
The Common Seal of
Servcorp Japan
was affixed to the
document in the
presence of:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Signed by Guarantor
/s/ Stephen E. Recht
- --------------------------------------------------------------------------------
Name (printed)
STEPHEN E. RECHT
- --------------------------------------------------------------------------------
Date: 1/28/98
- --------------------------------------------------------------------------------
Signature
/s/ Stephen E. Recht
- --------------------------------------------------------------------------------
In the presence of:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Signed for and on behalf of the Tenant
- --------------------------------------------------------------------------------
Name (printed):
STEPHEN E. RECHT, CFO
- --------------------------------------------------------------------------------
Date: 1/28/98
- --------------------------------------------------------------------------------
Driver's License or Passport No.:
- --------------------------------------------------------------------------------
Signature
/s/ Stephen E. Recht, CFO
- --------------------------------------------------------------------------------
The Common Seal of
Net Gravity
was affixed to this document
in the presence of:
<PAGE>
Exhibit 10.8
NETGRAVITY, INC.
EMPLOYMENT AND SEVERANCE AGREEMENT
This Employment and Severance Agreement (the "Agreement") is made and
entered into effective as of March 31, 1998, by and between Stephen E. Recht
(the "Employee") and NetGravity, Inc., a Delaware corporation (the "Company").
RECITALS
A. The Company may from time to time need to address the possibility
of an acquisition transaction or change of control event. The Board of
Directors of the Company (the "Board") recognizes that such events can be a
distraction to the Employee and can cause the Employee to consider
alternative employment opportunities. The Board has determined that it is in
the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control
(as defined below) of the Company.
B. The Board believes that it is in the best interests of the Company
and its stockholders to provide the Employee with an incentive to continue
his employment and to motivate the Employee to maximize the value of the
Company upon a Change of Control for the benefit of its stockholders.
C. The Board believes that it is imperative to provide the Employee with
certain benefits upon a Change of Control and, under certain circumstances, upon
termination of the Employee's employment in connection with a Change of Control,
which benefits are intended to provide the Employee with financial security and
provide sufficient incentive and encouragement to the Employee to remain with
the Company notwithstanding the possibility of a Change of Control.
D. To accomplish the foregoing objectives, the Board has directed the
Company, upon execution of this Agreement by the Employee, to agree to the terms
provided herein.
E. Certain capitalized terms used in this Agreement are defined in
Section 6 below.
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AGREEMENT
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of the Employee by the Company, the
parties agree as follows:
1. DUTIES AND SCOPE OF EMPLOYMENT. The Company shall employ the
Employee in the position of Chief Financial Officer and Vice President of
Finance, as such position has been defined in terms of responsibilities and
compensation as of the effective date of this Agreement; provided, however,
that the Board shall have the right, at any time prior to the occurrence of a
Change of Control, to revise such responsibilities and compensation as the
Board in its discretion may deem necessary or appropriate. The Employee
shall comply with and be bound by the Company's operating policies,
procedures and practices from time to time in effect during his employment.
During the term of the Employee's employment with the Company, the Employee
shall continue to devote his full time, skill and attention to his duties and
responsibilities, and shall perform them faithfully, diligently and
competently, and the Employee shall use his best efforts to further the
business of the Company and its affiliated entities.
2. BASE COMPENSATION. The Company shall pay the Employee as
compensation for his services a base salary at the annualized rate of
$159,000.00. Such salary shall be paid periodically in accordance with
normal Company payroll practices. The annualized compensation specified in
this Section 2, as such compensation may be increased or decreased by the
Board or the Compensation Committee of the Board, is referred to in this
Agreement as "Base Compensation."
3. EMPLOYEE BENEFITS. The Employee shall be eligible to participate
in the employee benefit plans and executive compensation programs maintained
by the Company applicable to other key executives of the Company, including
(without limitation) retirement plans, savings or profit-sharing plans, stock
option, incentive or other bonus plans, life, disability, health, accident
and other insurance programs, paid vacations, and similar plans or programs,
subject in each case to the generally applicable terms and conditions of the
applicable plan or program in question and to the sole determination of the
Board or any committee administering such plan or program.
4. EMPLOYMENT RELATIONSHIP. The Company and the Employee acknowledge
that the Employee's employment is and shall continue to be at-will, as defined
under applicable law. If the Employee's employment terminates for any reason,
the Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
policies at the time of termination.
5. TERMINATION BENEFITS. Subject to Sections 7 and 8 below, in the event
the Employee's employment terminates as a result of an Involuntary Termination
other than for
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Cause upon or within 12 months after a Change of Control, then the Employee
shall be entitled to receive severance and other benefits as follows:
(a) PAY CONTINUATION. The Employee shall be entitled to monthly
payments equal to the Employee's monthly Base Salary as in effect immediately
prior to the Change of Control. Such monthly amounts shall be paid according to
the normal payroll practice of the Company for eighteen months following the
date of termination (the "Termination Period").
(b) MEDICAL BENEFITS. The Company shall reimburse the Employee for
the cost of the Employee's group health and dental plan coverage in effect until
the end of the Termination Period. The Employee may use this payment, as well
as any other payment made under this Section 5, for such continuation coverage
or for any other purpose.
6. DEFINITION OF TERMS. The following terms referred to in this
Agreement shall have the following meanings:
(a) CAUSE. "Cause" shall mean (i) any act of personal dishonesty
taken by the Employee in connection with his responsibilities as an employee and
intended to result in substantial personal enrichment of the Employee, (ii)
conviction of a felony that is injurious to the Company, (iii) a willful act by
the Employee which constitutes gross misconduct and which is injurious to the
Company, and (iv) continued violations by the Employee of the Employee's
obligations under Section 1 of this Agreement that are demonstrably willful and
deliberate on the Employee's part after there has been delivered to the Employee
a written demand for performance from the Company which describes the basis for
the Company's belief that the Employee has not substantially performed his
duties.
(b) CHANGE OF CONTROL. "Change of Control" shall mean the occurrence
of any of the following events:
(i) The acquisition by any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Company) of the "beneficial ownership" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the total voting power
represented by the Company's then outstanding voting securities; or
(ii) A merger or consolidation of the Company with any other
corporation, other than a merger of consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least fifty percent (50%) of
the total voting power represented by the voting securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or the approval by the stockholders of the Company of a plan of
complete liquidation of the Company or of an
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agreement for the sale or disposition by the Company of all or substantially all
the Company's assets.
(c) DISABILITY. "Disability" shall mean that the Employee has been unable
to substantially perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the Employee
or the Employee's legal representative (such agreement as to acceptability not
to be unreasonably withheld).
