<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1999
REGISTRATION NO. 333-76981
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
QUOKKA SPORTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7999 94-3250045
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
525 BRANNAN STREET, GROUND FLOOR
SAN FRANCISCO, CA 94107
(415) 908-3800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ALAN RAMADAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
525 BRANNAN STREET, GROUND FLOOR
SAN FRANCISCO, CA 94107
(415) 908-3800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
KENNETH L. GUERNSEY STEVEN L. BERSON
ISOBEL A. JONES ROBERT E. CURRY, II
STEVE R. DAETZ MICHAEL S. RUSSELL
DAVID J. PAUL WILSON SONSINI GOODRICH & ROSATI
COOLEY GODWARD LLP PROFESSIONAL CORPORATION
ONE MARITIME PLAZA, 20TH FLOOR 650 PAGE MILL ROAD
SAN FRANCISCO, CALIFORNIA 94111 PALO ALTO, CA 94304
(415) 693-2000 (650) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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(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. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 20, 1999
PROSPECTUS
5,000,000 SHARES
[QUOKKASPORTS LOGO]
COMMON STOCK
-----------------------
This is Quokka Sports, Inc.'s initial public offering, and no public
market currently exists for our stock.
We expect that the public offering price will be between $9.00 and
$11.00 per share. After pricing of the offering, we expect that the common stock
will trade on the Nasdaq National Market under the symbol "QKKA."
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN
THE "RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
-----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Initial public offering price.............................. $ $
Underwriting discount...................................... $ $
Proceeds, before expenses, to Quokka....................... $ $
</TABLE>
The underwriters may also purchase up to an additional 750,000 shares
from Quokka within 30 days from the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities, or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The underwriters expect that the shares of common stock will be ready
for delivery in New York, New York on or about , 1999.
-----------------------
MERRILL LYNCH & CO.
LEHMAN BROTHERS
BANCBOSTON ROBERTSON STEPHENS
-----------------------
The date of this prospectus is , 1999.
<PAGE> 3
(INSIDE FRONT COVER)
[Picture of the primary Quokka web page. Quokka logo is centered on the page and
a portion of the Quokka event calender is located at the bottom of the page.]
<PAGE> 4
(INSIDE FRONT COVER GATE FOLD)
[COLOR CODED WORLD MAP ENTITLED "QUOKKA GLOBAL EVENT NETWORK" IDENTIFYING
LOCATIONS OF THE FOLLOWING SPORTING EVENTS COVERED BY QUOKKA: CART, Around
Alone, 500 Grand Prix, Marathon Des Sables, First Ascent, Great Trango Tower,
Olympic Games, Whitbread and America's Cup.]
The following descriptions accompany the identified events:
CART:
- DESCRIPTION: Champ car racers chase millions of dollars at speeds
approaching 200 mph.
- DISTANCE: VARIES
- MODE: 2.65 LITER V-8 CHAMP CAR
AROUND ALONE:
- DESCRIPTION: The ultimate sailing challenge: one person, on a boat,
around the world, alone.
- DISTANCE: 27,000 NAUTICAL MILES IN 4 LEGS
- MODE: 40-60 FT. MONOHULL SAILING YACHT
500 GRAND PRIX:
- DESCRIPTION: Riders defy asphalt and gravity in championship motorcycle
racing.
- DISTANCE: VARIES
- MODE: 500, 250 & 125 CC MOTORCYCLES
MARATHON DES SABLES:
- DESCRIPTION: Runners struggled against sand, wind, and themselves in
Morocco's scorching Sahara.
- DISTANCE: 140 MILES IN 6 STAGES
- MODE: FEET
FIRST ASCENT:
- DESCRIPTION: Seven world-class climbers probe China's Karakoram range.
- DISTANCE: 3,000 MILES IN 4 LEGS
- MODE: TRUCK, CAMEL, FEET
GREAT TRANGO TOWER:
- DESCRIPTION: Three top climbers attempt to find a new route up one of
the tallest rock faces in the world.
- DISTANCE: 6,018 VERTICAL FEET
- MODE: FEET, GEAR, ROPE
OLYMPIC GAMES:
- DESCRIPTION: Athletes from all over the world compete for gold and glory
in 35 different sports.
- DISTANCE: VARIES
- MODE: FEET, BICYCLE, SKIS, LUGE, ETC.
WHITBREAD:
- DESCRIPTION: Nine boats battled in a 32,000 nautical-mile around-the-
world race.
- DISTANCE: 32,000 NAUTICAL MILES IN 9 LEGS
- MODE: W60 SAILBOAT
AMERICA'S CUP:
- DESCRIPTION: Sailors push the limits of technology and teamwork in
pursuit of one of sport's oldest trophies.
- DISTANCE: 18.5 NAUTICAL MILES PER RACE
- MODE: IACC CLASS YACHT
<PAGE> 5
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Use of Proceeds............................................. 19
Dividend Policy............................................. 19
Capitalization.............................................. 20
Dilution.................................................... 21
Selected Consolidated Financial Data........................ 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 30
Management.................................................. 52
Certain Transactions........................................ 64
Principal Stockholders...................................... 67
Description of Capital Stock................................ 70
Shares Eligible for Future Sale............................. 76
Underwriting................................................ 78
Legal Matters............................................... 80
Experts..................................................... 80
Change in Principal Accountants............................. 80
Additional Information...................................... 81
Index to Consolidated Financial Statements.................. F-1
</TABLE>
Quokka Sports(R) and Quokka Sports Immersion(TM) are trademarks of Quokka.
This prospectus also includes trade dress, trade names and trademarks of other
companies. All other brand names or trademarks appearing in this prospectus are
the property of their respective holders.
<PAGE> 6
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our financial statements and notes to those statements appearing
elsewhere in this prospectus. References in this prospectus to "Quokka," "Quokka
Sports," "our company," "we," "our," and "us" refer to Quokka Sports, Inc.
QUOKKA SPORTS, INC.
Quokka Sports has pioneered a distinctive new style of global sports
entertainment programming that uses the digital information sharing and
communications power of the Internet. Our programming is designed to provide a
compelling sports entertainment experience by allowing viewers to choose from a
variety of perspectives, information and action sequences. Our coverage of
sporting events incorporates, where available, video, text, audio, images,
athlete vital signs, locational and directional data, environmental data,
e-mails, results and timing data collected at the sports venue and from other
sources. We call these materials used in our programming "digital media assets."
Our programming can be accessed over the Internet at www.quokka.com and may be
delivered to viewers over other interactive systems that transmit digitized
data, such as cable and satellite systems, in the future. We believe new
interactive technologies provide exciting opportunities for making
information-intensive programming also entertaining. With distinctive content
designed to build on this opportunity, we believe we are positioned to become a
leading provider of digital sports entertainment addressing the entertainment
passions of a global community of sports enthusiasts.
We are creating an interactive digital sports network that offers a variety
of sports entertainment programming. To deliver our sports entertainment
programming over the Internet and other interactive systems, we have developed
and continue to enhance proprietary technology that we call our Quokka Sports
Platform. In developing our programming calendar, we currently target sports
events that are generally long in duration and rich in the materials or digital
media assets we seek to incorporate in our programming. We also usually target
sports events that have a global audience and involve continuous action with
multiple simultaneous activities. We have selected the Olympics, motor racing,
sailing and adventure sports as the first four channels of our network.
We generate revenues primarily through the sale of sponsorships. Sponsors
pay us for the right to be named as the exclusive sponsor of our network within
a particular industry category. Sponsors also secure the opportunity to embed
and promote their products in our digital programming. Our sponsors in the
technology and communication industries also have the opportunity to showcase
the technological capabilities of their products and services in the production
of our distinctive programming. Additionally, we believe we deliver a global
audience that has demographic qualities desired by sponsors and advertisers.
Our first digital sports program was the 1997-98 Whitbread Round The World
Race, a 32,000 nautical mile, around-the-world sailing race featuring an
international field of competitors. Our coverage attracted more than 1.8 million
unique users from 177 countries, more than half of whom accessed our Whitbread
Web site from outside the United States. "Unique user" is an industry term used
to describe an individual who has visited a particular Internet site once or
more. According to a Quokka-conducted survey, visitors to the Whitbread site
were primarily between 25 and 34 years old and had an average annual household
income of $75,000. Additionally, according to this survey, 64% of the visitors
to the Whitbread site were college educated and 63% held professional, executive
or technical positions. Based on these demographic characteristics, we believe
the visitors to the Whitbread site represented an attractive, targeted audience
for sponsors and advertisers. These users spent an average of approximately 9.9
minutes per visit at the site. This compares favorably to an average of 5.8
minutes per visit at other leading sports-related Web sites, according to our
estimates based on Media Metrix statistics. We generated $9.4 million of
revenues from sponsorships related to the Whitbread race.
1
<PAGE> 7
In February 1999, we established a joint venture with NBC Olympics, Inc. to
develop interactive digital coverage of the Olympics through August 2004. In
March 1999, through a joint venture with Forsythe Racing, Inc., we acquired
digital rights to cover Championship Auto Racing Teams events through 2003.
Additionally, in March 1999, we acquired digital rights to cover FIM 500cc Road
Racing World Championship motorcycle races through 2003. In May 1999, we
acquired digital rights to cover the America's Cup Match yacht race in 2000. Our
rights to cover each of these events, including the Olympics, are subject to
limitations as described in the "Business" section of this prospectus. We began
coverage of the nine-month Around Alone sailing race in September 1998. We
covered the 14th Marathon des Sables desert footrace and are also covering
Quokka-originated, adventure sports events as part of our adventure sports
channel.
As of March 31, 1999, we had an accumulated deficit of $23.9 million.
In August 1996, we adopted our current business model and incorporated in
Delaware under the name Quokka Productions, Inc. Shortly thereafter, in
September 1996, we changed our name to Quokka Sports, Inc. Prior to August 1996,
we operated as an Australian software development and consulting company, Ozware
Developments Unit Trust, an Australian unit trust. Our main offices are located
at 525 Brannan Street, San Francisco, California 94107, and our phone number is
(415) 908-3800. Our primary Web site is located at www.quokka.com. Information
contained on our Web site does not constitute part of this prospectus.
RECENT DEVELOPMENTS
In May and June 1999, we completed the private sale of 4,522,223 shares of
our Series D preferred stock at $9.00 per share for $40.7 million to the
following strategic and financial investors:
<TABLE>
<S> <C>
- Liberty QS, Inc. - MeriTech Capital Partners L.P.
- Hearst Communications, Inc. - Pivotal Partners, L.P.
- Comcast Interactive Investments, Inc. - Crossover Fund II, L.P.
- AtHome Corporation - British Telecom (Netherlands) Holdings B.V.
</TABLE>
We intend to work closely with our strategic investors to develop new channels
of distribution, digital sports entertainment programming and related products.
Our revenues increased from $2.5 million for the three months ended June
30, 1998 to an estimated $2.6 million for the three months ended June 30, 1999.
During the three months ended June 30, 1999, we recognized revenues primarily
from our recent digital entertainment sponsorship agreements. Our revenues were
$900,000 for the three months ended March 31, 1999.
Our expenses increased from $4.1 million for the three months ended June
30, 1998 to an estimated $20.8 million for the three months ended June 30, 1999.
Our expenses for the three months ended March 31, 1999 were $8.5 million.
Estimated expenses increased due to an increase in marketing expenses associated
with the launch of www.quokka.com, an increase in research and engineering costs
associated with our broadband trials and other engineering initiatives and an
increase in production costs resulting from the launch of our www.quokka.com
network and costs associated with the development of our planned initial
coverage of FIM 500cc Road Racing World Championship motorcycle races, the
Olympics and the America's Cup Match yacht race.
Our net loss increased from $1.6 million for the three months ended June
30, 1998 to an estimated $18.2 million for the three months ended June 30, 1999.
Our net loss for the three months ended March 31, 1999 was $7.8 million.
Our financial statements for the period ended June 30, 1999 have not yet
been completed and accordingly information regarding this period is preliminary
and subject to change. Additionally, the operating results for the June 1999
quarter or any other quarter are not necessarily indicative of the operating
results for any future period.
2
<PAGE> 8
THE OFFERING
Common stock offered by Quokka...... 5,000,000 shares
Common stock to be outstanding after
the offering........................ 43,656,429 shares
Use of proceeds..................... For capital contributions to our joint
ventures, payments under our rights and
distribution agreements and general
corporate purposes, including working
capital, expansion of operations,
expansion of our marketing campaign and
capital expenditures.
The information above is based on shares outstanding as of March 31, 1999,
gives effect to the sale in May and June 1999 of 4,522,223 shares of Series D
preferred stock and the conversion of all outstanding shares of preferred stock
into common stock upon the closing of this offering and includes 508,848 shares
issuable upon the exercise of warrants outstanding as of March 31, 1999 at a
weighted average per share price of $1.06, which will expire if not exercised
prior to the closing of this offering. The number of shares of common stock to
be outstanding after the offering excludes:
- 2,391,750 shares issuable upon the exercise of warrants outstanding as of
March 31, 1999 at a weighted average per share price of $5.33;
- 7,145,025 shares issuable upon the exercise of options outstanding as of
March 31, 1999 at a weighted average per share price of $4.35;
- 6,460,401 shares reserved for issuance under Quokka's 1997 Equity
Incentive Plan;
- 450,000 shares reserved for issuance under Quokka's 1999 Non-Employee
Director's Stock Option Plan; and
- 1,000,000 shares reserved for issuance under Quokka's 1999 Employee Stock
Purchase Plan.
Under the terms of the Series D financing agreements, Quokka may issue up to an
additional 200,000 shares of Series D preferred stock or an equivalent number of
shares of common stock. See "Capitalization," and "Description of Capital
Stock," for additional information relating to our capital structure. Also see
"Management -- Employee Benefit Plans" for a description of the benefit plans
referred to above.
3
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- --------- --------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENT OF
OPERATIONS:
Revenues........... $ 399 $ 82 $ 39 $ 4,000 $ 8,635 $ 4,867 $ 897
Operating
expenses......... 311 100 1,595 8,871 18,493 5,289 8,461
Income/(loss) from
operations....... 88 (18) (1,556) (4,871) (9,858) (422) (7,564)
Net
income/(loss).... $ 90 $ (6) $ (1,560) $ (4,942) $ (9,538) $ (390) $ (7,848)
Historical basic
and diluted net
income/(loss) per
share............ $ 0.02 $ 0.00 $ (0.41) $ (0.73) $ (0.99) $ (0.04) $ (0.80)
Shares used in
computing
historical basic
and diluted net
income/(loss) per
share............ 3,800,000 3,800,000 3,800,000 6,791,534 9,654,835 9,651,566 9,756,059
Pro forma net loss
per
share -- basic
and diluted...... $ (0.40) $ (0.23)
Shares used in
computing pro
forma net loss
per
share -- basic
and diluted...... 23,914,934 34,000,923
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 15,263 $ 60,446
Working capital........................................... 13,953 59,136
Total assets.............................................. 22,853 68,036
Debt and leases, long-term portion........................ 699 699
Accumulated deficit....................................... (23,894) (23,894)
Total stockholders' equity................................ 18,612 63,795
</TABLE>
In the table above, the as adjusted amounts reflect the proceeds from the
sale of the 5,000,000 shares offered by Quokka at an assumed public offering
price of $10.00, after deducting the estimated underwriting discount and
offering expenses.
4
<PAGE> 10
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also could harm our business.
If any of the following risks actually occur, our business could suffer and the
trading price of our common stock could decline.
This prospectus contains forward-looking statements. The outcome of the
events described in these forward-looking statements is subject to risks and you
should not put undue reliance on these forward-looking statements. When used in
this prospectus, the words "intend," "anticipate," "believe," "estimate," "plan"
and "expect" and similar expressions as they relate to us are included to
identify forward-looking statements. Our actual results could differ materially
from those discussed in the forward-looking statements contained in this
prospectus. This section and the sections entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
contain a discussion of some of the factors that could contribute to those
differences.
RISKS RELATED TO OUR OPERATIONS
WE HAVE A HISTORY OF OPERATING LOSSES, EXPECT TO INCUR LOSSES FOR AT LEAST THE
NEXT EIGHT QUARTERS AND MAY BE UNABLE TO ACHIEVE OR SUSTAIN PROFITABILITY OR
GENERATE POSITIVE CASH FLOW
We expect to incur losses for at least the next eight quarters, largely due
to substantial planned increases in marketing expenses and expenses associated
with our digital sports entertainment programming. We may be unable to generate
sufficient revenues or control operating expenses to achieve or sustain
profitability or generate positive cash flow. We adopted our current business
model in August 1996 and began generating revenues in connection with this model
during the first quarter of 1997. As of March 31, 1999, we had an accumulated
deficit of $23.9 million. Our net operating losses were $4.9 million for 1997,
$9.5 million for 1998 and $7.8 million for the three months ended March 31,
1999. Cash used in operating activities was $3.9 million for 1997, $10.9 million
for 1998 and $6.4 million for the three months ended March 31, 1999.
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE OUR BUSINESS AND
PROSPECTS
Our limited operating history makes it difficult to evaluate our business
and prospects. As a digital sports entertainment company in an early stage of
development, we face significant risks, uncertainties, expenses and
difficulties. In order to succeed, we must do most, if not all, of the
following:
- develop programming to attract and retain our audience;
- secure and retain additional sponsors and advertisers;
- acquire rights on commercially feasible terms to cover additional
sporting events;
- develop, enhance and carefully manage our brand;
- deliver multiple programming events simultaneously to one or more global
distribution networks;
- promote our name in the sports and media markets;
- respond appropriately to competitive developments;
- develop and implement a successful electronic commerce strategy;
- develop a successful line of product merchandise;
- secure additional distribution systems for our content;
- continue to develop and improve our know-how, to enhance our Web sites to
meet the needs of a changing market and to adapt to changing technology;
5
<PAGE> 11
- successfully execute our business and marketing strategies; and
- attract, integrate, retain and motivate qualified personnel.
Our business operations and revenues will suffer if we are unable to accomplish
these things.
OUR QUARTERLY OPERATING RESULTS ARE EXPECTED TO FLUCTUATE AND OUR FAILURE TO
MEET EARNINGS ESTIMATES COULD CAUSE OUR STOCK PRICE TO SUFFER
Our quarterly operating results have varied in the past, and we expect them
to fluctuate in future periods. For example, our revenues for the three months
ended March 31, 1999 were $900,000 compared to revenues of $4.9 million for the
three months ended March 31, 1998. These fluctuations depend on a number of
factors described below and elsewhere in this "Risk Factors" section of the
prospectus, many of which are outside our control. We may be unable to predict
our future revenues accurately or adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Any significant shortfall of
revenues would have a negative impact on our results of operations. For these
and other reasons, we may not meet the earnings estimates of securities analysts
or investors and our stock price could suffer. Our revenues in any quarter
depend on the sports programming we offer, the sponsorship arrangements we have
in place at that time and finalize during the quarter and, to a lesser extent,
the advertising and electronic commerce transactions we execute. We expect that
our electronic commerce revenues will be higher leading up to and during our
major sports programming. It is likely that sponsorship deals will have a long
sales cycle and may be unevenly distributed across fiscal quarters. We expect
our expenses to increase over time for production and other operational costs.
The timing of these expenses, as well as our obligations under existing and
future contracts, could fluctuate from quarter to quarter and intensify leading
up to and during significant sporting events such as the Olympic Games.
WE NEED TO ACQUIRE RIGHTS TO KEY SPORTING EVENTS TO DEVELOP MORE PROGRAMMING AND
GROW OUR BUSINESS, BUT THE COST AND COMPETITION FOR THESE RIGHTS COULD PREVENT
US FROM DOING SO
We need to acquire rights to key sporting events to succeed. If we are
unable to acquire these rights, our ability to broaden our programming and grow
our business will be limited. Our limited operating history makes it difficult
to assess our ability to acquire rights in the future. Holders of rights may not
be willing to enter into strategic relationships with us or sell rights to us at
prices we can afford, or at all. We expect the cost of acquiring rights to
increase significantly as competition for these rights increases. We may not be
successful in acquiring the rights we need, especially if third parties, such as
traditional media companies, which have significantly greater resources,
experience and bargaining leverage than we do, compete for those rights.
OUR LIMITED EXPERIENCE DEVELOPING AND COORDINATING A COMPREHENSIVE PROGRAMMING
SCHEDULE COULD RESULT IN DELAYS OR SETBACKS THAT REDUCE THE APPEAL OF OUR WEB
SITES
We have limited experience developing and coordinating a comprehensive
programming schedule and may experience delays or setbacks that reduce the
appeal of our Web sites. The programming we have developed required
significantly fewer resources and technical skills than the major sports
programming we are scheduled to produce, including the Olympic Games and
coverage of motor sports. Our programming may not keep pace with technological
developments, evolving industry standards or competing programming alternatives.
We have not developed multiple large-scale programming events simultaneously and
may lack the financial and technical resources to develop content for multiple
simultaneous sporting events. Even if the resources are available, we may be
unable to coordinate a comprehensive programming schedule. To be successful, we
will need to staff and operate 24-hour production facilities that are capable of
collecting, repackaging and distributing digital coverage to a global audience.
6
<PAGE> 12
IF OUR AUDIENCE DOES NOT LIKE OUR WEB SITES OR THE INTERACTIVE NATURE OF OUR
PROGRAMMING WE MAY NOT BE ABLE TO ATTRACT AND RETAIN SPONSORS
It is difficult to predict whether our audience will like the layout and
design of our Web sites or adapt to the interactive nature of our programming.
If our layout and design are not user-friendly in the eyes of a wide and diverse
audience, we will not be successful in attracting repeat users and our revenue
could decline. Additionally, the nature of our programming requires our audience
to actively navigate through multiple pages to experience the depth of coverage.
Sports fans who are accustomed to passive listening or viewing sports coverage
provided by traditional media may not be willing to participate in the
interactive nature of sports entertainment on our Web sites. Our audience could
reduce its viewing of our existing programming due to dissatisfaction with our
programming or greater satisfaction with programming developed by one or more of
our competitors. Additionally, the number of sporting events covered on various
media may saturate the market and reduce the likelihood a sports fan would
select our Web site. If the size of our audience or the duration of visits to
our sites decreases or fails to grow as expected, we may be unable to achieve
the audience exposure we have committed and will commit to provide to our
sponsors, which could result in lost sponsorship revenues. For example,
sponsorship revenues could be affected if audience interest in the Olympic Games
is reduced as a result of recent scandals involving the International Olympic
Committee.
OUR SPONSORSHIP MODEL IS UNPROVEN AND OUR REVENUES AND RESULTS OF OPERATIONS
WILL SUFFER IF WE ARE UNABLE TO MAINTAIN OUR EXISTING SPONSORS AND SECURE
ADDITIONAL SPONSORSHIPS
Our revenues and results of operations will suffer if we are unable to
maintain our existing sponsors and secure additional sponsors. Our revenue model
is primarily based on securing long-term digital entertainment sponsorships that
provide each sponsor with the right to be named as the exclusive sponsor of our
network within a particular industry category. We have limited experience with
this sponsorship model and to date have entered into digital entertainment
sponsorships only with Compaq Computer Corporation and Computer Associates
International, Inc. Prospective sponsors may not be interested in entering into
these digital entertainment sponsorships at the rates we set, if at all.
Additionally, our sponsorship agreements typically require the delivery of
a specified number of brand impressions, which refers to the number of times the
sponsor's brand appears on a user's screen while the user is connected to our
Web sites. Our fulfillment of these commitments assumes that we will be able to
deliver these brand impressions on sports programming that we acquire or create.
Owners of rights to sporting events often have pre-arranged sponsor lists they
require us to honor. Pre-existing sponsorship relationships may prevent us from
meeting the minimum commitments we have to our exclusive digital entertainment
sponsors and could cause us to allocate impressions to our sponsors that were
otherwise available for additional revenue generating purposes. These
pre-existing sponsorship relationships could also negatively affect our business
by limiting our ability to attract new sponsors. We might acquire or create
additional programming that would allow us to provide our sponsors with
sufficient brand impressions for which we would incur additional expenses.
WE DEPEND ON A SMALL NUMBER OF SPONSORS, THE LOSS OF WHICH COULD HARM OUR
REVENUES
To date, we have depended on a limited number of sponsors for a majority of
our revenues. In 1998, two sponsors accounted for 68% of our revenues.
We anticipate that our results of operations will depend to a significant
extent upon revenues from a small number of digital entertainment sponsors. The
loss of one or more digital entertainment sponsors could negatively affect our
business. Although we seek to enter into multi-year agreements with our digital
entertainment sponsors, we cannot guarantee that these sponsors will maintain
their association with us.
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A DISASTER OR MALFUNCTION THAT DISABLES OUR COMPUTER SYSTEMS COULD HARM OUR WEB
SITES AND REDUCE THE APPEAL OF OUR PROGRAMMING
Substantially all of our communications hardware and computer hardware
operations are located in our facilities in San Francisco, California and at
Frontier GlobalCenter in Sunnyvale, California, where our Web sites are hosted.
Our operations depend on our ability to protect these systems against damage
from fire, earthquakes, power loss, telecommunications failures, break-ins and
similar events. Additionally, computer viruses, electronic break-ins or other
similar disruptive problems could harm our Web sites. A disaster or malfunction
that disables either our San Francisco production facility or our Sunnyvale
hosting services could cause an interruption in the production and distribution
of our programming, limit the quantity or timeliness of updates to our
productions or limit the speed at which our audience can access our content. Any
of these occurrences could reduce the appeal of our programming. Our insurance
policies may not adequately compensate us for any losses that may occur due to
any failures or interruptions in our systems. We do not presently have a formal
disaster recovery plan.
Our Web sites have experienced significant increases in traffic during
coverage of some sporting events. As we deliver additional programming, we
expect our audience base to increase significantly. This will require our Web
sites to accommodate a high volume of traffic and deliver frequently updated
information. Failure of our systems to accommodate higher volumes of traffic
could reduce the performance and appeal of our Web sites and harm our results of
operations. Our Web sites in the past have experienced slower response times or
other problems for a variety of reasons, including delays or malfunctions as a
result of third-party distributors on which we rely.
OUR BRAND MAY NOT ACHIEVE THE BROAD RECOGNITION NECESSARY TO SUCCEED
We believe that broad recognition and a favorable audience perception of
the Quokka brand will be essential to our success. If our brand does not achieve
favorable broad recognition, our success will be limited. We intend to build
traffic and brand recognition by aggressively marketing www.quokka.com as the
first interactive network that offers sports programming that brings the
audience closer to the athlete's perspective. We plan to market www.quokka.com
through an extensive traditional media campaign employing advertising on
television, printed publications, outdoor signage and radio. We also plan to
conduct a simultaneous online advertising campaign and to seek exposure through
our co-branded initiatives. During 1998, we spent $554,000 for advertising. We
expect to significantly increase our advertising expenses in future periods as
we build the Quokka brand and awareness of our programming. We may lack the
resources necessary to accomplish these initiatives. Even if the resources are
available, we cannot be certain that our brand enhancement strategy will deliver
the brand recognition and favorable audience perception that we seek. If our
strategy is unsuccessful, these expenses may never be recovered and we may be
unable to increase future revenues. Even if we achieve greater recognition of
our brand, competitors with greater resources or a more recognizable brand could
reduce our market share of the emerging digital sports entertainment market.
THE LOSS OF ANY STRATEGIC RELATIONSHIPS WITH MEDIA ENTITIES AND SPORTS GOVERNING
BODIES COULD NEGATIVELY IMPACT THE BREADTH OF OUR SPORTS PROGRAMMING AND OUR
ABILITY TO ACQUIRE ADDITIONAL RIGHTS TO COVER SPORTS OR SECURE SPONSORSHIPS
We depend on agreements with certain established media entities and sports
governing bodies, such as NBC Olympics, Inc. and Championship Auto Racing Teams,
Inc. The loss of any of these strategic relationships could impact the breadth
of our sports programming and affect our ability to acquire additional rights or
secure sponsorships. Our agreements with these parties enable development of
certain Olympic and motor sports programming. Additionally, these strategic
relationships, among others, provide us with credibility in the marketplace to
negotiate sponsorships and acquire rights to cover additional sports. While
these strategic relationships are grounded in contractual agreements, these
parties can terminate the agreements for various reasons, including contractual
breaches and a change in control of our company. For example, NBC Olympics, Inc.
can terminate its strategic relationship with us if a competitor of NBC acquires
us. We cannot guarantee that our strategic partners will perform their
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contractual obligations. Even if the contracts run for the full term, we may not
be able to renew the agreements on comparable terms, if at all. For a more
detailed discussion of the terms of some of our strategic relationships, see
"Business -- Joint Ventures and Rights Agreements."
FAILURE BY THIRD PARTIES ON WHOM WE DEPEND FOR INTERNET ACCESS, DELIVERY OF OUR
PROGRAMMING AND GENERATION OF MULTIPLE REVENUE STREAMS COULD HARM OUR OPERATIONS
AND REVENUES
Our audience depends on Internet service providers, online service
providers and other Web site operators for access to our Web sites. Many of them
have experienced significant outages in the past, and could experience outages,
delays and other difficulties due to system failures unrelated to our systems.
Access by our audience outside the United States could also be delayed or
interrupted due to the uncertainty of the telecommunications infrastructure in
foreign countries.
We depend on various domestic and international third parties for software,
systems and delivery of much of our programming. Many of these third parties
have limited operating histories, early generation technology and are themselves
dependent on reliable delivery from others. Any delays or malfunctions in the
distribution of our content would limit our ability to deliver our programming.
We also depend on Frontier GlobalCenter in Sunnyvale, California, which hosts
our Web sites. If the Frontier GlobalCenter hosting facility is disabled or
malfunctions, access to our Web sites would be limited or eliminated.
Our plans to generate multiple revenue streams also depend on third
parties. In particular, we depend on encryption technology provided by others to
enable secure electronic commerce transactions. In addition, our ability to
obtain sponsorship and advertising interest will depend on whether third parties
we hire can generate meaningful and accurate data to measure the demographics of
our audience and the delivery of advertisements on our Web sites. Companies may
choose not to advertise on our Web sites or may pay less if they do not perceive
these measurements made by third parties to be reliable.
OUR SPONSORSHIP MODEL COULD PREVENT US FROM ACQUIRING CRITICAL TECHNOLOGY, WHICH
COULD AFFECT THE QUALITY OF OUR PROGRAMMING
A significant feature of our sponsorship model is the exclusive right to be
the sole sponsor of a sponsorship category, such as computing, database
software, digital distribution, consumer electronics or wireless communications.
While we expect this exclusivity feature to be central to our marketing strategy
for securing and retaining these sponsorships, it may bind us to undesirable
sponsorship arrangements and limit our ability to acquire technology we may
otherwise want or need. Exclusive sponsors acquire multi-year rights to a
sponsorship category and sometimes provide us with equipment or technical
expertise to enable us to develop and distribute our programming. We are limited
in our ability to terminate an existing sponsor relationship if a sponsor fails
to provide us with necessary equipment and expertise, or is otherwise less
desirable than a prospective sponsor in the same sponsorship category. An
existing sponsor also may prevent us from acquiring desirable technology from
competitors of the sponsor, which could harm our programming.
OUR PROGRAMMING AND OPERATIONS WILL SUFFER IF WE ARE UNABLE TO ADAPT IN A TIMELY
MANNER TO TECHNOLOGICAL DEVELOPMENTS, EVOLVING INDUSTRY STANDARDS, CHANGING
MARKET CONDITIONS OR CUSTOMER REQUIREMENTS
The market for digital sports programming is characterized by rapid
technological change. To be successful, we must adapt to this rapidly changing
market by continually improving the features we offer and developing new
features. Our programming and operations will suffer if we are unable to adapt
in a timely manner in response to technological developments, evolving industry
standards, changing market conditions or customer requirements. We may not
maintain our competitive position in the digital sports entertainment market for
a number of reasons, including the following:
- our technology infrastructure may not provide high-quality, reliable
programming or adequately scale to support multiple simultaneous events;
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- we may be unable to afford substantial expenditures to adapt our service
to changing technologies;
- we may be unable to license leading technologies or develop new
proprietary technologies; and
- we may fail to use new technologies effectively or adapt to technological
changes.
OUR BUSINESS IS SUBJECT TO MANY RISKS ASSOCIATED WITH WORLDWIDE SPORTS EVENT
COVERAGE AND OTHER INTERNATIONAL ACTIVITIES, WHICH COULD PREVENT OR DELAY OUR
COVERAGE OR CAUSE US TO INCUR ADDITIONAL EXPENSES
Our coverage of adventure sports is not limited geographically and is
therefore subject to many risks associated with worldwide sports event coverage
and other international activities that could prevent or delay our coverage. We
have developed, and expect to continue to develop, programming covering sporting
events throughout the world and across the oceans. For example, our coverage of
yachting races and of adventure sports, such as mountaineering in the Karakoram
range in China and treks across deserts in Morocco, require us to traverse
international borders. Coverage of these events requires that we deploy
production staff to locations throughout the world. Additionally, we expect to
maintain offices in several foreign countries, including Great Britain,
Switzerland and Australia. As a result, we are subject to numerous risks
associated with doing business internationally, including the following:
- regulatory requirements, including export requirements, tariffs and other
barriers, health and safety requirements and labor and immigration laws;
- difficulties in staffing and managing foreign operations;
- differences in reliability of telecommunications infrastructure and
Internet access;
- varying technological standards and capabilities;
- differences in standards of protection for intellectual property;
- political instability;
- hostile action against event participants or our employees;
- currency fluctuations;
- potentially adverse tax consequences; and
- restrictions against the repatriation of earnings from a foreign country.
Additionally, regional events that we choose to cover may fail to attract a
global audience. In that case, we would incur the significant expenses inherent
in the coverage of an international event without achieving the audience
exposure we have committed or may commit to provide to our sponsors.
OUR BUSINESS WILL NOT OPERATE EFFICIENTLY AND OUR RESULTS OF OPERATIONS WILL BE
NEGATIVELY AFFECTED IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH
We are experiencing a period of significant expansion. We had 40 employees
at December 31, 1997, compared to 118 employees at December 31, 1998 and 186
employees at March 31, 1999. This growth is placing, and we expect any further
growth to continue to place, a significant strain on our management, operational
and financial resources. This will require us to implement additional management
information systems and to develop additional operating, administrative,
financial and accounting systems and controls. If we are unable to develop these
systems and manage our growth effectively, our business will not operate
efficiently and our results of operations could be negatively affected.
Many of our senior management have only recently joined us. Seven of our
sixteen most senior officers have worked for us for less than one year. These
individuals have not previously worked together and are becoming integrated as a
management team. Our operations and personnel relations will suffer if our
senior management is unable to successfully manage our growth.
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IF WE FAIL TO ATTRACT AND RETAIN KEY PERSONNEL WE WILL BE UNABLE TO EXECUTE OUR
BUSINESS STRATEGY
Our success will depend on the continued services of our senior management
and other key personnel, as well as our ability to attract, train, retain and
motivate other highly skilled technical, managerial, marketing and customer
service personnel. The loss of the services of any of our executive officers,
particularly Alan Ramadan, our president and chief executive officer, or other
key employees could prevent us from executing our business strategy. Competition
for these personnel is intense, and we may not be able to successfully attract,
integrate or retain sufficiently qualified personnel. Our anticipated
programming schedule in the near future will require that we attract and retain
personnel who are skilled in production, computer and other technical fields.
Skilled technical personnel are in high demand and have multiple employment
opportunities, especially in the San Francisco Bay Area, where our headquarters
are located. As a matter of practice, we do not generally enter into employment
agreements with our employees.
ACCEPTANCE OF PROPERTY OR SERVICES AS PAYMENT MAY PROVIDE LESS WORKING CAPITAL
FLEXIBILITY THAN A CASH PAYMENT WOULD PROVIDE
We have received property or services, including computer equipment,
Internet access, digital cameras and telecommunications equipment and services
as payment for our sponsorships. While these property and services allow us to
develop and distribute our programming content, they do not provide us with the
same working capital flexibility that a cash payment would provide. We expect to
reduce the amount of property and services accepted as payment in future
periods, but may not be successful in doing so.