(d) EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
(e) INVOLUNTARY TERMINATION. "Involuntary Termination" shall mean (i)
without the Employee's express written consent, the significant reduction of the
Employee's duties or responsibilities relative to the Employee's duties or
responsibilities in effect immediately prior to such reduction; provided,
however, that a reduction in duties or responsibilities solely by virtue of the
Company being acquired and made part of a larger entity (as, for example, when
the Chief Financial Officer of Company remains as such following a Change of
Control and is not made the Chief Financial Officer of the acquiring
corporation) shall not constitute an "Involuntary Termination"; (ii) without the
Employee's express written consent, a substantial reduction, without good
business reasons, of the facilities and perquisites (including office space and
location) available to the Employee immediately prior to such reduction; (iii)
without the Employee's express written consent, a material reduction by the
Company in the Base Compensation of the Employee as in effect immediately prior
to such reduction, or the ineligibility of the Employee to continue to
participate in any long-term incentive plan of the Company; (iv) a material
reduction by the Company in the kind or level of employee benefits to which the
Employee is entitled immediately prior to such reduction with the result that
the Employee's overall benefits package is significantly reduced; (v) the
relocation of the Employee to a facility or a location more than 50 miles from
the Employee's then present location, without the Employee's express written
consent; (vi) any purported termination of the Employee by the Company which is
not effected for death or Disability or for Cause, or any purported termination
for which the grounds relied upon are not valid; or (vii) the failure of the
Company to obtain the assumption of this agreement by any successors
contemplated in Section 9 below.
7. LIMITATION ON PAYMENTS.
(a) In the event that the severance and other benefits provided for in
this Agreement or otherwise payable to the Employee (i) constitute "parachute
payments" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code") and (ii) but for this Section 7 would be subject
to the excise tax imposed by Section 4999 of the Code, then the Employee's
severance benefits under Section 5 shall be payable either (i) in full, or (ii)
as to such lesser amount which would result in no portion of such severance
benefits being subject to excise
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tax under Section 4999 of the Code, whichever of the foregoing amounts, taking
into account the applicable federal, state and local income taxes and the excise
tax imposed by Section 4999, results in the receipt by the Employee on an
after-tax basis, of the greatest amount of severance benefits under this
Agreement, notwithstanding that all or some portion of such severance benefits
may be taxable under Section 4999 of the Code.
(b) The Company shall be entitled to select which payments or benefits
will be reduced and the manner and method of any such reduction of such payments
or benefits. If, as a result of any reduction required by Section 8(a), amounts
previously paid to the Employee exceed the amount to which the Employee is
entitled, the Employee will promptly return the excess amount to the Company.
(c) Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 8 shall be made in writing by the
Company's independent public accountants (the "Accountants"), whose
determination shall be conclusive and binding upon the Employee and the Company
for all purposes. For purposes of making the calculations required by this
Section 7, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Sections 280G and 4999 of the
Code. The Company and the Employee shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 7.
8. CERTAIN BUSINESS COMBINATIONS. In the event it is determined by the Board,
upon receipt of a written opinion of the Company's independent public
accountants, that the enforcement of any Section or subsection of this Agreement
would preclude accounting for any proposed business combination of the Company
involving a Change of Control as a pooling of interests, and the Board otherwise
desires to approve such a proposed business transaction which requires as a
condition to the closing of such transaction that it be accounted for as a
pooling of interests, then any such Section of this Agreement shall be null and
void, but only if the absence of enforcement of such Section would preserve the
pooling treatment. For purposes of this Section 8, the Board's determination
shall require the unanimous approval of the disinterested Board members.
9. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. Any successor to the Company (whether direct or
indirect and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Company's business and assets
shall assume the obligations under this Agreement and agree expressly to perform
the obligations under this Agreement in the same manner and to the same extent
as the Company would be required to perform such obligations in the absence of a
succession. For all purposes under this Agreement, the term "Company" shall
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include any successor to the Company's business and assets which executes and
delivers the assumption agreement described in this Section 9(a) or which
becomes bound by the terms of this Agreement by operation of law.
(b) EMPLOYEE'S SUCCESSORS. The terms of this Agreement and all rights of
the Employee hereunder shall inure to the benefit of, and be enforceable by, the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, devisees and legatees.
10. NOTICE. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
11. MISCELLANEOUS PROVISIONS.
(a) WAIVER. No provision of this Agreement shall be modified, waived or
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Employee and by an authorized officer of the Company (other
than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(b) WHOLE AGREEMENT. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.
(c) CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(d) SEVERABILITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision hereof, which shall remain in full force and effect.
(e) ARBITRATION. Any dispute or controversy arising out of, relating to
or in connection with this Agreement shall be settled exclusively by binding
arbitration in San Mateo County, California, in accordance with the National
Rules for the Resolution of Employment Disputes of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award
in any court having jurisdiction. The Company and the Employee shall
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each pay one-half of the costs and expenses of such arbitration, and each shall
separately pay its counsel fees and expenses. Punitive damages shall not be
awarded.
(f) NO ASSIGNMENT OF BENEFITS. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this Section 11(f) shall be void.
(g) ASSIGNMENT BY COMPANY. The Company may assign its rights under this
Agreement to an affiliate, and an affiliate may assign its rights under this
Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case
of any such assignment, the term "Company" when used in a section of this
Agreement shall mean the corporation that actually employs the Employee.
(h) COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together will constitute one
and the same instrument.
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IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
COMPANY: NETGRAVITY, INC.
By: /s/ John Danner
------------------------------
John Danner, President
EMPLOYEE: /s/ Stephen E. Recht
------------------------------
Stephen E. Recht
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Exhibit 10.9
PROTEGE CONFIDENTIAL
NETGRAVITY Inc. PROFESSIONAL SERVICES AGREEMENT
This PROFESSIONAL SERVICES AGREEMENT (the "Agreement") is made this ____ day of
March 1997 between PROTEGE SOFTWARE (HOLDINGS) LIMITED of Richmond House, St
Anne's Place, St. Peter Port, Guernsey, GY1 2NV Channel Islands (the
"Contractor") and NETGRAVITY Inc. of Delaware, USA ("the Company") who agree as
follows:
1. TERM
The initial term of this Agreement shall begin at the date of signing by
the later of the two parties to sign (the "Effective Date"), and shall end
on the termination of the Agreement by either party in accordance with
Paragraph 7.
2. PROFESSIONAL SERVICES
(a) The Contractor agrees to act as General Manager for the Company and
perform the Professional Services specified in the Work Assignment
Schedule contained in Schedule A, as modified from time to time by
mutual agreement of the parties (the "Professional Services")
including:
(i) to set up a wholly owned subsidiary company of the Company
(subject to local approval) to be called NetGravity Europe
Ltd.;
(ii) to set up such other corporation or entities, or in furtherance
of distribution, marketing or agency relationships with third
parties as the Company and Contractor agree to establish in
the Territory (as defined in Schedule A).
(b) The Contractor shall perform the Professional Services for Company,
and shall in all cases act in a professional manner and such services
shall conform to the standards, specifications and other reasonable
requirements agreed between the parties.
(c) The Contractor agrees to submit monthly progress reports to the
Company.
3. CONTRACTOR'S REWARD
The Company shall reward the Contractor for its activities as contained in
Schedule A.
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4. PROPRIETARY INFORMATION
(a) Each party acknowledges that it may be furnished or may otherwise
receive or have access to confidential or proprietary information
which relates to the other party's business, including (without
limitation) past, present or future business plans, marketing plans,
products, software, research, development, inventions, processes,
techniques, design or other technical information and data, etc. (the
"Proprietary Information"). Each party further acknowledges that all
intellectual property rights residing in the other party's
Proprietary Information are and will remain the exclusive property
of the other party.
(b) Each party agrees to preserve and protect the confidentiality of
the Proprietary Information and all forms thereof, whether
disclosed to it before this Agreement is signed or afterwards. In
addition, it shall not disclose or disseminate the Proprietary
Information to any third party and shall not use the Proprietary
Information for its own benefit (other than in furtherance of the
goals of the other party) or for the benefit of any third party
(other than in furtherance of the goals of the other party).
(c) The foregoing obligations shall not apply to any information which
the recipient can prove (i) is previously publicly known at the
time of receipt from the other party or which subsequently becomes
publicly known through no act or fault of the recipient; (ii) is
given to it by a third party who is not obligated to maintain
confidentiality; or (iii) was independently developed by it without
resort to the Proprietary Information or other resources of the
other and not in the course of performance of the Professional
Services, and not for the other party, (unless the parties have
otherwise agreed that the specific information was to be governed
by this Agreement).
(d) Within three days after the termination of this Agreement (or any
other time at the other party's request), each party shall return
to the other all copies of Proprietary Information in tangible form
in its possession or control. The Contractor hereby assigns to the
Company all its intellectual and other property rights in its work
product performed pursuant to this Agreement, and waives its moral
rights to or in same, and shall require each of its employees (if
any are so permitted by the Company pursuant to Schedule A) working
on this project to sign the Company's standard independent
contractor confidentiality agreement, and assignment of
intellectual property rights and waiver of moral rights.
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(e) Section 4 of this Agreement shall survive the expiry or termination of
the Agreement.
5. WARRANTIES AND COVENANTS
A. THE CONTRACTOR WARRANTS AND COVENANTS THAT:
(i) it is able to perform the Professional Services, as set out in
the agreed business plan;
(ii) that any service it provides and information or materials it
develops for or discloses to the Company shall not in any way
be based upon any confidential or proprietary information
derived from any source other than the Company, unless the
Contractor is specifically authorised in writing by such
source to use such proprietary information and the Contractor
agrees it shall not knowingly furnish or use any such
information in the performance of this Agreement, without the
prior written consent of the Company provided that the
Company agrees the Contractor can use commercially available
software development tools;
(iii) in performance of its obligations hereunder it shall not
infringe any intellectual property right, or trade secret of
any third party;
(iv) it shall perform all work in a professional manner to the best
of its ability; and
(v) that if the Company incurs any liability or expense outside
of the agreed business plan, as a result of any warranty that
the Contractor makes in this Agreement not being true, the
Contractor shall indemnify the Company and hold it harmless
against all such liability or expense, including reasonable
attorney/solicitor fees, provided that the Company notifies
the Contractor of the claim and co-operates with the
Contractor in defending against the claim. Each party shall
notify the other if it ever becomes aware of any such claim.
B. THE COMPANY WARRANTS AND COVENANTS THAT:
(i) it is entitled to appoint the Contractor to perform the
Professional Services in the Territory;
(ii) that any information or materials it discloses to the
Contractor shall not in any way be based upon any confidential
or proprietary information
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derived from any source other than the Contractor or the
Company, unless the Company is specifically authorised in
writing by such source to use such proprietary information;
(iii) in performance of its obligations and the provision of
information to the Contractor hereunder it will not infringe
any intellectual property right, or trade secret of any
third party;
(iv) if the Contractor incurs any liability or expense as a result
of any warranty the Company makes in this Agreement not being
true, the Company shall indemnify the Contractor and hold it
harmless against all such liability or expense, including
reasonable attorney/solicitor fees, provided that the
Contractor notifies the Company of the claim and cooperates
with the Company in defending against the claim. Each party
shall notify the other if it ever becomes aware of any such
claim; and
(v) it will sell it's products and services in the Territory only
through NetGravity Europe Ltd. In respect of any sales
received by the Company and its Group generated on a world-wide
basis, the parties agree that 30% - 50% of the European
revenues will be included in the calculation of Net Revenue for
the purposes of the Schedule. The precise figure will be
mutually agreed by both parties acting in good faith.
6. LOANED EQUIPMENT
If the Company loans the Contractor any item, the Contractor shall sign the
Company's standard equipment loan agreement and return the loaned equipment
promptly on termination of this Agreement. The same shall apply to any
item loaned by the Contractor to the Company or NetGravity Europe.
7. TERMINATION AND RENEWAL
(a) The Initial Term shall be for a 12 month period from the Effective
Date (the "Initial Term").
(b) This Agreement shall automatically continue, following the expiry of
the Initial Term for subsequent periods of 12 months ("Renewal Terms")
each unless terminated in accordance with the terms set out below.
(c) This Agreement may be terminated by either party, as follows:
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(i) without cause, after the Initial Term, on at least 3 months
written notice, provided that if the Company fails to renew any
Renewal Term, it shall provide at least 3 months notice or
payment in lieu thereof.
(ii) during the Initial Term, or any Renewal Term, if the other party
has not performed any material covenant when performance was
due or has otherwise breached any material term of this
Agreement, the following procedures shall apply:
(A) the non-defaulting party shall provide written notice
of the event or circumstances representing such breach
or non-performance together with a demand that such
breach or non-performance be cured immediately;
(B) if the breach or non-performance has not been cured (or
other arrangements satisfactory to the non-defaulting
party have not been agreed to) within 30 days from the
date of the notice delivered under clause (A) above,
immediately upon delivery of a second written notice
terminating this Agreement.
8. MISCELLANEOUS
(a) The laws of England and Wales shall govern this Agreement and the
parties hereby submit to the exclusive jurisdiction of the English
Courts.
(b) This Agreement, including Schedule A attached hereto, is the entire
agreement between the parties. Any change in the Agreement must be
made in writing and signed by both the Company and the Contractor.
(c) If either party cannot perform of its respective obligations due to
causes beyond its reasonable control which shall not include the
reward to the Contractor under Schedule A, then the non-performing
party shall (i) notify the other party, (ii) take reasonable steps to
resume performance as soon as possible, and (iii) not be considered in
breach during the period performance is beyond the party's reasonable
control.
(d) If any provision of this Agreement shall be deemed by a court to be
too broad, the court is hereby authorised to limit any scope,
duration or area of applicability, or all of them, so such provision
is no longer overly broad and to enforce the same as so limited.
Subject to the prior sentence, if any part of this Agreement is held
unenforceable for any reason, such unenforceability shall
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void only such part and shall not render unenforceable any other part
of this Agreement.
(e) Either party's waiver of a default by the other does not constitute a
waiver of future or other defaults.