WE MAY BE SUBJECT TO NEGATIVE PUBLICITY AND LIABILITY FOR ATHLETES OR OUR
EMPLOYEES ASSOCIATED WITH OUR EVENTS, WHICH WOULD DISRUPT OUR PROGRAMMING AND
REDUCE SPONSORSHIPS AND PARTICIPATION IN FUTURE EVENTS
Many of our events, including sailing and mountain climbing, involve
significant risks to athletes and our employees that participate in or document
the events. Additionally, many of our events take place in regions of the world
where there may be increased danger of external threats such as terrorism. We
will experience adverse publicity, and may be subject to liability claims by
athletes, employees or their relatives, for injuries or deaths that occur as a
result of our events. Any incidents like this during our events could disrupt
our programming and reduce sponsorships and athlete and employee participation
in future events. Liability claims, regardless of merit, could require us to
expend significant resources. Additionally, while we obtain insurance coverage
with respect to each event based on the risks and exposure we face in that
event, our insurance coverage may be inadequate to protect us against any
claims.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, AND OUR EFFORTS TO DO SO COULD BE TIME-CONSUMING AND EXPENSIVE AND COULD
DIVERT MANAGEMENT ATTENTION FROM EXECUTING OUR BUSINESS STRATEGY
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our success. We rely on a
combination of copyright, trademark, service mark, patent and trade secret laws
and contractual restrictions to protect our proprietary rights in products and
services. While we actively protect and enforce our intellectual property
rights, we may be unable to prevent others from misappropriating our technology
and may be subject to claims of infringement by others. The enforcement of our
intellectual property rights could be time-consuming, result in costly
litigation and the diversion of technical and management personnel. We have
entered into confidentiality and invention assignment agreements with our
employees and contractors and nondisclosure agreements with parties with which
we conduct significant business to limit access to and disclosure of our
proprietary information. These contractual arrangements and the other measures
taken by us to protect our intellectual property may not prevent
misappropriation of our technology or deter independent third-party development
of similar technologies. In addition, we may need to engage in litigation to
enforce our intellectual property rights in the future or to determine the
validity and scope of the proprietary rights of others. This litigation could
result in substantial costs and diversion of management and other resources.
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We pursue the registration of our trademarks and service marks in the
United States and internationally. We have also filed four patent applications
in the United States Patent and Trademark Office. Effective trademark, service
mark, copyright, patent and trade secret protection may not be available in
every country in which our programming is accessible online. We have licensed in
the past, and expect to license in the future, some of our proprietary rights,
including trademarks or copyrighted material, to third parties. These licensees
may take actions that might adversely affect the value of our proprietary rights
or reputation. We also rely on off-the-shelf technologies that we license from
third parties. "Off-the-shelf" technology refers to generally commercially
available software that is not customized for a particular user. These
third-party licenses may not continue to be available to us on commercially
reasonable terms or at all. The inability to use licensed technology important
to our business could require us to obtain substitute technology of lower
quality or performance standards or at greater cost. In the future, we may seek
to license additional technology or content to enhance our current programming
or to introduce new content. We cannot be certain that any such licenses will be
available on commercially reasonable terms or at all. The loss of or inability
to obtain or maintain any of these technology licenses could result in delays in
providing our programming until equivalent technology, if available, is
identified, licensed and integrated.
Because we license some data and content from third parties, we must rely
upon these third parties for information as to the origin and ownership of the
licensed content and our exposure to copyright infringement actions may
increase. We generally obtain representations as to the origins and ownership of
licensed content and obtain indemnification to cover any breach of any
representations. However, we cannot be certain that these representations are
accurate or that any indemnification amounts will be sufficient to provide
adequate compensation for any breach of representations.
We cannot guarantee that infringement or other claims will not be asserted
or prosecuted against us in the future whether resulting from our internally
developed intellectual property or licenses or content from third parties. Any
future assertions or prosecutions could be time-consuming, result in costly
litigation and diversion of technical and management personnel or require us to
introduce new content or trademarks, develop non-infringing technology or enter
into royalty or licensing agreements. These royalty or licensing agreements, if
required, may not be available on acceptable terms, if at all. Our ability to
execute on our business strategy will suffer if a successful claim of
infringement is brought against us and we are unable to introduce new content or
trademarks, develop non-infringing technology or license the infringed or
similar technology on a timely basis.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR BUSINESS
Computer systems, software packages and microprocessor dependent equipment
may cease to function or generate erroneous data when the year 2000 arrives. To
correctly identify the year 2000, a four-digit date code field will be required
to be what is commonly termed "year 2000 compliant." If systems material to our
business are not year 2000 compliant or if third parties fail to make their
systems year 2000 compliant in a timely manner, the year 2000 issue could affect
our operations. Our operations and programming may suffer if the systems we
depend on are not year 2000 compliant. The potential areas of exposure include
electronic data exchange systems operated by third parties with which we
transact business and computers, software, telephone systems and other equipment
used internally. While we have established a year 2000 compliance program, this
program may not uncover all year 2000 problems.
WE MAY BE SUBJECT TO LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT, AND OUR
INSURANCE COVERAGE MAY BE INADEQUATE TO PROTECT US FROM THIS LIABILITY
We may be subject to claims relating to content associated with us,
including content that may appear on our Web sites or be obtained through other
distribution channels. Although we carry general liability insurance, our
insurance may not cover potential claims of this type or may not be adequate to
cover all costs incurred in defense of potential claims or to indemnify us for
all liability that may be imposed. These claims could take the form of lawsuits
for defamation, negligence, copyright or trademark infringement or other
theories based on the nature and content of such materials. In addition, we
could be subject to liability with respect to content that may be accessible
through our Web sites or third-party Web sites accessed from our sites.
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OUR COMPETITIVE POSITION IN THE DIGITAL SPORTS ENTERTAINMENT INDUSTRY COULD
DECLINE IF WE ARE UNABLE TO ACQUIRE BUSINESSES OR TECHNOLOGY THAT ARE STRATEGIC
FOR OUR SUCCESS OR IF WE FAIL TO SUCCESSFULLY INTEGRATE ANY ACQUISITIONS WITH
OUR CURRENT BUSINESS
If appropriate opportunities arise, we intend to acquire businesses,
technologies, services or products that we believe are strategic for our
success. The digital sports entertainment industry is new, highly competitive
and rapidly changing. We believe these industry dynamics could result in a high
level of acquisition activity as companies seek to gain competitive advantage.
While we currently do not have any understandings, commitments or agreements
with respect to any material acquisition, competitive forces could require us to
acquire companies or technology. Our competitive position in the industry could
decline if we are unable to acquire businesses or technology that are strategic
for our success or if we fail to successfully integrate any acquisitions with
our current business. We may be unable to identify, negotiate or finance future
acquisitions successfully, or to integrate successfully any acquisitions with
our current business. The process of integrating an acquired business,
technology, service or product into our business and operations may result in
unforeseen operating difficulties and expenditures, including the allocation of
significant management time and company resources that would otherwise be
available for ongoing development of our business. Moreover, the anticipated
benefits of any acquisition may not be realized.
RISKS RELATED TO THE INTERNET AND DIGITAL SPORTS ENTERTAINMENT INDUSTRIES
DELAYS IN THE ACCESSIBILITY OR GROWTH OF THE INTERNET COULD ADVERSELY AFFECT OUR
PROGRAMMING AND REDUCE THE LEVEL OF TRAFFIC ON OUR WEB SITES
Our success will depend on the continued development and growth of the
Internet. Our programming will suffer if the necessary infrastructure, standards
or protocols or complementary products, services or facilities for the Internet
are not developed in a timely manner. While Internet technologies have been
evolving rapidly in recent years, future growth may not continue at comparable
rates. As the Internet continues to experience increased numbers of users and
increased frequency of use, the Internet infrastructure may be unable to support
the demands of a global audience or the requirements of consumers for faster
access. The Internet has experienced a variety of outages and other delays as a
result of damage to portions of its infrastructure, and it could face outages
and delays in the future. This might include outages and delays resulting from
the year 2000 problem. These outages and delays could adversely affect the level
of Internet usage as well as the level of traffic on our Web sites. In addition,
the Internet could lose its viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of activity
or due to regulation by governments, businesses or other organizations.
Our programming is designed to operate on today's Internet platform as well
as other interactive systems that transmit digitized data, such as cable and
satellite systems, in the future. These future systems are commonly referred to
as "broadband" systems and are expected to enable transmission of large amounts
of digitized material, such as video clips, within a relatively short time
frame. Delays in the development of broadband systems could harm our ability to
distribute our programming through subscription services and pay-per-view
events, which could adversely affect our ability to generate revenues from these
types of programming.
THE ONLINE DIGITAL SPORTS ENTERTAINMENT INDUSTRY IS INTENSELY COMPETITIVE, AND
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE COMPETITORS
The market for Internet services and products is relatively new, intensely
competitive and rapidly changing. Since the Internet's commercialization in the
early 1990's, the number of Web sites on the Internet competing for consumers'
attention and spending has proliferated. We expect that competition will
continue to intensify. We may be unable to compete successfully against current
and future competitors.
Many of our current and potential competitors have significantly longer
operating histories, greater financial, technical and marketing resources,
greater name recognition and larger user or membership bases
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than us and, therefore may have a significantly greater ability to attract
advertisers and users. In addition, many of these competitors may be able to
respond more quickly to new or emerging technologies and changes in Internet
user requirements and to devote greater resources to the development, promotion
and sale of their services. Our current or potential competitors may develop
products and services comparable or superior to those developed by us. Increased
competition could result in price reductions, reduced margins or loss of market
share, any of which would harm our business. In addition, as we expand
internationally, we may face new competition.
We compete, directly and indirectly, for sponsors, rights and the attention
of sports viewers with the following categories of companies:
- Web sites targeted to sports enthusiasts generally, such as
www.cbs.sportsline.com, www.cnnsi.com and www.espn.com, many of which
have been established by traditional media companies, and Web sites
targeted to enthusiasts of particular sports, such as
www.majorleaguebaseball.com, www.nascar.com, www.nba.com, www.nfl.com and
www.nhl.com;
- publishers and distributors of traditional media targeted to sports
enthusiasts, such as the ESPN networks, the FoxSports network and Sports
Illustrated;
- online services such as America Online and the Microsoft Network, which
provide access to sports-related content and services;
- vendors of sports information, merchandise, products and services
distributed through other means, including retail stores, mail, facsimile
and private bulletin board services; and
- Web search and retrieval services, such as Excite, Infoseek, Lycos and
Yahoo! and other high-traffic Web sites, such as those operated by cYnet
and Netscape.
We expect that the number of our direct and indirect competitors will
increase in the future. We anticipate that, as the Internet and other
interactive distribution systems converge with traditional television
broadcasting and cable, significant competition may come from the cable arena,
including such sports-oriented cable networks as the ESPN networks.
OUR ABILITY TO GENERATE REVENUES WILL BE ADVERSELY AFFECTED IF SPONSORS AND
ADVERTISERS DO NOT ACCEPT THE INTERNET AS AN EFFECTIVE MEDIUM TO PROMOTE THEIR
PRODUCTS AND SERVICES
Our ability to generate sponsorship and advertising revenues will depend on
many factors, including the following:
- the development of the Internet as an attractive medium for sponsors and
advertisers;
- the level of use of the Internet by consumers and the amount of traffic
on our Web sites; and
- our ability to achieve and measure demographic characteristics that are
attractive to sponsors and advertisers.
Market acceptance of the Internet as a medium for sponsorship and
advertising is highly uncertain. Most potential sponsors and advertisers have
only limited experience with the Internet as an advertising medium and have not
devoted a significant portion of their advertising expenditures to
Internet-based campaigns. Even if sponsors and advertisers are persuaded to
allocate portions of their budgets to Internet-based advertising, they may not
find the medium to be effective for promoting their products and services
relative to traditional print and broadcast media. Additionally, no standards
are widely accepted to measure the effectiveness of the Internet as a medium for
targeting consumers with particular demographics and influencing consumer
behavior. If these standards do not develop, existing sponsors or advertisers
may not continue their current level of Internet-based sponsorships or
advertising, and sponsors or advertisers who are not currently buying
sponsorships or advertising on the Internet may be reluctant to do so.
REVENUES FROM SUBSCRIPTION SERVICES MAY FAIL TO DEVELOP, WHICH WOULD HARM OUR
RESULTS OF OPERATIONS
While we intend to generate revenues through subscription services that
provide access to premium content and pay-per-view events, we have no experience
in doing so and our failure to generate revenues
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from these sources would harm our results of operations. While subscription
services are a viable business alternative to cover sporting events on
television, subscription services for our programming may not develop for a
variety of reasons. These include:
- our failure to develop and implement a successful strategy for
subscription services;
- delays in the development of broadband systems that enable increased
bandwidth for content and provide faster access for consumers;
- consumers' unwillingness to pay for the programming offered through
subscription services;
- prohibitive costs of producing higher quality programming for
subscription services; and
- security concerns in transmitting payment information for the
subscription services.
CHANGES IN REGULATION OF THE INTERNET COULD LIMIT OUR BUSINESS PROSPECTS
We are subject to the same federal, state and local laws as other
businesses on the Internet. Today there are relatively few laws directed towards
online services. However, due to the increasing popularity and use of the
Internet and other online services, it is possible that a number of laws and
regulations may be adopted with respect to the Internet or other online
services. Changes in regulation of the Internet could affect our results of
operations. These laws and regulations could cover issues such as user privacy,
freedom of expression, pricing, fraud, content and quality of products and
services, taxation, advertising, intellectual property rights and information
security. Applicability to the Internet of existing laws governing issues such
as property ownership, copyrights and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain. The vast majority
of these laws were adopted prior to the advent of the Internet and related
technologies and, as a result, do not contemplate or address the unique issues
of the Internet and related technologies. Those laws that do reference the
Internet, such as the recently passed Digital Millennium Copyright Act, have not
yet been interpreted by the courts and their applicability and reach are
therefore uncertain.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties.
While we do not sell information about users on our sites, we have historically
collected demographic data about our users to assist us in marketing our
sponsorship arrangements. Changes to existing laws or the passage of new laws
intended to address these issues, including some recently proposed changes,
could directly affect the way we do business or could create uncertainty in the
marketplace.
In addition to government regulation of the Internet, businesses and other
organizations may restrict access to the Internet at work. Many users access the
Internet through computer terminals at work, either because they do not have
access at home or because the networks at work provide faster and more reliable
access. Access at work may increase if employers upgrade their technology more
quickly than individual consumers in response to the development of broadband
solutions. In response to Internet use by employees or consultants at work,
employers may impose regulations limiting or eliminating Internet or broadband
access on their equipment. To the extent that many of our users access our Web
sites at work, our audience could diminish if businesses and other organizations
restrict Internet access at work.
OUR INTERNET ACTIVITIES MAY BECOME SUBJECT TO ADDITIONAL TAXES, WHICH COULD
NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS
Tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in electronic commerce.
Therefore, our products and services may become subject to additional sales and
income taxes. If consumers of our products and services are required to pay
additional sales or other taxes, they could reduce their purchases, which would
negatively affect our results of operations. As our content is available over
the Internet in multiple states and foreign countries, these jurisdictions may
claim that we are required to qualify to do business as a foreign corporation.
We are
15
<PAGE> 21
qualified to do business in six states in the United States, and qualifying in
additional states could subject us to additional taxes. Additionally, failure by
us to comply with foreign laws or to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and
penalties for the failure to qualify and could result in the inability to
enforce contracts in such jurisdictions.
WE HAVE LIMITED EXPERIENCE GENERATING REVENUES FROM ELECTRONIC COMMERCE, AND WE
MAY NOT BE ABLE TO DO SO IF WE ARE UNABLE TO DEVELOP AND IMPLEMENT A SUCCESSFUL
ELECTRONIC COMMERCE STRATEGY, DEVELOP A SUCCESSFUL LINE OF PRODUCT MERCHANDISE,
OVERCOME INTERNET SECURITY CONCERNS OR RESPOND TO COMPETITIVE PRICING
A key component of our business model includes selling products associated
with our sports entertainment programming. We have limited experience generating
revenues from electronic commerce. If we are unable to develop and implement a
successful electronic commerce strategy, develop a successful line of product
merchandise that appeals to a broad audience, overcome Internet security
concerns or respond to competitive pricing, we may be unable to generate
revenues from electronic commerce.
The need to securely transmit confidential information over the Internet
has been a significant barrier to electronic commerce and communications over
the Internet. Any compromise of security could deter people from using the
Internet and our Web sites to conduct transactions that involve transmitting
confidential information. We may need to expend significant resources to protect
against security breaches or to address problems caused by such breaches. Even
if we are able to overcome Internet security concerns, individuals may not buy
our products, resulting in revenues from electronic commerce that fall short of
the cost of our electronic commerce strategy. Many Internet companies engaged in
electronic commerce are losing money. Additionally, many of our current and
potential competitors may have significantly greater resources and more
favorable cost structures than we do and may be able to price comparable
products at levels we are unable to match without incurring unacceptable
operating losses.
RISKS RELATED TO THIS OFFERING
OUR COMMON STOCK PRICE IS LIKELY TO BE VOLATILE, WHICH COULD HURT INVESTORS AND
EXPOSE US TO LITIGATION
The stock markets in general, and the Nasdaq National Market and the market
for Internet-related and technology companies in particular, have experienced
extreme price and volume fluctuations in recent months. These fluctuations often
have been unrelated or disproportionate to the operating performance of these
companies. These broad market and industry factors could harm the market price
of our common stock, regardless of our performance. Market fluctuations, as well
as general political and economic conditions such as a recession or interest or
currency rate fluctuations, also could harm the market price of our common
stock.
The trading prices of many technology company stocks, particularly Internet
company stocks, have recently been at or near historical highs, reflecting
valuations substantially above historical levels. Our stock price could be
subject to wide fluctuations in response to a variety of factors, including
factors that may be beyond our control. These include:
- actual or anticipated variations in our quarterly operating results;
- announcements of technological innovations or new sports entertainment
programming by us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet and online entertainment industries;
- changes in the market valuations of other Internet companies;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- additions or departures of key personnel; and
16
<PAGE> 22
- sales of substantial amounts of our common stock or other securities in
the open market.
Volatility in the market price of our common stock could result in
securities class action litigation. This type of litigation could result in
substantial costs and a diversion of management's attention and resources.
OUR MANAGEMENT HAS BROAD DISCRETION TO DETERMINE HOW TO USE THE FUNDS RAISED IN
THIS OFFERING AND MAY USE THEM IN WAYS THAT STOCKHOLDERS MAY NOT DEEM DESIRABLE
We plan to use the net proceeds of this offering for general corporate
purposes, including working capital associated with the expansion of our network
production operations and our marketing campaigns. In addition, we may use a
portion of the net proceeds for the license or acquisition of additional
programming rights, creation of programming associated with these rights,
meeting our capital contribution obligations under our joint venture
arrangements, establishing additional joint ventures as well as capital
equipment purchases associated with both the production of our programming and
general business services. Our management will have significant discretion as to
the use of the net proceeds of this offering. This could result in the proceeds
being applied to uses stockholders may not deem desirable. In addition, we
cannot be certain that the proceeds invested will yield a significant return, if
any.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE ON
FAVORABLE TERMS AND COULD RESULT IN ADDITIONAL DILUTION
We currently anticipate that the net proceeds of this offering, together
with our available funds, will be sufficient to meet our anticipated needs for
working capital, capital expenditures and business expansion through at least
the next 12 months. Thereafter, we will need to raise additional capital.
Additional financing may not be available on favorable terms or at all. If
adequate funds are not available or are not available on acceptable terms, we
may not be able to fund our expansion, take advantage of unanticipated
opportunities or respond to competitive pressures. We may seek to raise
additional capital sooner than the next 12 months to fund unanticipated
opportunities or respond to competitive pressures. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders will be reduced and the securities
issued may have rights, preferences and privileges senior to those of our common
stock.
SALES OF OUR SHARES AFTER THIS OFFERING COULD NEGATIVELY AFFECT THE MARKET PRICE
OF OUR STOCK, IMPAIR OUR ABILITY TO RAISE CAPITAL THROUGH THE SALE OF ADDITIONAL
EQUITY SECURITIES AND RESULT IN FURTHER DILUTION
Sales of a substantial number of shares in the public market after this
offering could negatively affect the market price of our common stock and could
impair our ability to raise capital through the sale of additional equity
securities. Immediately following this offering, and based upon the number of
shares outstanding as of June 9, 1999, we will have 43,791,118 shares of common
stock outstanding assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options or certain warrants after June 9,
1999. Of these shares, all of the 5,000,000 shares sold in this offering will be
freely tradable without restrictions or further registration under the
Securities Act of 1933. The remaining 38,791,118 shares of common stock will be
"restricted securities" as defined by Rule 144 adopted under the Securities Act
of 1933. These shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701
adopted under the Securities Act of 1933. We can not predict the effect that
future sales made under Rule 144, Rule 701 or otherwise will have on the market
price of our common stock.
In addition, following closing of this offering we intend to register
shares of common stock issuable upon the exercise of stock options granted under
our stock option plans. After the effective date of such registration, shares
issued upon the exercise of stock options generally will be available for sale
in the public market. Our executive officers and directors and certain
stockholders beneficially owning in the aggregate 38,791,118 shares of common
stock are subject to lock-up agreements generally providing that, with certain
limited exceptions, the stockholder will not offer, sell, contract to sell,
grant any option to
17
<PAGE> 23
purchase or otherwise dispose of any shares of common stock, without the prior
written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated for a
period of 180 days after the first day any of the common stock to be sold in
this offering is released by the underwriters for sale to the public. Any shares
subject to these lock-up agreements may be released at any time by Merrill
Lynch, Pierce, Fenner & Smith Incorporated, with or without notice. The holders
of approximately 38,418,653 shares of common stock are entitled to certain
registration rights with respect to such shares. The holders of warrants to
purchase approximately 2,663,288 shares of common stock are also entitled to
certain registration rights with respect to such shares.
OUR EXISTING STOCKHOLDERS HAVE SIGNIFICANT CONTROL OF OUR MANAGEMENT AND
AFFAIRS, WHICH THEY COULD EXERCISE AGAINST YOUR BEST INTEREST
Upon completion of this offering, our executive officers, directors and
their affiliates will, in the aggregate, own approximately 38.9% of our
outstanding common stock, 38.2% if the underwriters' over-allotment option is
exercised in full. As a result, these persons, acting together, will have the
ability to control all matters submitted to our stockholders for approval and to
control our management and affairs. This concentration of ownership may delay or
prevent a change in control or discourage a potential acquirer from making a
tender offer or otherwise attempting to obtain control of our company, which
could decrease the market price of our common stock. Matters that would require
stockholder approval include the following:
- election and removal of directors;
- merger or consolidation of our company; and
- sale of all or substantially all of our assets.
SOME ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY
DELAY OR PREVENT A TAKEOVER OF OUR COMPANY
Some provisions of our charter documents and Delaware law may make it more
difficult for a third party to acquire control of us, even if a change in
control would be beneficial to our stockholders. Our board of directors can
issue up to 10,000,000 shares of preferred stock without stockholder approval.
The issuance of preferred stock could make it more difficult for a third party
to acquire our company. These provisions could diminish the opportunities for a
stockholder to participate in tender offers, including tender offers at a price
above the then-current market value of our common stock. Additionally, certain
of our material agreements, including our agreement with NBC Olympics, Inc.,
allow the other party to terminate the agreement if a change in control occurs.
This could also have the effect of deterring a change in control.
In addition, our charter documents provide that special meetings of
stockholders may be called only by the chairman of the board of directors, our
chief executive officer, a majority of the board of directors and holders of 50%
of the outstanding capital stock. Our charter documents also provide for a
classified board of directors, require advance notice of stockholder proposals
and nominations and do not provide for cumulative voting in the election of
directors. These provisions may make it more difficult for stockholders to
replace current members of our board of directors and may make the acquisition
of our company by a third party more difficult.
------------------------
Unless otherwise indicated, all information in this prospectus:
- assumes the automatic conversion of our outstanding preferred stock into
common stock on a one-for-one basis upon closing of the offering;
- assumes the underwriters' option to purchase additional shares in the
offering will not be exercised; and
- assumes the exercise of warrants to purchase 508,848 shares.
18
<PAGE> 24
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 5,000,000 shares of
common stock in this offering will be approximately $45.2 million ($52.2 million
if the underwriter's over-allotment option is exercised in full), assuming an
initial public offering price of $10.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses of $1.3
million. The principal purposes of this offering are to obtain additional
working capital.
We currently expect to use the net proceeds of this offering as follows:
- An estimated $20 to $25 million of the net proceeds may be used to meet
our capital contribution obligations to NBC/Quokka Ventures, LLC and CART
Digital Media Enterprises, LLC. The terms of the operating agreement for
NBC/Quokka Ventures, LLC require us to make quarterly capital
contributions in amounts necessary to fund the venture's operations on an
ongoing basis in accordance with the annual operating plan. With respect
to CART Digital Media Enterprises, LLC, we expect to make capital
contributions in order to meet our 50% share of the venture's need for
operating capital. Accordingly, the amounts and timing of these capital
contributions to be made by us with respect to each of NBC/Quokka
Ventures, LLC and CART Digital Media Enterprises, LLC will be based on
the actual activities of each venture and are unknown at this time.
- A portion of the net proceeds will be used to meet our obligations under
current programming rights and distribution agreements. Under these
agreements, we are required to make cash payments through 2003 totaling
$16.3 million.
- A portion of the net proceeds may be used for the repayment of
indebtedness. In particular, we may use a portion of the net proceeds to
repay approximately $646,000 of indebtedness outstanding under an
equipment financing arrangement with a bank. The terms of this agreement
require monthly repayments of principal and interest at 8.5% over 36
months commencing November 1998 and terminating October 2001. In
addition, we may also use a portion of the net proceeds to repay certain
other outstanding long-term equipment financing arrangements of
approximately $400,000. Terms of these agreements call for monthly
principal and interest payments through March 2004 at approximately 9.5%
interest.
- The remainder of the net proceeds will be used for general corporate
purposes, including expansion of our network production operations, the
license or acquisition of additional programming and distribution rights,
creation of programming associated with these rights, establishment of
additional joint ventures and purchases of capital equipment and
leasehold improvements and also including an estimated $7 to $12 million
for our expanded marketing campaign.
As of the date of this prospectus, we have no specific plan detailing the
amount of the proceeds to be used for each of the purposes described above and
cannot specify with certainty the particular uses for the net proceeds to be
received upon completion of this offering. We have estimated some of our uses of
proceeds above but these estimates may not be accurate, and our actual use of
proceeds may vary from these estimates. To the extent the net proceeds from this
offering are not sufficient for the uses described above, we may use a portion
of the net proceeds from our recent private sale of Series D preferred stock for
these described uses. Our management will have broad discretion in the
application of the net proceeds. Pending such uses, the net proceeds will be
primarily invested in short-term, interest bearing obligations, investment grade
instruments, certificates of deposit or direct or guaranteed obligations of the
United States. For a discussion of the risks associated with management's
discretion in the application of the net proceeds, see "Risk Factors -- Our
management has broad discretion to determine how to use the funds raised in this
offering and may use them in ways that stockholders may not deem desirable."
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock and do
not anticipate paying any cash dividends in the foreseeable future. In addition,
the terms of our subordinated debt and equipment lease lines prohibit the
payment of cash dividends on our stock.
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<PAGE> 25
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect the issuance of 4,522,223 shares of
Series D preferred stock issued in May and June 1999 and the conversion
of all outstanding shares of preferred stock, including the Series D
preferred stock, into common stock upon the closing of this offering; and
- on a pro forma as adjusted basis to reflect this conversion and the
application of the net proceeds from the sale of the 5,000,000 shares
offered hereby at an assumed initial public offering price of $10.00 per
share, after deducting the estimated underwriting discount and estimated
offering expenses.
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt and lease obligations, net of current
portion................................................... $ 699 $ 699 $ 699
Stockholders' equity(1):
Preferred stock, $0.0001 par value; actual -- 27,600,000
shares authorized, 23,736,016 shares issued and
outstanding; pro forma -- 32,322,223 shares authorized,
no shares issued and outstanding; pro forma as
adjusted -- 28,258,239 shares authorized, no shares
issued and outstanding................................. 2 0 --
Common stock:
Voting stock, $0.0001 par value; actual -- 45,400,000
shares authorized, 9,589,342 shares issued and
outstanding; pro forma -- 45,400,000
shares authorized, 38,656,429 shares issued and
outstanding; pro forma as adjusted -- 45,400,000
shares authorized, 43,656,429 shares issued and
outstanding........................................... 1 4 4
Non-voting stock, $0.0001 par value; actual -- 300,000
shares authorized, 300,000 shares issued and
outstanding; pro forma -- 300,000 shares authorized,
no shares issued and outstanding; pro forma as
adjusted -- 300,000 shares authorized, no shares
issued and outstanding................................ -- -- --
Additional paid-in capital................................ 41,087 82,803 127,986
Stock warrants............................................ 1,416 938 938
Accumulated deficit....................................... (23,894) (23,894) (23,894)
-------- -------- --------
Total stockholders' equity........................ 18,612 59,851 105,034
-------- -------- --------
Total capitalization.............................. $ 19,311 $ 60,550 $105,733
======== ======== ========
</TABLE>
- ---------------
(1) The share numbers in this table are based on shares outstanding as of March
31, 1999. These numbers include 508,848 shares issuable upon the exercise of
warrants outstanding as of March 31, 1999 at a weighted average per share
price of $1.06, which will expire if not exercised prior to the closing of
this offering, and exclude:
- 2,391,750 shares issuable upon the exercise of warrants outstanding as of
March 31, 1999 at a weighted average per share price of $5.33;
- 7,145,025 shares issuable upon the exercise of options outstanding as of
March 31, 1999 at a weighted average per share price of $4.35;
- 6,460,401 shares reserved for issuance under Quokka's 1997 Equity
Incentive Plan;
- 450,000 shares reserved for issuance under Quokka's 1999 Non-Employee
Director's Stock Option Plan; and
- 1,000,000 shares reserved for issuance under Quokka's 1999 Employee Stock
Purchase Plan.
Under the terms of the Series D financing agreements, Quokka may issue up to an
additional 200,000 shares of Series D preferred stock or an equivalent number of
shares of common stock. See "Capitalization," and "Description of Capital Stock"
for information relating to our capital structure. Also see
"Management -- Employee Benefit Plans" for a description of the benefit plans
referred to above.
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<PAGE> 26
DILUTION
The pro forma net tangible book value of Quokka as of March 31, 1999 was
$59.9 million, or $1.55 per share of common stock. "Pro forma net tangible book
value per share" is determined by dividing the pro forma number of outstanding
shares of common stock (reflecting the issuance of 4,522,223 shares of Series D
preferred stock in May and June 1999 as well as assuming the conversion of all
outstanding shares of preferred stock, including the Series D preferred stock,
into shares of common stock and the exercise of certain warrants) into the net
tangible book value of Quokka (total tangible assets less total liabilities).
After giving effect to the receipt of the estimated net proceeds from the sale
by Quokka of the 5,000,000 shares of common stock offered hereby (after
deducting the underwriting discount and estimated offering expenses), the pro
forma net tangible book value of Quokka as of March 31, 1999 would have been
approximately $105.0 million, or $2.41 per share. This represents an immediate
increase in pro forma net tangible book value of $0.86 per share to existing
stockholders and an immediate dilution of $7.59 per share to new investors
purchasing shares at the initial public offering price. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
Pro forma net tangible book value per share as of March
31, 1999............................................... 1.55
Increase per share attributable to new investors.......... 0.86
------
Pro forma net tangible book value per share after the
offering.................................................. 2.41
------
Dilution per share to new investors......................... $ 7.59
======
</TABLE>
The following table summarizes as of March 31, 1999, on the pro forma basis
described above, the number of shares of common stock purchased from Quokka, the
total consideration paid to Quokka and the average price per share paid by
existing stockholders and by investors purchasing shares of common stock in this
offering (before deducting the underwriting discount and estimated offering
expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 38,656,429 89% $ 82,807,494 62% $ 2.14
New stockholders............ 5,000,000 11% 50,000,000 38% 10.00
---------- --- ------------ ---
Total............. 43,656,429 100% $132,807,494 100%
========== === ============ ===
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
outstanding as of March 31, 1999. As of March 31, 1999, there were options
outstanding to purchase a total of 7,145,025 shares with a weighted average
exercise price of $4.35 per share. Additionally, the foregoing discussion and
tables assume no exercise of warrants outstanding as of March 31, 1999 to
purchase a total of 2,391,750 shares at a weighted average exercise price of
$5.33 per share. However, the discussion and tables assume the exercise of
certain warrants outstanding as of March 31, 1999 to purchase a total of 508,848
shares at a weighted average exercise price of $1.06 per share, which will
expire if not exercised prior to the closing of this offering. To the extent
that any of these warrants or options are exercised, other than the warrants
which we have assumed will be exercised, there will be further dilution to new
public investors. See "Capitalization" for information relating to our capital
structure and "Management -- Employee Benefit Plans" for a description of the
benefit plans under which the options referred to above were granted.
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<PAGE> 27
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus. The consolidated statement of operations data is qualified by
reference to:
- the audited consolidated statement of operations for each of the three
one-year periods ended December 31, 1996, 1997 and 1998;
- the unaudited consolidated statement of operations for each of the two
one-year periods ended December 31, 1994 and 1995; and
- the unaudited consolidated statement of operations for each of the two
three-month periods ended March 31, 1998 and 1999.
The consolidated balance sheet data is qualified by reference to:
- the audited consolidated balance sheet data as of December 31, 1996, 1997
and 1998; and
- the unaudited consolidated balance sheet data as of December 31, 1994 and
1995, and as of March 31, 1999, not included in this prospectus.
Note 1 of Notes to Consolidated Financial Statements contains a description
of the method used to compute the pro forma basic and diluted net income per
share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- --------- --------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues...................... $ 399 $ 82 $ 39 $ 4,000 $ 8,635 $ 4,867 $ 897
Production costs.............. 25 21 611 5,130 7,779 3,431 2,718
Research and engineering...... 41 18 423 1,030 4,480 585 2,132
Sales and marketing........... -- 5 53 816 2,519 358 1,390
General and administration.... 245 56 508 1,827 3,185 871 1,792
Depreciation and
amortization................ -- -- -- 68 530 44 430
--------- --------- --------- --------- ---------- ---------- ----------
Total costs and
expenses............. 311 100 1,595 8,871 18,493 5,289 8,462
Income/(loss) from
operations......... 88 (18) (1,556) (4,871) (9,858) (422) (7,565)
Equity and losses of
associated venture.......... -- -- -- -- -- -- 452
Interest (income)/expense,
net......................... (2) (12) 4 71 (320) (32) (169)
--------- --------- --------- --------- ---------- ---------- ----------
Net income/(loss)....... $ 90 $ (6) $ (1,560) $ (4,942) $ (9,538) $ (390) $ (7,848)
========= ========= ========= ========= ========== ========== ==========
Historical basic and diluted
net income/(loss) per
share(1).................... $ 0.02 $ 0.00 $ (0.41) $ (0.73) $ (0.99) $ (0.04) $ (0.80)
Shares used in computing
historical basic and diluted
net income/(loss) per
share....................... 3,800,000 3,800,000 3,800,000 6,791,534 9,654,835 9,651,566 9,756,059
Pro forma net loss per
share -- basic and
diluted..................... $ (0.40) $ (0.23)
Shares used in computing pro
forma net loss per share --
basic and diluted........... 23,914,934 34,000,923
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------- MARCH 31,
1994 1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------- ---------
(UNAUDITED)
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents..... $ 72 $ 0 $ 65 $ 4,027 $ 23,994 $ 15,263
Working capital............... 1 (8) (1,566) 1,444 23,218 13,953
Total assets.................. 117 0 113 4,651 28,212 22,853
Debt and leases, long-term
portion..................... 0 0 0 83 501 699
Accumulated deficit........... 0 (8) (1,566) (6,508) (16,046) (23,894)
Total stockholders' equity.... 1 (8) (1,566) 1,663 25,453 18,612
</TABLE>
22
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the related notes included elsewhere in this prospectus. This
discussion contains certain forward-looking statements that involve risks and
uncertainties. When used in this prospectus, the words "intend," "anticipate,"
"believe," "estimate," "plan" and "expect" and similar expressions as they
relate to us are included to identify forward-looking statements. Our actual
results could differ materially from the results discussed in the
forward-looking statements as a result of certain of the risk factors set forth
below and elsewhere in this prospectus.
OVERVIEW
Quokka Sports has pioneered a distinctive new style of global sports
entertainment programming that uses the digital information sharing and
communications power of the Internet. Our programming can be accessed over the
Internet at www.quokka.com. Our programming is designed to provide a compelling
sports entertainment experience by allowing viewers to choose from a variety of
perspectives, information and action sequences. We believe new interactive
technologies provide exciting opportunities for making information-intensive
programming also entertaining. With distinctive content designed to build on
this opportunity, we believe we are positioned to become a leading provider of
digital sports entertainment addressing the entertainment passions of a global
community of sports enthusiasts.
In August 1996, we adopted our current business model. The primary focus of
our operating activities since August 1996 has been to develop our digital
sports entertainment network. Our network development activities have included
studio services to strategic partners, including the International Olympic
Committee, Sydney Organizing Committee for the Olympic Games, News America
Digital Publishing and others. Studio services represent consulting and Web
design services.