(f) The parties shall not, for 12 months after the Agreement ends,
directly solicit for employment or any other engagement for work, any
employee or any employee of any affiliate of the other party. In this
Agreement, Affiliate means a company under the ultimate common control
of the other party of which the party has been notified.
(g) The Contractor shall not assign its rights or obligations under this
Agreement unless it first obtains the prior written agreement of the
Company.
(h) Any notice or other communication required or permitted to be given by
his Agreement (including the signing of this Agreement) shall be in
writing and shall be effectively given if delivered personally, by
facsimile confirmed received, or by registered mail to the party at
the relevant party's address below.
Dated at San Mateo, CA, USA this 27 day of March 1997
/s/ Stephen E. Recht
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duly authorised for and on behalf of
NETGRAVITY INC. of
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Dated at San Mateo, this 27 day of March 1997
/s/ [Signature Illegible]
- -----------------------------------
duly authorised for and on behalf of
PROTEGE SOFTWARE (HOLDINGS) LIMITED
of Richmond House, St. Anne's Place, St. Peter Port,
Guernsey, GY1 2NV, Channel Islands
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SCHEDULE A
WORK ASSIGNMENT SCHEDULE
Territory - For purposes of this Agreement, Territory means Europe, Africa and
the Middle East, subject to then prevailing export regulations in Canada, the
United States or countries in which NetGravity Europe resides. Europe means
those countries set out in Schedule B. Middle East means all Arab League
countries, Turkey and Israel.
Analysis and Recommendations re:
* Marketing positioning;
* Presentation;
* Technical Support;
* Competitiveness;
* Localisation
Implementation of approved Recommendations:
* Sales,
* Marketing,
* Technical Support,
* Production,
* Finance and Administration
all for operations, in the Territory, as more particularly set out in the annual
business plans (including budgets) of the Company as said plans and budgets
relate to its operations implemented directly or through:
* NetGravity Europe, and/or
* such other corporations or entities, or in furtherance of distribution,
marketing or agency relationships with such third parties, as the Company
and the Contractor agree to establish in the Territory;
The business plan and budgets shall be mutually agreed upon by Contractor and
Company.
This implementation will include, but not necessary be limited to, the
following:
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SCOPE OF ACTIVITIES
During the term, Contractor shall perform the following activities in the
Territory:
* Establishment of an organisation for the Territory, to complement the
current resources, technology and economic considerations of the Company,
and the circumstances that prevail in the Territory.
* Achieving this by the setting up of NetGravity Europe Ltd to initially be a
UK based wholly owned subsidiary of the Company, to serve as the
Territorial headquarters so that Company may professionally provide the
following:
(a) solicitation of sales orders;
(b) provision of support for Company's distributors and dealers in the
Territory;
(c) co-ordination of product and warranty service between NetGravity
Europe and such other affiliated or third party, arms length
corporations or entities, and licensees and distributors/VARs etc.
of the Company's products, located in the Territory;
(d) provision of product technical support services;
(e) the conducting of periodic training courses and seminars regarding
applications and operations of the products in major marketing centres
located in the Territory for the benefit of distributors and dealers
etc.;
(f) development of business plans for the Territory;
(g) management and co-ordination of the implementation of the Company's
marketing strategy in the Territory (for the products of Company
handled by Contractor);
(h) localisation of products;
(i) set up of systems (such as accounting legal and human resources
consistent with those set-up by the Company); the Contractor shall
assist NetGravity Europe (and other related entities as agreed
following Company's request) with implementation and administration of
all general, administrative and financial systems as requested by
Company; and
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SOLICITATION OF CONTRACTS
(a) NetGravity Europe shall solicit orders for product only at such current
prices as may be periodically established in writing by the Company and
notified to the Contractor.
(b) All orders solicited by NetGravity Europe from customers in the Territory
are subject to acceptance or rejection by an officer or other authorised
person at the principal office of the Company, which approval or rejection
shall in all cases be in writing, and no order shall be binding upon
NetGravity Europe until so accepted. The Company and NetGravity Europe
reserve the right to refuse any order originating in the Territory, either
for lack of credit of the customer or for any other reason which, in the
judgement of the Company or NetGravity Europe is reasonable grounds for
refusal. The Contractor agrees to cause NetGravity Europe to fully inform
all customers it solicits of the substance of this sub-paragraph and to
furnish NetGravity Europe and the Company with such periodic reports of its
activity and other information as the Company may reasonably request.
(c) The Contractor agrees to dispatch all inquiries received by it, applicable
to the Company or the products of the Company, from points or sources
outside the Territory promptly to the Company for attention and handling.
(d) Neither NetGravity Europe nor the Company is under any obligation to the
Contractor to continue its business or to manufacture, sell or supply, or
to continue to manufacture, sell or supply any of the products nor shall
any warranty of any nature as to any products run from NetGravity Europe,
the Company, or their affiliates to the Contractor, and neither the Company
nor its affiliates are under any obligations to the Contractor to continue,
discontinue, or change any model or type of any of the products.
(e) All invoices in connection with sales to customers in the Territory shall
be rendered by NetGravity Europe to such customers. It is expressly
understood that full power by and such authority for all collections rest
with NetGravity Europe and the Company, which exercises complete control
over the approval of all customers' credit, orders, and contracts. The
Contractor agrees to protect NetGravity Europe and the Company, as far as
is reasonable by reporting adverse credit information of which it is aware
with respect to customers in the Territory.
10
<PAGE>
CONTRACTOR REWARD SCHEDULE
1. MONETARY FEE
A. Contractor shall be paid a commission equal to 5% of annual Net
Revenue NetGravity Europe, subject to a minimum of 75,000 Pounds ("the
minimum commission") and a maximum of 150,000 Pounds in each year of
the Initial Term and any Renewal Term.
B. In this Agreement, the currency is in UK pounds sterling.
C. Payment of commission shall be made to Contractor as follows:
(i) monthly in arrears, on the basis of estimated commission
subject to an annual adjustment and repayment of any over
payment
(ii) within 30 days after the end of each calendar quarter, the
parties shall calculate the actual commission due to
Contractor, and the balance due shall be paid or repaid before
the end of said 30th day.
D. Net Revenue means gross revenue from licenses of NetGravity Europe
product, net of returns, allowances, credits, discounts (based on
volume or otherwise), RMAs and net of any bad debt reserve or actual
bad debts. All reserves will be calculated on a consistent basis in
accordance with generally accepted accounting principles.
2. BONUS
A. In addition to the commission referred to above, Contractor shall also
be paid a bonus, calculated as set out below.
B. The bonus shall be calculated as a percentage of revenue, as defined
in the Table below, of one times the Annualised Net revenue of
NetGravity Europe. Annualised Net Revenue means Net Revenue for the
12 months immediately prior to the date on which the bonus payment
obligation is triggered.
C. TERM OF SERVICE % BONUS
0-12 months 20%
GREATER THAN 12-18 months 15%
GREATER THAN 18 months 10%
11
<PAGE>
D. The bonus payment can be triggered either:
(a) by the Contractor at any time after the date 24 months after
the Effective Date
(a) on termination of the agreement as defined in paragraph 7
(c) change of control of the Company.
E. Triggering by the Contractor of the bonus payment shall constitute an
event which entitles (but does not require) Company to terminate this
Agreement without payment of additional compensation to Contractor.
F. Company may, at its option, pay the bonus in either cash or in shares
of the Company or any successor company.
3. EXPENSE REIMBURSEMENT
The Company will reimburse Contractor within thirty (30) days after the end
of each fiscal month an amount equal to one hundred per cent (100%) of all
costs approved within the agreed business plan or otherwise agreed to by
the Company, and reasonably incurred by Contractor in good faith and
reasonable fulfilment of Contractor's obligations under this Agreement.
For the avoidance of doubt, the cost and expense of the provision of a
managing director by the Contractor shall not be recharged to the Company
and shall be treated as comprised in commission. The Contractor will keep
records of (and receipts for) all costs in incurs in its performance of the
services and will provide copies of such records to the Company upon
reasonable request.
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SCHEDULE B
EUROPE MEANS
Such of the countries listed below, except to the extent that Sales of the
Company's products are prohibited pursuant to the laws of the United States or
other jurisdiction applicable to the Company's operations.
Albania Liechtenstein
Andorra Lithuania
Armenia Luxembourg
Austria Macedonia
Azerbaijan Malta & Gozo
Belarus Moldova
Belgium Monaco
Bosnia The Netherlands
Bulgaria Norway
Byclorussia Poland
Croatia Portugal
Cyprus Romania
Czech Republic Russia Federation
Denmark San Marino
Estonia Serbia
Federal Republic of Yugoslavia Slovak Republic
Finland Slovenia
France Spain
Germany Sweden
Gibraltar Switzerland
Greece Tajikistan
Hungary Turkey
Iceland Turkmenistan
Republic of Ireland Ukraine
Italy United Kingdom
Kazakhstan Uzbekistan
Kyrgyzstan Vatican City State
Latvia
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<PAGE>
Exhibit 10.10
NETGRAVITY, INC.
COMMON STOCK REPURCHASE AGREEMENT AND
CLARIFICATION OF FOUNDER'S STOCK PURCHASE AGREEMENT
MARCH 12, 1997
This Agreement (the "AGREEMENT") is made as of the date first written above
by and between NetGravity, Inc., a Delaware corporation (the "COMPANY"), and
John W. Danner ("FOUNDER") (together, the "PARTIES").
RECITALS
A. Founder is the owner and holder of record of 3,597,900 shares of Common
Stock of the Company (the "SHARES") purchased pursuant to a Founder's Stock
Purchase Agreement by and between the Company and the Founder dated
September 29, 1995 (the "FOUNDERS STOCK PURCHASE AGREEMENT").
B. The Founders Stock Purchase Agreement provides that the Shares are subject
to a right of repurchase in favor of the Company (the "REPURCHASE OPTION")
and that 75,000 of the Shares shall be released from the Repurchase Option
each month, subject to the terms and conditions of the Founders Stock
Purchase Agreement.
C. Founder now desires to transfer and resell to the Company 196,268 of the
Shares as to which the Repurchase Option has not lapsed (the "TRANSFERRED
SHARES").
D. Founder and the Company desire to acknowledge their mutual understanding
that the absolute rate at which Shares are released from the Repurchase
Option shall not be affected by the resale effected hereunder.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises set forth below, the
Parties hereby agree as follows:
1. PURCHASE AND SALE OF TRANSFERRED SHARES. Subject to the terms and
conditions contained herein, and for the consideration set forth below, Founder
hereby sells, transfers, delivers and assigns all of his right, title and
interest in and to the Transferred Shares to the Company, and the Company hereby
purchases such Transferred Shares from Founder. In consideration of the sale of
the Transferred Shares from Founder to the Company, the Company hereby delivers
to Founder, and
<PAGE>
Founder hereby accepts from the Company. cash payment of the purchase price of
ten cents ($0.10) per share for the Transferred Shares, or a total of
$19,626.80.
2. TRANSFERRED SHARES FROM UNVESTED SHARES; SUBSEQUENT VESTING RATE. The
Parties agree that the Transferred Shares shall be deemed to have come from that
portion of the Shares not yet released from the Repurchase Option. The Parties
further agree that, subject to the other terms and conditions of the Founders
Stock Purchase Agreement, the absolute number of Shares released from the
Repurchase Option each month shall continue to be 75,000 and shall be unaffected
by the sale of the Transferred Shares to the Company.
3. REPRESENTATIONS AND WARRANTIES OF FOUNDER. Founder hereby represents and
warrants to the Company that:
3.1 SHARES VALIDLY ISSUED. The Transferred Shares being sold by Founder
pursuant to this Agreement have been duly and validly issued by the Company and
are fully paid and nonassessable.
3.2 POWER AND AUTHORITY TO TRANSFER. This Agreement, when executed and
delivered by Founder, shall constitute a valid and binding obligation of the
Founder, enforceable in accordance with its terms, subject to laws of general
application relating to bankruptcy, insolvency and the relief of debtors and
rules of law governing specific performance, injunctive relief or other
equitable remedies.
3.3 EFFECT OF TRANSFER. The delivery of the Transferred Shares to the
Company by Founder as contemplated by this Agreement will transfer to the
Company good, valid and absolute title to, and beneficial ownership of, the
Transferred Shares, free and clear of all liens and encumbrances whatsoever,
except those that may be created by the Company itself.
3.4 ACCESS TO AND REVIEW OF COMPANY INFORMATION; SOPHISTICATION. By
virtue of his position within the Company, Founder has access to, and has
actually reviewed, such information regarding the Company and its Common Stock
that the Founder deemed appropriate in connection with the transactions
contemplated by this Agreement. Founder has a prior business and/or personal
relationship with the Company and/or its officers and directors and has the
capacity to protect his own interests in connection with the sale of the
Transferred Shares.
3.5 TAX CONSEQUENCES. To the extent he deemed appropriate, Founder has
reviewed with his own tax advisors the federal, state, and local tax
consequences of the sale of the Transferred Shares to the Company. Founder is
relying solely on such advisors and not on any statements or representations of
the Company or any of its agents. Founder understands that he (and not the
Company) shall be responsible for his own tax liability that may arise as a
result of the transactions contemplated by this Agreement.
2
<PAGE>
4. MISCELLANEOUS.
4.1 ENTIRE AGREEMENT This Agreement represents the entire agreement
between the Parties with respect to the subject matter hereof, and may only be
amended in a writing signed by the Party to be charged.
4.2 GOVERNING LAW. This Agreement shall be governed in all respects by
the internal laws of the State of California without regard to conflict of laws
provisions.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
effective as of the date first written above.
NETGRAVITY, INC. (THE "COMPANY")
By: /s/ Stephen E. Recht
-----------------------------
Stephen Recht, Chief Financial Officer and
Secretary
JOHN W. DANNER ("FOUNDER")
/s/ John Danner
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3
<PAGE>
Exhibit 10.11
NETGRAVITY, INC.