We generate revenues from digital entertainment sponsorships, studio
services, advertising and electronic commerce. During 1998, 81% of our revenues
came from digital entertainment sponsorships, 18% of our revenue came from
studio services, 1% of our revenues came from advertising and less than 1% of
our revenues came from electronic commerce. We derive the majority of our
revenues from the sale of sponsorship packages to corporations. In the past, we
have accepted property and services as payment for sponsorships, including
Internet access, computer equipment, digital cameras, hosting services, and
telecommunications equipment and services. Property and services received as
payment are valued at fair market value based on the amounts normally charged to
third parties for similar property and services. We intend to reduce the amount
of property and services accepted for payment in future periods, although we may
not be successful in this regard.
Prior to 1999, our sponsorships were primarily short-term and associated
with two individual events, the Whitbread and Around Alone races. Our sponsors
typically pay fees or provide in-kind services, which we recognize as revenue
ratably over the duration of the event based upon the actual number of
impressions generated to date as compared to an estimated total number of
impressions for the entire event. Sponsors may require that we guarantee a
minimum number of impressions over the term of the event. In these instances, we
will defer a portion of the sponsorship revenues until the minimum number of
impressions has been achieved. We will also defer a portion of the revenues
until other contractual obligations have been satisfied and collection of the
related receivable is probable.
In 1999, we began to configure our sponsorships as multi-year, multi-event
and multi-benefit sponsorships. These new sponsorships, which we call digital
entertainment sponsorships, may include a variety of benefits such as category
exclusivity, embedded product placement in our programming, traditional sports
sponsorship benefits and sales and marketing assistance. We plan to sell digital
entertainment sponsorships to technology and communications companies as well as
consumer retail goods and services companies. These multi-year sponsorship
agreements are expected to provide for periodic sponsorship fees that we intend
to recognize ratably as revenues over the corresponding period during the term
of the contract, provided that no significant obligations remain and collection
of the resulting
23
<PAGE> 29
receivable is probable. Because digital entertainment sponsorships relate to our
network of events rather than a single event, we do not track the profitability
of each event. However, we do track production costs by event as well as the
visitors to our coverage of each event.
As a direct result of having only one live program at a time, revenues from
sponsorships, advertising and electronic commerce have varied on both a
quarterly and annual basis during our short operating history. Revenues may
fluctuate from period to period in the future depending upon our ability to
attract digital entertainment sponsorships, the number of live events that are
being produced and distributed simultaneously during any one period, our ability
to maintain a continuous programming calendar, our ability to attract a
worldwide audience for our sporting events, our ability to acquire long-term
digital and other intellectual property rights to global sporting events and our
ability to develop and produce sports programming which will attract a global
audience.
We also generate revenues by providing studio services that could lead to
digital sports entertainment programming opportunities. These revenues are
recognized in the period the service is provided. We intend to continue to offer
studio services; however, we expect studio services to decline substantially as
a percentage of overall revenues in future periods.
We have incurred significant net losses and negative cash flows from
operations, and as of March 31, 1999, we had an accumulated deficit of $23.9
million. This accumulated deficit resulted from the production costs of our
network programming, the costs of developing new and enhancing existing tools
and techniques that enhance our Quokka Sports Platform technology, the costs of
expanding our sales and business development efforts and other costs related to
ongoing research and design. Due to the planned expansion of our digital sports
entertainment programming, we expect to incur significant operating losses for
the foreseeable future. Although we have experienced revenue growth in recent
periods, this growth may not be sustainable and, therefore, these recent periods
should not be considered indicative of future performance. We may never achieve
significant revenues or profitability; or if we achieve significant revenues,
they may not be sustained.
Quokka and its subsidiaries and joint venture will account for acquired
media rights pursuant to Statement of Financial Accounting Standards No. 63.
Under FAS No. 63, a licensee shall report an asset and a liability for the
rights acquired and obligations incurred under a license agreement when the
license period begins and other conditions, including availability and
acceptance, have been met. The assets will be amortized over their estimated
useful life.
RESULTS OF OPERATIONS
Years Ended December 31, 1996, 1997 and 1998
Revenues. Revenues increased from $39,000 in 1996 to $4.0 million in
1997 to $8.6 million in 1998. In 1997, we generated revenues from the sale of
sponsorships for the first time. Revenues increased from 1996 to 1997 primarily
as a result of 1997 sponsorship sales totaling $2.7 million. The increase in
revenues from 1997 to 1998 is primarily attributable to a $4.3 million increase
in sponsorship revenues. Included in total sponsorship revenues for 1996, 1997
and 1998 were revenues relating to products and services accepted as payment of
$0, $1.7 million and $4.4 million. Products and services accepted as payment
have included Internet access, computer hardware and software, digital cameras,
hosting services, telecommunications equipment and other products and services
required to operate our events. These products and services are recorded as
revenues and are also reflected as production costs in the consolidated
statements of operations for all periods presented. The balance of the increase
in revenues was primarily attributable to increases in revenues from studio
services from $39,000 in 1996 to $1.2 million in 1997 to $1.6 million in 1998.
Production Costs. Total production costs increased from $611,000 in
1996 to $5.1 million in 1997 to $7.8 million in 1998. Production costs include
costs of personnel and consultants, computer hardware and software, travel,
satellite transmission costs, field gear, cameras, satellite phones, marketing
and an allocation of general and administrative expenses. The $4.5 million
increase in production costs
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from 1996 to 1997 is due to the launch of our first digital sports entertainment
program, the Whitbread race, during 1997. The $2.7 million increase from 1997 to
1998 is attributable to an increase in the number of months of live programming.
Research and Engineering. Research and engineering expenses increased
from $423,000 in 1996 to $1.0 million in 1997 to $4.5 million in 1998. Research
and engineering expenses include personnel cost, costs associated with network
operations and expenses incurred to improve and develop our Quokka Sports
Platform and broadband applications. The increase in research and engineering
expenses from year to year is attributable to an increase in the number of
development projects. Research and engineering costs are expensed as incurred.
During 1998, we entered into a software license and development agreement.
In connection with this agreement, we issued warrants to purchase 635,650 shares
of our preferred stock and recognized a non-cash charge of $853,000 during 1998.
Sales and Marketing. Sales and marketing expenses increased from
$53,000 in 1996 to $816,000 in 1997 to $2.5 million in 1998. Sales and marketing
expenses include personnel costs, consultants and advertising. These expenses
increased primarily due to increases in the number of sales and marketing
personnel and consultants. During 1998, we spent $554,000 for advertising and we
expect to significantly increase our advertising expenses in future periods as
we build the Quokka brand and awareness of our programming.
Depreciation and Amortization. Depreciation and amortization expenses
increased from $0 in 1996 to $68,000 in 1997 to $530,000 in 1998. Depreciation
and amortization expenses consist of depreciation of computers,
telecommunications equipment, software, and furniture and fixtures associated
with our operational infrastructure. Amortization expense relates to leasehold
improvements of our facilities in San Francisco. The increase in depreciation
and amortization expenses was primarily due to increased facilities, equipment
and related costs associated with an increase in personnel in all areas.
General and Administrative. General and administrative expenses
increased from $508,000 in 1996 to $1.8 million in 1997 to $3.2 million in 1998.
General and administrative expenses include management, business and legal
affairs, finance and accounting, facilities, management information systems and
human resources. The increase in general and administrative expenses is due to
increased personnel in all areas to support and grow our business including
increased facilities and related costs.
Interest Income and Expense, Net. Net interest expense was $4,000 in
1996 and $71,000 in 1997. Net interest income was $320,000 in 1998. Interest
expense incurred during these periods relate to our financing obligations for
various equipment purchases. Interest income recorded during these periods
includes interest income earned on cash and cash equivalents. The increase from
1997 to 1998 was primarily due to a higher investment balance throughout 1998
due to the issuance of preferred stock. Interest income in 1998 was partially
offset by increased interest expense due to borrowings under a line of credit.
Net Losses. Based upon the foregoing information, we had net losses of
$1.6 million for the year ended December 31, 1996, $4.9 million for the year
ended December 31, 1997 and $9.5 million for the year ended December 31, 1998.
Three Months Ended March 31, 1998 and 1999
Revenues. Revenues declined from $4.9 million for the three months
ended March 31, 1998 to $897,000 for the three months ended March 31, 1999.
Revenues for the first quarter of 1998 were primarily derived from sponsorship
revenues associated with our coverage of the Whitbread Round The World Race, our
sole event during the period. Revenues for the first quarter of 1999 were
primarily derived from sponsorship revenues associated with our coverage of the
Around Alone race, our sole event during the period. The Whitbread is a better
known event than Around Alone and, accordingly, attracted larger sponsorship
revenues.
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Production Costs. Production costs decreased from $3.4 million for the
three months ended March 31, 1998 to $2.7 million for the three months ended
March 31, 1999. The $713,000 decrease reflects significantly lower costs
associated with our coverage of the Around Alone race as compared to the
Whitbread race. Production costs for each event we cover vary based on the
specific attributes of each event, operating efficiencies gained from our
previous experience with similar events and the depth and breadth of our event
coverage. A combination of these factors resulted in production costs for the
Around Alone race that were less than those for the Whitbread race. Decreased
Around Alone production costs were partially offset by increased expenses
related to the production activities for upcoming events. Our production costs
associated with coverage of the Around Alone race, our sole event during the
period, exceeded the revenues generated by this coverage. Accordingly, our
coverage of the Around Alone race was not profitable.
Research and Engineering. Research and engineering expenses increased
from $586,000 for the three months ended March 31, 1998 to $2.1 million for the
three months ended March 31, 1999. This increase represents the cost of
additional personnel and related expenses associated with our continuing
development of our Quokka Sports Platform, broadband applications and network
operations.
Sales and Marketing. Sales and marketing expenses increased from
$358,000 for the three months ended March 31, 1998 to $1.4 million for the three
months ended March 31, 1999. The $1.0 million increase is attributable to
increases in the number of sales and marketing personnel and expenses related to
creating a brand, developing audience awareness of our programming and launching
www.quokka.com.
General and Administrative. General and administrative expenses
increased from $870,000 for the three months ended March 31, 1998 to $1.8
million for the three months ended March 31, 1999. This increase was
attributable to increased personnel and related facilities and other third-party
expenses associated with building our operational infrastructure. During the
first quarter of 1999, we leased additional office space in San Francisco and
new office space in London.
Depreciation and Amortization. Depreciation and amortization expenses
increased from $44,000 for the three months ended March 31, 1998 to $430,000 for
the three months ended March 31, 1999. The $386,000 increase was primarily due
to increased facilities, equipment and related costs associated with an increase
in personnel in all areas.
Interest Income and Expense, Net. Net interest income was $32,000 for
the three months ended March 31, 1998 and $169,000 for the three months ended
March 31, 1999. The $137,000 net increase reflects a higher investment balance
during the three months ended March 31, 1999 due to the issuance of preferred
stock during prior periods.
Equity and Losses of Associated Venture. We incurred net losses of
$452,000 in our joint venture with Forsythe Racing, Inc. for the period from the
inception of CART Digital Media Enterprises, LLC in January 1999 through March
31, 1999. We have accounted for our 50% interest in this joint venture under the
equity method of accounting. Expenses incurred during the period related
primarily to pre-production expenses for CART programming.
Net Losses. Based upon the foregoing information, we had net losses of
$390,000 for the three months ended March 31, 1998 and $7.8 million for the
three months ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since August 1996, we have financed our operations primarily through
private sales of our equity securities. Total net proceeds from sales of our
equity securities since August 1996 were $41.1 million through March 31, 1999.
In May and June 1999, we completed an additional private sale of our equity
securities. The gross proceeds from this transaction were $40.7 million.
In addition to funding ongoing operations and capital expenditures, our
principal commitments consist of various obligations under operating and capital
leases. On July 24, 1997, we entered into a capital lease for the use of certain
computer and telecommunications equipment with a purchase price of approximately
$120,000. This capital lease requires monthly payments of $4,200 through
November 2000. On October 7, 1998, we entered into a financing arrangement with
a bank to borrow $750,000 for the purchase of
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equipment. Our obligations under this financing arrangement are secured by the
underlying equipment. Terms of this agreement require monthly repayment over 36
months commencing November 25, 1998 in the amount of approximately $21,000 per
month plus interest at a rate equal to 0.75% over the prime rate quoted by the
bank. At March 31, 1999, the prime rate quoted by the bank was 7.75% and
accordingly the interest rate was 8.50%. Total rent expense for outstanding
leases is approximately $90,000 per month.
In February 1999, we established NBC/Quokka Ventures, LLC, a joint venture
with NBC Olympics, Inc. The terms of the operating agreement for the venture
require us to make quarterly capital contributions in amounts necessary to fund
the venture's operations on an ongoing basis in accordance with the annual
operating plan. Accordingly, the capital contribution amounts and the timing of
these contributions will be based on the actual activities of the venture and
are unknown at this time. We plan to fund the venture with our cash and cash
equivalent balances and the net proceeds from this offering. This venture has
been consolidated in our financial statements.
In February 1999, we entered into a subordinated debt agreement. The terms
of this agreement call for maximum borrowings of $10 million. Repayment is due
in 36 monthly installments commencing in February 2000 and is subject to
acceleration under certain conditions including the completion of an initial
public offering. No amounts were outstanding on this facility as of March 31,
1999. In connection with this agreement, we issued warrants for the purchase of
215,384 shares of preferred stock. The imputed value of these warrants is
$552,000 and has been treated as a loan commitment fee. This fee is being
amortized over the term of the six-month draw down period as no further services
are required to earn the warrants and they are fully vested, and $140,000 of
this amount was amortized in the three months ended March 31, 1999.
In March 1999, we established CART Digital Media Enterprises, LLC, a joint
venture with Forsythe Racing, Inc. The terms of the venture agreement require
the two parties to make equal capital contributions on a quarterly basis. We
currently expect to make capital contributions in order to meet our 50% share of
the venture's needs for operating capital. Accordingly, the capital contribution
amounts and the timing of these contributions will be based on the actual
activities of the venture and are unknown at this time. We plan to fund the
venture with our cash and cash equivalent balances and the net proceeds from
this offering. This joint venture has been accounted for under the equity method
in our financial statements.
We have acquired programming and distribution rights to various other
events. Under these agreements, we are required to make cash payments through
2003 totaling $16.3 million. We plan to fund these payments with our cash and
cash equivalent balances and the net proceeds of this offering.
At March 31, 1999, we had $15.3 million in cash and cash equivalents. Net
cash used in operating activities was $3.8 million and $10.9 million for 1997
and 1998. Net cash used in operating activities was $1.3 million and $6.4
million for the three months ended March 31, 1998 and 1999. Net cash used in
operating activities resulted from our net operating losses, adjusted for
certain non-cash items including compensation expense related to the issuance of
warrants to attract key vendors and business partners. Non-cash charges relating
to the issuance of these warrants were $62,000 and $450,000 for 1997 and 1998
and $382,000 and $569,000 for the three months ended March 31, 1998 and 1999.
Non-cash charges relating to depreciation expense were $68,000 and $530,000 for
1997 and 1998 and $44,000 and $430,000 for the three months ended March 31, 1998
and 1999.
Net cash used in investing activities was $295,000 and $2.7 million for
1997 and 1998. Net cash used in investing activities was $246,000 and $2.6
million for the three months ended March 31, 1998 and 1999. Net cash used in
investing activities resulted primarily from capital expenditures relating to
purchases of computer equipment.
Net cash provided by financing activities was $8.1 million and $33.5
million for 1997 and 1998. Net cash used in financing activities for the three
months ended March 31, 1998 was $11,000 and net cash provided by financing
activities for the three months ended March 31, 1999 was $279,000. Net cash
provided by financing activities for these periods included the issuance of
preferred stock, common stock and warrants.
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No provision for federal or state income taxes has been recorded as we
incurred net operating losses for the three months ended March 31, 1998 and 1999
and for 1996, 1997 and 1998. However, we have paid state franchise taxes during
1997 and 1998 as well as foreign corporation taxes during 1998. At December 31,
1998, we had approximately $12.0 million of federal net operating loss
carryforwards available to offset future taxable income; these carryforwards
expire in years 2011 through 2017. In addition, we have carryforwards of
approximately $10.0 million as of December 31, 1998 for California franchise tax
purposes, commencing in 2001. As a result of various equity transactions during
1996 and 1997, we believe our company has undergone an "ownership change" as
defined by Section 382 of the Internal Revenue Code. Accordingly, the use of a
portion of the net operating loss carryforward may be limited. Due to this
limitation, and the uncertainty regarding the ultimate use of the net operating
loss carryforward, we have not recorded any tax benefit for losses and have
recorded a valuation allowance for the entire amount of the net deferred tax
asset. In addition, certain events, including any sales by us of shares of our
stock, including sales pursuant to this offering, and/or transfers of a
substantial number of shares of common stock by the current stockholders, may
partially restrict our ability to use our net operating loss carryforwards.
We believe that the net proceeds from this offering, combined with current
cash and cash equivalent balances will be sufficient to fund our operating
requirements for working capital and capital expenditures for at least the next
twelve months. Thereafter, we will need to raise additional funds. To the extent
that we encounter unanticipated opportunities, we may seek to raise additional
funds sooner, in which case we may sell additional equity or debt securities or
borrow funds from banks. No assurances can be given that our efforts to raise
these funds will be successful. In the event we are unable to raise these funds,
our operations would suffer. Sales of additional equity or convertible debt
securities would result in additional dilution of our stockholders. For a
discussion of the risks associated with raising additional capital, see "Risk
Factors -- We will need to raise additional capital, which may not be available
on favorable terms and could result in additional dilution."
YEAR 2000 IMPLICATIONS
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced to
comply with year 2000 requirements.
We are in the process of assessing the year 2000 issue and expect to
complete our assessment by July 1999. We are conducting a three-phase process of
identifying both information technology and non-information technology systems
that are not year 2000 compliant, determining their significance to operations,
and developing plans to resolve issues where necessary. We have not incurred
material costs to date in this process and we do not believe that the cost of
additional actions will have a material effect on our operations. We currently
expect that we will complete this process in August 1999.
Although we currently believe that our systems and products are year 2000
compliant in all material respects, these systems and products may contain
undetected errors or defects with year 2000 date functions that may result in
material costs. Further, although we are not aware of any material operational
issues or costs associated with preparing our internal systems for the year
2000, we may experience serious unanticipated negative consequences, such as
significant downtime for one or more programming events, or material costs
caused by undetected errors or defects in the technology used in our internal
systems.
We use third-party equipment, software and content, including
non-information technology systems such as security systems, building equipment
and non-IT systems embedded microcontrollers that may not be year 2000
compliant. We have communicated with all of our hardware and software
developers, suppliers and other third parties to determine whether these third
parties are adequately addressing the year 2000 issue and whether any of their
non-IT systems have material year 2000 compliance problems. Based on the written
representations of these third parties, we believe that the third-party hardware
and
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software that we use is compliant or is expected to be compliant prior to the
year 2000. Failure of third-party equipment, software or content to operate
properly with regard to the year 2000 and thereafter could cause us to incur
unanticipated expenses to remedy any problems, which could have a material
adverse effect on our business, results of operations and financial condition.
We are in the process of developing a contingency plan to address situations
that may result if we, or third parties that we rely upon, are unable to achieve
year 2000 readiness. We currently expect to complete this contingency plan by
the end of the third quarter in 1999.
We do not currently have any information about the year 2000 status of our
sponsors. Failure of our sponsors' equipment or software due to year 2000
problems may result in reduced funds available for sponsorship activities.
Further, the purchasing patterns of sports viewers may be affected by year 2000
issues as companies expend significant resources to correct their current
systems for year 2000 compliance. Finally, we are subject to external forces
that might generally affect industry and commerce, such as utility or
transportation company year 2000 compliance failures and related service
interruptions. The occurrence of any year 2000 compliance failures that affect
our sponsors, our audience or industry and commerce generally could have a
material adverse effect on our business, results of operations and financial
condition.
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BUSINESS
The following description of our business should be read in conjunction
with the information included elsewhere in this prospectus. The description
contains certain forward-looking statements that involve risks and
uncertainties. When used in this prospectus, the words "intend," "anticipate,"
"believe," "estimate," "plan" and "expect" and similar expressions as they
relate to us are included to identify forward-looking statements. Our actual
results could differ materially from the results discussed in the
forward-looking statements as a result of certain of the risk factors set forth
below and elsewhere in this prospectus.
OVERVIEW
Quokka Sports has pioneered a distinctive new style of global sports
entertainment programming that uses the digital information sharing and
communications power of the Internet. Our programming is designed to provide a
compelling sports entertainment experience by allowing viewers to choose from a
variety of perspectives, information and action sequences. Our coverage of
sporting events incorporates a wide range of materials or digital media assets,
which might include: video, text, audio, images, athlete vital signs, locational
and directional data, environmental data, e-mails, results and timing. Our
programming can be accessed over the Internet at www.quokka.com and may be
delivered to viewers over other interactive systems that transmit digitized
data, such as cable and satellite systems, in the future. We believe new
interactive technologies provide exciting opportunities for making
information-intensive programming also entertaining. With distinctive content
designed to build on this opportunity, we believe we are positioned to become a
leading provider of digital sports entertainment addressing the entertainment
passions of a global community of sports enthusiasts.
We are creating an interactive digital sports network that offers a variety
of sports entertainment programming. In developing our programming calendar, we
currently target sports events that are generally long in duration and rich in
the types of materials or digital media assets we seek to incorporate in our
program. We also currently target sports events that involve continuous action
with multiple simultaneous activities and have a global audience that is
attractive to sponsors and advertisers. We have selected the Olympics, motor
racing, sailing and adventure sports as the first four channels of our network.
In February 1999, we established a joint venture with NBC Olympics, Inc. to
develop interactive digital coverage of the Olympics through August 2004. In
March 1999, through a joint venture with Forsythe Racing, Inc., we acquired
digital rights to cover the Championship Auto Racing Teams events through 2003.
Additionally, in March 1999, we acquired digital rights to cover FIM 500cc Road
Racing World Championship motorcycle races through 2003. In May 1999, we
acquired digital rights to cover the America's Cup Match yacht race in 2000. We
covered the 7th Whitbread Round The World Race from September 1997 to May 1998
and began coverage of the nine-month Around Alone sailing race in September
1998. We covered the 14th Marathon des Sables desert footrace and are also
covering Quokka-created adventure sports events as part of our adventure sports
channel. We plan to add programming to each of our four existing channels and
may create additional channels in the future.
INDUSTRY BACKGROUND
The Evolution of the Internet as a Powerful New Medium
The Internet has quickly become a global medium for worldwide
communication, instant access to information and electronic commerce.
International Data Corporation estimates that the number of Web users worldwide
will increase from approximately 142 million at the end of 1998 to more than 502
million by the end of 2003 and that more than 56% of Web users in 1998 accessed
the Internet from outside the United States. We believe such rapid growth is
attributable mainly to the increasing number of personal computers in homes and
offices, the decreasing cost of personal computers, technological innovations
providing easier, faster and cheaper access to the Internet and the
proliferation of content and services available on the Internet.
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The technological advances associated with the Internet and other emerging
interactive systems that transmit digitized data, such as cable and satellite
systems, provide advertisers with a level of targetability, interactivity and
measurability not available in traditional media. Accordingly, Forrester
Research estimates that the amount of Web advertising worldwide will grow from
$1.5 billion in 1998 to over $15.3 billion by the year 2003. Additionally, as
online merchants take advantage of these technological improvements to deliver a
guided selling experience, integrating intelligent product recommendations,
real-time customer services and simplified buying procedures, more consumers are
expected to engage in electronic commerce. International Data Corporation
estimates that the number of consumers making purchases on the Internet will
grow from 30.8 million in 1998 to 182.6 million in 2003 and that the total value
of consumer goods and services purchased over the Internet will increase from
$14.9 billion to $177.7 billion over the same five-year period. The combination
of the growth in online advertising and electronic commerce enhances the
Internet's value as a commerce medium. There can be no assurance that the
current growth of the Internet and Internet-related business will result in a
corresponding growth in our business.
As new interactive systems, including cable and satellite, continue to
become more widely adopted, we believe the Internet will continue to transform
from an information-based medium to one that enables dynamic entertainment-based
content. These new systems are capable of transmitting digitized material at
faster rates and consequently can transmit large amounts of this material, such
as video clips, within a relatively short time frame. These systems are often
referred to as "broadband" systems. Technology companies are developing these
broadband systems to accommodate the larger amounts of digitized data that must
be transmitted quickly to provide faster access, portability of media over
multiple delivery devices and new interactive opportunities. According to
Forrester Research, broadband access provides consumers with high-speed,
always-on connections and multiple services like telephone and Internet on a
single line at a price to performance ratio that is 5 to 25 times better than
conventional Internet dial-up connections. As a result, Forrester Research
estimates that approximately 15.8 million households in the United States will
have high-speed personal computer connections to the Internet by 2002.
The Global Sports Industry
Participatory and spectator sports are among the leading passions in
developed nations around the globe as evidenced by the popularity of sports
media and the amount of money consumers spend on sports events, products and
related services. The ESPN Chilton Sports Poll estimates that 86.6% of the
general population 12 years of age or older in the United States are sports
fans. Further, according to Nielsen Media Research, sports television
programming in the United States consistently draws large audiences, with sports
broadcasts comprising seven of the top ten most widely viewed telecasts during
the 1997-98 television season.
The business opportunities associated with sports are large and diverse.
Today, sporting events generate revenues from the sale of broadcast rights,
sponsorships, advertising, merchandising, publishing and venue access, and these
revenue opportunities continue to evolve. The Georgia Institute of Technology
estimated that revenue streams derived from spectator sports, sporting goods and
sporting publications in the United States in 1995 exceeded $130 billion.
Sponsorships frequently integrate the sponsoring company's products, logos and
trademarks with the sporting event. Based on research conducted by Sponsorship
Research International, an independent research organization that measures
global sponsorship opportunities, we estimate that in 1998 $13.2 billion was
invested globally in sports through the sponsorship of events, federations,
teams, individuals and stadiums.
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Sponsorship Research International has identified the following events as
some of the leading global sports sponsorship opportunities:
<TABLE>
<CAPTION>
NUMBER OF CUMULATIVE GLOBAL
SPORTING EVENT DURATION COUNTRIES TELEVISION AUDIENCE
- -------------- ---------- --------- -------------------
<S> <C> <C> <C>
World Cup Soccer (1994)........................ 52 games 188 32.1 billion
Olympics: Summer (1996)........................ 16 days 214 20.0 billion
Olympics: Winter (1994)........................ 16 days 100 10.7 billion
European Championship Soccer (1996)............ 31 games 192 6.7 billion
Formula 1 Grand Prix Season (1997)............. 17 races 133 5.4 billion
World Championship Athletics (1997)............ 9 days 154 3.8 billion
World Cup Rugby (1995)......................... 32 matches 100 2.7 billion
Whitbread Round The World Race (1993-94)....... 9 months 177 2.6 billion
Wimbledon Tennis Tournament (1996)............. 15 days 167 1.6 billion
CART World Series (1997)....................... 17 races 182 1.2 billion
Super Bowl (1996).............................. 1 game 187 0.1 billion
</TABLE>
In the table above, information for each event is as of the year indicated and
is the most recently available data from Sponsorship Research International.
Additionally, in applying the method used to determine the cumulative global
television audience a person who watches multiple games or multiple days of
coverage of an event would be counted multiple times. For example, a person who
watches 15 World Cup Soccer matches would be counted 15 times.
Advertising and merchandise sales also generate substantial revenues in the
sports industry. Paul Kagan Associates, Inc. estimates that advertisers in the
United States will increase their sports-related television advertising from
$4.8 billion in 1998 to $6.6 billion in 2003. The Sporting Goods Manufacturers
Association estimates that expenditures by sports fans in the United States on
sports-related goods and services reached $45.6 billion in 1998.
The growth of the Internet presents a unique means of reaching
geographically dispersed sports audiences. Because of the low incremental cost
of distributing information and entertainment over the Internet, producing
global sporting events for a geographically dispersed fan base is now
economically feasible. Additionally, as the Internet has evolved, sports fans
have increasingly turned to the Internet for sports information, making
sports-related Web sites some of the most popular online destinations. Based on
a poll of computer owners in the United States, the ESPN Chilton Sports Poll
estimates that 36 million people in the United States accessed sports
information on the Internet in 1998, an increase of 40% over 1997. In addition,
using Media Metrix data, we estimate that sports fans spend approximately 20%
more time per usage session on sports-related Web sites than the average user
does at the average Web site and revisit these sports-related Web sites
approximately 33% more often. At this time, our sites are not tracked by Media
Metrix, which uses a sampling procedure similar to television's Nielsen ratings.
Accordingly, we believe our traffic and audience metrics, which are based on
actual visitors, are not comparable to the Media Metrix statistics. Therefore,
we do not know where our sites would rank among sports-related Web sites.
Cyberdialogue/findsvp also found that on average, sports fans spend more time
per week online, have higher household incomes and make more online purchases
than the average online adult.
Limitations of Current Sports Coverage
Because of the tremendous popularity of sports worldwide, numerous
traditional and online information sources such as newspapers, magazines,
broadcasters and specialized sports-related Web sites have attempted to address
sports fans' demand for up-to-date information and entertaining coverage of
their favorite events. Although print media, such as newspapers and magazines,
are adequate for communicating basic information such as scores and statistics
or reporting on the outcome of an event, their content cannot be enhanced with
video animation or audio stimulation. Further, although these media have the
ability to produce in-depth analysis of athletes and events, the content cannot
be changed until a new edition is published and the timeliness of this content
is often limited because of inherent delays in production and distribution.
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Although radio and television broadcasters are able to provide real-time
coverage in an entertaining fashion, all viewers and listeners of a given
program receive a single presentation of the content. Broadcast coverage is
generally regional in nature, leaving significant global audiences untapped as
broadcasters seek to meet the demands of the largest audiences in their specific
coverage regions. Additionally, broadcast media are constrained by the limited
ability of the audience to interact with the programming on a real-time basis
and the relatively small number of available frequencies or channels. Further,
because traditional broadcast media are unlikely to devote all 24 hours of
programming available on a channel to coverage of a single event and because
traditional broadcast media do not have the technological capabilities to allow
viewers to choose from a variety of perspectives, information and action
sequences, we believe they are not well suited to cover sporting events with
long durations, large or discontinuous venues, multiple simultaneous activities
and continuous action for a global audience. For example, traditional
broadcasters were limited in their ability to provide continuous coverage of the
action during the Whitbread Round The World Race, which was primarily conducted
across the most remote sections of the world's oceans for approximately nine
months.
While Web sites that include sports information as part of their offerings
have proliferated, we believe these sites are typically more informational than
engaging. In general, these sites deploy traditional styles of sports coverage
by providing access to the same type of content available through traditional
media channels, except on a real-time and interactive basis. We believe that
because these sites use traditional styles of presenting content they fail to
take full advantage of the opportunities presented by new interactive
technologies to produce engaging sports entertainment programming.
THE QUOKKA SOLUTION
We have pioneered a unique new style of global sports entertainment
programming that uses the digital information sharing and communications power
of the Internet. By leveraging our rights to digital media assets such as
locational and directional data, environmental data, e-mails, video, text,
audio, images, results and timing, we believe we are able to capitalize on the
advantages of interactive systems to provide our global audience with a
compelling sports entertainment experience. Through our distinctive approach to
covering sports we intend to capitalize on the market opportunities created by
the emergence of the Internet as a communications and commerce medium, the
worldwide popularity of sports and the appealing demographics of sports fans.
Further, because we use the Internet to distribute our programming to
geographically dispersed audiences, we are able to reach significant global
markets on a cost-effective basis. The primary advantages of our solution are as
follows:
Brings the Sports Fan Closer to the Event Through Distinctive Programming
Our programming is designed to emulate the experience of being at the
sports venue by removing barriers between the athlete and the audience and
enabling fans to experience the sport from the athlete's perspective. We call
our distinctive approach to covering sports Quokka Sports Immersion. As
performance data about the athletes and their equipment are captured during
competitions, we create graphic visualizations, simulations and extensive
performance analyses. These visualizations, simulations and analyses, together
with e-mail from the athletes themselves, audio, video and other material, tell
the story behind a given athletic endeavor to fans who want to look deeper into
the action. For example, when covering the Whitbread and Around Alone races, we
presented the data that drove each skipper's tactical decisions, including each
boat's position as well as forecasts of wind speed, currents and water
temperature. Additionally, our programming includes virtual competitions that
parallel the actual event, allowing fans to compare their performance directly
against that of the competitors. The Quokka Sports Immersion experience is
controlled by each user in an interactive environment that traditional media
does not provide, enabling our audience to become actively involved in the
sports coverage they enjoy.
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Establishes a Network Offering Distinctive Sports Programming and Content
We are creating an interactive digital sports network that offers a broad
range of engaging sports entertainment programming. Our programming can be
accessed over the Internet at www.quokka.com and related event Web sites and may
be available through other interactive systems, such as cable and satellite
systems, in the future. Our selection of sports events is central to the
experience we create for our audience. In developing our programming calendar,
we are currently targeting sports events that are particularly well-suited to
our distinctive style of coverage, such as the Olympics, motor racing, sailing
and adventure sports. These sporting events typically have long durations, large
or discontinuous venues, multiple simultaneous activities or continuous action.
We believe that Quokka Sports Immersion has the potential to change the way
sports such as these are experienced.
Provides Attractive Opportunities for Sponsors and Advertisers
We provide our sponsors with value beyond a simple media buy over the
Internet. Sponsors secure exclusivity within a particular industry category and
the opportunity to embed and promote their products in our digital programming.
Our technology and communication sponsors also have the opportunity to showcase
their technological capabilities using our Quokka Sports Immersion programming.
Additionally, we believe we deliver a global audience of loyal users with
demographics desired by sponsors and advertisers. For example, our first digital
sports program, the 1997-98 Whitbread Round The World Race, attracted more than
1.8 million unique users from 177 countries, more than half of whom accessed the
site outside the United States. According to statistics audited by Internet
Profiles Corporation, these users spent an average of approximately 9.9 minutes
per visit at the site. This compares favorably to an average of 5.8 minutes per
visit at other leading sports-related Web sites, according to our estimates
based on Media Metrix statistics. According to a Quokka-conducted survey,
visitors to the Whitbread site were primarily between 25 and 34 years old and
had an average annual household income of $75,000. Additionally, according to
this survey, 64% of the visitors to the Whitbread site were college educated and
63% held professional, executive or technical positions. Based on these
demographic characteristics, we believe the visitors to the Whitbread site
represented an attractive, targeted audience for sponsors and advertisers.
STRATEGY
Our objective is to be the leading branded interactive network for digital
sports entertainment. Our strategy includes the following key elements:
Establish Key Relationships Centered Around Global Sporting Events
We intend to establish additional key relationships to complement our
existing relationships with global sports organizations and their media partners
in order to expand our programming. Through relationships with a variety of
sports leaders, including NBC Olympics, Inc. and Forsythe Racing, Inc., we and
our joint ventures have secured rights to provide digital coverage of major
sports events such as the Olympics and CART auto racing. We intend to expand our
programming schedule as we establish additional relationships. We also expect to
capitalize on the exposure we receive from our coverage of our existing events
to gain access to digital rights to additional sporting events in the future. As
we seek to expand our programming, we will target events that attract a global
audience and are well-suited to our distinctive style of programming.
Build Brand Recognition
We intend to build traffic and brand recognition by aggressively marketing
www.quokka.com as the first interactive network that emulates the experience of
being at the sports venue. We believe building brand awareness of www.quokka.com
and the Quokka Sports Immersion experience will lead users to associate our
style of programming with a distinctive experience that inspires lengthy repeat
visits and strong audience loyalty. We plan to market www.quokka.com through an
extensive traditional media campaign employing advertising through television,
print publications, outdoor signage and radio. We also plan to conduct a
simultaneous online advertising campaign and to gain increased exposure through
our co-branded initiatives. For example, we expect to receive significant
exposure on the CART Radio Network during its broadcast of CART FedEx
Championship Series races.
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Establish Global Communities by Bringing Together Geographically Dispersed
Audiences
We intend to use the global nature of the Internet to provide our sports
programming to large, geographically dispersed audiences. Through our
programming, we plan to create global online communities of viewers with similar
interests that come together to experience international sporting events that
take place continents or oceans away. For example, we plan to establish
membership-based online communities centered around each of our major channels.
These communities will provide geographically dispersed sports fans with the
opportunity to participate in virtual competitions, chat rooms and electronic
commerce. We believe these online communities will inspire sports enthusiasts to
visit our network repeatedly and will help establish www.quokka.com as the
leading destination site for global sports enthusiasts.
Generate Multiple Revenue Opportunities
We intend to leverage our distinctive programming, dispersed global
communities and interactive content library to create multiple revenue streams.
In addition to generating revenue by selling digital entertainment sponsorships
and advertising, we intend to offer subscription services that provide access to
premium content and pay-per-view events. We are also pursuing electronic
commerce opportunities to sell merchandise targeted to the audience of each
sporting event we cover as well as certain derivative products generated from
our content, such as books, games and screen savers. We also plan to expand our
library of archived content from our sports programming that we believe may
generate additional revenues through syndication.
Enhance Our Innovative Approach to Sports Programming
We plan to continue using leading-edge digital technology to create
entertaining sports experiences for our audience. To improve and expand our
programming, we intend to continue developing our technological expertise and
our content library as well as our strategic relationships with leading
technology companies. We believe that our innovative approach to sports
programming positions us to become the leading interactive sports network and
gives us a competitive advantage in the emerging digital broadcast industry. We
intend to leverage the experience we gain from covering each event across all of
our programming to enhance the overall experience for our audiences and
encourage them to visit our network for longer periods of time.
Capitalize on Evolving Broadband Opportunities
We plan to capitalize on opportunities created by the evolution of
broadband technologies. We intend to build our programming on a component by
component basis. We expect that this programming structure will enable us to
optimize the richness of our programming for the bandwidth available across a
range of interactive systems, including the Internet, cable modems, satellite
systems and other emerging broadband technologies. We believe this approach will
enable users to enjoy our programming at all connection speeds.
OUR SPORTS ENTERTAINMENT PROGRAMMING
Our selection of sporting events is the foundation for the experience we
create for our audience. In developing our programming calendar, we currently
target sporting events that are generally long in duration, have a global
audience and involve continuous action and multiple simultaneous activities.
Additionally, these events are generally rich in the materials or digital media
assets we seek to incorporate in our programming. We believe that as we expand
our programming and develop new methods of providing our distinctive sports
coverage, we will be able to enhance the overall experience for our future
audiences and encourage them to visit our network for longer periods of time. In
developing our distinctive coverage of each event, we strive to create an
experience through which our audience can connect with our content as a member
of a community with shared interests. Our goal is to enable our audience to
understand the event with the intensity of participating athletes, get to know
the athletes so the audience will empathize with them and interact with the
experience we create.
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Whitbread Round The World Race: Our Inaugural Event
Our digital coverage of the 7th Whitbread Round The World Race, a 32,000
nautical mile around-the-world sailing competition, provides an excellent
example of the programming that we are able to create by using Quokka Sports
Immersion. We chose this event as the first test of our programming approach
because we believed it exemplified the type of global, long-duration,
large-venue, continuous and multi-focus sporting event that traditional media
has failed to cover adequately and because it fit well with our distinctive
style of programming. By exploiting the new technological opportunities afforded
by the Internet, we created interactive coverage not possible through
traditional media. Team profiles and ongoing stories, such as accounts of the
drama that unfolded when a contender collided with an iceberg in the Southern
Ocean, made the athletes more than simply names on a screen but people to be
cheered on, empathized with and cared about. The Whitbread site attracted more
than 1.8 million unique users from 177 countries during the nine-month race,
with over half the audience coming from outside the United States.
When the ten Whitbread yachts left Southampton, England on September 21,
1997 to begin their nine-month race, we had each boat fully equipped to transmit
digital assets. Satellite transceivers on each boat sent digital video, still
images, audio clips, e-mails and locational and directional data to our
production studios in San Francisco. We then combined that data with wind,
weather and water current information forecasts to create our distinctive
coverage for the www.whitbread.org site. The site presented the drama
surrounding each boat's voyage, using the crew's own words and pictures. In
addition, the site gave fans the ability to follow the race action on our
proprietary Quokka Race Viewer, a fully interactive navigation quality map that
gave fans a bird's eye view of each boat's location, maneuvers and tactical
challenges 24 hours a day, seven days a week, allowing fans to drill down deeply
into the event and understand it from the sailor's perspective.
The locational and directional data provided by the boats as well as the
wind, weather and water current forecasts also fed our proprietary Virtual Race
game engine, allowing fans to sail their own virtual yachts, competing against
other virtual racers and comparing their progress against the actual
competitors. More than 11,000 virtual boats raced side-by-side with the real
boats on our Quokka Race Viewer, bringing virtual competitors into the heart of
the action. With access to the same information on wind speed, current and
weather as the actual competitors, the virtual racers could make real-time
strategy and tactics decisions regarding sail selection and course headings in
an effort to complete the course first.
Current and Upcoming Programming
We have selected the Olympics, motor racing, sailing and adventure sports
as the first four channels of our network, and we plan to develop additional
channels in the future. The following calendar identifies our and our joint
ventures' programming, including pre- and post-event coverage.
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[GRAPH OF PROGRAMMING CALENDAR DEPICTING APPROXIMATE START AND END DATES OF THE
FOLLOWING EVENTS: (1) OLYMPICS (OLYMPICS); (2) CART (MOTOR RACING); (3) FIM
GRAND PRIX MOTORCYCLES (MOTOR RACING); (4) AROUND ALONE (SAILING); (5) AMERICA'S
CUP; (6) FIRST ASCENT (ADVENTURE); (7) MARATHON DES SABLES (ADVENTURE) AND (8)
GREAT TRANGO TOWER (ADVENTURE).]
LOGO
Olympics
The International Olympic Committee expects more than 10,000 athletes from
an estimated 200 countries to compete in the 2000 Olympic Games in Sydney,
Australia. According to the International Olympic Committee, the 1996 Olympic
Games in Atlanta generated a cumulative television audience in the United States
of 2.3 billion. Additionally, the International Olympic Committee estimates that
Olympic marketing, which is composed of broadcast rights fees, sponsorships,
supplierships, license fees, ticket revenue and related merchandise sales, is
projected to exceed $3.5 billion for the 1997-2000 Olympic quadrennium.
Our joint venture with NBC Olympics, Inc. has the rights to provide
interactive digital coverage in the United States of the Summer Games in Sydney
in 2000, the Winter Games in Salt Lake City in 2002, the Summer Games in Athens
in 2004 and certain related pre-Games and United States Olympic qualifying
events. Additionally, the joint venture has secured rights to incorporate
limited highlights of NBC video into its digital interactive coverage for a
United States audience. See "-- Joint Ventures and Rights Agreements" for a
discussion of the rights held by the joint venture.
The joint venture is scheduled to launch its Web site in August 1999 in
advance of the 2000 Olympic Games. The site will build awareness for broadcast
and digital interactive coverage of the Games by covering pre-Olympic events,
such as the United States Gymnastics Championship and United States Olympic Team
Trials. In addition, covering the pre-Olympic events also has certain production
advantages. For example, the events will enable us to tune our production
infrastructure in advance of the 2000 Olympic Games. Likewise, in covering
pre-Olympic events, the joint venture will collect numerous digital assets, such
as athletes' backgrounds, that can also be used in the digital coverage of the
Olympic Games.
The joint venture is currently preparing for its coverage of the 2000
Olympic Games in Sydney and the United States trials leading up to these Games.
These development and pre-production activities include hiring key personnel,
integrating the respective expertise of NBC and Quokka, selecting the emphasis
for the coverage, gathering background information on athletes, building
templates for the joint venture's coverage and establishing the infrastructure
necessary to create the coverage and support anticipated visits to the joint
venture's Web site.
Motor Racing
Motor racing attracts a global audience with races held around the world.
Based on information compiled by Sponsorship Research International across 14
countries including the United States, the
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United Kingdom, Brazil and Russia, we estimate that there were approximately 340
million people who watched televised motor racing events and approximately 350
million people who watched televised motor cycling events in 1998. Additionally,
we believe that auto racing is one of the most popular spectator sports in North
America. According to the 1998 Goodyear Racing Attendance Report, race
attendance for the 12 North American racing series that the Goodyear Rubber &
Tire Company monitored in 1998 was approximately 17.1 million people.
We believe motor racing is well-suited to our distinctive style of
programming due to its continuous, multi-focus action. Although it is exciting
to follow the current leader, motor races are often won or lost by action
occurring elsewhere in the race. A contender threatening to overtake the lead
may lose critical time during an inefficient pit-stop or a dark-horse may
suddenly pull into the lead because of a particularly adept cornering maneuver.
Additionally, motor racing fans tend to be interested in following one or two of
their favorite racers, who, unless in the lead, may rarely be shown on-air by
traditional broadcasters.
Our coverage of a motor racing event will generally include:
- a proprietary Quokka Race Viewer providing an up-to-the-minute lap
position graphic, lap time and time-behind-leader updates;
- track audio feeds;
- graphical representations of the course;
- a chronicle allowing fans to follow their favorite drivers and teams;
- in-depth profiles on drivers, teams and manufacturers with interactive
photo galleries;
- interactive global event map and detailed race schedules, including
United States and foreign television coverage schedules;
- a virtual competition, where fans play the role of team owners; and
- community and electronic commerce areas.
CART. We have acquired, through a joint venture with Forsythe Racing,
Inc., the exclusive worldwide interactive media rights for all Championship Auto
Racing Team (otherwise known as CART) events through December 31, 2003. CART
competitors drive open-wheel champ cars with engines generating 900 or more
horsepower at speeds up to 200 miles per hour. In 1999, the CART FedEx
Championship Series consists of 20 races held on large and small oval tracks,
permanent road courses and temporary street circuits in Japan, Brazil, Canada,
the United States and Australia. See "-- Joint Ventures and Rights Agreements"
for a discussion of the rights held by the joint venture.
In Motegi, Japan, the joint venture's digital coverage of CART captured the
drama that sometimes occurs in motor racing. Near the end of the race, live
in-car audio feeds from drivers Adrian Fernandez and Greg Moore gave our
audience a unique insight into the closing laps of Fernandez's victory at
Motegi. Fernandez and his crew gambled on having enough gas to complete the race
and stayed out of the pit, knowing that the entire race could be lost by running
out of gas on the last lap. Meanwhile, Moore spun with less than two laps to go,
bringing out a caution flag that enabled Fernandez to conserve fuel and win the
race. With live in-car audio feeds from both these drivers, our digital coverage
brought our audience inside the drama as it was developing.
We plan to provide coverage of the annual CART FedEx Championship Series
racing season, which runs from February to November, and to extend the coverage
to include pre-and post-season developments. We may elect to cover additional
CART events in the future.
FIM Motorcycle Racing. We have acquired the exclusive, worldwide
interactive media rights for all Federation Internacionale de Motocyclisme
(otherwise known as FIM) 500cc Road Racing World Championship Grand Prix and
related 250cc and 125cc motorcycle events from January 1, 2000 through December
31, 2003. Racing prototype motorcycles, competitors in FIM Grand Prix races
compete at speeds in excess of 170 miles per hour on fixed course tracks. Races
are held throughout the world several
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times a month during the racing season. The season runs from mid-April through
October, with 16 races held in such varied locations as Brazil, Germany, South
Africa, Italy, Holland, Spain, Japan and Malaysia. Beginning in 2000, we plan to
provide coverage of the annual FIM Grand Prix motorcycle racing season and to
extend this coverage to include pre- and post-season developments. See "-- Joint
Ventures and Rights Agreements" for a discussion of the rights we acquired from
FIM.
Sailing
Sailing attracts a significant worldwide audience, with events like the
Whitbread Round The World Race generating a cumulative global television
audience of approximately 2.6 billion according to Sponsorship Research
International. Based on information compiled by Sponsorship Research
International across 14 countries including the United States, the United
Kingdom, Brazil and Russia, we estimate that approximately 270 million people
watched televised sailing events in 1998. As evidenced by our successful
coverage of the Whitbread race, sailing is well-suited to our distinctive style
of programming.
Our coverage of a sailing event will generally include:
- a proprietary Quokka Race Viewer depicting each boat's position as well
as wind, water current and other weather data on navigation-quality
charts 24 hours a day, seven days a week;
- substantial coverage by the competitors themselves through e-mail, moving
video, still video and audio transmissions;
- a chronicle allowing fans to follow their favorite skippers and crews;
- behind-the-scenes, in-depth coverage of the crews and boats, with
interactive photo galleries;
- a virtual competition, where fans can race head-to-head against other
virtual competitors and compare their progress against the actual
competitors, and where both actual and virtual boats are tracked on our
proprietary Quokka Race Viewer; and
- community and electronic commerce areas.
Around Alone. We have acquired the exclusive, worldwide interactive
media rights for the Around Alone race through December 31, 2001 with the option
to extend the term for two additional four-year periods.
Held every four years, the Around Alone race is a 27,000 nautical mile solo
sailing race around the world through some of the earth's most treacherous
waters. The race challenges the nautical skills, endurance, resourcefulness,
innovation and fortitude of competitors who circumnavigate the globe making only
four stops. Sixteen competitors entered the 5th Around Alone race that began in
September 1998 and ended in May 1999. This year's race had stops in Cape Town,
South Africa; Auckland, New Zealand; Punta del Este, Uruguay; and Charleston,
South Carolina. Our coverage of the 5th Around Alone race began in September
1998, and by mid-April 1999, we had attracted more than 300,000 unique users.
Because we had equipped the boats with instruments to capture real-time
information about the competitors, we were able to provide live coverage of
significant events during the race -- events that previously would have been
covered only after the sailors had reached port and the action had long-since
passed. For example, fans were able to follow the exciting rescue of Isabelle
Autissier whose boat capsized in the middle of the Southern Ocean. With
Autissier too far from land for any national rescue services to reach her, a
fellow competitor undertook the rescue effort. Our audience tracked Giovanni
Soldini as he turned back and began a 24-hour, 200-mile battle against
gale-force winds and 30-foot waves to search for and eventually rescue
Autissier. Additionally, the race garnered significant media attention in the
United States when traditional media companies became aware of the story we were
covering live. Traditional media, including the New York Times, National Public
Radio and Dateline NBC, picked up the story of Viktor Yazykov, a Russian
competitor who performed surgery on his own arm in the middle of the Atlantic
Ocean by following a doctor's e-mail instructions. We posted the e-mails as they
were received and were the first media company with pictures of Yazykov during
and following the surgery. We supplied
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video clips, still photographs and other assets to traditional media companies
seeking to cover the story, demonstrating the distribution of our coverage
possible through traditional media. We believe our ability to cover exciting
sports events as they happen in remote locations, often using first-person
accounts from participants such as Soldini and Yazykov, increases the
attractiveness of our programming to sports fans.
America's Cup 2000. We have acquired the exclusive, worldwide interactive
media rights for the America's Cup 2000 Match yacht race to be held in February
and March 2000 in Auckland, New Zealand. Sailors first competed for the
America's Cup in 1851, making it one of the oldest international sporting
trophies in continuous competition. The America's Cup race is held approximately
every four years. Syndicates from approximately ten countries will compete in a
challenger elimination series in the fall of 1999, with the winner facing the
host and defending New Zealand team in a best five-of-nine series. See "-- Joint
Ventures and Rights Agreements" for a discussion of our rights relating to
coverage of the America's Cup Match.
Adventure Sports
Adventure sports such as climbing expeditions, wilderness challenges and
similar events are particularly well-suited to our style of programming. By
collecting digital media assets from these remote events, we are able to create
entertainment experiences that help to transform these events into spectator
sports. As an emerging category of spectator sports there are few established
branded adventure sports events. Accordingly, our programming for adventure
sports will cover Quokka-originated events as well as currently existing events
such as the Marathon des Sables.
Our coverage of an adventure sports event will generally include:
- graphical displays depicting the athletes' positions, whether climbing up
a mountain or running across a desert, on a 24 hours a day, seven days a
week basis;
- vital signs, such as heart-rates, from selected athletes;
- substantial coverage by the competitors themselves through e-mail, video,
still images and audio transmissions;
- a chronicle allowing fans to follow their favorite adventure athletes and
teams;
- behind-the-scenes coverage of the rigors and challenges presented by the
event as well as the event location; and
- community and electronic commerce areas.
Marathon des Sables. We provided exclusive interactive coverage of the
14th Marathon des Sables in April 1999. The Marathon des Sables is a grueling
seven-day footrace that stretches approximately 140 miles through Morocco's
Sahara Desert. During the 14th race, rest stations were available to the
athletes at predetermined locations that ranged from six to 44 miles apart. Each
of the 590 competitors had to carry his or her own backpack containing food,
sleeping gear and anti-venom kits. Water was provided, but was typically limited
to a ration of nine liters a day.
First Ascent: The Expedition to China's Karakoram Range. From mid-April
through June 1999, we provided coverage of a crew of seven climbers traveling by
truck and camel across the ancient Silk Route from Beijing to Kashgar. This
3,000 mile Quokka-originated expedition to the mountains in the Karakoram range
in the Chinese Himalayas included several first ascents by our company-selected
team of world-class climbers. The team also searched for a route up Hidden Peak,
the world's 11th tallest mountain. Although a route was not found, we plan to
schedule a second expedition in 2000 to continue the search.
Great Trango Tower. We have acquired the exclusive, worldwide interactive
media rights to cover a June through August 1999 climbing expedition by the
North Face Climbing Team to and on the unclimbed northwest face of Great Trango
Tower in Pakistan. The northwest face of the Great Trango Tower looms a vertical
mile above the base camp and rises to a peak of approximately 20,500 feet. With
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live images, audio, video and electronic mail from the climbing team, our
audience will be brought closer to the climbing experience.
AUDIENCE GENERATION
We are planning to employ a variety of methods to promote www.quokka.com
and to build and retain our audience.
Building Our Audience
We plan to build our audience by:
- launching an aggressive media campaign, using print, outdoor signage,
radio, television and Internet advertisements to build our brand and
promote awareness of www.quokka.com and our programming offerings;
- capitalizing on exposure to a national audience through guaranteed
promotion by NBC of the Web site being developed by the joint venture we
formed with NBC Olympics, Inc.;
- expanding our programming offerings;
- capitalizing on our association with, and promotion of our coverage
provided by, governing bodies and rights holders of the sports events we
cover; and
- exploiting appropriate syndication opportunities by distributing portions
of our programming to other Internet sites and traditional media
companies in exchange for advertisements or other promotional
consideration designed to direct audience to www.quokka.com.
Consistent with this plan to build our audience, in May 1999, we entered
into a binding letter of intent with Excite@Home to integrate and promote our
sports programming on the www.excite.com Web site and the @Home broadband
service. Under the letter of intent, we acquired guaranteed levels of promotion
and prominent placement of the Quokka brand on the Internet and broadband
services of Excite@Home. These promotional efforts will link users to content
that we develop and that Excite@Home licenses from us. We anticipate that the
branding and promotional opportunities on the www.excite.com Web site and the
@Home broadband services will help build our audience and increase awareness of
www.quokka.com.
Retaining Our Audience
We plan to retain our audience by:
- continuing to deliver immersive and engaging content;
- maximizing audience loyalty through community-building activities such as
virtual competitions, chat rooms, online forums and online transactions;
and
- migrating our audience to different channels on our network.
We believe an important metric for measuring the quality of our audience is
the duration of an average visit to our Web sites. Based on Media Metrix data,
we estimate that users spend an average of approximately 5.8 minutes per visit
on other leading sports-related Web sites. To date, our event programming has
generated average visit durations during the event significantly greater than
this 5.8-minute average.
<TABLE>
<CAPTION>
AVERAGE
EVENT CHANNEL VISIT DURATION
- ----- ------- --------------
<S> <C> <C>
Whitbread Round The World Race.......... Sailing 9.9 minutes
Around Alone race....................... Sailing 14.6 minutes
CART auto races......................... Motor Sports 13.1 minutes
Marathon des Sables..................... Adventure 19.6 minutes
</TABLE>
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Our internal statistics presented in the above table have been audited by
Internet Profiles Corporation. The CART race coverage is ongoing and final
results may differ.
Marketing and Advertising
As of March 31, 1999, we had 15 full-time employees on our marketing team.
In addition to being responsible for brand marketing, program marketing,
audience research and the coordination of our external public relations efforts,
members of our marketing team also serve as product managers for our media and
derivative products. In 1998, we spent $554,000 on advertising. In 1999, we
expect to raise our advertising expenditures and launch an aggressive media
campaign. We also plan to increase our marketing staff to support our brand
building, electronic commerce and derivative product strategies.
LEVERAGING OUR AUDIENCE AND CONTENT: GENERATING MULTIPLE REVENUE STREAMS
We plan to leverage our diverse, global audience and suite of content
offerings to create multiple revenue streams. We believe we can generate revenue
from a variety of sources, including sponsors, advertising, electronic commerce,
derivative product sales, subscription and pay-per-view opportunities and studio
services.
Digital Entertainment Sponsorships
We plan to offer multi-year digital entertainment sponsorships to
technology, communications, consumer retail and consumer services companies. We
currently sell sponsorships to certain companies whose products can be
integrated into our technical infrastructure. These companies will form the
Quokka Performance Team. Each member of the Quokka Performance Team will be an
exclusive sponsor within a particular product or service category. In early
1999, we entered into three-year digital entertainment sponsorships with Compaq
Computer Corporation and Computer Associates International, Inc. Compaq
acquired exclusive sponsorship of our programming in the computer hardware
category. Computer Associates acquired exclusive sponsorship of our programming
in the category covering database management, software, systems or tools and any
software that monitors and maintains information technology production and
delivery systems. Compaq has the right to terminate its sponsorship agreement on
an annual basis if it is dissatisfied with our performance, while Computer
Associates has the right to terminate its sponsorship agreement at the end of
the second year of the agreement.
Although the benefits associated with Team membership are and will continue
to be custom-designed and consequently may vary from agreement to agreement,
members of the Quokka Performance Team will receive benefits such as the
following:
- exclusive exposure in their category as part of our digital media
coverage, including embedded product placement in our programming that
identifies the sponsor as an enabler of the Quokka Sports Immersion
experience;
- traditional sports sponsorship benefits in connection with Quokka-owned
events, including venue signage, licenses to use event designations in
their own marketing efforts and access to hospitality suites; and
- sales and marketing assistance, including targeted lead generation, trade
show presence, in-store demonstrations using our digital content and
sales presentations demonstrating the Team member's contribution to the
Quokka Sports Immersion experience.
In addition to the Quokka Performance Team, we plan to create additional
"Teams" with similar custom-designed sponsor benefits in order to build
sponsorship revenues. For example, consumer retail goods and services companies
could become part of an Athlete's Team, covering equipment, sports clothing and
similar items of interest to athletes of all abilities. We developed our Team
model for digital entertainment sponsorships as we identified the various ways
we provided value to sponsors of our early Web sites, such as Tandem (which has
since been acquired by Compaq Computer Corporation), which accounted for
approximately 52% of our revenues in 1998, and CompuServe, which accounted for
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approximately 16% of our revenues in 1998. We plan to continually evolve our
Team model in order to better meet sponsors' needs.
Because sponsorship is already part of the sports industry, many sports
governing bodies or other rights holders for the events we cover will have
pre-existing sponsorship relationships. We believe these pre-existing
sponsorships will provide us with ready-made sales opportunities. In some
circumstances, however, pre-existing sponsorships associated with specific
events may limit the pool of prospective companies we can approach regarding
sponsorship sales in connection with these events.
Advertising Opportunities
We plan to generate additional revenues from banner advertisements that are
prominently displayed throughout our digital sports entertainment network. In
selling banner advertisements, we plan to target companies seeking to reach a
global sports audience. Our experience with the Whitbread race demonstrated that
our distinctive coverage can attract a significant loyal and global audience
representing a demographic base sought by Internet advertisers and sponsors from
the consumer-products industry. We believe that by delivering an audience that
returns to our site frequently and stays for an extended period of time, we can
provide additional value to our sponsors and advertisers and generate
advertising revenues on a per user basis in excess of that currently achieved
elsewhere in the Internet industry.
Electronic Commerce Opportunities
We plan to develop electronic commerce opportunities on our Web sites to
generate additional revenues, as well as enhance our user experience. As
electronic commerce continues to grow, we expect that sports fans will
increasingly seek sports merchandise, event gear and other equipment over the
Internet and other digital distribution systems. We believe audiences of each of
our channels provide a receptive market for goods relating to sailing, motor
sports, the Olympics and adventure sports as well as general sports merchandise.
In the future, we plan to offer event-branded gear, event-related gear, Quokka-
branded products and our derivative products. In addition, we hope to offer
products produced by our digital entertainment sponsors that we use in creating
and producing the Quokka Sports Immersion experience. We will seek to make the
electronic shopping experience as immersive as possible so that it complements
the overall look and feel of our digital media programming. Additionally, by
providing access to high-quality sporting and events-related products through
our site or other digital distribution systems, we believe that we will be
expanding the overall Quokka experience for our audience.
Derivative Products: Leveraging Digital Assets
We plan to repurpose our digital content for distribution through
derivative products, such as books, magazines, other publications, videos and
screen savers. We believe that our audience will be a receptive market for such
derivative products and that such products will also appeal to people who are
not yet part of our audience. One of our initial derivative products is a book
containing page views from the Whitbread race that tells the inside story of the
race from beginning to end and maps each competitor's progress throughout the
race. Additionally, we believe that derivative products will provide additional
value to our digital entertainment sponsors and can be used to gather important
information regarding our audience. For example, we created a screen saver that
embedded our sponsors' logos within digital media from the Whitbread
competition. Approximately 40,000 users downloaded the screen saver for free in
exchange for providing valuable, in-depth demographic information.
Subscription and Pay-Per-View Opportunities
As broadband interactive systems, such as cable and satellite systems,
proliferate and users are able to access greater volumes of streaming video and
audio in interactive settings, we believe we may be able to distribute our
distinctive sports content through subscription services and that certain sports
events or coverage depths may be appropriate for distribution on a pay-per-view
basis.
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Studio Services
We believe our studio services, which have included designing the official
Web site for the International Olympic Committee, have provided opportunities to
build strategic relationships with key players in the sports and sports media
industries. Our studio services have been primarily strategic in nature, and we
believe that revenues from studio services are likely to decrease as a
percentage of total revenues in the future.
International Olympic Committee. We produced www.olympic.org, the
official site of the International Olympic Committee and have advised the
International Olympic Committee on interactive rights and branding on the
Internet. Creation of the www.olympic.org site was a multi-phase project aimed
at establishing a significant online presence for the Olympic movement. This
Olympic site provides a store of information on Olympic history, tradition and
current events. Our work for the International Olympic Committee accounted for
more than 12% of our revenues in 1998.
Our Sales Team
As of March 31, 1999, our sales team consisted of thirteen full-time
employees, twelve of whom focus on selling sponsorships. Because of the
strategic and customized nature of our sponsorship sales, we plan to add
additional members to our sponsorship sales force. In connection with NBC/Quokka
Ventures' coverage of the Olympics, Quokka and NBC Olympics, Inc. will jointly
sell sponsorships for the joint venture's Olympic Web site. Additionally, we
plan to expand our sales force significantly in order to grow advertising sales
and develop our media and derivative products sales. We may also use third party
vendors to sell banner ads on our site.
THE QUOKKA SPORTS PLATFORM
The Quokka Sports Platform is a proprietary set of processes and
facilitating technologies that enables us to collect digital assets from sports
events and produce and deliver our distinctive programming. We believe this set
of processes and technologies provides a robust and efficient method that
facilitates real-time production of our sports entertainment programming and
maximizes the long-term value of the digital assets that Quokka collects and
produces. Our current programming is produced using the Quokka Sports Platform,
which is continuously being enhanced and improved to accommodate our expanding
requirements.
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At the highest level, the Quokka Sports Platform is organized into six
segments:
[GRAPHIC TITLED "QUOKKA SPORTS PLATFORM" AND DEPICTING
DATA FLOW THROUGH THE FOLLOWING SIX STAGES OF THE QUOKKA SPORTS
PLATFORM: (1) COLLECTION; (2) TRANSMISSION; (3) PRODUCTION;
(4) DISTRIBUTION; (5) DELIVERY; AND (6) CLIENT.]
LOGO
Collection. Collection is the process of capturing data at event
venues. Collection is the point at which the Quokka Sports Platform begins and
the raw data from venues become digital media assets, the fundamental building
blocks of the Quokka Sports Platform. Digital media assets consist of individual
units of digital content, such as photographic images, video streams or e-mails
from an athlete as well as information about the assets, such as author or
physical storage location.
Devices capturing wide-ranging data are already a part of many sports. For
example, a world-class yacht is equipped with over 40 sensors that track
multiple variables such as rig tension, rudder position and wind speed. Over 80
attributes of a CART car's performance are measured, including fuel level,
engine temperature and engine RPMs. Athletes use this feedback to hone their
skills and track their performance. We seek access to relevant portions of this
data either directly by connecting to the sensors monitoring the actual
information or indirectly through our contractual relationships with the
governing body of an event, such as CART. We also seek access to data by
securing voluntary cooperation from athletes.
Remote Production and Transmission. Collected digital media assets are
prepared for transmission and then transmitted to our production studio. In our
remote production process, we define event-specific data tags that indicate the
type of data included in a transmission in much the same way desktop icons
indicate whether a file is a word processing document or electronic spreadsheet.
Remote production teams also control which assets are captured, formatted and
transmitted from the event and manage physical resources necessary to accomplish
this task. Tagged data is then transmitted to our production studio over
Internet Protocol networks, using satellite data communications, high-bandwidth
wide-area networks or other communications technologies.
Production. Transmissions are stored at our production studio in San
Francisco on receipt. Our event producers, directors and their multi-disciplined
teams use these transmitted digital assets to create multiple visual and audio
presentations. Aided by automation technologies, digital media assets received
from the sports venue are combined with previously stored assets or original
material created by our staff of designers, writers, audio specialists and
photographers. In advance of each event, these teams have
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developed story-telling templates that enable the action to be experienced from
the athlete's perspective and drive the audience to explore the site further.
Distribution and Delivery. Distribution is the process of transporting
our content from our production studio through high-speed interactive systems to
entities that provide delivery, while delivery is the process of ultimately
reaching the end user. We currently distribute our Quokka Sports Immersion
programming through www.quokka.com over the Internet. Accordingly, delivery is
accomplished primarily through Internet service providers who provide end-users
with access to the Internet through their computers. We are also designing our
programming to exploit the technological opportunities presented by other
interactive systems, such as DSL, cable modem and satellite. If we ultimately
employ these distribution methods, our future delivery partners are likely to
include the providers of DSL service, interactive cable services, or satellite
providers. End-users accessing our programming through these systems in the
future may use computers or ultimately other interactive viewing devices such as
interactive televisions. We have also distributed our content to traditional
broadcast and print media. We believe these traditional media may serve as
additional distribution outlets for our rich digital programming.
JOINT VENTURES AND RIGHTS AGREEMENTS
We plan to secure rights to cover sporting events through a variety of
methods, including direct acquisition and the formation of joint ventures with
rights holders or other entities having established relationships with rights
holders. We have experience with both methods. To date, we have acquired the
rights to events such as FIM Motorcycle racing directly from the rights holders
and we have entered into a joint venture with NBC Olympics, Inc. in connection
with the Olympic Games and a joint venture with Forsythe Racing, Inc. in
connection with CART.
Joint Venture with NBC. In February 1999, we formed NBC/Quokka
Ventures, LLC with NBC Olympics, Inc., a wholly-owned subsidiary of National
Broadcasting Company, Inc. In connection with the formation of the joint
venture, we contracted with the joint venture to provide the services necessary
for the joint venture to provide interactive digital coverage. Consequently, we
expect that the joint venture's interactive digital coverage of the Olympics on
its Web site will showcase Quokka's distinctive style of programming and will
complement NBC's television coverage.
NBC Olympics, Inc. granted the joint venture the following interactive
media rights, subject to limitations, in connection with the Olympic Games and
certain United States qualifying events through 2004:
- United States interactive rights to incorporate limited highlights of NBC
video into its coverage;
- an exclusive license to produce the official NBC interactive media
coverage of the Games;
- a license to incorporate still photographs and sequential still
photographs taken from video produced from the Games by NBC Olympics into
the joint venture's coverage;
- a license to incorporate into the joint venture's coverage historical
Games footage, non-competition video and all research and other
materials, whether text, audio, video, still footage, written or fixed in
any other medium relating to the Games produced by NBC Olympics;
- the right to distribute the joint venture's coverage in interactive media
throughout the United States; and
- a license to use the composite NBC/Olympic logo on the joint venture's
Web site in connection with the production, operation, promotion,
marketing and distribution of the joint venture's coverage of the Games.
In order to protect its broadcast rights and brand, however, NBC Olympics,
Inc. can restrict the joint venture's use of any of the foregoing interactive
media rights if:
- NBC lacks the ability to grant such rights to the joint venture as a
result of contractual limitations or restrictions imposed by, or
conflicts with any legal rights held by the International Olympic
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Committee or any other person or entity possessing intellectual property
or other rights in the still photographs, sequential still photographs or
video, whether Games, non-competition or historical;
- a use conflicts with NBC's current sponsors or advertisers or the
sponsors or advertisers of the International Olympic Committee, United
States Olympic Committee, Sydney Organizing Committee of the Olympic
Games, Salt Lake Olympic Organizing Committee or the 2004 Games
Organizing Committee;
- the digital assets are involved in any transaction by us or the joint
venture with any NBC Competitor, as defined below;
- a use competes with NBC's broadcast, cable or direct broadcast satellite
coverage of the Games; or
- a use violates NBC's, NBC Sports', the International Olympic Committee's,
the United States Olympic Committee's or other Olympic organizations'
editorial policies and practices.
NBC/Quokka Ventures, LLC is owned 51% by us and 49% by NBC Olympics, Inc.,
and management is vested in a board of directors, three of whom are currently
appointed by us and two of whom are currently appointed by NBC Olympics, Inc.
Under the terms of the venture's operating agreement, Quokka is solely
responsible for making cash capital contributions to the venture. The terms of
the operating agreement for the venture require us to make quarterly capital
contributions in amounts necessary to fund the venture's operations on an
ongoing basis in accordance with the annual operating plan. Accordingly, the
amounts and timing of these capital contributions will be based on the actual
activities of the venture and are unknown at this time. NBC Olympics, Inc.'s
obligation to the joint venture is to contribute interactive media rights as
described above as well as on-air promotion of the site, access to NBC
personalities and research.
NBC Olympics, Inc. has the right to terminate the joint venture in the
event an NBC Competitor:
- merges or otherwise consolidates with us in a transaction where we are
not the surviving entity;
- becomes the beneficial owner of 15% or more of our outstanding equity
securities;
- becomes entitled to elect, appoint or replace a member or members of our
board of directors unless NBC Olympics, Inc. is also granted the same
right; or
- acquires all or substantially all of our assets.
For these purposes, an "NBC Competitor" includes any media company that is
significantly engaged in any of the primary businesses of NBC Olympics, Inc.,
National Broadcasting Company, Inc. or its subsidiaries or any
telecommunications, Internet or similar company that is significantly engaged in
any of the primary businesses of NBC Olympics, Inc., National Broadcasting
Company, Inc., its subsidiaries or Snap! LLC or successor entities. However, an
NBC Competitor shall not include any entity identified by Quokka in writing to
NBC Olympics, Inc. that NBC Olympics, Inc. does not designate as an NBC
Competitor in writing to Quokka within 30 days of our written notice.
Joint Venture with Forsythe Racing, Inc. In January 1999, we
established CART Digital Media Enterprises, LLC a joint venture with Forsythe
Racing, Inc. Forsythe owns two of the teams that compete as part of the
Championship Auto Racing Teams circuit and brings to the joint venture racing
expertise as well as long-standing relationships with suppliers, teams and event
promoters in the auto racing world.
CART Digital Media Enterprises, LLC is owned 50% by us and 50% by Forsythe
Racing, Inc., and management is vested in a board of managers, two of whom are
appointed by us and two of whom are appointed by Forsythe Racing, Inc. We expect
to make capital contributions in order to meet our 50% share of the venture's
need for operating capital. Accordingly, the amounts and timing of these capital
contributions will be based on the actual activities of the venture and are
unknown at this time.
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In March 1999, the joint venture secured the exclusive worldwide
interactive media rights for all CART events through December 31, 2003 with a
right of first negotiation beyond that date. In connection with this digital
coverage, the joint venture also secured exclusive worldwide rights to:
- use CART's marks in its digital coverage as well as in connection with
any derivative products;
- use data and content from the events;
- syndicate content; and
- sell commercial partnerships, advertising, official merchandise,
electronic commerce products and services, official photographs and
derivative products.
The right to sell advertising and commercial partnerships is subject to
obligations to honor category exclusivity rights of current CART sponsors or to
first negotiate with those sponsors and the right to sell derivative products
and syndicate content is subject to CART's reasonable approval. The right to
sell official merchandise, official photographs and other electronic commerce
products and services is subject to receiving approval of other third parties.