COMMON STOCK REPURCHASE AGREEMENT AND
CLARIFICATION OF FOUNDER'S STOCK PURCHASE AGREEMENT
MARCH 12, 1997
This Agreement (the "AGREEMENT") is made as of the date first written above
by and between NetGravity, Inc., a Delaware corporation (the "COMPANY"), and
Thomas A. Shields ("FOUNDER") (together, the "PARTIES").
RECITALS
A. Founder is the owner and holder of record of 1,800,000 shares of Common
Stock of the Company (the "SHARES") purchased pursuant to a Founder's Stock
Purchase Agreement by and between the Company and the Founder dated
September 29, 1995 (the "FOUNDERS STOCK PURCHASE AGREEMENT").
B. The Founders Stock Purchase Agreement provides that the Shares are subject
to a right of repurchase in favor of the Company (the "REPURCHASE OPTION")
and that 37,500 of the Shares shall be released from the Repurchase Option
each month, subject to the terms and conditions of the Founders Stock
Purchase Agreement.
C. Founder now desires to transfer and resell to the Company 785,072 of the
Shares as to which the Repurchase Option has not lapsed (the "TRANSFERRED
SHARES").
D. Founder and the Company desire to acknowledge their mutual understanding
that the absolute rate at which Shares are released from the Repurchase
Option shall not be affected by the resale effected hereunder.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises set forth below, the
Parties hereby agree as follows:
1. PURCHASE AND SALE OF TRANSFERRED SHARES. Subject to the terms and
conditions contained herein, and for the consideration set forth below, Founder
hereby sells, transfers, delivers and assigns all of his right, title and
interest in and to the Transferred Shares to the Company, and the Company hereby
purchases such Transferred Shares from Founder. In consideration of the sale of
the Transferred Shares from Founder to the Company, the Company hereby delivers
to Founder, and
<PAGE>
Founder hereby accepts from the Company. cash payment of the purchase price of
ten cents ($0.10) per share for the Transferred Shares, or a total of
$78,507.20.
2. TRANSFERRED SHARES FROM UNVESTED SHARES; SUBSEQUENT VESTING RATE. The
Parties agree that the Transferred Shares shall be deemed to have come from that
portion of the Shares not yet released from the Repurchase Option. The Parties
further agree that, subject to the other terms and conditions of the Founders
Stock Purchase Agreement, the absolute number of Shares released from the
Repurchase Option each month shall continue to be 37,500 and shall be unaffected
by the sale of the Transferred Shares to the Company.
3. REPRESENTATIONS AND WARRANTIES OF FOUNDER. Founder hereby represents and
warrants to the Company that:
3.1 TAS
3.2 POWER AND AUTHORITY TO TRANSFER. This Agreement, when executed and
delivered by Founder, shall constitute a valid and binding obligation of the
Founder, enforceable in accordance with its terms, subject to laws of general
application relating to bankruptcy, insolvency and the relief of debtors and
rules of law governing specific performance, injunctive relief or other
equitable remedies.
3.3 EFFECT OF TRANSFER. The delivery of the Transferred Shares to the
Company by Founder as contemplated by this Agreement will transfer to the
Company good, valid and absolute title to, and beneficial ownership of, the
Transferred Shares, free and clear of all liens and encumbrances whatsoever,
except those that may be created by the Company itself.
3.4 ACCESS TO AND REVIEW OF COMPANY INFORMATION; SOPHISTICATION. By
virtue of his position within the Company, Founder has access to, and has
actually reviewed, such information regarding the Company and its Common Stock
that the Founder deemed appropriate in connection with the transactions
contemplated by this Agreement. Founder has a prior business and/or personal
relationship with the Company and/or its officers and directors and has the
capacity to protect his own interests in connection with the sale of the
Transferred Shares.
3.5 TAX CONSEQUENCES. To the extent he deemed appropriate, Founder has
reviewed with his own tax advisors the federal, state, and local tax
consequences of the sale of the Transferred Shares to the Company. Founder is
relying solely on such advisors and not on any statements or representations of
the Company or any of its agents. Founder understands that he (and not the
Company) shall be responsible for his own tax liability that may arise as a
result of the transactions contemplated by this Agreement.
2
<PAGE>
4. MISCELLANEOUS.
4.1 ENTIRE AGREEMENT This Agreement represents the entire agreement
between the Parties with respect to the subject matter hereof, and may only be
amended in a writing signed by the Party to be charged.
4.2 GOVERNING LAW. This Agreement shall be governed in all respects by
the internal laws of the State of California without regard to conflict of laws
provisions.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
effective as of the date first written above.
NETGRAVITY, INC. (THE "COMPANY")
By: /s/ Stephen E. Recht
-----------------------------------
Stephen Recht, Chief Financial Officer and
Secretary
THOMAS A. SHIELDS ("FOUNDER")
/s/ Thomas A. Shields
- --------------------------------------
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<PAGE>
[NetGravity Logo] [LETTERHEAD]
NETGRAVITY, INC.
EMPLOYMENT AGREEMENT
This Agreement is made by and between NetGravity, Inc., a Delaware
corporation (the "Company"), and Susan Atherton ("Executive").
1. DUTIES AND SCOPE OF EMPLOYMENT. The Company shall employ the
Executive as the Vice President of North American Sales, reporting to the
President and Chief Executive Officer of the Company, and assuming and
discharging such responsibilities as are commensurate with such position.
Executive shall comply with and be bound by the Company's operating policies,
procedures and practices as in effect from time to time during the term of
Executive's employment hereunder. During the term of Executive's employment
with the Company, Executive shall devote her full business time, skill and
attention to her duties and responsibilities, and shall perform them
faithfully, diligently and competently, and Executive shall use her best
efforts to further the business of the Company and its affiliated entities.
Executive's employment with the Company pursuant to this Agreement shall
commence on [April 22, 1998] (the "Effective Date").
2. AT-WILL EMPLOYMENT. Executive and the Company understand and
acknowledge that Executive's employment with the Company constitutes "at-will"
employment. Executive and the Company acknowledge that this employment
relationship may be terminated at any time, with or without good cause or for
any or no cause, and with or without notice, at the option either of the Company
or Executive.
3. COMPENSATION, FRINGE BENEFITS AND STOCK OPTIONS.
(a) BASE SALARY. While employed by the Company pursuant to this
Agreement, the Company shall pay the Executive as compensation for her
services a base salary at the annualized rate of $150,000 (the "Base
Salary"). Such salary shall be paid periodically in accordance with normal
Company payroll practices and subject to the usual, required withholding.
Executive understands and agrees that neither her job performance nor
promotions, commendations, bonuses or the like from the Company give rise to
or in any way serve as the basis for modification, amendment, or extension,
by implication or otherwise, of this Agreement.
(b) COMMISSION. In addition to the Base Salary, the Company shall
pay the Executive, on account of the first partial year while employed
hereunder ending March 31, 1999, an annual commission with at-plan payment
equal to $125,000, pro-rated for such partial year (the "Commission"), to be
paid quarterly, at the end of each fiscal quarter of the Company, subject to
Executive meeting or exceeding plan sales targets to be mutually agreed upon
by the Company and Executive. Notwithstanding the above, the Company shall
automatically pay Executive a pro-rated share of the at-plan $31,250
commission on account of the quarter ending June 30, 1998, subject to
Executive remaining employed with the Company through the end of such fiscal
quarter (the "Guaranteed Commission"). The amount of the Guaranteed
Commission shall be offset against the Commission that may be earned under
the first sentence of his paragraph. Commissions for future years shall be
mutually agreed upon by the parties hereto, subject to Executive remaining
employed by the Company in such years. Any commission paid to the Executive
pursuant to this Agreement shall be subject to the usual, required
withholding.
<PAGE>
[NetGravity Logo]
(c) EXECUTIVE BENEFITS. During her employment hereunder, Executive
shall be eligible to participate in the employee benefit plans maintained by
the Company of general applicability to other key executives of the Company.
(d) STOCK OPTION. As of the Effective Date, Executive shall be
granted a stock option, which shall be, to the extent possible under the
$100,000 rule of Section 422(d) of the Internal Revenue Code of 1986, as
amended (the "Code") an "incentive stock option" (as defined in Section 422
of the Code), to purchase a total of 388,965 shares of the Company's Common
Stock at an exercise price of $3.00 per share on the date of grant (the
"Option"). The Option shall have a term of ten years, or shorter upon
termination of Executive's employment or consulting relationship with the
Company. Subject to the accelerated vesting provisions set forth in Section 5
of this Agreement, the Option will vest as to 25% of the shares originally
subject to the Option on the first anniversary of the Effective Date and as
to 1/48th of the shares originally subject to the Option monthly thereafter,
so as to be 100% vested on the fourth anniversary of the Effective Date,
subject to Executive continuing to render services to the Company as an
employee or consultant on such vesting dates. Alternatively, at the election
of the Executive, the option may be exercised in whole or in part at any time
as to shares which have not yet vested, subject to the Executive entering
into a restricted stock purchase agreement in the form supplied by the
Company with respect to such shares (the "Restricted Stock Purchase
Agreement"). This stock option grant is in all respects subject to the terms,
definitions and provisions of the Company's 1995 Stock Option Plan (the
"Option Plan") and the stock option agreement by and between Executive and
the Company (the "Option Agreement"), both of which documents are
incorporated herein by reference.
4. EXPENSES. The Company will pay or reimburse Executive for reasonable
travel, entertainment or other expenses incurred by Executive in the furtherance
of or in connection with the performance of Executive's duties hereunder in
accordance with the Company's established policies.
5. SEVERANCE BENEFITS.
(a) INVOLUNTARY TERMINATION. If Executive's employment with the
Company terminates other than voluntarily or for "Cause" (as defined herein)
within six (6) months of the Effective Date (an "Involuntary Termination"), then
(i) 12.5% of the shares subject to the stock option granted pursuant to Section
3(d) of this Agreement will accelerate and become fully vested.
(b) VOLUNTARY TERMINATION; TERMINATION FOR CAUSE WITHIN SIX
MONTHS, TERMINATION AFTER SIX MONTHS. If Executive's employment with the
Company terminates (i) voluntarily by Executive, (ii) for "Cause" (as defined
herein) by the Company within six months of the Effective Date, or (iii)
involuntarily by the Company at least six months following the Effective Date
(whether or not for Cause) then Executive shall only be eligible for
severance benefits in accordance with the Company's established policies as
then in effect. For this purpose, "Cause" is defined as (i) an act of
dishonesty made by Executive in connection with Executive's responsibilities
as an employee, (ii) Executive's conviction of, or plea of NOLO CONTENDERE
to, a felony, (iii) Executive's serious misconduct, (iv) Executive's continued
violations of her employment duties after Executive has received a written
demand for performance from the Company which specifically sets forth the
factual basis for the Company's belief that Executive has not substantially
performed her duties, (v) Executive's death or permanent and total disability.
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[NetGravity Logo]
(c) TERMINATION FOLLOWING A CHANGE OF CONTROL.
(i) INVOLUNTARY TERMINATION. If the Executive's employment
with the Company terminates as a result of an Involuntary Termination at any
time within twelve (12) months after a "Change of Control" (as defined
below), then the Executive shall be entitled to receive a lump-sum severance
payment equal to eighteen (18) months of the Executive's base salary (as in
effect immediately prior to the Change of Control). Notwithstanding the
foregoing, if it is determined by the Company's independent auditors that the
Company's hiring of a new Chief Executive Officer, if any, within six (6)
months of the Effective Date would preclude accounting for a Change of
Control subsequent to such hiring as a "pooling of interests" for financial
accounting purposes, then the parties hereto agree to renegotiate this
section 5(c)(i) in its entirety in good faith.
(ii) OTHER TERMINATION. If the Executive's employment with the
Company terminates either other than as a result of an Involuntary Termination
at any time within twelve (12) months after a Change of Control, then the
Executive shall not be entitled to receive severance or other benefits
hereunder, and shall only be eligible for those benefits (if any) as may then be
established under the Company's then existing severance and benefits plans and
policies at the termination date.
(iii) DEFINITION OF CHANGE OF CONTROL. For this purpose,
"Change of Control of the Company is defined as:
(A) Any "person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing 50% or more of the total
voting power represented by the Company's then outstanding voting securities; or
(B) The date of the consummation of a merger or
consolidation of the Company with any other corporation that has been approved
by the stockholders of the Company, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least fifty
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation, or the stockholders of the Company approve a plan of complete
liquidation of the Company; or
(C) The date of the consummation of the sale or
disposition by the Company of all or substantially all the Company's assets (if
Executive transfers employment to the purchaser.)
6. DEATH OF EXECUTIVE. If Executive dies during the term of this
Agreement, this Agreement shall terminate immediately and all payments of
compensation by the Company to the Executive hereunder shall immediately
terminate. Executive shall only be eligible for severance benefits in accordance
with the Company's established policies as then in effect.
7. ENFORCEMENT. In the event of any action to enforce the terms of this
Agreement, the prevailing party in such action shall be entitled to such party's
reasonable costs and expenses of enforcement including, without limitation,
reasonable attorney's fees.
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<PAGE>
[NetGravity Logo]
8. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of (a) the heirs, executors and legal representatives of Executive upon
Executive's death and (b) any successor of the Company. Any such successor of
the Company shall be deemed substituted for the Company under the terms of this
Agreement for all purposes. As used herein, "successor" shall include any
person, firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly, acquires all or
substantially all of the assets or business of the Company. None of the rights
of Executive to receive any form of compensation payable pursuant to this
Agreement shall be assignable or transferable except through a testamentary
disposition or by the laws of descent and distribution upon the death of
Executive following termination without cause. Any attempted assignment,
transfer, conveyance or other disposition (other than as aforesaid) of any
interest in the rights of Executive to receive any form of compensation
hereunder shall be null and void.