CART has the ability to terminate the agreement if:
- the joint venture materially breaches any term of the agreement,
including failure to pay amounts owing under the agreement, subject to
notice and an opportunity to cure;
- the joint venture fails to maintain state of the art quality and
technological enhancements, subject to notice and an opportunity to cure;
- the Web site fails to achieve certain minimum levels of traffic, subject
to notice and an opportunity to cure;
- if the joint venture or we provide similar services to an open wheel
professional auto racing sanctioning body, league or series currently
domiciled in the United States that promotes products or services
competitive with those of CART; or
- if more than 49% of the ownership or beneficial interest in the joint
venture or in Quokka is transferred, sold or assigned to an entity whose
products or services are competitive to or in conflict with those of
CART.
FIM Motorcycle Racing
We have acquired from Dorna Promocion del Deporte, S.A. the exclusive,
worldwide interactive media rights for all FIM Road Racing World Championship
Grand Prix events from January 1, 2000 through December 31, 2003. In connection
with our coverage rights, we have secured the exclusive worldwide rights to:
- use FIM Motorcycling World Championships' trademarks as part of our
coverage as well as in connection with any derivative products;
- use data and content from the events;
- syndicate content; and
- sell sponsorships, advertising, official merchandise, electronic commerce
products and services and derivative products.
Our right to sell advertising and sponsorships is subject to obligations to
honor category exclusivity rights of current FIM Motorcycling World
Championships sponsors or to first negotiate with those sponsors and our right
to sell derivative products is subject to Dorna's reasonable approval. Our right
to syndicate content is subject to a restriction that certain assets may not be
syndicated alone without Dorna's consent. Our right to sell official merchandise
and other electronic commerce products and services is subject to
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receiving approval of certain other third parties. Dorna has the ability to
terminate the agreement if we fail to pay the required rights fee.
Around Alone
We have acquired from Great Adventures, Ltd. the exclusive, worldwide
interactive media rights for the Around Alone race through December 31, 2001
with the option to extend the term for two additional four-year periods. In
connection with our coverage rights, we also have secured worldwide rights to:
- use Around Alone's trademarks in our coverage as well as in connection
with any derivative products;
- use data and content from the events; and
- sell sponsorships, advertising, official merchandise, certain electronic
commerce products and services, official photographs, video and audio and
derivative products.
Our right to sell advertising and sponsorships is subject to certain obligations
to approach current Around Alone sponsors. Our right to sell official
merchandise, official photographs, video and audio and certain electronic
commerce products and services is subject to receiving approval of certain other
third parties. Great Adventures has the ability to terminate the agreement if we
fail to pay any revenue sharing earned.
America's Cup 2000
We have acquired the exclusive, worldwide interactive media rights for the
America's Cup 2000 Match yacht race to be held in February and March 2000 in
Auckland, New Zealand. In connection with our coverage rights, we also have
secured rights to:
- create and host the exclusive official America's Cup 2000 and Team New
Zealand Web sites;
- use trademarks and logos of America's Cup 2000 and Team New Zealand on
the Web sites we develop;
- collect and distribute data and content from the race; and
- sell and retain the revenues from sponsorship, advertising and commercial
arrangements to sell official merchandise.
In selling advertising and sponsorships, we are required to avoid conflicts
with existing sponsors of America's Cup 2000 or Team New Zealand. The agreement
can be terminated if we materially breach its terms, which could include our
failure to pay amounts we owe under the agreement.
Commitments Relating to Rights Acquisition
In connection with securing the rights to cover various events, we agree to
pay rights holders minimum annual guaranteed amounts, profit participation or
up-front fees, or a combination of these payments. See "Management's Discussion
and Analysis -- Liquidity and Capital Resources" for a discussion of our future
aggregate financial obligations relating to existing rights agreements.
COMPETITION
The market for Internet services and products is relatively new, intensely
competitive and rapidly changing. Since the Internet's commercialization in the
early 1990's, the number of Web sites on the Internet competing for consumers'
attention and spending has proliferated. We expect that competition will
continue to intensify.
We believe that our programming does not compete directly with traditional
media, primarily because traditional media frequently do not provide substantial
coverage of the sports that we cover and because we believe our programming can
substantially enhance coverage provided by traditional media.
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We expect that the number of our direct and indirect competitors will
increase in the future. We anticipate that, as the Internet and other
interactive systems, such as cable and satellite systems, converge with
traditional television broadcasting and traditional cable networks, significant
competition may come from the cable arena, including such sports-oriented cable
networks as the ESPN networks.
We believe that the principal competitive factors in attracting and
retaining audience are the ability to offer compelling and entertaining sports
programming, the depth, breadth and timeliness of coverage and brand
recognition. We believe that the principal competitive factors in securing and
retaining long-term digital rights to cover sporting events include the ability
to do the following:
- offer high-quality coverage;
- establish and maintain relationships with rights holders;
- deliver an attractive audience demographics;
- maintain credibility as a leading and enduring company; and
- pay substantial rights fees.
We may be unable to compete successfully with respect to one or all of these
factors. To review the risks we face from competitors, see "Risk Factors -- The
online digital sports entertainment industry is intensely competitive, and we
may be unable to compete successfully against current and future competitors."
INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY
The www.quokka.com site is hosted at Frontier GlobalCenter in Sunnyvale,
California. All of our network operations are controlled from our headquarters
in San Francisco, California. We provide multiple Web servers that run the
Microsoft Internet Information Server on the Microsoft Windows NT Server
operating system and Compaq server hardware. Internet access is maintained
through Frontier GlobalCenter.
The network infrastructure is composed of Cisco Systems, Inc. products in
redundant configurations. The computer and networking equipment used to operate
our Web sites is configured with multiple power supplies. Frontier GlobalCenter
provides a generator with up to two weeks of backup power.
Our operations depend upon our ability to protect systems against damage
from fire, earthquakes, power loss, telecommunications failure, break-ins,
computer viruses, hacker attacks and other events beyond our control. A disaster
or malfunction that disables either our San Francisco production facility or
Frontier Global Center could interrupt our programming completely, limit the
quantity or timeliness of updates to our productions or limit the speed at which
our audience can access our content. Although we do not currently have a
documented disaster recovery plan, we intend to create one.
The market for digital media is characterized by rapid growth, rapidly
changing technology, evolving industry standards and frequent announcements of
new developments. To be successful, we must adapt to our rapidly changing
environment by continually improving the performance, features and reliability
of our services as well as adapting to new technologies. We may also incur
substantial costs if we need to modify our programming or distribution processes
to adapt to these changes. Our business could be adversely affected if we incur
significant costs without adequate results or cannot adapt to these changes.
INTELLECTUAL PROPERTY
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our success. We rely on a
combination of copyright, trademark, service mark, patent and trade secret laws
and contractual restrictions to protect our proprietary rights in products and
services. The measures taken by us to protect our intellectual property may not
prevent misappropriation of our technology or deter independent third-party
development of similar technologies.
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We also cannot guarantee that infringement or other claims will not be
asserted or prosecuted against us in the future whether resulting from our
internally developed intellectual property or licenses or content from third
parties. For a description of our intellectual property practices and potential
risks, see "Risk Factors -- We may be unable to adequately protect or enforce
our intellectual property rights, and our efforts to do so could be
time-consuming and expensive and could divert management attention from
executing our business strategy."
GOVERNMENT REGULATION
We are subject to the same federal, state and local laws as other
businesses on the Internet. Today there are relatively few laws directed towards
online services. However, due to the increasing popularity and use of the
Internet and other online services, it is possible that a number of laws and
regulations may be adopted with respect to the Internet or other online
services. For a description of risks we face from regulation of the Internet,
see "Risk Factors -- Changes in regulation of the Internet could limit our
business prospects."
We are qualified to do business in six states in the United States, and
failure by us to comply with foreign laws or to qualify as a foreign corporation
in a jurisdiction where we are required to do so could subject us to taxes and
penalties for the failure to qualify and could result in the inability to
enforce contracts in such jurisdictions. Any such new legislation or regulation,
or the application of laws or regulations from jurisdictions whose laws do not
currently apply to our business, could have a negative effect on our business.
EMPLOYEES
As of March 31, 1999, we had 186 employees, including 84 in production and
programming, 41 in engineering, software development and network operations, 15
in marketing, 13 in sales and 33 in administration, which includes rights
acquisition and other business services. We consider our relations with our
employees to be good. We believe that our future success will depend in part on
our continued ability to attract, integrate, retain and motivate highly
qualified technical and managerial personnel and upon the continued service of
our senior management and key creative personnel, none of whom is bound by an
employment agreement. Our growth has required us to continually hire, train and
manage new employees at a rapid rate, although competition for qualified
personnel in our industry and geographical location is intense. There can be no
assurance that we will be successful in attracting, integrating, retaining and
motivating a sufficient number of qualified personnel to conduct our business in
the future.
FACILITIES
Our principal administrative, marketing, production and research and
engineering facilities are located in approximately 41,000 square feet of office
space in San Francisco, California under a lease that expires in March 2006. We
have entered into four additional office leases in San Francisco, California
covering an aggregate of approximately 140,000 square feet at four additional
sites to accommodate additional personnel. Approximately 88,000 square feet of
this space is not expected to be available until Spring 2000. We have a 168
square-foot office in Troy, Michigan, a 400 square-foot office in La Jolla,
California and a 208 square-foot office in Schaumburg, Illinois for local sales
activities. Finally, we have entered into a long-term lease covering
approximately 5,000 square feet of office space in London, England which will
serve as the center for our international operations. We are actively seeking
additional space.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our directors,
executive officers and certain other key employees as of March 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Alan S. Ramadan................... 41 President, Chief Executive Officer and Director
Richard H. Williams(1)............ 55 Chairman of the Board of Directors
John Bertrand A.M................. 52 Vice Chairman of the Board of Directors
Alvaro J. Saralegui............... 42 Chief Operating Officer
Les Schmidt....................... 44 Executive Vice President, Chief Financial Officer and
Secretary
Michael W. Gough.................. 43 Chief Creative Officer and Executive Producer
L. Steve Nelson................... 40 Senior Vice President, Olympics
Thomas P. Newell.................. 41 Senior Vice President, Business and Legal Affairs
David A. Riemer................... 41 Senior Vice President, Marketing
Pascal Wattiaux................... 38 Senior Vice President, Engineering
Mark J. Ellis..................... 40 Vice President, Sales
Marc P. Erzberger................. 31 Vice President, Motor Racing and General Manager
G. Michael Novelly................ 34 Vice President Finance and Controller
M. Elizabeth Sandell.............. 43 Vice President, Organizational Design and Development
Gerardo Seeliger.................. 52 General Manager, Europe
Brian J. Terkelsen................ 35 Vice President, Programming and Production
Walter W. Bregman(1)(2)........... 65 Director
Roel Pieper....................... 43 Director
James G. Shennan, Jr.(1)(2)(3).... 57 Director
Barry M. Weinman(2)(3)............ 60 Director
</TABLE>
- ---------------
(1) Member of the Nominating Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
Alan S. Ramadan has served as our President and Chief Executive Officer
and as a director since August 1996, when we incorporated in Delaware under the
name Quokka Productions, Inc. Additionally, Mr. Ramadan served as Managing
Director of our Company from 1990 to August 1996, during which period we were
known as Ozware Developments Unit Trust and operated in Australia. In January
1993, Mr. Ramadan joined Fluid Thinking, Pty. Ltd. in Melbourne, Australia as
that company's Chief Executive Officer until June 1995. As Chief Executive
Officer of Fluid Thinking, Pty. Ltd., Mr. Ramadan was responsible for drawing
together a team of specialists that, together with the Technology Foundation,
developed key technology used by oneAustralia in the America's Cup challenge.
Mr. Ramadan also founded Best Knowledge Systems, a consulting company, and
worked as a research scientist at BHP Steel and as a computer scientist at
Monash University in Melbourne, Australia. Mr. Ramadan holds a B.Sc. in Computer
Science and Applied Mathematics from Monash University and is a 1995 graduate of
the Stanford Business School's Executive Program for Growing Companies.
Richard H. Williams has served as a director since August 1996, when we
incorporated in Delaware under the name Quokka Productions, Inc. Since April
1997, Mr. Williams has served as our Chairman of the Board. From December 1993
to February 1996, Mr. Williams was President and Chief Executive Officer of
Illustra Information Technologies, Inc. In February 1996, Illustra Information
Technologies, Inc. was acquired by Informix Software, Inc., where Mr. Williams
served as Senior Vice
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President until August 1996. From October 1991 to May 1992, Mr. Williams was
Executive Vice President of Sales for Novell, Inc., and General Manager of that
company's Digital Research Systems Group. Prior to that time, Mr. Williams
served as President and Chief Executive Officer of Digital Research, Inc. Before
joining Digital Research, Inc., Mr. Williams was employed by IBM for twenty two
years, where he served as Vice President of Plans, Controls and Product
Management for the General Products Division from May 1984 to December 1986. Mr.
Williams holds a B.S. in Mathematics from the University of North Dakota and
conducted graduate studies at the University of Minnesota in numerical analysis
and statistics.
John Bertrand A.M. has served as a director since August 1996 when we
incorporated in Delaware under the name Quokka Productions, Inc. Since April
1997, Mr. Bertrand has served as our Vice Chairman of the Board. From September
1992 to June 1995, Mr. Bertrand was the Chairman of the Board of Fluid Thinking,
Pty. Ltd. and the skipper of oneAustralia, the 1995 America's Cup Challenge team
that received technological support from Fluid Thinking, Pty. Ltd. From
September 1995 to October 1998, Mr. Bertrand was Chairman of the Australian
Government's Industry Research and Development Board. From June 1993 to the
present, Mr. Bertrand has been the Chairman of the Southern Cross Foundation, an
Australian scholarship foundation for engineering and applied science students.
Mr. Bertrand holds a B.S. in Mechanical Engineering from Monash University and a
M.S. in Naval Architecture from M.I.T. During his twenty-nine year international
sailing career, from 1970 to the present, Mr. Bertrand has represented Australia
in five America's Cups and two Olympic Games. Mr. Bertrand won the America's Cup
for Australia in September 1983 and is a life member of the Australia's Sports
Hall of Fame as well as the International America's Cup Hall of Fame.
Alvaro J. Saralegui joined Quokka in April 1999 as our Chief Operating
Officer. From March 1998 to April 1999, Mr. Saralegui was employed by the People
Magazine Group where he initially served as Vice President of People Weekly
until he was promoted to Group Publisher in January 1999. From September 1983 to
March 1998, Mr. Saralegui was employed at Sports Illustrated, Inc, where he
served as General Manager from November 1992 to March 1998. During his fifteen
years at Sports Illustrated, Inc., Mr. Saralegui also served as that company's
Business manager, Director of Marketing and Sales Development and Advertising
Sales Director. Mr. Saralegui holds a B.A. in History and Economics from
Dartmouth and an M.B.A. from Columbia University.
Les Schmidt joined Quokka in February 1998 as our Senior Vice President,
Quokka Productions, Chief Financial Officer and Secretary and was promoted to
Executive Vice President, Chief Financial Officer and Secretary in February
1999. From September 1996 to June 1997, Mr. Schmidt served as the Chief
Executive Officer of MECON, a healthcare benchmarking company. Mr. Schmidt
joined The Learning Company in 1987 and served as that company's Chief Financial
Officer until September 1994 when he was promoted to Chief Operating Officer. He
served as Chief Operating Officer of The Learning Company and its successor, The
Learning Company, Inc., a publicly traded developer and publisher of
educational, foreign language and home office productivity software, until
September 1996. Prior to that, Mr. Schmidt served as the Controller for Applied
ImmuneSciences, Inc., a venture-backed biotech start-up. Before joining Applied
ImmuneSciences, Inc., Mr. Schmidt was employed by Coopers & Lybrand, an
accounting firm, during which time he became a CPA. Mr. Schmidt holds a B.A. in
Political Economics from Antioch College and an M.S. in Taxation from Golden
Gate University.
Michael W. Gough joined Quokka in July 1997 as our Vice President,
Design and Creative Director and was promoted to Chief Creative Officer and
Executive Producer in September 1998. In August 1995, Mr. Gough co-founded
Construct Internet Design, a digital media design firm, where he served as
Creative Director until July 1997. Prior to that, Mr. Gough co-founded Jones,
Partners: Architecture, a design-focused architecture firm, where he served as
Managing Partner from December 1994 to August 1995. Earlier in his career, Mr.
Gough was an architect for Holt Hinshaw Pfau Jones and, before that, an
architect for the San Jose Redevelopment Agency. Mr. Gough studied Architecture
at California Polytechnic State University.
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<PAGE> 59
L. Steve Nelson joined Quokka in December 1996 as our Senior Vice
President. In February 1999, Mr. Nelson became the Senior Vice President,
Olympics. From December 1995 to December 1996, Mr. Nelson served as Vice
President, America's Marketing and Sales for Informix Software, Inc. While at
Informix Software, Inc., Mr. Nelson oversaw industry sales and marketing for
telecommunications, media, financial services, retail and manufacturing. From
October 1994 to December 1996, Mr. Nelson served as Vice President of Software
Marketing for IBM. During his fourteen years at IBM, Mr. Nelson also served as
that company's Director of Marketing and General Manager of Product Marketing.
Mr. Nelson holds a B.S. in Business from Wake Forest University where he was on
the Varsity Golf Team.
Thomas P. Newell joined Quokka in March 1998 as Vice President of
Business Affairs and was promoted to Senior Vice President, Business and Legal
Affairs in October 1998. From May 1994 to August 1997, Mr. Newell served as
Executive Vice President and General Counsel for GGP Productions, LP, an
independent sports television production, syndication and sports marketing
company. There, he handled the company's financial and business operations for
three and a half years until its sale to International Management Group, a
Cleveland-based sports marketing and television company. From April 1992 to
April 1994, Mr. Newell served as Vice President, Business Affairs and Operations
of CBS Enterprises for CBS, Inc. During his seven years at CBS, Inc., Mr. Newell
also served as Litigation Counsel, then as Broadcast Counsel and as Director of
Business Affairs of CBS Sports, in which capacity he conducted negotiations that
resulted in CBS Sports' opportunity to cover the 1992 Olympic Winter Games.
Prior to that, Tom worked as a civil litigator for five years at O'Melveny &
Myers, a national law firm. Mr. Newell holds a B.A. from Stanford University and
a J.D. from USC Law School.
David A. Riemer joined Quokka in November 1998 as our Senior Vice
President, Marketing. Prior to joining us, Mr. Riemer spent 13 years at J.
Walter Thompson, where he served as President, JWT/West from May 1997 to
September 1998. While serving as President, JWT/West, Mr. Riemer oversaw the
JWT/Digital Unit and developed an agency specialization in telecommunications,
technology, retail and service marketing. Over the course of his career, Mr.
Riemer has written two musical comedies, two books and directed various
theatrical productions. Mr. Riemer holds a B.A. in Urban Studies and History
from Brown University and an M.B.A. from Columbia University.
Pascal Wattiaux joined Quokka in June 1999 as our Senior Vice President,
Engineering. From August 1996 to June 1999, Mr. Wattiaux served as Director of
Technology at the International Olympic Committee in Lausanne, Switzerland,
where he was responsible for all Olympic technology functions, including timing,
scoring, telecommunications and information systems, as well as managing
relationships with strategic technology partners. From January 1996 until August
1996, he served as senior manager at Price Waterhouse LLP, which has been
renamed PricewaterhouseCoopers LLP, and was responsible for developing a systems
integration practice in Europe. From August 1993 until January 1996, Mr.
Wattiaux served as Information Technology Director for International Operations
at Reebok International Ltd., having previously served as Management Information
Systems Director for Reebok France since January 1993. Prior to that, Mr.
Wattiaux worked at Andersen Consulting for nine years in Paris, France, first as
a consultant and then as a director. Mr. Wattiaux holds a Diplome d'Ingenieur
from Ecole Nationale Superieure des Telecommunications.
Mark J. Ellis joined Quokka in May 1999 as our Vice President, Sales.
From March 1998 to April 1999, Mr. Ellis served as a Vice President/Publisher
for Time Inc. New Media. From November 1997 to March 1998, Mr. Ellis served as
the Publishing Director for Sports Illustrated Presents. From July 1991 to
November 1997, Mr. Ellis served as the Detroit Advertising Director for Sports
Illustrated. Mr. Ellis holds a B.A. in Marketing from the University of Notre
Dame and an M.B.A. from the University of Detroit.
Marc P. Erzberger joined Quokka in August 1998 as our Vice President,
Motor Racing. From June 1991 to June 1998, Mr. Erzberger served as a consultant
for the Boston Consulting Group in London where he worked extensively in the
financial services and consumer/retail sectors. Mr. Erzberger worked on issues
of strategy and implementation in several product areas, including household
products, spirits and beverages, food, automotive and credit cards. Mr.
Erzberger holds a B.Sc. in Mathematics and Management
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<PAGE> 60
from the University of London, King's College, and an M.B.A. from the Harvard
Graduate School of Business Administration. Mr. Erzberger is an avid sportsman,
having represented Switzerland in the windsurfing event at the 1984 Olympic
Games in Los Angeles.
G. Michael Novelly joined Quokka in August 1998 as our Controller and
was promoted to Vice President, Finance and Controller in January 1999. From
March 1995 to August 1998, Mr. Novelly served as the Senior Vice President and
Chief Financial Officer of PolyGram Television, a division of the publicly
traded global music and entertainment group, PolyGram, N.V. During his years at
PolyGram, Mr. Novelly oversaw all financial and administrative aspects of the
Company's film production, acquisition and worldwide distribution of its library
of over 10,000 hours of filmed entertainment programming. Before joining
PolyGram Television, Mr. Novelly was employed by KPMG Peat Marwick LLP, an
accounting firm, where he provided auditing and consulting services to film
production and distribution companies, including Metro-Goldwyn-Mayer Inc,
Ticketmaster Corporation and Gramercy Pictures. Mr. Novelly is a CPA and holds a
B.S. in Accounting and Finance from the University of Colorado at Boulder.
M. Elizabeth Sandell joined Quokka in July 1998 as our Vice President,
Organizational Design and Development. From December 1996 to June 1998, Ms.
Sandell served as Vice President, Human Resources for NetChannel Inc., a
multi-media, internet service provider. In 1993, Ms. Sandell founded The Sandell
Group, a consulting firm for technology companies, where she has served as that
company's Principal from November 1993 to the present. Prior to that time, Ms.
Sandell served as Western Region Director of Human Resources for Service America
Corporation, where she was responsible for 4500 employees throughout 10 states
and Canada. Ms. Sandell began her career in Human Resources with Marriott
Corporation, holding a variety of corporate personnel management positions in
the Hotel and Lodging Division. She holds a B.A. in Psychology from Agnes Scott
College and a Masters of Divinity with emphasis in cross-cultural communication
from Alliance Theological Seminary.
Gerardo Seeliger joined Quokka in August 1998 as an advisor and was
promoted to General Manager, Europe, in April 1999. Mr. Seeliger co-founded
Seeliger & Conde, one of Spain's largest executive search firms, and served as
that company's Managing Partner from April 1990 to April 1999. Prior to that
time, Mr. Seeliger served as the General Manager of Sardan AG, the holding
company for Adidas Group, Switzerland. Before that, Mr. Seeliger served as a
Managing Director for Russell Reynolds Associates, an executive recruitment
firm, and as a General Manager for Bankers Trust, Co. Mr. Seeliger has held
several positions within the International Sailing Federation, including
Chairman, Marketing. Mr. Seeliger holds a degree in Economics and Science from
the University of Freiburg, Germany.
Brian J. Terkelsen joined Quokka in June 1998 as our Vice President,
Programming and Production. In January 1993, Mr. Terkelsen co-founded
Eco-Challenge Lifestyles, Inc., an adventure racing company, where he served as
Chief Operating Officer from that company's inception to January 1998. During
that period, Mr. Terkelsen also served as Executive Producer for several
adventure racing television productions, including productions for MTV and The
Discovery Channel. From May 1985 to June 1992, Mr. Terkelsen was employed as an
investment banker for Barclay's Bank and Bankers Trust, Co. Mr. Terkelsen holds
a B.S. in Business Administration, Finance from Bryant College.
Walter W. Bregman became a director of Quokka in October 1997. From
January 1988 to the present, Mr. Bregman has served as Chairman and Joint Chief
Executive Officer of S&B Enterprises, a marketing and consulting company. In
1985, Mr. Bregman co-founded Cormorant Beach Club in St. Croix USVI and served
as its Chief Executive Officer and Manager from 1985 to 1987. Prior to that
time, Mr. Bregman was President of International Playtex, Inc. a manufacturer of
intimate apparel, toiletries, pantyhose and baby nursers. Before joining
International Playtex, Inc., Mr. Bregman served as Vice President of Marketing
and Advertising for E&J Gallo Winery and as President of NCK, Inc., a worldwide
advertising agency. Mr. Bregman also serves on the boards of directors for
Symantec, Inc. and Sento, Inc. Mr. Bregman holds an A.B. in English Literature
from Harvard College.
Roel Pieper became a director of Quokka in December 1997. From May 1998
to May 1999, Mr. Pieper has served as a director and an Executive Vice President
of Royal Philips Electronics N.V. From August 1997 to March 1998, Mr. Pieper
served as Senior Vice President, Worldwide Sales and Marketing,
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<PAGE> 61
of Compaq Computer Corporation. From January 1996 to August 1997, Mr. Pieper
served as the President and Chief Executive Officer of Tandem Computers, Inc.,
where he helped reposition the company for its eventual merger with Compaq
Computer Corporation. From September 1993 to December 1995, Mr. Pieper also
served as the President and Chief Executive officers of Ub Networks, Inc., a
wholly-owned subsidiary of Tandem Computers, Inc., until that subsidiary merged
with Compaq Computer Corporation. From December 1990 to August 1993, Mr. Pieper
was the President and Chief Executive Officer of AT&T's UNIX System
Laboratories. Prior to that time, Mr. Pieper spent ten years in the employ of
Software AG, where he was eventually promoted to the position of Chief
Technology Officer. Mr. Pieper also serves on the boards of directors of
Computer Associates, Inc., Veritas Software, Inc., General Magic, Inc. and
Lincoln Financial Group. Mr. Pieper holds a Doctoral Degree in Mathematics and
Computer Science from Delft Technical University and is Crown Fellow of the
Aspen Institute in the United States.
James G. Shennan, Jr., became a director of Quokka in December 1997.
From June 1989 to the present, Mr. Shennan has been a General Partner of Trinity
Ventures, a venture capital firm. Mr. Shennan has over 25 years experience in
consumer products and services marketing. Mr. Shennan also serves on the boards
of directors of the Starbucks Coffee Company and P. F. Chang's China Bistro,
Inc., as well as several private consumer and e-commerce companies in which
Trinity Ventures is an investor. Mr. Shennan holds a B.A. in International
Politics from Princeton University and an M.B.A. from the Stanford Graduate
School of Business.
Barry M. Weinman became a director of Quokka in December 1997. From May
1993 to the present, Mr. Weinman has been a General Partner at Media Technology
Ventures/AVI Management and has been making high tech venture capital
investments in Silicon Valley since 1980. AVI Management and its new media fund,
Media Technology Ventures, had approximately $300 million under management as of
March 31, 1999. Mr. Weinman is also on the boards of directors of Women.com
Networks (Women's Wire), Be, Inc., InfoGear, Inc. and TalkCity, Inc. Mr. Weinman
holds a B.S. in Industrial Engineering from Clarkson College of Technology and
an M.A. in International Relations from the London School of
Economics/University of Southern California.
BOARD COMPOSITION
Upon the completion of this offering, Quokka will have authorized seven
directors. In accordance with the terms of our certificate of incorporation and
bylaws, each of which will become effective upon the completion of this
offering, the board of directors will be divided into three classes, Class I,
Class II and Class III, with each class serving staggered three-year terms. Upon
the completion of this offering, the members of the classes will be divided as
follows:
- Class I: Messrs. Bertrand, Pieper and Ramadan;
- Class II: Messrs. Bregman and Shennan; and
- Class III: Messrs. Weinman and Williams.
The Class I directors will stand for re-election or election at the 2000
annual meeting of stockholders. The Class II directors will stand for
re-election or election at the 2001 annual meeting of stockholders and the Class
III directors will stand for re-election or election at the 2002 annual meeting
of stockholders. At each annual meeting of stockholders after the initial
classification, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following the election or special meeting held in lieu thereof.
Our certificate of incorporation provides that the authorized number of
directors may be changed only by resolution of the board of directors. Any
additional directorships resulting from an increase in the number of directors
will be distributed between the three classes so that, as nearly as possible,
each class will consist of one-third of the directors. This classification of
the board of directors may have the effect of delaying or preventing changes in
the control or management of Quokka. Notwithstanding the foregoing, if Quokka is
subject to Section 2115 of the California General Corporation Law, all directors
shall be designated of the same class, and such directors shall be elected by
cumulative voting if any stockholder
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requests cumulative voting. See "Description of Capital Stock -- Section 2115"
for additional information relating to the effect of Section 2115 on Quokka.
Directors of Quokka may be removed for cause by the affirmative vote of the
holders of a majority of our voting stock and such directors may be removed
without cause by the affirmative vote of the holders of at least two-thirds of
our voting stock. Notwithstanding the foregoing, if Quokka is subject to Section
2115 of the California General Corporation Law, unless every director is
removed, no single director may be removed without cause when the votes cast
against such director's removal would be sufficient to elect that director if
voted cumulatively. See "Description of Capital Stock -- Section 2115" for
additional information relating to the effect of Section 2115 on Quokka.
BOARD COMMITTEES
The Audit Committee of the board of directors consists of Messrs. Shennan
and Weinman. The Audit Committee reviews our financial statements and accounting
practices, makes recommendations to the board of directors regarding the
selection of independent auditors and reviews the results and scope of the audit
and other services provided by our independent auditors. The Compensation
Committee of the board of directors consists of Messrs. Bregman, Shennan and
Weinman. The Compensation Committee makes recommendations to the board of
directors concerning salaries and incentive compensation for our officers and
employees and administers our employee benefit plans. The Nominating Committee
of the board of directors consists of Messrs. Bregman, Shennan and Williams. The
Nominating Committee makes recommendations to the board of directors concerning
the nomination of new directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the board of directors
is an officer or employee of Quokka. None of our executive officers serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving on our board of directors or
Compensation Committee.
DIRECTOR COMPENSATION
Except for Mr. Bregman, we have not provided cash compensation to
non-employee directors for their services as directors. Following the completion
of this offering, all directors will be eligible to participate in our 1999
Equity Incentive Plan, employee directors will be eligible to participate in our
1999 Employee Stock Purchase Plan and non-employee directors will be eligible to
participate in our 1999 Non-Employee Directors' Stock Option Plan. See
"-- Employee Benefit Plans" for additional information relating to these plans.
In October 1997, we entered into an agreement with Mr. Bregman, under which
Mr. Bregman had been paid, as of March 31, 1999, an aggregate of $43,000. Prior
to the completion of this offering, Mr. Bregman was compensated under the
agreement at a rate of $2,000 for every board meeting attended and $500 for
every committee meeting attended, if the committee meeting was held in
conjunction with a board meeting. For each committee meeting not held in
conjunction with a board meeting, Mr. Bregman received $1,500. Additionally,
under the agreement, Mr. Bregman received an initial option grant as well as
option grants in the amount of 16,000 shares each year. As of March 31, 1999,
Mr. Bregman had been granted an aggregate of 112,000 shares of our stock outside
of the 1997 Equity Incentive Plan with a weighted average exercise price of
$0.80 per share.
EXECUTIVE COMPENSATION
The following table shows compensation earned during fiscal 1998 by
Quokka's chief executive officer and our only other executive officer who earned
more than $100,000 in 1998. These people are referred to as the named executive
officers. Titles shown in the table are titles held as of March 31, 1999. The
information in the table includes salaries, bonuses, stock options granted and
other miscellaneous compensation. We have not granted stock appreciation rights
or restricted stock awards and provide no long-term compensation benefits other
than stock options.
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SUMMARY COMPENSATION TABLE(1)(2)
<TABLE>
<CAPTION>
LONG-TERM AND
ANNUAL COMPENSATION FOR 1998 OTHER COMPENSATION
------------------------------- --------------------
OTHER ANNUAL NUMBER OF SECURITIES
NAME AND PRINCIPAL POSITIONS SALARY BONUS COMPENSATION UNDERLYING OPTIONS
- ---------------------------- -------- ----- ------------ --------------------
<S> <C> <C> <C> <C>
Alan Ramadan.................................... $214,583 -- -- --
President, Chief Executive Officer and
Director
Les Schmidt..................................... $172,051 -- -- 200,000
Executive Vice President, Chief Financial
Officer and Secretary
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission the
compensation described in this table does not include medical, group life
insurance or other benefits received by the named executive officers that
are available generally to all of our salaried employees and certain
perquisites and other personal benefits received by the named executive
officers, which do not exceed the lesser of $50,000 or 10% of any such
officer's salary and bonus disclosed in this table.
(2) Messrs. Riemer and Williams did not serve as employees of Quokka for all of
1998. If these officers' base salaries were annualized for all of fiscal
1998, their compensation would have required disclosure on this table. For
1998, Mr. Riemer's base salary on an annualized basis was $200,000. For
1998, Mr. William's base salary on an annualized basis was $200,000.
Additionally, if Mr. Saralegui, who was not hired by Quokka until April
1999, had been employed with Quokka during 1998 pursuant to the same
compensation arrangement that he has with us during 1999, his compensation
would have required disclosure in this table. For 1999, Mr. Saralegui's base
salary is $275,000.
OPTION GRANTS DURING 1998
The following table sets forth each grant of stock options made during 1998
to each of the named executive officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL RATES
NUMBER OF PERCENTAGE OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM(4)
OPTIONS EMPLOYEES PER EXPIRATION --------------------------
NAME GRANTED(1) DURING 1998(2) SHARE(3) DATE 5% 10%
- ---- ---------- -------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Alan Ramadan(5)....... -- -- -- -- -- --
Les Schmidt(6)........ 200,000 8.8% $0.50 2/16/08 $3,158,000 $5,087,000
</TABLE>
- ---------------
(1) Options granted in 1998 to the named executive officers were granted under
the 1997 Equity Incentive Plan. All options granted to the named executive
officers are immediately exercisable, incentive stock options, to the extent
permissible under applicable IRS regulations. Generally, initial option
grants vest as to 20% of the shares subject to the option one year from the
date of hire and one-forty-eighth of the remaining shares subject to the
option vest on each monthly anniversary thereafter. Bonus or promotion
options vest according to the same schedule as the initial option grants
except that the one year waiting period typically commences on the date the
bonus is awarded or on the date of promotion. Other options vest according
to the same schedule as the initial option grants except that the one year
waiting period is reduced to ten months and the waiting period commenced on
January 1, 1999. Upon certain changes in control of Quokka, this vesting
schedule will accelerate as to all shares that are then unvested. Unvested
shares are subject to Quokka's right of repurchase upon termination of
employment. Options expire ten years from the date of grant.
(2) Based on an aggregate of 2,273,000 shares subject to options granted to
employees of Quokka in 1998, including named executive officers.
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<PAGE> 64
(3) The exercise price per share of each option granted was equal to the fair
market value of the common stock as determined by the board of directors on
the date of the grant. In determining the fair market value of the stock
granted on the grant date, the board of directors considered, among other
things, Quokka's absolute and relative levels of revenues and other
operating results and the state of Quokka's strategic relationships.
(4) Potential realizable values are computed by (a) multiplying the number of
shares of common stock subject to a given option by an assumed initial
public offering price of $10.00 per share, (b) assuming that the aggregate
stock value derived from that calculation compounds at the annual 5% or 10%
rate shown in the table for the entire ten-year term of the option and (c)
subtracting from that result the aggregate option exercise price. The 5% and
10% assumed annual rates of stock price appreciation are mandated by the
rules of the SEC and do not represent Quokka's estimate or projection of
future common stock prices.
(5) Excludes 300,000 shares subject to options granted in March 1999. Such
options are subject to the same provisions regarding vesting as described in
footnote (1) above, expire on March 15, 2009 and were granted at an exercise
price of $8.00 per share.
(6) Excludes 250,000 shares subject to options granted in February 1999. Such
options are subject to the same provisions regarding vesting as described in
footnote (1) above, expire on February 25, 2009 and were granted at an
exercise price of $7.00 per share.
AGGREGATE OPTION EXERCISES IN 1998 AND YEAR-END OPTION VALUES AT DECEMBER 31,
1998
The following table sets forth the number of shares of common stock
acquired and the value realized upon exercise of stock options during 1998 and
the number of shares of common stock subject to exercisable and unexercisable
stock options held as of December 31, 1998 by each of the named executive
officers. Value at fiscal year end is measured as the difference between the
exercise price and the fair market value on December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED
NUMBER OF OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1998(3) DECEMBER 31, 1998(4)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(1) REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alan Ramadan............... -- -- -- -- -- --
Les Schmidt................ 32,000 $304,000 168,000(5) -- $1,596,000 --
</TABLE>
- ---------------
(1) Represents shares which were vested on the date of exercise.