9. NOTICES. All notices, requests, demands and other communications
called for hereunder shall be in writing and shall be deemed given if delivered
personally, one (1) day after mailing via Federal Express overnight or a similar
overnight delivery service, or three (3) days after being mailed by registered
or certified mail, return receipt requested, prepaid and addressed to the
parties or their successors in interest at the following addresses, or at such
other addresses as the parties may designate by written notice in the manner
aforesaid:
If to the Company: NetGravity
1700 S. Amphlett Blvd., Suite 350
San Mateo, CA 94402
ATTN: John Danner
If to Executive: Susan Atherton
at the last residential address known by the Company.
10. SEVERABILITY. In the event that any provision hereof becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
11. CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT. Executive agrees
to enter into the Company's standard Employment, Confidential Information and
Invention Assignment Agreement (the "Confidential Information Agreement") upon
commencing employment hereunder.
12. ENTIRE AGREEMENT. This Agreement, the Stock Option Plan, the Option
Agreement, the Restricted Stock Agreement (if any) and the Confidential
Information Agreement represent the entire agreement and understanding between
the Company and Executive concerning Executive's employment relationship with
the Company, and supersede and replace any and all prior agreements and
understandings concerning Executive's employment relationship with the Company.
13. ARBITRATION AND EQUITABLE RELIEF.
(a) Except as provided in Section 13(d) below, Executive agrees that
any dispute or controversy arising out of, relating to, or in connection with
this Agreement, or the interpretation, validity, construction, performance,
breach, or termination thereof shall be settled by arbitration to be held in San
Mateo
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<PAGE>
[NetGravity Logo]
County, California, in accordance with the National Rules for the Resolution of
Employment Disputes then in effect of the American Arbitration Association (the
"Rules"). The arbitrator may grant injunctions or other relief in such dispute
or controversy. The decision of the arbitrator shall be final, conclusive and
binding on the parties to the arbitration. Judgment may be entered on the
arbitrator's decision in any court having jurisdiction.
(b) The arbitrator shall apply California law to the merits of any
dispute or claim, without reference to rules of conflict of law. The
arbitration proceedings shall be governed by federal arbitration law and by
the Rules, without reference to state arbitration law. Executive hereby
expressly consents to the personal jurisdiction of the state and federal
courts located in California for any action or proceeding arising from or
relating to this Agreement and/or relating to any arbitration in which the
parties are participants.
(c) The Company and Executive shall each pay one-half of the costs
and expenses of such arbitration, and shall separately pay its counsel fees and
expenses.
(d) Executive understands that nothing in Section 13 modifies
Executive's at-will status. Either the Company or Executive can terminate the
employment relationship at any time, with or without cause.
(e) EXECUTIVE HAS READ AND UNDERSTANDS SECTION 13, WHICH DISCUSSES
ARBITRATION. EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EXECUTIVE
AGREES TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION
WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE,
BREACH, OR TERMINATION THEREOF TO BINDING ARBITRATION, AND THAT THIS ARBITRATION
CLAUSE CONSTITUTES A WAIVER OF EXECUTIVE'S RIGHT TO A JURY TRIAL AND RELATES TO
THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE EMPLOYER/EXECUTIVE
RELATIONSHIP, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING CLAIMS:
(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT;
BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD
FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL
INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL MISREPRESENTATION;
NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR PROSPECTIVE ECONOMIC
ADVANTAGE; AND DEFAMATION.
(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL, STATE OR
MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS
ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN EMPLOYMENT
ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE FAIR LABOR
STANDARDS ACT;
(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND
REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
14. NO ORAL MODIFICATION, CANCELLATION OR DISCHARGE. This Agreement may
only be amended, canceled or discharged in writing signed by Executive and the
Company.
15. GOVERNING LAW. This Agreement shall be governed by the internal
substantive laws, but not the choice of law rules, of the State of California.
-5-
<PAGE>
[NetGravity Logo]
16. EFFECTIVE DATE. This Agreement is effective immediately after it has
been signed.
17. ACKNOWLEDGMENT. Executive acknowledges that he has had the
opportunity to discuss this matter with and obtain advice from her private
attorney, has had sufficient time to, and has carefully read and fully
understands all the provisions of this Agreement, and is knowingly and
voluntarily entering into this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
respective dates set forth below.
NETGRAVITY, INC.
By: /s/ John Danner
----------------------
Name: John Danner
--------------------
Title: CEO
-------------------
SUSAN ATHERTON
/s/ Susan Atherton
-------------------------
Signature
-6-
<PAGE>
EXHIBIT 21.1
List of Subsidiaries.
NetGravity Europe Ltd.
NetGravity Asia Pacific K.K.
<PAGE>
The Board of Directors and Stockholders
NetGravity, Inc.:
When the reverse stock split referred to in Note 8 of the Notes to
Consolidated Financial Statements has been consummated, we will be in a position
to render the following consent.
KPMG PEAT MARWICK LLP
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
NetGravity, Inc.:
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
San Francisco, California
April 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,637
<SECURITIES> 0
<RECEIVABLES> 2,962
<ALLOWANCES> (223)
<INVENTORY> 0
<CURRENT-ASSETS> 8,531
<PP&E> 2,073
<DEPRECIATION> (717)
<TOTAL-ASSETS> 9,887
<CURRENT-LIABILITIES> 6,309
<BONDS> 0
0
11
<COMMON> 4
<OTHER-SE> 4,505
<TOTAL-LIABILITY-AND-EQUITY> 9,887
<SALES> 0
<TOTAL-REVENUES> 6,358
<CGS> 0
<TOTAL-COSTS> (2,572)
<OTHER-EXPENSES> 10,658
<LOSS-PROVISION> 67
<INTEREST-EXPENSE> 107
<INCOME-PRETAX> (6,882)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,882)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,882)
<EPS-PRIMARY> (2.46)
<EPS-DILUTED> (2.46)<F1>
<FN>
<F1>PRO FORMA DILUTED NET LOSS PER SHARE OF ($1.00)
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,318
<SECURITIES> 0
<RECEIVABLES> 3,949
<ALLOWANCES> (137)
<INVENTORY> 0
<CURRENT-ASSETS> 10,349
<PP&E> 2,423
<DEPRECIATION> (940)
<TOTAL-ASSETS> 11,832
<CURRENT-LIABILITIES> 7,667
<BONDS> 0
0
13
<COMMON> 4
<OTHER-SE> 3,542
<TOTAL-LIABILITY-AND-EQUITY> 11,832
<SALES> 0
<TOTAL-REVENUES> 2,003
<CGS> 0
<TOTAL-COSTS> 1,173
<OTHER-EXPENSES> 3,660
<LOSS-PROVISION> 121
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> (2,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,800)
<EPS-PRIMARY> (0.93)
<EPS-DILUTED> (0.93)<F1>
<FN>
<F1>PRO FORMA DILUTED NET LOSS PER SHARE OF $(0.32)
</FN>
</TABLE>