(2) Based on an assumed initial public offering price per share of $10.00, minus
the per share exercise price, multiplied by the number of shares issued upon
exercise of the option.
(3) Options granted to named executive officers may be exercised immediately
(i.e. prior to vesting) pursuant to early exercise provisions contained in
option agreements. Any unvested shares issued pursuant to any such early
exercise are subject to a repurchase option in favor of Quokka at the
original exercise price paid per share upon the optionee's cessation of
service as an employee, director or consultant prior to the vesting of such
shares. Such repurchase option lapses at a rate reflecting the vesting
schedule of the underlying option. Accordingly, such repurchase option
generally lapses at a rate of 2.083% per month.
(4) Based on the difference between the assumed initial public offering price
per share of $10.00 and the exercise price.
(5) If exercised in full within 60 days of June 9, 1999, 143,334 of these shares
would be subject to a right of repurchase in favor of Quokka.
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<PAGE> 65
EMPLOYEE BENEFIT PLANS
1997 Equity Incentive Plan
General. In February 1997, the board of directors adopted, and the
stockholders approved, the 1997 Equity Incentive Plan. The incentive plan was
amended in September 1998 and March 1999. In April 1999 the Board of Directors
adopted, and in May 1999 the stockholders approved, an amendment and restatement
of the incentive plan. An aggregate of 13,350,000 shares of common stock
currently are authorized for issuance under the incentive plan; provided,
however, that on January 31 of each year, commencing on January 31, 2000, the
share reserve under the incentive plan will automatically be increased by
1,500,000 shares. As of June 9, 1999, options to purchase a total of 8,276,436
shares of common stock were held by all participants under the Incentive Plan
and options to purchase 4,729,801 remained available for grant. The incentive
plan provides for the grant of:
- incentive stock options, as defined under the Internal Revenue Code of
1986, as amended, to employees (including officers);
- nonstatutory stock options;
- restricted stock purchase awards; and
- stock bonuses to employees (including officers), directors and
consultants.
Administration. The incentive plan is administered by the board of
directors. The board of directors may delegate authority to administer the
incentive plan to the compensation committee. The board of directors determines
recipients, types of options to be granted, number of shares subject to the
option vesting, and the exercisability of options granted. The board of
directors also determines the exercise price of options granted. The exercise
price for an incentive stock option cannot be less than 100% of the fair market
value of the common stock on the date of grant. The exercise price for a
nonstatutory stock option cannot be less than 85% of the fair market value of
the common stock on the date of grant. Options granted under the incentive plan
vest at the rate specified in the option agreement.
In general, the term of stock options granted under the incentive plan may
not exceed 10 years. Unless the terms of an optionee's stock option agreement
provide for earlier termination, in the event an optionee's service relationship
with us, or any affiliate of ours, ceases due to disability or death, the
optionee (or his beneficiary) may exercise any vested options up to twelve
months (eighteen months in the event of death) after the date such service
relationship ends. If an optionee's relationship with us, or any affiliate of
ours, ceases for any reason other than disability or death, the optionee may
(unless the terms of the stock option agreement provide for earlier termination)
exercise any vested options up to three months from cessation of service.
Generally, an optionee may not transfer a stock option other than by will
or the laws of descent or distribution unless the optionee holds a nonstatutory
stock option that provides otherwise. However, an optionee may designate a
beneficiary who may exercise the option following the optionee's death.
Option Grants. Incentive stock options may be granted only to our
employees. The aggregate fair market value, determined at the time of grant, of
shares of our common stock with respect to which incentive stock options are
exercisable for the first time by an optionee during any calendar year under all
of our stock plans may not exceed $100,000. No incentive stock option, and prior
to our stock being publicly traded no nonstatutory stock option, may be granted
to any person who, at the time of the grant, owns or is deemed to own stock
possessing more than 10% of the total combined voting power of Quokka or any of
its affiliates unless the following conditions are satisfied:
- the option exercise price must be at least 110% of the fair market value
of the stock subject to the option on the date of grant; and
- the term of the incentive stock option award must not exceed five years
from the date of grant.
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When we become subject to Section 162(m) of the Internal Revenue Code of
1986 (which denies a deduction to publicly held corporations for certain
compensation paid to specified employees in a taxable year to the extent that
the compensation exceeds $1.0 million), no person may be granted options under
the incentive plan covering more than 2,000,000 shares of common stock in any
calendar year. Shares subject to stock options that have expired or otherwise
terminated without having been exercised in full again become available for the
grant of awards under the incentive plan. Under its general authority to grant
options, the board of directors has the implicit authority to reprice
outstanding options or to offer optionees the opportunity to replace outstanding
options with new options for the same or a different number of shares. Both the
original and new options will count toward the Section 162(m) limitation.
Restricted Stock and Stock Bonus Awards. Prior to our stock being
publicly traded, the purchase price for each restricted stock award granted must
be at least 100% of the fair market value of the stock subject to the option on
the date of the award or at the time the purchase is consummated. For restricted
stock awards made on or after the date that our stock is publicly traded, the
purchase price for such awards must be at least 85% of the fair market value of
the stock subject to the option on the date of the award or at the time the
purchase is consummated. Rights to acquire shares under a stock bonus or
restricted stock bonus agreement may not be transferred other than by will or by
the laws of descent and distribution and are exercisable during the life of the
optionee only by the optionee. Certain restricted stock awards made following
the completion of this offering may be otherwise transferable if the stock bonus
agreement so provides.
Changes in Control. In the event of certain changes in control, all
outstanding options under the incentive plan either will be assumed, continued
or substituted for by any surviving entity. If the surviving entity determines
not to assume, continue or substitute for such awards, the vesting provisions of
such stock awards will be accelerated and such stock awards will be terminated
upon the change in control if not previously exercised. In the event of an
acquisition pursuant to Section 13(d) or 14(d) of the Exchange Act of securities
representing 50% of our combined voting power, the vesting provisions of stock
awards will either be assumed, continued or substituted by Quokka (or a
controlling affiliate of Quokka) or accelerated immediately upon the occurrence
of such event and such stock awards will be terminated upon such acquisition if
not previously exercised.
1999 Non-Employee Directors' Stock Option Plan
General. In April 1999, the board of directors adopted, and in May 1999
the stockholders approved, the 1999 Non-Employee Directors' Stock Option Plan to
provide for the automatic grant of options to purchase shares of common stock to
our non-employee directors. The aggregate number of shares of common stock that
may be issued pursuant to options granted under the directors' plan is 450,000
shares.
Administration and Terms. The board of directors shall administer the
directors' plan unless and until it delegates administration to a committee.
Options granted under the directors' plan are generally subject to the following
terms:
- the exercise price of options granted will be equal to the fair market
value of the common stock on the date of grant;
- no option granted may be exercised after the expiration of 3 years from
the date it was granted;
- options granted are not transferable other than by will or by the laws of
descent and distribution and are exercisable during the life of the
optionee only by the optionee;
- an optionee may designate a beneficiary who may exercise the option
following the optionee's death; and
- an optionee whose service relationship with Quokka or any affiliate
(whether as a non-employee director of Quokka or subsequently as an
employee, director or consultant of either Quokka or an affiliate) ceases
for any reason may exercise vested options for the term provided in the
option agreement (12 months generally, 18 months in the event of death).
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Automatic Grants. Upon the completion of this offering, subject to
certain exceptions, each non-employee director will automatically be granted an
option to purchase 25,000 shares of common stock. Any individual who becomes a
non-employee director after this offering will automatically receive this
initial grant upon being elected to the board of directors. On June 1 of each
year, commencing in 2000, any person who is then a non-employee director will
automatically will be granted an option to purchase 25,000 shares of common
stock, provided that if any non-employee director that had not served in that
capacity for the entire period since the preceding June 1, then the number of
shares subject to the annual grant shall be reduced, pro rata, for each full
quarter the person did not serve during the previous period. Initial grants and
annual grants vest and become immediately exercisable upon grant.
1999 Employee Stock Purchase Plan
General. In April 1999, the board of directors adopted, and in May 1999
the stockholders approved, the 1999 Employee Stock Purchase Plan, authorizing
the issuance of 1,000,000 shares of common stock pursuant to purchase rights
granted to our employees or to employees of any affiliate of ours. The purchase
plan is intended to qualify as an employee stock purchase plan within the
meaning of Section 423 of the Code. As of the date hereof, no shares of common
stock have been purchased under the purchase plan.
Administration. The purchase plan shall be administered by the board of
directors, but such administration may be delegated to the compensation
committee. The purchase plan provides a means by which employees may purchase
our common stock through payroll deductions. The purchase plan is implemented by
offerings of rights to eligible employees. Generally, all regular employees,
including executive officers, who work at least 20 hours per week and are
customarily employed by Quokka or by an affiliate of Quokka for at least five
months per calendar year may participate in the purchase plan and may authorize
payroll deductions of up to 15% of their earnings for the purchase of stock
under the Purchase Plan. Under the plan, we may specify offerings with a
duration of not more than 27 months, and may specify shorter purchase periods
within each offering. The first offering will begin on the effective date of
this offering and be approximately 12 months in duration with purchases
occurring every six months. Unless otherwise determined by the board of
directors, common stock is purchased for accounts of employees participating in
the purchase plan at a price per share equal to the lower of:
- 85% of the fair market value of a share of our common stock on the date
of commencement of participation in this offering; or
- 85% of the fair market value of a share of our common stock on the date
of purchase.
Limitations. Eligible employees may be granted rights only if the
rights, together with any other rights granted under employee stock purchase
plans, do not permit such employee's rights to purchase stock to accrue at a
rate which exceeds $25,000 of the fair market value of such stock for each
calendar year in which such rights are outstanding. In addition, an employee may
purchase no more than 2,000 shares during any one offering. No employee shall be
eligible for the grant of any rights under the Purchase Plan if immediately
after such rights are granted, such employee has voting power over 5% or more of
our outstanding capital stock (measured by vote or value).
401(k) Plan
We sponsor the Quokka Sports, Inc. 401(k) Plan, a defined contribution plan
intended to qualify under Section 401 of the Internal Revenue Code of 1986, as
amended. All employees are eligible to participate and may enter the 401(k) plan
as of the first day of any month. Participants may make pre-tax contributions to
the 401(k) plan of up to 15% of their eligible earnings, subject to a
statutorily prescribed annual limit. We do not make matching contributions. Each
participant's contributions, and the corresponding investment earnings, are
generally not taxable to the participants until withdrawn. Participant
contributions are held in trust as required by law. Individual participants may
direct the trustee to invest their accounts in authorized investment
alternatives.
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EMPLOYMENT AGREEMENTS
In April 1999, we entered into a key employee agreement with Mr. Saralegui,
under which Mr. Saralegui is compensated at a rate of $275,000 per year, paid on
a semi-monthly basis. The agreement also provides for an stock option grant,
pursuant to our 1997 Equity Incentive Plan, for the purchase of 1,000,000 shares
our common stock at an exercise price of $8.50 per share. To the extent
permissible under applicable IRS rules, this grant will be an incentive stock
option grant. In the event Mr. Saralegui is terminated without cause, he is
entitled to receive from us an amount equal to twelve months of his base salary
as well as acceleration of a portion of his unvested options under certain
circumstances.
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CERTAIN TRANSACTIONS
In January 1997, we issued and sold and aggregate of 3,800,000 shares of
common stock in exchange for all of the properties, rights, interests and other
tangible and intangible assets of Ozware Developments Unit Trust, an Australian
unit trust. From March 1997 to August 1997, we issued and sold an aggregate of
5,851,566 shares of common stock at $0.50 per share. In October 1997, we issued
warrants to purchase an aggregate of 212,800 shares of common stock at an
exercise price of $0.50 per share that will expire upon the closing of this
offering. In December 1997, we issued and sold an aggregate of 7,720,590 shares
of Series A preferred stock at $0.68 per share. Between March 1998 and December
1998, we issued and sold warrants to purchase up to 245,098 shares of Series A
preferred stock at an exercise price of $1.02 per share, 245,098 shares of
Series B preferred stock at an exercise price of $1.02 per share, 72,727 shares
of Series B preferred stock at an exercise price of $1.50 per share and 72,727
shares of Series C preferred stock at an exercise price of $3.25 per share. The
warrants were amended and partially exercised in December 1998 for 145,559
shares of Series A preferred stock, 145,559 shares of Series B preferred stock,
24,242 shares of Series B preferred stock and 24,242 shares of Series C
preferred stock. The warrants, as amended, are currently exercisable for 99,539
shares of Series A preferred stock at an exercise price of $1.02 per share,
99,539 shares of Series B preferred stock at an exercise price of $1.02 per
share, 48,485 shares of Series B preferred stock at an exercise price of $1.50
per share and 48,485 shares of Series C preferred stock at an exercise price of
$3.25 per share and will expire upon the closing of our initial public offering.
From June to August 1998, we issued and sold an aggregate of 10,737,068 shares
of Series B preferred stock at $1.50 per share. In December 1998, we issued and
sold an aggregate of 4,938,756 shares of Series C preferred stock at $3.25 per
share. From February 1999 to March 1999, we issued and sold warrants to purchase
up to an aggregate of 2,391,750 shares of Series C preferred stock at a weighted
average per share price of $5.33. In April 1999, we issued and sold warrants to
purchase up to an aggregate of 161,538 shares of Series C preferred stock at an
exercise price of $3.25 per share. In May and June 1999, we issued and sold an
aggregate of 4,522,223 shares of Series D preferred stock at $9.00 per share. In
May 1999, we issued and sold a warrant to purchase up to 110,000 shares of
Series D preferred stock at an exercise price of $9.00 per share. In July 1999,
we issued and sold warrants to purchase up to an aggregate of 30,000 shares of
common stock at an exercise price of $9.00 per share.
The following table identifies the directors, executive officers and five
percent stockholders who have made equity investments in Quokka to purchase
shares of our preferred stock or common stock. See "Principal Stockholders" for
additional information relating to the beneficial ownership of these
stockholders.
<TABLE>
<CAPTION>
SHARES OF SHARES OF SERIES A SHARES OF SERIES B SHARES OF SERIES C SHARES OF SERIES D
INVESTOR COMMON STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
- -------- ------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Alan S. Ramadan(1)............. 2,090,572 -- -- -- --
Richard H. Williams(2)......... 2,500,000 208,823 -- -- --
John Bertrand A.M. ............ 2,116,204 -- -- -- --
Walter W. Bregman(3)........... 200,000 22,058 89,381 30,769 --
Roel Pieper.................... 500,000 257,353 305,523 215,679 --
Les Schmidt(4)................. 35,500 -- 200,000 76,923 --
David A. Riemer................ -- -- -- 20,000 --
Media Technology Ventures,
LP(5)........................ -- 2,941,177 1,185,524 769,231 --
MediaOne Interactive Services,
Inc.(6)...................... -- -- 2,666,667 1,230,770 --
Intel Corporation(7)........... -- 1,322,030 1,311,003 1,255,012 --
Accel VI LP(8)................. -- -- 3,333,333 153,846 --
Trinity Ventures V, LP(9)...... -- 2,205,883 884,752 153,846 --
Wakefield Group II LLC.(10).... 800,000 577,942 555,791 92,308 --
</TABLE>
- ---------------
(1) Includes 1,900,000 shares of common stock held by Pogmohane Partners, LP, an
entity for which Mr. Ramadan serves as a general partner.
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<PAGE> 70
(2) Excludes warrants to purchase 56,800 shares of common stock issued to Mr.
Williams in October 1997.
(3) Includes 200,000 shares of common stock, 22,058 shares of Series A
preferred stock, 89,381 shares of Series B preferred stock and 30,769
shares of Series C preferred stock held in the Bregman Revocable Trust
u/a/d 8/21/92, for which Mr. Bregman, a director of Quokka, serves as a
trustee. Does not include warrants to purchase 6,000 shares of common stock
issued to the Bregman Revocable Trust u/a/d 8/21/92 in October 1997.
Excludes options to purchase 112,000 shares of common stock granted to Mr.
Bregman outside of the 1997 Equity Incentive Plan.
(4) Includes 182,000 shares of Series B preferred stock and 76,923 shares of
Series C preferred stock held in The Les Schmidt and Joanne P. Hattum
Family Trust u/t/d 4/8/92, for which Mr. Schmidt, an executive officer of
Quokka, serves as a trustee. Also includes 6,000 shares of Series B
preferred stock held by each of The Schmidt Family Irrevocable Trust, dated
12/27/95, FBO Caryn H. Schmidt, The Schmidt Family Irrevocable Trust, dated
12/27/95, FBO Bryan P. Schmidt and The Schmidt Family Irrevocable Trust,
dated 12/27/95, FBO Taylor G. Schmidt.
(5) Includes 769,231 shares of Series C preferred stock held by Media
Technology Equity Partners, LP, and 336,337 shares of Series A preferred
stock and 135,570 shares of Series B preferred stock held by Media
Technology Ventures Entrepreneurs Fund, L.P. Mr. Weinman, a director of
Quokka, is affiliated with the Media Technology entities.
(6) Excludes warrants to purchase 153,846 shares of Series C preferred stock
issued to MediaOne Interactive Services, Inc. in April 1999.
(7) Excludes warrants to purchase 99,539 shares of Series A preferred stock,
warrants to purchase 148,024 shares of Series B preferred stock and
warrants to purchase 48,485 shares of Series C preferred stock issued to
Intel Corporation in December 1998. These warrants represent the balance of
warrants issued upon the amendment and partial exercise of the original
warrants issued between March 1998 and December 1998.
(8) Includes 346,667 shares of Series B preferred stock and 16,000 shares of
Series C preferred stock held by Accel Internet Fund II LP, 230,000 shares
of Series B preferred stock and 10,615 shares of Series C preferred stock
held by Accel Investors '98 LP, and 43,333 shares of Series B preferred
stock and 2,000 shares of Series C preferred stock held by Accel Keiretsu
VI LP.
(9) Includes 121,791 shares of Series A preferred stock, 48,849 shares of
Series B preferred stock and 7,692 shares of Series C preferred stock held
by Trinity V, side-by-side fund, LP. Mr. Shennan, a director of Quokka, is
affiliated with Trinity Ventures V, LP and Trinity V, Side-by-Side Fund,
LP.
(10) Excludes warrants to purchase 100,000 shares of common stock issued to
Wakefield Group LLC in October 1997.
Pursuant to an investors' rights agreement dated May 27, 1999 between
Quokka and certain investors, the investors have certain registration rights for
the shares of common stock held by them, or subject to acquisition upon exercise
of certain warrants. See "Description of Capital Stock -- Registration Rights"
for a description of these registration rights.
In March 1998, we entered into a software license and development agreement
with Intel Corporation, a holder of more than five percent of our outstanding
capital stock. Under this agreement, Intel is developing transport level
software that will allow end users to view multiple video streams which are
delivered over a satellite network. In connection with this agreement, we issued
warrants to Intel to purchase 635,650 shares of our preferred stock at prices
ranging from $1.02 to $3.25 per share. Intel has exercised warrants to purchase
339,602 shares of our preferred stock. The remaining outstanding warrants will
expire upon this offering if not earlier exercised.
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<PAGE> 71
In April 1999, we entered into a trial agreement with MediaOne Interactive
Services, Inc., a holder of more than five percent of our outstanding capital
stock. Under this agreement, Quokka and MediaOne are working together to
implement and test streaming media over the MediaOne cable modem infrastructure.
In connection with this agreement, Quokka has issued warrants to MediaOne to
purchase 153,846 shares of our preferred stock at an exercise price of $3.25 per
share. These warrants will expire in April 2009 if not earlier exercised.
Since February 1, 1999, in connection with Mr. Bertrand's relocation to
London, England, we have been paying, and will continue to pay, Mr. Bertrand an
amount equal to $3,000 per month to secure Mr. Bertrand's residence in San
Francisco, California as short-term corporate housing for various persons
associated with Quokka.
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<PAGE> 72
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us with respect
to beneficial ownership of our common stock as of June 9, 1999 by:
- each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;
- each of our directors;
- the named executive officers; and
- all executive officers and directors as a group.
Unless otherwise noted, the address for the individuals listed below is: c/o
Quokka Sports, 525 Brannan Street, San Francisco, California 94107.
<TABLE>
<CAPTION>
PERCENTAGE OWNED(1)
NUMBER OF ---------------------------------
NAME OF BENEFICIAL OWNER SHARES BEFORE OFFERING AFTER OFFERING
- ------------------------ ---------- --------------- --------------
<S> <C> <C> <C>
Entities associated with Media Technology
Ventures(2)........................................ 4,895,932 12.6% 11.2%
One First Street, Suite 2
Los Altos, CA 94022
Intel Corporation.................................... 4,184,093 10.8% 9.6%
2200 Mission College Blvd.
Santa Clara, CA 95052
MediaOne Interactive Services, Inc.(3)............... 4,051,283 10.4% 9.2%
9000 E. Nichols Avenue, Suite 100
Englewood, CO 80112
Entities associated with Accel VI LP(4).............. 3,487,179 9.0% 8.0%
428 University Avenue
Palo Alto, CA 94301
Entities associated with Trinity Ventures(5)......... 3,244,481 8.4% 7.4%
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
Wakefield Group II LLC............................... 2,126,041 5.5% 4.8%
1110 East Morehead
Charlotte, NC 28204
Pogmohane Partners, LP............................... 1,900,000 4.9% 4.3%
151 Lark Lane
Mill Valley, CA 94941
Alan Ramadan(6)...................................... 2,390,572 6.1% 5.4%
Richard H. Williams(7)............................... 2,915,623 7.5% 6.6%
P.O. Box 4281
Incline Village, NV 89450
John Bertrand(8)..................................... 2,266,204 5.8% 5.2%
c/o Quokka Sports
133 Long Acre
London, WC2E98D
Walter Bregman(9).................................... 379,674 1.0% *
Roel Pieper(10)...................................... 1,278,555 3.3% 2.9%
</TABLE>
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<PAGE> 73
<TABLE>
<CAPTION>
PERCENTAGE OWNED(1)
NUMBER OF ---------------------------------
NAME OF BENEFICIAL OWNER SHARES BEFORE OFFERING AFTER OFFERING
- ------------------------ ---------- --------------- --------------
<S> <C> <C> <C>
James G. Shennan, Jr.(11)............................ 3,244,481 8.4% 7.4%
c/o Trinity Ventures V, L.P.
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
Barry M. Weinman(12)................................. 4,895,932 12.6% 11.2%
c/o Media Technology Ventures
One First Street, Suite 12
Los Altos, CA 94022
Les Schmidt(13)...................................... 708,923 1.8% 1.6%
All directors and executive officers as a group (10
persons)(14)....................................... 19,279,964 47.0% 41.9%
</TABLE>
- ---------------
* Less than 1%.
(1) 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. Unless otherwise indicated
below, the persons and entities named in the table have sole voting and
sole investment power with respect to all shares beneficially owned,
subject to community property laws where applicable. Percentage ownership
is based on 38,791,118 shares of common stock outstanding as of June 9,
1999 and 43,791,118 shares outstanding immediately following completion of
this offering. Shares of common stock subject to options and warrants that
are currently exercisable or exercisable within 60 days of June 9, 1999 are
deemed to be outstanding and 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 3,654,794 shares held by Media Technology Ventures, LP, 769,231
shares held by Media Technology Equity Partners, LP, and 471,907 shares
held by Media Technology Ventures Entrepreneurs Fund, LP (collectively, the
"MT Funds"). Mr. Weinman, a director of Quokka, is a general partner of
each of the MT Funds and, as such, may be deemed to have an indirect
pecuniary interest (within the meaning of Rule 16a-1 under the Securities
Exchange Act of 1934) in an indeterminate portion of the shares
beneficially owned by the MT Funds. Mr. Weinman disclaims beneficial
ownership of these shares within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934.
(3) Includes warrants to purchase 153,846 shares that are currently
exercisable.
(4) Includes 2,838,564 shares held by Accel VI LP, 362,667 shares held by Accel
Internet Fund II LP, 240,615 shares held by Accel Investors '98 LP, and
45,333 shares held by Accel Keiretsu VI LP (collectively, the "Accel
Funds").
(5) Includes 3,066,149 shares held by Trinity Ventures V, LP and 178,332 shares
held by Trinity V, Side-by-Side Fund, LP. Mr. Shennan, a director of
Quokka, is a general partner of Trinity Ventures V, LP and Trinity V,
side-by-side fund, LP. As such, Mr. Shennan may be deemed to have an
indirect pecuniary interest (within the meaning of Rule 16a-1 under the
Securities Exchange Act of 1934) in an indeterminate portion of the shares
beneficially owned by Trinity Ventures V, LP and Trinity V, side-by-side
fund, LP. Mr. Shennan disclaims beneficial ownership of these shares within
the meaning of Rule 13d-3 under the Securities Exchange Act of 1934.
(6) Includes 1,900,000 shares held by Pogmohane Partners, L.P. Mr. Ramadan, a
director of Quokka, is a general partner of Pogmohane Partners, L.P. As
such, Mr. Ramadan may be deemed to have an indirect pecuniary interest
(within the meaning of Rule 16a-1 under the Securities Exchange Act of
1934) in an indeterminate portion of the shares beneficially owned by
Pogmohane Partners, L.P.
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<PAGE> 74
Mr. Ramadan disclaims beneficial ownership of these shares within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934. Also
includes 300,000 shares underlying currently exercisable stock options. If
exercised in full within 60 days of the date of this table, all of the
shares subject to the options would be subject to a repurchase right in
favor of Quokka.
(7) Includes warrants to purchase 56,800 shares that expire if not exercised
prior to the completion of this offering. Includes 150,000 shares
underlying currently exercisable stock options. If exercised in full within
60 days of the date of this table, all of the shares subject to the option
would be subject to a repurchase right in favor of Quokka.
(8) Includes 150,000 shares underlying currently exercisable stock options. If
exercised in full within 60 days of the date of this table, all of the
shares subject to the option would be subject to a repurchase right in
favor of Quokka.
(9) Includes 342,208 shares held in the Bregman Revocable Trust u/a/d 8/21/92,
for which Mr. Bregman, a director of Quokka, serves as a trustee. Mr.
Bregman disclaims beneficial ownership of these shares within the meaning
of Rule 13d-3 under the Securities Exchange Act of 1934. Includes warrants
to purchase 6,000 shares that expire if not exercised prior to the
completion of this offering. Includes 33,066 shares underlying currently
exercisable stock options granted to Mr. Bregman outside Quokka's 1997
Equity Incentive Plan.
(10) All shares are held outright by Mr. Pieper.
(11) Includes 3,066,149 shares held by Trinity Ventures V, LP and 178,332 shares
held by Trinity V, Side-by-Side Fund, LP. See footnote (5) above regarding
Mr. Shennan's indirect pecuniary interest in these shares.
(12) Includes 4,895,932 shares held by MT Funds. See footnote (2) above
regarding Mr. Weinman's indirect pecuniary interest in these shares.
(13) Includes 258,923 shares held in The Les Schmidt and Joanne P. Hattum Family
Trust u/t/d 4/8/92, for which Mr. Schmidt, an executive officer of Quokka,
serves as a trustee. Mr. Schmidt disclaims beneficial ownership of these
shares within the meaning of Rule 13d-3 under the Securities Exchange Act
of 1934. Includes 414,500 shares underlying currently exercisable stock
options. If exercised in full within 60 days of the date of this table,
389,834 shares would be subject to a right of repurchase in favor of
Quokka.
(14) See footnotes (1) through (13) above, as applicable.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and material provisions of
our certificate of incorporation and bylaws, which will become effective upon
the completion of this offering, is a summary only and is qualified in its
entirety by the complete provisions of the certificate of incorporation and
bylaws, which have been filed as exhibits to the registration statement, of
which this prospectus is a part.
Upon the closing of this offering, our authorized capital stock will
consist of 110,000,000 shares of common stock, $0.0001 par value per share and
10,000,000 shares of preferred stock, $0.0001 par value per share.
COMMON STOCK
Upon the closing of this offering, each outstanding share of non-voting
common stock will be automatically converted to voting common stock and, at such
time, no share of common stock, whether previously designated as non-voting
common stock or voting common stock, will be subject to any further conversion
right. The common stock is not entitled to preemptive rights and is not subject
to redemption.
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the board of directors may from time to time
determine. Each stockholder is entitled to one vote for each share of common
stock held on all matters submitted to a vote of stockholders. Unless Section
2115 of the California Corporations Code is applicable to us, holders of common
stock are not entitled to cumulative voting rights with respect to the election
of directors and, as a consequence, minority stockholders will not be able to
elect directors on the basis of their votes alone. Upon a liquidation,
dissolution or winding-up of Quokka, the assets legally available for
distribution to stockholders are distributable ratably among the holders of the
common stock and any participating preferred stock outstanding at that time
after payment of liquidation preferences, if any, on any outstanding preferred
stock and payment of other claims of creditors. Each outstanding share of common
stock is, and all shares of common stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Series A,
Series B, Series C and Series D preferred stock will be converted into
28,258,239 shares of common stock. Following the conversion, the shares
converted will be retired from the number of authorized shares of preferred
stock.
Upon the closing of this offering, the board of directors will have the
authority, without further action by the stockholders, to issue up to 10,000,000
shares of preferred stock in one or more series, to establish from time to time
the number of shares to be included in each such series, to fix the rights,
preferences and privileges of the shares of each wholly unissued series and any
qualifications, limitations or restrictions thereon, and to increase or decrease
the number of shares of any such series (but not below the number of shares of
such series then outstanding). The board of directors may authorize the issuance
of preferred stock with voting or conversion rights that could adversely affect
the voting power or other rights of the holders of the common stock. The
issuance of preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could, among other things,
have the effect of delaying, deferring or preventing a change in control of
Quokka and may adversely affect the market price of the common stock and the
voting and other rights of the holders of common stock.
WARRANTS
In October 1997, we issued warrants to purchase an aggregate of 212,800
shares of common stock at an exercise price of $0.50 per share to four
investors. Each of these warrants will expire upon the closing of this offering,
unless earlier exercised.
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Between March 1998 and December 1998, we issued and sold warrants to
purchase up to 245,098 shares of Series A preferred stock at an exercise price
of $1.02 per share, 245,098 shares of Series B preferred stock at an exercise
price of $1.02 per share, 72,727 shares of Series B preferred stock at an
exercise price of $1.50 per share and 72,727 shares of Series C preferred stock
at an exercise price of $3.25 per share to Intel Corporation (the "Intel
Warrants"). The Intel Warrants were amended in December 1998 and partially
exercised by Intel in December 1998 for 145,559 shares of Series A preferred
stock, 145,559 shares of Series B preferred stock, 24,242 shares of Series B
preferred stock and 24,242 shares of Series C preferred stock. The Intel
Warrants, as amended, are currently exercisable for 99,539 shares of Series A
preferred stock at an exercise price of $1.02 per share, 99,539 shares of Series
B preferred stock at an exercise price of $1.02 per share, 48,485 shares of
Series B preferred stock at an exercise price of $1.50 per share and 48,485
shares of Series C preferred stock at an exercise price of $3.25 per share. Each
of the Intel Warrants will expire upon completion of this offering, unless
earlier exercised.
From February 1999 to April 1999, we issued and sold warrants to purchase
up to an aggregate of 2,553,288 shares of Series C preferred stock at a weighted
average per share price of $5.20 to four investors. On February 8, 2009,
2,100,000 of these warrant shares will expire. On March 19, 2004, 76,366 of
these warrant shares will expire. On April 22, 2009, 153,846 of these warrant
shares will expire. The remaining 223,076 of these warrant shares will expire
three years from the effective date of this offering.
In May 1999, we issued and sold a warrant to purchase up to 110,000 shares
of Series D preferred stock at an exercise price of $9.00 per share to one
investor. All of these warrant shares will expire on May 27, 2006.
Each of the aforementioned warrants are subject to the provisions of an
investors' rights agreement. See "-- Registration Rights" for additional
information relating to this agreement.
In July 1999, we issued and sold warrants to purchase an aggregate of up to
30,000 shares of common stock at an exercise price of $9.00 per share to two
investors. On March 1, 2002, 15,000 of these warrant shares will expire. On
March 1, 2003, the remainder of these warrant shares will expire.
REGISTRATION RIGHTS
Pursuant to an investors' rights agreement dated May 27, 1999, between
Quokka and some of our investors, the investors have registration rights for the
41,081,941 shares of common stock held by them, or subject to acquisition upon
exercise of warrants. Under the rights agreement, the investors may demand, by
written request from holders of more than 50% of the then outstanding investors'
registrable securities, that we file a registration statement under the
Securities Act covering all or a portion of the investors' registrable
securities, provided that, in the case of a registration on a form other than a
Form S-3, there is a reasonably anticipated aggregate offering price to the
public of more than $10.0 million, or in the case of a registration of Form S-3,
there is a reasonably anticipated aggregate offering price to the public of at
least $1.0 million. These registration rights are subject to our right to delay
the filing of a registration statement, in the case of a registration on a form
other than a Form S-3, for a period not to exceed 60 days, and, in the case of a
registration on a Form S-3, for a period not to exceed 90 days. In the case of a
registration on a form other than a Form S-3, we cannot delay more than twice in
a 12-month period after receiving the registration demand. In the case of a
registration on a Form S-3, we cannot delay more than once in a 12-month period
after receiving the registration demand. In the case of a registration on a form
other than a Form S-3, the managing underwriter, if any, of any such offering
has certain rights to limit the number of the Registrable Securities proposed to
be included in such registration.
In addition, the investors have "piggyback" registration rights. If we
propose to register any of our securities under the Securities Act of 1933
(other than pursuant to the investors' demand registration rights noted above),
the investors may require us to include all or a portion of their registrable
securities in such registration. The managing underwriter, if any, of any such
offering will have the right to limit the number of the registrable securities
to no less than 25% of the total number of securities proposed to be included in
such registration.
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<PAGE> 77
All registration expenses incurred in connection with the above
registrations would be borne by us. Each selling investor would pay all
underwriting discounts and selling commissions applicable to the sale of his or
its registrable securities.
All registration rights described above will terminate ten years after the
date of our initial public offering. Following the closing of this offering, the
rights of each investor holding less than 1% of our outstanding common stock
under the rights agreement will terminate when that investor may sell all of its
or his shares under Rule 144(k) of the Securities Act or during any 90-day
period under Rule 144 of the Securities Act.
SECTION 2115
We are currently subject to Section 2115 of the California General
Corporation Law. Section 2115 provides that, regardless of a company's legal
domicile, certain provisions of California corporate law will apply to that
company if more than 50% of its outstanding voting securities are held of record
by persons having addresses in California and the majority of the Company's
operations occur in California.
The following table sets forth some of the effects on our corporate
governance of Section 2115:
<TABLE>
<CAPTION>
SECTION 2115 NON-SECTION 2115
------------ ----------------
<S> <C> <C>
Election of Cumulative voting is allowed which No cumulative voting is allowed;
Directors allows each shareholder to vote the accordingly a holder of 50% or more
number of votes equal to the number of voting stock controls election
of candidates multiplied by the of all directors.
number of votes to which the
shareholders' shares are normally
entitled in favor of one candidate.
This potentially allows minority
stockholders to elect some members
of the board of directors.
Removal of Directors Removal with or without cause by Removal is only allowed without
the affirmative vote of the holders cause upon the affirmative vote of
of a majority of outstanding voting 66 2/3% of the outstanding voting
stock is allowed. stock.
Supermajority Vote In order to institute a Simple majority may adopt amendment
Requirement supermajority provision, the providing for supermajority.
amendment must be approved by at
least as large a proportion as
would be required under the
amendment.
Dividend Dividends are only payable (a) out Dividends are payable out of either
Distribution of the surplus of retained earnings the surplus of retained earnings or
and (b) if, immediately after the out of its net profits for the year
distribution, a company's assets the distribution takes place, or
are at least equal to its the preceding year.
liabilities.
Dissenters' Rights Generally available in any type of Generally only available in a
reorganization, including a merger, merger. No rights so long as our
sale of assets or sale/exchange of common stock is quoted on the
shares. If the shares are listed on Nasdaq National Market or traded on
an exchange, 5% of the stockholders an exchange.
must assert their right for any
stockholder to have these rights.
</TABLE>
In addition to these differences, Section 2115 also provides for information
rights and required filings in the event a company effects a sale of assets or
completes a merger.
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We anticipate that our common stock will be qualified for trading as a
national market security on the Nasdaq National Market and that we will have at
least 800 stockholders of record by the record date for our 2000 annual meeting
of stockholders. If these two conditions occur, then we will no longer be
subject to Section 2115 as of the record date for our 2000 annual meeting of
stockholders. See "-- Common Stock" and "Management -- Board Composition" for
additional information relating to the effects of Section 2115 on Quokka.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. Section 203, subject to 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 the
stockholder became an interested stockholder unless:
- prior to the date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that 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 those shares owned by persons who
are directors and also officers, and 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
- on or subsequent to the 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 two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
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 the
entity or person.
A Delaware corporation may "opt out" of Section 203 with an express
provision in its original certificate of incorporation or an express provision
in its certificate or incorporation or bylaws resulting from a stockholders'
amendment approved by a majority of the outstanding voting shares. We have not
"opted out" of the provisions of Section 203. The statute could prohibit or
delay mergers or other takeover or change-in-control attempts with respect to
Quokka and, accordingly, may discourage attempts to acquire Quokka.
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Charter Provisions
Our bylaws divide the board of directors into three classes as nearly equal
in size as possible with staggered three-year terms. The classification of the
board of directors could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from acquiring, control of
Quokka. In addition, the bylaws provide that any action required or permitted to
be taken by our stockholders at an annual meeting or a special meeting of the
stockholders may be taken only if it is properly brought before such meeting and
may not be taken by written action in lieu of a meeting. The
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<PAGE> 80
bylaws also provide that special meetings of our stockholders may be called only
by the board of directors, the chairman of the board, the chief executive
officer or the holders of 50% or more of our outstanding stock. See
"Management -- Board Composition" for additional information relating to the
classification of the board of directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation, which will become effective upon the
closing of this offering, contains provisions permitted under Delaware law
relating to the liability of directors. These provisions eliminate a director's
personal liability for monetary damages resulting from a breach of fiduciary
duty, except in circumstances involving wrongful acts, such as:
- any breach of the director's duty of loyalty;
- acts or omissions which involve a lack of good faith, intentional
misconduct or a knowing violation of the law;
- payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law; or
- any transaction from which the director derives an improper personal
benefit.
These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief, such as an injunction or rescission, in the
event of a breach of director's fiduciary duty. These provisions will not alter
a director's liability under federal securities laws.
Our bylaws, which will become effective upon the closing of this offering,
require us to indemnify our directors and executive officers to the fullest
extent not prohibited by the Delaware law. We may limit the extent of such
indemnification by individual contracts with our directors and executive
officers. Further, we may decline to indemnify any director or executive officer
in connection with any proceeding initiated by such person or any proceeding by
such person against Quokka or its directors, officers, employees or other
agents, unless such indemnification is expressly required to be made by law or
the proceeding was authorized by our board of directors.
We have entered into indemnity agreements with each of our current
directors and certain of our executive officers to give such directors and
officers additional contractual assurances regarding the scope of the
indemnification set forth in our certificate of incorporation and bylaws and to
provide additional procedural protections. At present, there is no pending
litigation or proceeding involving a director, officer or employee of Quokka for
which indemnification is sought, nor are we aware of any threatened litigation
that may result in claims for indemnification.
We have the power to indemnify our other officers, employees and other
agents, as permitted by Delaware law, but we are not required to do so.
Quokka plans to obtain directors' and officers' liability insurance.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for Quokka's common stock is BankBoston
N.A.
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<PAGE> 81
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and based on the number of shares
outstanding as of June 9, 1999, Quokka will have outstanding 43,791,118 shares
of common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options. Of these shares, the 5,000,000 shares
sold in this offering will be freely tradable without restriction under the
Securities Act unless purchased by "affiliates" of Quokka as that term is
defined in Rule 144 under the Securities Act. Of the remaining shares, all of
the 38,791,118 shares held by existing stockholders are subject to lock-up
agreements generally providing that, with certain limited exceptions, the
stockholder will not:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of or otherwise dispose of or transfer any
shares of common stock or securities convertible into or exchangeable or
exercisable for or repayable with common stock; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of the common stock whether
any such swap or transaction is to be settled by delivery of common stock
or other securities, in cash or otherwise, without the prior written
consent of Merrill Lynch on behalf of the underwriters for a period of
180 days after the date of this prospectus.
As a result of these lock-up agreements, notwithstanding possible earlier
eligibility for sale under the provisions of Rules 144, 144(k) and 701, none of
these shares can be sold until 181 days after the date of the final prospectus.
Beginning 181 days after the date of the final prospectus, 33,737,470 of these
shares will be eligible for sale in the public market, although a portion of
such shares will be subject to certain volume limitations pursuant to Rule 144.
The remaining restricted shares will become eligible for sale from time to time
thereafter upon expiration of applicable holding periods under Rule 144 under
the Securities Act and Quokka's right to repurchase unvested shares. Holders of
options to purchase common stock of Quokka are also subject to 180-day lock-up
agreements.
In general, under Rule 144 as currently in effect, 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:
- 1% of the number of shares of common stock then outstanding (which will
equal approximately 437,911 shares immediately after this offering); or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a 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
Quokka. Under Rule 144(k), a person who is not deemed to have been an affiliate
of Quokka at any time during the three months 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.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director of or consultant to Quokka who
purchased his or her shares pursuant to a written compensatory plan or contract
may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell such shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or notice
provisions of Rule 144.
Some holders of shares of common stock are also entitled to rights with
respect to registration of such shares of common stock for offer and sale to the
public. See "Description of Capital Stock -- Registration Rights" for additional
information relating to registration rights.
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<PAGE> 82
There can be no assurance that an active public market for the common stock
will continue after this offering. Future sales of substantial amounts of common
stock (including shares issued upon exercise of outstanding options) in the
public market after this offering could adversely affect market prices
prevailing from time to time and could impair Quokka's ability to raise capital
through the sale of its equity securities. As described below, only a limited
number of shares will be available for sale immediately after this offering due
to certain contractual restrictions on resale. Sales of substantial amounts of
common stock of Quokka in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of Quokka to raise
equity capital in the future.
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<PAGE> 83
UNDERWRITING
GENERAL
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc.
and BancBoston Robertson Stephens Inc. are acting as representatives of each of
the underwriters named below. Subject to the terms and conditions set forth in a
purchase agreement among Quokka and the underwriters, Quokka has agreed to sell
to the underwriters, and each of the underwriters severally and not jointly has
agreed to purchase from Quokka, the number of shares of common stock set forth
opposite its name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Lehman Brothers Inc. .......................................
BancBoston Robertson Stephens Inc. .........................
---------
Total.......................................... 5,000,000
=========
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the shares of
common stock being sold pursuant to each such agreement if any of the shares of
common stock being sold pursuant to such agreement are purchased. In the event
of a default by an underwriter, the purchase agreement provides that, in certain
circumstances, the purchase commitments of the nondefaulting underwriters may be
increased or the purchase agreement may be terminated.
Quokka has agreed to indemnify the underwriters against certain
liabilities, including certain liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make in respect of
this offering.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and certain
other conditions. The underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised Quokka that the underwriters propose
initially to offer the shares of common stock to the public at the initial
public offering price set forth on the cover page of this prospectus, and to
certain dealers at such price less a concession not in excess of $ per share
of common stock. The underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share of common stock to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The following table shows the per share and total public offering price,
underwriting discount to be paid by Quokka to the underwriters, and the proceeds
before expenses to Quokka. This information is presented assuming either no
exercise or full exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.......................... $ $ $
Underwriting discount.......................... $ $ $
Proceeds, before expenses, to Quokka........... $ $ $
</TABLE>
The expenses of this offering (exclusive of the underwriting discount and
commissions) are estimated at $1.3 million and are payable by Quokka. The public
offering price, underwriting discount and other terms set forth in the purchase
agreement were approved by the pricing committee of Quokka's board of directors.
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<PAGE> 84
OVER-ALLOTMENT OPTION
Quokka has granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of 750,000
additional shares of common stock at the public offering price set forth on the
cover page of this prospectus, less the underwriting discount. The underwriters
may exercise this option solely to cover over-allotments, if any, made on the
sale of the common stock offered hereby. To the extent that the underwriters
exercise this option, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares of common stock
proportionate to such underwriters initial amount reflected in the foregoing
table.
RESERVED SHARES
At the request of Quokka, the underwriters have reserved for sale, at the
initial public offering price, up to 500,000 of the shares offered hereby to be
sold to certain directors, officers, employees, distributors, dealers, business
associates and related persons of Quokka. The number of shares of common stock
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares which are not orally
confirmed for purchase within one day of the pricing of this offering will be
offered by the underwriters to the general public on the same terms as the other
shares offered in this prospectus.
NO SALES OF SIMILAR SECURITIES
Quokka and its executive officers, directors and other stockholders
beneficially owning substantially all of the outstanding shares of common stock
have agreed, subject to certain exceptions, not to directly or indirectly:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of or otherwise dispose of or transfer any
shares of common stock or securities convertible into or exchangeable or
exercisable for or repayable with common stock, whether now owned or
thereafter acquired by the person executing the agreement or with respect
to which the person executing the agreement thereafter acquires the power
of disposition, or file a registration statement under the Securities Act
with respect to the foregoing;
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of the common stock whether
any such swap or transaction is to be settled by delivery of common stock
or other securities, in cash or otherwise; or
- make any demand for, or exercise any right with respect to, the
registration of any share of common stock or any securities convertible
into or exchangeable for common stock, without the prior written consent
of Merrill Lynch on behalf of the underwriters for a period of 180 days
after the date of this prospectus.
NASDAQ NATIONAL MARKET LISTING
Prior to this offering, there has been no public market for the common
stock of Quokka. The initial public offering price will be determined through
negotiations between Quokka and the representatives. The factors to be
considered in determining the initial public offering price, in addition to
prevailing market conditions, are expected to be price-revenue and discounted
price-earnings ratios of publicly traded companies that the representatives
believe to be comparable to Quokka, certain financial information of Quokka, the
history of, and the prospects for, Quokka and the industry in which it competes,
and an assessment of Quokka's management, its past and present operations, the
prospects for, and timing of, future revenues of Quokka, and the present state
of Quokka's development. There can be no assurance that an active trading market
will develop for the common stock or that the common stock will trade in the
public market subsequent to this offering at or above the initial public
offering price.
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<PAGE> 85
The underwriters do not expect sales of the common stock to be made to any
accounts over which they exercise discretionary authority to exceed 5% of the
number of shares being offered hereby.
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of the common stock is completed, SEC rules may
limit the ability of the underwriters and certain selling group members to bid
for and purchase our common stock. As an exception to these rules, the
representatives are permitted to engage in certain transactions that stabilize
the price of our common stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of our common stock.
If the underwriters create a short position in our common stock in
connection with the offering contemplated hereby, i.e., if they sell more shares
of common stock than are set forth on the cover page of this prospectus, the
representatives may reduce that short position by purchasing our common stock in
the open market. The representatives may also elect to reduce any short position
by exercising all or part of the over-allotment option described above.
PENALTY BIDS
The representatives may also impose a penalty bid on certain underwriters
and selling group members. This means that if the representatives purchase
shares of our common stock in the open market to reduce the underwriters' short
position or to stabilize the price of our common stock, they may reclaim the
amount of the selling concession from the underwriters and selling group members
who sold those shares.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.
Neither Quokka nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
Quokka nor any of the underwriters makes any representation that the
representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for Quokka by Cooley Godward LLP, San Francisco, California. Certain legal
matters will be passed upon for the underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California. An investment
partnership affiliated with Cooley Godward LLP owns 127,887 shares of Quokka's
preferred stock, which will convert into 127,887 shares of Quokka's common stock
upon the closing of this offering.
EXPERTS
The financial statements included in this prospectus have been audited by
PricewaterhouseCoopers LLP, independent accountants. The companies and periods
covered by these audits are indicated in the individual reports of
PricewaterhouseCoopers LLP. Such financial statements have been so included in
reliance on the reports of PricewaterhouseCoopers LLP given on the authority of
said firm as experts in auditing and accounting.
CHANGE IN PRINCIPAL ACCOUNTANTS
In March 1998, KPMG LLP was dismissed and PricewaterhouseCoopers LLP
replaced KPMG LLP as our independent accountants. The selection of
PricewaterhouseCoopers LLP as our independent accountants was ratified by our
board of directors in April 1998. During fiscal 1997 and fiscal 1998, we had no
disagreement with our former accountants, KPMG LLP, on any matter of accounting
principles or
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practices, financial statement disclosure or auditing scope or procedure, which
disagreements if not resolved to their satisfaction would have caused them to
make reference in connection with their opinion to the subject matter of the
disagreement. KPMG LLP did not issue a report on our financial statements with
respect to the years ended December 31, 1997 or 1998.
ADDITIONAL INFORMATION
A registration statement on Form S-1 relating to the common stock offered
hereby has been filed by Quokka with the Securities and Exchange Commission in
Washington, D.C. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules thereto.
Statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement, each such statement being qualified in
all respects by such reference. For further information with respect to Quokka
and the common stock offered hereby, reference is made to such registration
statement, exhibits and schedules. A copy of the registration statement may be
inspected by anyone without charge at the SEC's principal office at the public
reference facility maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
part thereof may be obtained from the SEC's at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon the payment of certain fees prescribed by the SEC.
The SEC maintains a Web site that contains reports, proxy statements and other
information regarding registrants, including Quokka. The address of the SEC's
Web site is www.sec.gov.
As a result of this offering, Quokka will be subject to the information
requirements of the Securities Exchange Act of 1934. So long as Quokka is
subject to periodic reporting requirements of the Exchange Act, it will continue
to furnish the reports and other information required thereby to the SEC. Quokka
intends to furnish its stockholders with annual reports containing financial
statements audited by an independent public accounting firm and quarterly
reports containing unaudited financial information.
81
<PAGE> 87
QUOKKA SPORTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 88
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Quokka Sports, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Quokka Sports, Inc. and subsidiaries at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
January 22, 1999, except as to Note 12
for which the date is July 1, 1999
F-2
<PAGE> 89
QUOKKA SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1997 1998 1999 1999
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 4,026,610 $ 23,994,355 $ 15,262,901
Accounts receivable................................... 76,151 1,150,603 819,800
Prepaid expenses and other............................ 246,328 331,108 1,413,683
----------- ------------ ------------
Total current assets........................... 4,349,089 25,476,066 17,496,384
Property and equipment, net............................. 301,944 2,736,298 5,357,025
----------- ------------ ------------
Total assets................................... $ 4,651,033 $ 28,212,364 $ 22,853,409
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 480,577 $ 289,050 $ 2,220,288
Accrued expenses...................................... 81,990 1,199,357 726,819
Current portion of long-term debt and capitalized
lease obligations................................... 37,112 290,188 347,132
Deferred revenues..................................... 2,305,613 479,735 248,985
----------- ------------ ------------
Total current liabilities...................... 2,905,292 2,258,330 3,543,224
----------- ------------ ------------
Long term debt and capitalized lease obligations, net of
current portion....................................... 82,572 500,710 698,523
Commitments (Note 5)
Stockholders' equity:
Preferred stock, $0.0001 par value; authorized:
8,500,000 at December 31, 1997 and 27,600,000 at
December 31, 1998 and March 31, 1999 (unaudited);
issued and outstanding: 7,720,590 at December 31, 1997
and 23,736,016 at December 31, 1998 and March 31, 1999
and pro forma shares (unaudited); liquidation value:
$37,839,029 at December 31, 1998 and March 31, 1999
(unaudited)........................................... 772 2,374 2,374 $ --
Common stock:
Voting stock, $0.0001 par value; authorized:
20,500,000 at December 31, 1997 and 45,400,000 at
December 31, 1998 and March 31, 1999 (unaudited);
issued and outstanding: 9,351,566 at December 31,
1997 and 9,400,365 at December 31, 1998; and
9,589,342 and March 31, 1999 (unaudited) and
34,134,206 pro forma shares......................... 935 940 959 3,413
Non-voting stock, $0.0001 par value; authorized:
300,000 at December 31, 1997 and 1998 and March 31
1999 (unaudited); issued and outstanding: 300,000 at
December 31, 1997 and 1998 and March 31, 1999
(unaudited) and no pro forma shares................. 30 30 30 --
Additional paid-in capital.............................. 8,107,295 41,018,912 41,086,953 42,103,621
Warrants and other...................................... 61,860 477,115 1,414,993 938,038
Accumulated deficit..................................... (6,507,723) (16,046,047) (23,893,647) (23,893,647)
----------- ------------ ------------ ------------
Total stockholders' equity..................... 1,663,169 25,453,324 18,611,662 $ 19,151,425
----------- ------------ ------------ ============
Total liabilities and stockholders' equity..... $ 4,651,033 $ 28,212,364 $ 22,853,409
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 90
QUOKKA SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................ $ 38,906 $ 3,999,781 $ 8,635,099 $ 4,867,218 $ 896,566
Costs and expenses
Production costs.............. 610,867 5,130,130 7,779,593 3,430,803 2,717,704
Research and engineering...... 423,303 1,029,539 4,480,224 585,500 2,132,284
Sales and marketing........... 53,165 815,540 2,519,418 358,491 1,389,967
General and administrative.... 507,770 1,827,380 3,184,372 870,704 1,790,681
Depreciation and
amortization............... -- 68,247 530,261 43,789 430,406
----------- ----------- ----------- ----------- -----------
Total costs and expenses... 1,595,105 8,870,836 18,493,868 5,289,287 8,461,042
----------- ----------- ----------- ----------- -----------
Loss from operations..... (1,556,199) (4,871,055) (9,858,769) (422,069) (7,564,476)
Equity and losses of associated
venture....................... -- -- -- -- (452,275)
Interest income/(expense),
net........................... (3,580) (70,785) 320,445 32,428 169,151
----------- ----------- ----------- ----------- -----------
Net loss................. $(1,559,779) $(4,941,840) $(9,538,324) $ (389,641) $(7,847,600)
=========== =========== =========== =========== ===========
Historical net loss per share:
Basic and diluted............. $ (0.41) $ (0.73) $ (0.99) $ (0.04) $ (0.80)
Number of shares used in
calculation of historical
net loss per share -- basic
and diluted................ 3,800,000 6,791,534 9,654,835 9,651,566 9,756,059
Pro forma net loss per share
(unaudited):
Basic and diluted............. $ (0.40) $ (0.23)
Shares used in computing pro
forma net loss per share --
basic and diluted.......... 23,914,934 34,000,923
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 91
QUOKKA SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C VOTING
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------ ------------------- ------------------ ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ ---------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996................... -- $ -- -- $ -- -- $ -- 3,800,000 $380
Net loss................................... -- -- -- -- -- -- -- --
--------- ---- ---------- ------ --------- ---- --------- ----
Balance, December 31, 1996................. -- -- -- -- -- -- 3,800,000 380
Issuance of common stock to founder for
cash (January 1997)....................... -- -- -- -- -- -- -- --
Issuance of common stock to founder for
cash net of issuance costs of $31,401
(January 1997)............................ -- -- -- -- -- -- 1,900,000 190
Issuance of common stock for cash at $0.50
per share of issuance costs of $17,591
(August 1997)............................. -- -- -- -- -- -- 3,651,566 365
Issuance of warrants in connection with
promissory notes (October 1997)........... -- -- -- -- -- -- -- --
Issuance of Series A Preferred Stock for
cash of $0.68 per share, net of issuance
costs of $18,141 (December 1997).......... 7,720,590 772 -- -- -- -- -- --
Net loss................................... -- -- -- -- -- -- -- --
--------- ---- ---------- ------ --------- ---- --------- ----
Balance, December 31, 1997................. 7,720,590 772 -- -- -- -- 9,351,566 935
Issuance of Series B Preferred Stock for
cash of $1.50 per share, net of issuance
costs of $75,543 (June and August 1998)... -- -- 10,737,068 1,074 -- -- -- --
Issuance of warrants (August 1998)......... -- -- -- -- -- -- -- --
Issuance of options for services rendered
(August 1998)............................. -- -- -- -- -- -- -- --
Issuance of options for services rendered
(September 1998).......................... -- -- -- -- -- -- -- --
Exercise of voting common stock options to
employees for cash of $0.50 per share
(August -- December 1998)................. -- -- -- -- -- -- 48,799 5
Issuance of Series C Preferred Stock for
cash of $3.25 per share, net of issuance
costs of $36,031 (December 1998).......... -- -- -- -- 4,938,756 494 -- --
Issuance of warrants under joint
development agreement (December 1998)..... -- -- -- -- -- -- -- --
Exercise of warrants (December 1998)....... 145,559 15 169,801 17 24,242 2 -- --
Cumulative translation adjustment.......... -- -- -- -- -- -- -- --
Net loss................................... -- -- -- -- -- -- -- --
--------- ---- ---------- ------ --------- ---- --------- ----
Balance as of December 31, 1998............ 7,866,149 787 10,906,869 1,091 4,962,998 496 9,400,365 940
Exercise of voting common stock options to
employees for cash of $0.50 to $3.25 per
share (January -- March 1999)............. -- -- -- -- -- -- 197,775 20
Repurchase of common stock (11,875 shares
at $8.00 per share)....................... -- -- -- -- -- -- (11,875) (1)
Issuance of common stock for services
rendered.................................. -- -- -- -- -- -- 3,077 --
Issuance of warrants for subordinated-debt
agreement (March 1999).................... -- -- -- -- -- -- -- --
Issuance of warrants for CART rights
agreement (March 1999).................... -- -- -- -- -- -- -- --
Issuance of options for services
rendered.................................. -- -- -- -- -- -- -- --
Cumulative translation adjustment.......... -- -- -- -- -- -- -- --
Net loss................................... -- -- -- -- -- -- -- --
--------- ---- ---------- ------ --------- ---- --------- ----
Balance as of March 31, 1999 (unaudited)... 7,866,149 $787 10,906,869 $1,091 4,962,998 $496 9,589,342 $959
========= ==== ========== ====== ========= ==== ========= ====
<CAPTION>
NON-VOTING
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN WARRANTS ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL AND OTHER DEFICIT EQUITY/(DEFICIT)
------- ------ ----------- ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996................... -- $-- $ -- $ -- $ (6,104) $ (5,724)
Net loss................................... -- -- -- -- (1,559,779) (1,559,779)
------- --- ----------- ---------- ------------ -----------
Balance, December 31, 1996................. -- -- -- -- (1,565,883) (1,565,503)
Issuance of common stock to founder for
cash (January 1997)....................... 200,000 20 99,980 -- -- 100,000
Issuance of common stock to founder for
cash net of issuance costs of $31,401
(January 1997)............................ 100,000 10 968,399 -- -- 968,599
Issuance of common stock for cash at $0.50
per share of issuance costs of $17,591
(August 1997)............................. -- -- 1,807,828 -- -- 1,808,193
Issuance of warrants in connection with
promissory notes (October 1997)........... -- -- -- 61,860 -- 61,860
Issuance of Series A Preferred Stock for
cash of $0.68 per share, net of issuance
costs of $18,141 (December 1997).......... -- -- 5,231,088 -- -- 5,231,860
Net loss................................... -- -- -- -- (4,941,840) (4,941,840)
------- --- ----------- ---------- ------------ -----------
Balance, December 31, 1997................. 300,000 30 8,107,295 61,860 (6,507,723) 1,663,169
Issuance of Series B Preferred Stock for
cash of $1.50 per share, net of issuance
costs of $75,543 (June and August 1998)... -- -- 15,988,310 -- -- 15,989,384
Issuance of warrants (August 1998)......... -- -- -- 588,734 -- 588,734
Issuance of options for services rendered
(August 1998)............................. -- -- 5,293 -- -- 5,293
Issuance of options for services rendered
(September 1998).......................... -- -- 29,495 -- -- 29,495
Exercise of voting common stock options to
employees for cash of $0.50 per share
(August -- December 1998)................. -- -- 24,395 -- -- 24,400
Issuance of Series C Preferred Stock for
cash of $3.25 per share, net of issuance
costs of $36,031 (December 1998).......... -- -- 16,014,432 -- -- 16,014,926
Issuance of warrants under joint
development agreement (December 1998)..... -- -- -- 263,996 -- 263,996
Exercise of warrants (December 1998)....... -- -- 849,692 (437,636) -- 412,090
Cumulative translation adjustment.......... -- -- -- 161 -- 161
Net loss................................... -- -- -- -- (9,538,324) (9,538,324)
------- --- ----------- ---------- ------------ -----------
Balance as of December 31, 1998............ 300,000 30 41,018,912 477,115 (16,046,047) 25,453,324
Exercise of voting common stock options to
employees for cash of $0.50 to $3.25 per
share (January -- March 1999)............. -- -- 135,118 -- -- 135,138
Repurchase of common stock (11,875 shares
at $8.00 per share)....................... -- -- (94,999) -- -- (95,000)
Issuance of common stock for services
rendered.................................. -- -- 10,000 -- -- 10,000
Issuance of warrants for subordinated-debt
agreement (March 1999).................... -- -- -- 552,486 -- 552,486
Issuance of warrants for CART rights
agreement (March 1999).................... -- -- -- 400,841 -- 400,841
Issuance of options for services
rendered.................................. -- -- 17,922 -- -- 17,922
Cumulative translation adjustment.......... -- -- -- (15,449) -- (15,449)
Net loss................................... -- -- -- -- (7,847,600) (7,847,600)
------- --- ----------- ---------- ------------ -----------
Balance as of March 31, 1999 (unaudited)... 300,000 $30 $41,086,953 $1,414,993 $(23,893,647) $18,611,662
======= === =========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 92
QUOKKA SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $(1,559,779) $(4,941,840) $ (9,538,324) $ (389,641) $(7,847,600)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization of
property and equipment............. -- 68,247 530,261 43,789 430,406
Non-cash compensation-related charges
and other.......................... -- 61,860 450,044 381,948 569,077
Non-cash charges for equipment........ -- 44,220 -- -- --
Changes in operating assets and
liabilities:
Accounts receivable................ -- (76,151) (1,074,452) 3,081 330,803
Prepaid expenses and other......... (47,500) (198,828) (84,780) (113,590) (670,403)
Accounts payable................... 70,144 410,433 (433,336) (1,008) 1,447,292
Accrued expenses................... 77,258 (1,293) 1,117,367 621,774 (472,538)
Deferred revenues.................. 1,525,051 780,562 (1,825,878) (1,888,699) (230,750)
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in)
operating activities.......... 65,174 (3,852,790) (10,859,098) (1,342,346) (6,443,713)
----------- ----------- ------------ ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment.... -- (294,727) (2,722,807) (245,712) (2,567,187)
----------- ----------- ------------ ----------- -----------
Net cash used in investing
activities.................... -- (294,727) (2,722,807) (245,712) (2,567,187)
----------- ----------- ------------ ----------- -----------
Cash flows from financing activities:
Proceeds from borrowing............... -- -- 750,000 -- 331,069
Proceeds from bridge loan............. -- 532,000 -- -- --
Payments on notes and long-term
capital leases..................... -- -- (78,786) (11,067) (76,312)
Proceeds from the issuance of common
stock, net of issuance cost........ -- 2,876,792 24,400 -- 119,689
Repurchase of common stock............ -- -- -- -- (95,000)
Proceeds from the issuance of Series A
Preferred Stock, net of issuance
cost............................... -- 4,699,860 -- -- --
Proceeds from the issuance of Series B
Preferred Stock, net of issuance
cost............................... -- -- 15,989,384 -- --
Proceeds from the issuance of Series C
Preferred Stock, net of issuance
cost............................... -- -- 16,014,926 -- --
Proceeds from issuance and exercise of
warrants........................... -- -- 849,726 -- --
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in)
financing activities.......... -- 8,108,652 33,549,650 (11,067) 279,446
----------- ----------- ------------ ----------- -----------
Increase (decrease) in cash... 65,174 3,961,135 19,967,745 (1,599,125) (8,731,454)
Cash, beginning of period............... 301 65,475 4,026,610 4,026,610 23,994,355
----------- ----------- ------------ ----------- -----------
Cash, end of period..................... $ 65,475 $ 4,026,610 $ 23,994,355 $ 2,427,485 $15,262,901
=========== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 93
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
Organization
Prior to August 1996, Quokka Sports, Inc. operated as an Australian
software development and consulting company known as Ozware Developments Unit
Trust. In August 1996, Quokka adopted its current business model, incorporated
in Delaware under the name Quokka Productions, Inc. and relocated its
headquarters to San Francisco. In September 1996, Quokka Productions, Inc.
changed its name to Quokka Sports, Inc.
Quokka is an independent digital sports network providing real-time
coverage of sporting events for worldwide audiences. Utilizing digital assets
generated at a sports venue that are under-utilized by traditional media, Quokka
is building a digital sports network by creating digital programming content
that is specifically designed for interactive distribution systems.
Revenues are generated from digital entertainment sponsorships,
advertising, electronic commerce and studio services. The majority of revenues
are derived from the sale of sponsorship packages to corporations. Digital
entertainment sponsors may embed their products in Quokka's productions, site
branding, access to development projects, the use of trademarks and logos and
participation in various print and media campaigns.
Unaudited Interim Financial Information
The accompanying interim consolidated financial statements as of March 31,
1998 and 1999 and the three months then ended together with the related notes
are unaudited but include all adjustments, consisting of only normal recurring
adjustments, which management considers necessary to present fairly, in all
material respects, the consolidated financial position, and consolidated results
of operations and cash flows for the three month periods ended March 31, 1998
and 1999. Results for the three months ended March 31, 1999 are not necessarily
indicative of results of the entire year.
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.
Foreign Currency Translation
The functional currency of Quokka's subsidiaries is the local currency.
Accordingly, Quokka applies the current rate method to translate the
subsidiaries' financial statements into United States dollars. Translation
adjustments are included as a separate component of stockholders' equity in the
accompanying financial statements.
Basis of Presentation
The consolidated financial statements include the accounts of Quokka, and
all of its wholly and majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in the consolidated financial
statements. Investments in and advances to our joint venture in which we have a
50% ownership interest are accounted for by the equity method.
F-7
<PAGE> 94
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
Quokka includes in cash and cash equivalents all highly liquid investments
that mature within three months of their purchase date. Cash equivalents consist
primarily of money market funds.
Property and Equipment
Property and equipment are stated at cost and are depreciated on a
straight-line basis over the estimated useful lives of the related assets that
range from three to five years. Leased assets are amortized on a straight-line
basis over the lesser of the estimated useful life or the lease term.
Maintenance and repairs are charged to operations as incurred. When assets are
retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts, and any resulting gain or loss is reflected in
operations in the period realized.
Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statements and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
Net loss per share and pro forma net loss per share
Quokka computes net loss per share in accordance with SFAS No. 128,
Earnings per Share, and SEC Staff Accounting Bulletin ("SAB") No. 98. Under the
provisions of SFAS No. 128 and SAB No. 98, basic net loss per share is computed
by dividing the net loss available to common stockholders for the period by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share is computed by dividing the net loss for the period by the
weighted average number of vested common and common equivalent shares
outstanding during the period. However, as Quokka generated net losses in all
periods presented, common equivalent shares, composed of incremental common
shares issuable upon the exercise of stock options and warrants and upon
conversion of preferred stock, are not included in diluted net loss per share
because such shares are anti-dilutive.
Pro forma net loss per share in 1998 and the period ended March 31, 1999 is
computed using the weighted average number of common shares outstanding,
including the pro forma effects of the automatic conversion of Quokka's
preferred stock and exercise of in the money warrants to purchase 508,848 shares
into shares of Quokka's common stock effective upon the closing of Quokka's
initial public offering as if such conversion and exercise occurred on January
1, 1998 or at the date of original issuance, if later. The resulting pro forma
adjustments result in an increase in the weighted average shares used to compute
basic and diluted net loss per share in 1998 and for the three months ended
March 31, 1999. Pro forma common equivalent shares, composed of unvested
restricted common stock and incremental common shares issuable upon the exercise
of stock options and warrants, are not included in pro forma diluted net loss
per share because they would be anti-dilutive.
Pro Forma Stockholder's Equity (Unaudited)
Effective upon the closing of the Company's initial public offering, the
outstanding shares of Series A, Series B, Series C and Series D Preferred Stock
will automatically convert into shares of common stock. The pro forma effects of
these transactions are unaudited and have been reflected in the accompanying pro
forma consolidated balance sheet at March 31, 1999.
F-8
<PAGE> 95
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the computation of historical and pro forma
basic and diluted net loss per share for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss available to common
stockholders............... $(1,559,779) $(4,941,840) $(9,538,324) $ (389,641) $(7,847,600)
Denominator:
Weighted average shares....... 3,800,000 6,791,534 9,656,857 9,651,566 9,772,933
Weighted average unvested
common shares subject to
repurchase agreements...... -- -- (2,022) -- (16,874)
----------- ----------- ----------- ----------- -----------
Denominator for basic and
diluted calculation........ 3,800,000 6,791,534 9,654,835 9,651,566 9,756,059
=========== =========== =========== =========== ===========
Net loss per share:
Basic and diluted............. $ (0.41) $ (0.73) $ (0.99) $ (0.04) $ (0.80)
Anti-dilutive securities
including options, warrants
and preferred stock not
included in historical net
loss per share calculations... 0 1,643,306 17,755,299 9,373,525 32,685,779
PRO FORMA NET LOSS PER SHARE:
Net loss........................ $(9,538,324) $(7,847,600)
Shares used in computing net
loss per share,
basic and diluted............. 9,654,835 9,756,059
Adjustment to reflect assumed
conversion of preferred stock
and exercise of warrants...... 14,260,099 24,244,864
----------- -----------
Shares used in computing pro
forma net loss per share,
basic and diluted............. 23,914,934 34,000,923
=========== ===========
Pro forma net loss per share,
basic and diluted
(unaudited)................... $ (0.40) $ (0.23)
</TABLE>
Recently Issued Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
130, Reporting Comprehensive Income. SFAS 130 establishes standards for
reporting comprehensive income and its components in a financial statement.
Comprehensive income as defined includes all changes in equity (net assets)
during a period from nonowner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gains/losses on
available-for-sale securities. The difference between net loss, as reported, and
comprehensive income relates solely to the change in the cumulative translation
adjustment for the respective periods which were not material to these financial
statements.
During June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information" SFAS No. 131 replaces SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise" and changes the way
public companies report segment information. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997 and has been adopted by Quokka
for the year ended December 31, 1998. Quokka operates in one business segment.
F-9
<PAGE> 96
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 98-1, "Software for Internal Use" which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. Statement of Position No. 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998. Quokka
does not expect that the adoption of Statement of Position No. 98-1 will have a
material impact on its financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities." This standard requires companies to expense
the costs of start-up activities and organization costs as incurred. In general,
Statement of Position 98-5 is effective for fiscal years beginning after
December 15, 1998. Quokka believes the adoption of Statement of Position 98-5
will not have a material impact on its results of operations.
Fair Value of Financial Instruments
Carrying amounts of certain of Quokka's financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and other liabilities, approximate fair value due to their short
maturities. Based upon borrowing rates currently available for Quokka for loans
with similar terms, the carrying value of capital lease obligations approximates
fair value.
Business Risk and Concentration of Credit Risk
Quokka operates in the Internet industry, which are rapidly evolving and
intensely competitive. Quokka potentially competes with other Internet
companies, large, established media companies and sports marketing
organizations.
Financial instruments that potentially subject Quokka to concentrations of
credit risk consist primarily of one money market account placed with one
financial institution which exceeds federally insured limits.
Quokka performs ongoing credit evaluations, does not require collateral and
does not currently maintain any reserves for potential credit losses. For the
year ended December 31, 1998, three customers accounted for 52%, 16% and 12%,
respectively, of all revenues generated by Quokka. For the three months ended
March 31, 1998, three customers accounted for 63%, 18% and 10% of all revenues
generated by Quokka. For the three months ended March 31, 1999, three customers
accounted for 48%, 25% and 18% of all revenues generated by Quokka. At December
31, 1998, 23% of the outstanding accounts receivable was attributable to the
smallest of the three largest customers. One additional customer accounted for
another 65% of total outstanding accounts receivable. The remaining accounts
receivable balance at December 31, 1998 was attributable to three additional
customers. At March 31, 1999, 100% of the outstanding accounts receivable was
attributable to three customers.
For the year ended December 31, 1997, three customers accounted for 52%,
21% and 15% of all revenues generated by Quokka. At December 31, 1997, there
were no receivables from these customers. For the year ended December 31, 1996,
one customer accounted for all the revenues generated.
REVENUE RECOGNITION
Quokka generates revenues from digital entertainment sponsorships,
advertising, electronic commerce and studio services. Sponsorship revenues are
recognized over the term of the sponsored event based on the ratio of current
period impressions to projected total ultimate impressions based on a
determination that no significant obligations remained and collection of the
resulting receivable was probable. When Quokka was obligated to provide a
minimum number of impressions, a pro rata portion of amounts received was
recorded as deferred revenue until these obligations were satisfied. Revenues
from studio services are recognized in the period the service is provided.
Advertising and electronic commerce revenues, which have not been material to
date, are recognized when the commitment is met or product is
F-10
<PAGE> 97
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shipped and payment is assured. Quokka has accepted property and services as
payment for sponsorship. Property and services received as payment are valued at
fair market value based on the amounts normally charged to third parties for
similar property and services.
Total property and services received as payment were $0 in 1996, $1,738,298
in 1997 and $4,320,622 in 1998. Total property and services received as payment
were $2,773,874 and $244,763 for the three months ended March 31, 1998 and 1999.
RESEARCH AND ENGINEERING
Research and engineering expenses include personnel costs, costs incurred
to improve and develop the "Quokka Sports Platform," broadband applications and
costs associated with network operations. Research and engineering costs are
expensed as incurred.
ADVERTISING
Advertising is expensed as incurred. Advertising expenses were $4,000 in
1996, $62,000 in 1997 and $554,000 in 1998.
STOCK-BASED COMPENSATION
In 1997, Quokka adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-based Compensation." Quokka has elected to continue
accounting for stock-based compensation issued to the employees using Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and,
accordingly, pro forma disclosures required under SFAS No. 123 have been
presented (See Note 8). Under APB No. 25, compensation expense is based on the
difference, if any, on the date of the grant, between the fair value of Quokka's
common stock and the exercise price. Additionally, pursuant to SFAS No. 123,
stock issued to non-employees is accounted for at the fair value of the equity
instruments issued, or at the fair value of the consideration received,
whichever is more reliably measurable.
RECLASSIFICATION
Quokka has reclassified the presentation of certain prior year information
to conform to the current year presentation. These changes had no effect on
previously reported financial position or results of operations.
F-11
<PAGE> 98
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1997 1998 1999
-------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer, telecommunications equipment and
software..................................... $ 61,595 $2,241,644 $4,156,456
Leasehold improvements......................... 227,394 567,680 780,147
Furniture and fixtures......................... 5,738 356,068 611,346
Production equipment........................... -- 93,951 431,383
Leased equipment............................... 75,464 75,464 406,533
-------- ---------- ----------
370,191 3,334,807 6,385,865
Less accumulated depreciation and
amortization................................. (68,247) (598,509) (1,028,840)
-------- ---------- ----------
Property and equipment, net............... $301,944 $2,736,298 $5,357,025
======== ========== ==========
</TABLE>
Accumulated amortization related to leased equipment was $12,577 at
December 31, 1997 and $37,732 at December 31, 1998. There were no asset
disposals during 1996, 1997 and 1998. Accumulated amortization related to leased
equipment was $18,866 at March 31, 1998 and $62,413 at March 31, 1999. There
were no asset disposals during the three months ended March 31, 1999.
3. INCOME TAXES
The provision for income taxes are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current tax expense:
Federal -- Foreign........................ $ -- $ -- $ 12,090
State..................................... -- 800 800
Deferred tax expense
Federal................................... -- (1,438,864) (2,845,930)
State..................................... -- (128,098) (486,101)
Valuation allowance for deferred tax
assets.................................... -- 1,566,962 3,332,031
----------- ----------- -----------
$ -- $ 800 $ 12,890
=========== =========== ===========
</TABLE>
The change in the valuation allowance was $1,566,962 during the period from
August 15, 1996 (date of incorporation) to December 31, 1997 and $3,332,031 in
1998. Tax expenses, which were insignificant, were recorded in general and
administrative expenses.
F-12
<PAGE> 99
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The primary components of the net deferred tax asset are:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net operating loss carryforwards.................. $ 1,526,769 $ 4,671,438
Other............................................. 40,193 227,554
----------- -----------
1,566,962 4,898,992
Valuation allowance............................... (1,566,962) (4,898,992)
----------- -----------
Deferred tax liability............................ -- --
----------- -----------
Net deferred tax asset............................ $ -- $ --
=========== ===========
</TABLE>
At December 31, 1998, Quokka had net operating loss carryforwards of
$12,025,228 for federal tax purposes expiring in 2011 through 2018, and
$9,987,838 for California income tax purposes which expire in 2004. The issuance
of preferred stock in December, 1997, resulted in a change of ownership under
Section 382 of the Internal Revenue Code. As a result of the change,
approximately $3.8 million in federal losses and $1.8 million in California
losses are subject to an annual limitation of $254,319. The losses incurred
while operating as Ozware Developments Unit Trust in Australia are not available
for future utilization. Therefore, no deferred income taxes were recorded in the
financial statements.
The effective income tax rate differs from the federal statutory income tax
rate of 34% primarily as a result of state income taxes and the change in the
valuation allowance. The difference between Quokka's effective income tax rate
and the federal statutory rate is reconciled below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Provision computed at federal statutory
rate....................................... $ -- $(1,702,090) $(3,242,713)
State taxes, net of federal tax benefit...... -- (291,325) (556,411)
Change in valuation allowance................ -- 1,566,962 3,332,031
Other........................................ -- 427,253 479,983
---------- ----------- -----------
Net tax provision............................ $ -- $ 800 $ 12,890
========== =========== ===========
</TABLE>
4. ACCRUED LIABILITIES
Accrued liabilities are comprised of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------- -----------
1997 1998 1999
------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued compensation and related
expenses................................. $79,993 $ 579,380 $255,817
Accrued expenses........................... 1,997 544,977 450,000
Accrued professional service fees.......... -- 75,000 21,002
------- ---------- --------
Total accrued liabilities........ $81,990 $1,199,357 $726,819
======= ========== ========
</TABLE>
5. COMMITMENTS
Quokka's rental expense for office facilities was $149,839 in 1997 and
$232,799 in 1998 and $174,015 for the three months ended 1999. Quokka has the
option to terminate its facilities lease after December 2000 if the landlord is
unable to accommodate Quokka's expansion needs.
F-13
<PAGE> 100
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Lease Obligations
Quokka leases office facilities and equipment under noncancelable operating
leases. Additionally, Quokka leases certain office equipment under capital lease
agreements. Minimum future payments under capital and operating lease agreements
for the year ended December 31, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1999.................................................. $ 51,017 $ 438,668
2000.................................................. 45,960 412,980
2001.................................................. -- 381,314
2002.................................................. -- 55,746
-------- ----------
96,977 $1,288,708
==========
Less amount representing interest..................... 14,412
--------
Present value of minimum lease payments under capital
lease............................................... 82,565
Less current portion.................................. (40,188)
--------
Non-current portion......................... $ 42,377
========
</TABLE>
Long-Term Debt
Quokka has an equipment financing arrangement with a bank. Under the terms
of the agreement, Quokka had the right to draw on a $750,000 line of credit
until November 23, 1998 for the purchase of equipment collateralized by the
loan. These amounts are classified as long-term debt on the accompanying
financial statements. Quokka withdrew the maximum amount available under this
line during the period. The terms of the agreement require repayment over 36
months commencing November 23, 1998. Prior to that date, Quokka was obligated to
make payments of interest only on the unpaid balance. The current rate of 8.50%
is 0.75% over the prime rate quoted by the bank (7.75% at December 31, 1998).
Principal and interest payments are made monthly to fully amortize the loan.
6. STOCKHOLDERS' EQUITY
Preferred Stock
At December 31, 1998, Quokka had Series A, Series B and Series C preferred
stock authorized and outstanding. At December 31, 1997, Quokka was authorized to
issue 8,500,000 shares of preferred stock, all of which were designated Series A
Preferred Stock. At December 31, 1998, Quokka was authorized to issue 27,600,000
shares of preferred stock, 7,965,688 of which were designated Series A Preferred
Stock, 11,127,620 of which were designated Series B Preferred Stock and
8,500,000 of which were designated Series C Preferred Stock. The holders of
preferred stock have the following rights:
Dividends
The holders of all series of preferred stock outstanding are entitled
to receive in any fiscal year, when and if declared by the Board of
Directors, out of any funds legally available, cash dividends at the rate
of 8.00% of the original issuance price per share. The right to dividends
is not cumulative, and no dividends were declared through December 31,
1998.
F-14
<PAGE> 101
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Conversion Rights
At the option of the holder, each share of Series A, Series B and
Series C Preferred Stock is convertible, at any time, into one share of
common stock. The conversion ratio is subject to adjustment resulting from
future capital transactions. In addition, each share of Series A, Series B
and Series C Preferred Stock will convert automatically into common stock:
(i) at any time based on the affirmative vote of 75% of the outstanding
shares of all of Series A, Series B and Series C Preferred Stock; or (ii)
immediately prior to the closing of a firm commitment underwritten public
offering, provided the gross cash proceeds to Quokka are at least
$15,000,000 and the public offering price per share is at least $4.50.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of Quokka,
either voluntary or involuntary, the holders of the Series C Preferred
Stock retain liquidation preference over Series A and Series B Preferred
Stock and common stock equal to the original issuance price ($3.25 per
share) plus declared but unpaid dividends. After the payment of the full
liquidation preference of the Series C Preferred Stock, the holders of the
Series B Preferred Stock retain liquidation preference over Series A
Preferred Stock and common stock equal to the original issuance price
($1.50 per share) plus declared but unpaid dividends. After the payment of
the full liquidation preference of the Series C Preferred Stock and Series
B Preferred Stock, the holders of the Series A Preferred Stock retain
liquidation preference over common stock equal to the original issuance
price ($0.68 per share) plus declared but unpaid dividends. If there are
any available funds and assets remaining after payments or distributions
are made to the holders of Series A, Series B and Series C Preferred Stock
of their full preferential amounts, then all remaining funds and assets
will be distributed pro rata among the holders of the then-outstanding
common stock and Series A, Series B and Series C Preferred Stock on a pro
rata, as converted to common stock basis.
Voting Rights
The holders of all series of preferred stock and the holders of common
stock are entitled to notice of any stockholders' meeting. Holders of
voting common stock and Series A, Series B and Series C Preferred Stock ,
vote as a single class upon any matter submitted to the stockholders for a
vote, as follows: (i) each holder of Series A, Series B and Series C
Preferred Stock, has one vote for each full share of common stock into
which each share of preferred stock would be convertible on the record date
for the vote and (ii) each holder of common stock has one vote per share of
common stock. Voting as a separate class, holders of Series A Preferred
Stock have the right to elect two directors. This right can be exercised of
any annual meeting or at any special meeting called. Directors elected by
holders of a majority of all outstanding shares of Series A Preferred Stock
will serve until their successors have been elected or have been removed by
holders of the majority of the Series A Preferred Stock.
7. BRIDGE LOANS AND WARRANTS
In October 1997, Quokka obtained a bridge loan and issued warrants to
purchase common stock. The loan amount was subsequently converted into Series A
Preferred Stock in connection with the Series A Preferred Stock financing in
December 1997. Quokka issued 212,800 warrants at an exercise price of $0.50 per
share expiring in November 2004. In connection with these warrants, Quokka
recorded a charge to interest expense of $61,860, representing the fair value of
the warrants issued.
F-15
<PAGE> 102
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1998, Quokka issued warrants to purchase 635,650 shares of Series A, B,
and C Preferred Stock under a joint development agreement. In connection with
these warrants, Quokka recorded charges for research and engineering of
$852,730, representing the fair value of the warrants issued. In December 1998,
339,602 shares of preferred stock were exercised. As of December 31, 1998, the
following warrants were outstanding:
<TABLE>
<CAPTION>
AGGREGATE
EXERCISE
SHARES PRICE EXPIRATION DATES
------- --------- ----------------
<S> <C> <C> <C>
Common stock......... 212,800 $106,400 The earlier of November 2004 or initial public offering
Series A Preferred
Stock.............. 99,539 101,530 The earlier of August 2009 or initial public offering
Series B Preferred
Stock.............. 148,024 174,257 The earlier of August 2009 or initial public offering
Series C Preferred
Stock.............. 48,485 157,576 The earlier of August 2009 or initial public offering
</TABLE>
The estimated fair value of these warrants has been determined based on the
Noreen-Wolfson fair value model with a volatility of 70%.
8. STOCK OPTIONS
Pursuant to the Quokka Sports, Inc. 1997 Equity Incentive Plan ("the
Plan"), employees, directors and consultants of Quokka may be granted options to
purchase shares of common stock. At December 31, 1998, 7,350,000 shares of
common stock were reserved for issuance pursuant to the Plan. Options granted
under the Plan are exercisable but subject to repurchase at cost in the event
that the individual ceases to be an employee or provide services to Quokka.
Repurchase rights generally lapse according to a vesting schedule of 60 months.
A summary of the activity under the Plan together with options granted
outside of the Plan is as follows:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
PRICE AGGREGATE AVERAGE
SHARES PER SHARE PRICE EXERCISE PRICE
--------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding at December 31,
1996.......................... -- -- -- --
Granted......................... 1,340,000 $0.50 $ 670,000 $0.50
Cancelled....................... (252,000) $0.50 (126,000) $0.50
--------- ----------- ----------- -----
Outstanding at December 31,
1997.......................... 1,088,000 $0.50 544,000 $0.50
Granted......................... 2,695,000 $0.50-$2.60 3,719,000 $1.34
Exercised....................... (48,799) $0.50 (24,400) $0.50
Cancelled....................... (239,001) $0.50-$1.50 (176,000) $0.74
--------- ----------- ----------- -----
Outstanding at December 31,
1998.......................... 3,495,200 $0.50-$2.60 4,062,600 $1.12
--------- ----------- ----------- -----
Granted......................... 3,894,600 $3.25-$8.00 27,276,950 $7.00
Exercised....................... (197,775) $0.50-$7.00 (135,138) $0.68
Cancelled....................... (47,000) $1.50-$7.00 (131,000) $2.79
--------- ----------- ----------- -----
Outstanding at March 31, 1999... 7,145,025 $0.50-$8.00 $31,073,412 $4.35
========= =========== =========== =====
</TABLE>
At December 31, 1998, options to purchase 819,480 shares were fully vested.
F-16
<PAGE> 103
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information with respect to stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------- ----------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE 12/31/98 EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.50 1,454,200 8.68 $0.50 441,429 $0.50
$0.75-$1.25 911,000 9.65 $1.13 156,867 $1.12
$1.50-$2.60 1,106,000 9.88 $2.08 221,184 $2.08
</TABLE>
The following information concerning the Plan is provided in accordance
with Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123). Quokka accounts for the Plan in accordance
with Accounting Principles Board (APB) Opinion No. 25 and related
interpretations.
The fair value of each employee stock option grant has been estimated on
the date of grant using the minimum value method with the following weighted
average assumptions used for grants in 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
Risk-free interest rates........................... 5.72% 5.25%
Expected life of options........................... 5years 5years
Expected dividends................................. $0 $0
</TABLE>
The weighted average fair value of options granted in 1998 was $1.38. Stock
options issued to consultants were valued utilizing the Black-Scholes option
pricing model with a volatility of 71%.
The following comprises the pro forma information pursuant to the provision
of SFAS No. 123:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net loss -- historical.............. $(1,559,779) $(4,941,840) $(9,538,324)
Pro forma........................... $(1,559,779) $(4,966,164) $(9,694,002)
Basic and diluted net loss per share
Historical........................ ($0.41) ($0.73) ($0.99)
Pro forma......................... ($0.41) ($0.73) ($1.00)
</TABLE>
These pro forma amounts may not be representative of the effects on pro
forma net income (loss) for future years as options vest over several years and
additional awards are generally made each year.
9. 401(k) PLAN
On November 5, 1997, Quokka established a 401(k) plan, which took effect on
January 1, 1998. Under the plan, eligible employees are permitted to contribute
up to 15% of gross compensation, not to exceed the annual 402(g) limitation for
any plan year. Discretionary contributions may be made by Quokka. No
contributions have been made by Quokka since the adoption of the plan.
F-17
<PAGE> 104
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information and non-cash activities for 1997 and
1998, and the three months ended March 31, 1998 and 1999:
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------------
1997 1998 1998 1999
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Supplement disclosure of cash:
Equipment financed through capital lease.... $119,684 $ -- $ -- $ --
Account payable related to purchase of
property and equipment................... -- 241,809 -- 483,946
Issuance of warrants for preferred stock
under joint development agreement........ 61,860 415,094 381,948 --
Issuance of preferred warrants under license
rights agreement......................... -- -- -- 400,841
Issuance of preferred warrants for
subordinated debt........................ -- -- -- 552,486
Stock options issued as compensation for
services rendered........................ -- 34,788 -- 27,922
</TABLE>
11. COMMITMENTS & CONTINGENCIES
Quokka, together with, in some instances, some of its directors and
officers, may from time to time be the subject of claims or named as a defendant
or co-defendant in various legal actions involving breach of contract and
various other claims incident to the conduct of its businesses. Management does
not expect Quokka to suffer any material liability by reason of such actions,
nor does it expect that such actions will have a material effect on Quokka's
liquidity or operating results.
12. SUBSEQUENT EVENTS
In February 1999, Quokka established NBC/Quokka, LLC a joint venture with
NBC Olympics, Inc. NBC/Olympics, Inc. is owned 51% by Quokka and 49% by NBC
Olympics, Inc. The terms of the operating agreement for the venture require
Quokka to make quarterly capital contributions in amounts necessary to fund the
venture's operations on an ongoing basis in accordance with the annual operating
plan. Accordingly, the amount and timing of these capital contributions will be
based on the actual activities of the venture and are unknown at this time. In
consideration for Quokka's share of the equity in the joint venture, Quokka also
issued 2,100,000 warrants that have a fair value of $4.9 million. This joint
venture has been consolidated in Quokka's financial statements. NBC's obligation
to the joint venture is to contribute interactive media rights as well as on-air
promotion of the site, access to NBC personalities and research.
In March 1999, Quokka formed CART Digital Media Enterprises, LLC with
Forsythe Inc. CART Digital Media Enterprises, LLC is 50% owned by Quokka and 50%
owned by Forsythe, Inc., and both parties have an equal representation on the
Board of Managers. The terms of the agreement require the two partners to make
capital contributions in order to meet the venture's need for operating capital.
Accordingly, the amounts and timing of these capital contributions will be based
on the actual activities of the venture and are unknown at this time. This joint
venture will be treated as an equity investment within the financial statements.
As part of the consideration for the equity in this joint venture, Quokka issued
warrants to purchase 76,366 shares of Series C Preferred Stock, which has a fair
value of $400,841.
F-18
<PAGE> 105
QUOKKA SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Quokka has acquired rights to various other events. Under these agreements
Quokka is required to make cash payments through 2003 totaling $6,700,000.
Quokka and its subsidiaries and joint venture will account for acquired
media rights pursuant to Statement of Financial Accounting Standards No. 63.
Under FAS No. 63, a licensee shall report an asset and a liability for the
rights acquired and obligations incurred under a license agreement when the
license period begins and other conditions, including availability and
acceptance, have been met. The assets will be amortized over their estimated
useful life.
In February 1999, Quokka entered into a subordinated debt agreement. Terms
of this agreement call for maximum borrowings of $10 million. Repayment is due
in 36 monthly installments commencing on February 1, 2000 subject to
acceleration under certain conditions including the completion of an initial
public offering. No amounts were outstanding on this facility as of March 31,
1999. In connection with this agreement, Quokka has issued warrants for the
purchase of 215,384 shares of Series C Preferred Stock at an exercise price of
$3.25. The fair value of these warrants was $552,486 and has been treated as a
loan commitment fee and is being amortized over the term of the six-month
draw-down period as no further services are requested to earn the warrants, and
they are fully vested.
The estimated fair value of the above warrants have been determined based
on the Noreen-Wolfson fair value model with a volatility of 70%.
In April 1999, Quokka entered into a Trial Agreement with MediaOne
Interactive Services, Inc. Under this agreement, Quokka and MediaOne are working
together to implement and test streaming media over the MediaOne cable modem
infrastructure. In connection with this agreement, Quokka has issued warrants to
MediaOne to purchase 153,846 shares of Series C preferred stock at an exercise
price of $3.25 per share. These warrants will expire in January 2009 if not
earlier exercised.
In May 1999, Quokka entered into a noncancelable facilities lease. Terms of
the lease call for annual lease payments of approximately $1.9 million. Terms of
the lease agreement further require a $700,000 security deposit in the form of
an irrevocable letter of credit. The lease expires in February 2002.
In May 1999, Quokka completed an additional private sale of equity
securities issuing 3,966,667 shares of Series D Preferred Stock at a price of
$9.00 per share. Aggregate gross proceeds approximate $35.7 million.
In May 1999, Quokka entered into a binding letter of intent with
Excite@Home to integrate and promote their sports programming on the
www.excite.com web site and the @Home broadband service. Terms of this agreement
call for semiannual payments through January 2000 and quarterly payments
thereafter through October 2002 totaling $9.6 million.
In May 1999, the Company entered into a purchase commitment for property
and equipment totalling $10.5 million through December 2001.
In May 1999, the Company entered into an agreement to purchase software and
services totalling $3.5 million through December 2000.
In June 1999, Quokka completed an additional private sale of equity
securities issuing 555,556 shares of Series D Preferred Stock at a price of
$9.00 per share. Aggregate gross proceeds approximate $5.0 million.
F-19
<PAGE> 106
(INSIDE BACK COVER)
[Picture of the Race Viewer web page related to Quokka's coverage of the 1999
FedEx Championship Series car race, a CART event.]
<PAGE> 107
(INSIDE BACK COVER GATE FOLD)
[GRAPHIC TITLED "QUOKKA SPORTS PLATFORM" DEPICTING DATA FLOW THROUGH THE
FOLLOWING SIX STAGES OF THE QUOKKA SPORTS PLATFORM: (1) COLLECTION; (2)
TRANSMISSION; (3) PRODUCTION; (4) DISTRIBUTION; (5) DELIVERY; AND (6) CLIENT.]
<PAGE> 108
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 1999 (the 25(th) day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
5,000,000 SHARES
[QUOKKASPORTS LOGO]
COMMON STOCK
-----------------------
P R O S P E C T U S
--------------
MERRILL LYNCH & CO.
LEHMAN BROTHERS
BANCBOSTON ROBERTSON STEPHENS
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 109
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid by Quokka
in connection with the sale of the shares of common stock being registered
hereby. All amounts are estimates except for the SEC registration fee, the NASD
filing fee and the Nasdaq National Market filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 17,584
NASD filing fee............................................. 6,250
Nasdaq National Market filing fee........................... 95,000
Accounting fees and expenses................................ 250,000
Legal fees and expenses..................................... 350,000
Printing and engraving expenses............................. 325,000
Blue sky fees and expenses.................................. 10,000
Transfer agent and registrar fees and expenses.............. 15,000
Miscellaneous............................................... 248,401
----------
Total.................................................. $1,317,235
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our certificate of incorporation, which will become effective upon the
closing of this offering, contains provisions permitted under Delaware law
relating to the liability of directors. These provisions eliminate a director's
personal liability for monetary damages resulting from a breach of fiduciary
duty, except in circumstances involving wrongful acts, such as:
- any breach of the director's duty of loyalty;
- acts or omissions which involve a lack of good faith, intentional
misconduct or a knowing violation of the law;
- payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law; or
- any transaction from which the director derives an improper personal
benefit.
These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief, such as an injunction or rescission, in the
event of a breach of director's fiduciary duty. These provisions will not alter
a director's liability under federal securities laws.
Our bylaws, which will become effective upon the closing of this offering,
require us to indemnify our directors and executive officers to the fullest
extent not prohibited by the Delaware law. We may limit the extent of such
indemnification by individual contracts with our directors and executive
officers. Further, we may decline to indemnify any director or executive officer
in connection with any proceeding initiated by such person or any proceeding by
such person against Quokka or its directors, officers, employees or other
agents, unless such indemnification is expressly required to be made by law or
the proceeding was authorized by our board of directors.
We have entered into indemnity agreements with each of our current
directors and certain of our executive officers to give such directors and
officers additional contractual assurances regarding the scope of the
indemnification set forth in our certificate of incorporation and bylaws and to
provide additional procedural protections. At present, there is no pending
litigation or proceeding involving a director, officer or employee of Quokka for
which indemnification is sought, nor are we aware of any threatened litigation
that may result in claims for indemnification.
II-1
<PAGE> 110
We have the power to indemnify our other officers, employees and other
agents, as permitted by Delaware law, but we are not required to do so.
Quokka plans to obtain directors' and officers' liability insurance.
Reference is made to the following documents filed or to be filed as
exhibits to this registration statement regarding relevant indemnification
provisions described above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT NUMBER
- ---------------- ------
<S> <C>
Form of Underwriting Agreement.............................. 1.01
Amended and Restated Certificate of Incorporation........... 3.03
Amended and Restated Bylaws................................. 3.04
Amended and Restated Investors' Rights Agreement dated May
27, 1999.................................................. 4.02
Form of Indemnity Agreement................................. 10.01
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following list sets forth information regarding all securities sold by
Quokka since its incorporation in Delaware on August 15, 1996:
1. In January 1997, Quokka issued and sold an aggregate of 3,800,000
shares of its common stock to one entity in exchange for all of the
properties, rights, interests and other tangible and intangible assets
of Ozware Developments Unit Trust, an Australian unit trust.
2. From March 1997 to August 1997, Quokka issued and sold an aggregate of
5,851,566 shares of its common stock at $0.50 per share, 3,351,076 of
which were sold to five executive officers and/or directors (and
related entities) of Quokka.
3. In October 1997, Quokka issued warrants to purchase an aggregate of
212,800 shares of common stock at an exercise price of $0.50 per share
to four investors, 62,800 of which were sold to two executive officers
and/or directors (and related entities) of Quokka.
4. In December 1997, Quokka issued and sold an aggregate of 7,720,590
shares of Series A Preferred Stock at $0.68 per share to 11 investors,
5,635,294 of which were sold to five executive officers and/or
directors (and related entities) of Quokka.
5. Between March 1998 and December 1998, Quokka issued and sold warrants
to purchase up to 245,098 shares of Series A Preferred Stock at an
exercise price of $1.02 per share, 245,098 shares of Series B Preferred
Stock at an exercise price of $1.02 per share, 72,727 shares of Series
B Preferred Stock at an exercise price of $1.50 per share and 72,727
shares of Series C Preferred Stock at an exercise price of $3.25 per
share to one investor that is now a 5% stockholder of Quokka. The
warrants were amended in December 1998 and partially exercised by the
5% stockholder in December 1998 for 145,559 shares of Series A
Preferred Stock, 145,559 shares of Series B Preferred Stock, 24,242
shares of Series B Preferred Stock and 24,242 shares of Series C
Preferred Stock. The warrants, as amended, are currently exercisable
for 99,539 shares of Series A Preferred Stock at an exercise price of
$1.02 per share, 99,539 shares of Series B Preferred Stock at an
exercise price of $1.02 per share, 48,485 shares of Series B Preferred
Stock at an exercise price of $1.50 per share and 48,485 shares of
Series C Preferred Stock at an exercise price of $3.25 per share.
6. From June to August 1998, Quokka issued and sold an aggregate of
10,737,068 shares of Series B Preferred Stock at $1.50 per share to 21
investors, 9,767,269 of which were sold to six investors that are now
5% stockholders of Quokka, and 576,904 shares of which were sold to
three executive officers and directors (and related entities) of
Quokka.
7. In December 1998, Quokka issued and sold an aggregate of 4,938,756
shares of Series C Preferred Stock at $3.25 per share to 26 investors,
3,630,771 of which were sold to six
II-2
<PAGE> 111
investors that are now 5% stockholders, and 323,371 of which were sold to three
executive officers and directors (and related entities) of Quokka.
8. From February 1999 to March 1999, Quokka issued and sold warrants to
purchase up to an aggregate of 2,391,750 shares of Series C Preferred
Stock at a weighted average per share price of $5.33 to three
investors, one of which is now a 5% stockholder of Quokka.
9. In April 1999, Quokka issued and sold warrants to purchase up to an
aggregate of 161,538 shares of Series C Preferred Stock at an exercise
price of $3.25 per share to two investors, one of which is now a 5%
stockholder of Quokka.
10. In May and June 1999, Quokka issued and sold an aggregate of 4,522,223
shares of Series D Preferred Stock at $9.00 per share to eight
investors.
11. In May 1999, Quokka issued and sold a warrant to purchase up to 110,000
shares of Series D Preferred Stock at an exercise price of $9.00 per
share to one investor.
12. In July 1999, Quokka issued and sold warrants to purchase up to an
aggregate of 30,000 shares of common stock at an exercise price of
$9.00 per share to two investors.
13. Since inception, Quokka has granted stock options under its 1997 Equity
Incentive Plan, covering an aggregate of 8,971,499 shares of common
stock (net of expirations and cancellations) at exercise prices ranging
from $0.50 to $10.00 per share.
14. Since inception, options to purchase an aggregate of 470,744 shares of
common stock have been exercised for an aggregate purchase price of
$400,010.00 at a weighted exercise price of $0.85 per share.
15. Since inception, Quokka has granted stock options outside of its 1997
Equity Incentive Plan, covering an aggregate of 517,000 shares of
common stock (net of expirations and cancellations) at exercise prices
ranging from $0.50 to $8.50 per share. To date, no options granted
outside of the 1997 Equity Incentive Plan have been exercised.
All sales of common stock made pursuant to the exercise of stock options
granted under the 1997 Equity Incentive Plan to Quokka's officers, directors,
employees and consultants were made in reliance on Rule 701 under the Securities
Act or on Section 4(2) of the Securities Act.
All other sales were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated under the Securities Act. These sales were made
without general solicitation or advertising. Each purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment and represented to Quokka that the shares were being acquired for
investment.
II-3
<PAGE> 112
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) THE FOLLOWING EXHIBITS ARE FILED HEREWITH:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.
3.01* Amended and Restated Certificate of Incorporation.
3.02* Bylaws.
3.03* Form of Amended and Restated Certificate of Incorporation to
be filed upon completion of this offering.
3.04* Form of Amended and Restated Bylaws upon completion of this
offering.
4.01* Form of Specimen Stock Certificate.
4.02* Amended and Restated Investors' Rights Agreement, dated May
27, 1999, among Quokka and certain investors named therein.
5.01 Opinion of Cooley Godward LLP regarding legality of the
securities being registered.
10.01* Form of Indemnity Agreement entered into by Quokka with each
of its directors and certain executive officers.
10.02* Amended and Restated 1997 Equity Incentive Plan.
10.03* Form of Stock Option Agreement under the Amended and
Restated 1997 Equity Incentive Plan.
10.04* 1999 Non-Employee Directors' Stock Option Plan.
10.05* Form of Nonstatutory Stock Option Agreement under the 1999
Non-Employee Directors' Stock Option Plan.
10.06* 1999 Employee Stock Purchase Plan.
10.07 Form of 1999 Employee Stock Purchase Plan Offering.
10.08* Key Employee Agreement, dated March 25, 1999, between Alvaro
Saralegui and Quokka.
10.09* Subordinated Loan and Security Agreement, dated February 12,
1999, between Quokka and Comdisco, Inc.
10.10+* Software License and Development Agreement, dated March 20,
1998, as amended, between Quokka and Intel Corporation.
10.11* Lease, dated October 1, 1996, between Brannan Street
Partners and Quokka, as amended.
10.12* Sublease, dated June 23, 1998, between San Francisco
Mercantile Company, Inc. and Quokka, as amended.
10.13* Office Lease, dated February 18, 1999, between Tiffany M.
Gin and Stanton Lowe dba Spear Street Saphire and Quokka.
10.14+* Master Venture Agreement, dated February 9, 1999, by and
among Quokka, NBC Olympics, Inc. and NBC/Quokka Ventures,
LLC.
10.15+* Agreement, dated January 1, 1999, between Championship Auto
Racing Teams, Inc. and CART Digital Media Enterprises, LLC.
10.16+* Operating Agreement of NBC/Quokka Ventures, LLC, dated
February 9, 1999, between Quokka and NBC Olympics, Inc., as
amended.
10.17+* Digital Entertainment Partnership Agreement, dated January
1, 1999, between Quokka and Compaq Computer Corporation.
10.18* Lease, dated April 23, 1999, between Quokka and 1301 Evans
Street Associates, LLC.
</TABLE>
II-4
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<C> <S>
10.19* Office Lease Agreement, dated May 27, 1999, between Quokka
and EOP-Mission Street, L.L.C.
10.20 Lease, dated July 16, 1999, between SKS Brannan Associates,
LLC and Quokka.
16.01* Letter from KPMG LLP regarding change in certifying
accountant.
21.01* List of Subsidiaries.
23.01* Consent of Cooley Godward LLP (included in Exhibit 5.01).
23.02 Consent of PricewaterhouseCoopers LLP, independent
accountants.
24.01* Power of Attorney.
27.01* Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed with the Commission.
** To be filed by amendment.
+ Certain portions of this Exhibit have been omitted pursuant to a request for
confidential treatment. A full copy of this Exhibit has been filed with the
Commission.
(b) FINANCIAL STATEMENT SCHEDULES.
All financial statement schedules are omitted because the information
called for is not required, is not applicable, or is shown either in the
consolidated financial statements or the 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 for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Quokka
pursuant to the provisions described under Item 14 above, or otherwise, Quokka
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 Quokka of expenses incurred
or paid by a director, officer or controlling person of Quokka 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, Quokka
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by Quokka pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus 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.
II-5
<PAGE> 114
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Quokka Sports, Inc. has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, State of California, on the 20th day of July, 1999.
QUOKKA SPORTS, INC.
By: /s/ LES SCHMIDT
----------------------------------
Les Schmidt
Executive Vice President, Chief
Financial Officer and Secretary
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
ALAN S. RAMADAN* President, Chief Executive Officer July 20, 1999
- ------------------------------------------ and Director (Principal
Alan S. Ramadan Executive Officer)
/s/ LES SCHMIDT Executive Vice President, Chief July 20, 1999
- ------------------------------------------ Financial Officer and Secretary
Les Schmidt (Principal Financial and
Accounting Officer)
RICHARD H. WILLIAMS* Director (Chairman of the Board of July 20, 1999
- ------------------------------------------ Directors)
Richard H. Williams
JOHN BERTRAND A.M.* Director (Vice-Chairman of the July 20, 1999
- ------------------------------------------ Board of Directors)
John Bertrand A.M.
WALTER W. BREGMAN* Director July 20, 1999
- ------------------------------------------
Walter W. Bregman
ROEL PIEPER* Director July 20, 1999
- ------------------------------------------
Roel Pieper
JAMES G. SHENNAN, JR.* Director July 20, 1999
- ------------------------------------------
James G Shennan, Jr.
BARRY M. WEINMAN* Director July 20, 1999
- ------------------------------------------
Barry M. Weinman
*By: /s/ LES SCHMIDT
------------------------------------
Les Schmidt
Attorney-in-Fact
(Signing under the authority of a Power of
Attorney previously filed with the
Securities and Exchange Commission)
</TABLE>
II-6
<PAGE> 115
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT TITLE PAGE
- ------- ------------- ------------
<C> <S> <C>
1.01 Form of Underwriting Agreement..............................
3.01* Amended and Restated Certificate of Incorporation...........
3.02* Bylaws......................................................
3.03* Form of Amended and Restated Certificate of Incorporation to
be filed upon completion of this offering...................
3.04* Form of Amended and Restated Bylaws upon completion of this
offering....................................................
4.01* Form of Specimen Stock Certificate..........................
4.02* Amended and Restated Investors' Rights Agreement, dated May
27, 1999, among Quokka and certain investors named
therein.....................................................
5.01 Opinion of Cooley Godward LLP regarding legality of the
securities being registered.................................
10.01* Form of Indemnity Agreement entered into by Quokka with each
of its directors and certain executive officers.............
10.02* Amended and Restated 1997 Equity Incentive Plan.
10.03* Form of Stock Option Agreement under the Amended and
Restated 1997 Equity Incentive Plan.........................
10.04* 1999 Non-Employee Directors' Stock Option Plan..............
10.05* Form of Nonstatutory Stock Option Agreement under the 1999
Non-Employee Directors' Stock Option Plan...................
10.06* 1999 Employee Stock Purchase Plan...........................
10.07 Form of 1999 Employee Stock Purchase Plan Offering..........
10.08* Key Employee Agreement, dated March 25, 1999, between Alvaro
Saralegui and Quokka........................................
10.09* Subordinated Loan and Security Agreement, dated February 12,
1999, between Quokka and Comdisco, Inc......................
10.10+* Software License and Development Agreement, dated March 20,
1998, as amended, between Quokka and Intel Corporation......
10.11* Lease, dated October 1, 1996, between Brannan Street
Partners and Quokka, as amended.............................
10.12* Sublease, dated June 23, 1998, between San Francisco
Mercantile Company, Inc. and Quokka, as amended.............
10.13* Office Lease, dated February 18, 1999, between Tiffany M.
Gin and Stanton Lowe dba Spear Street Saphire and Quokka....
10.14+* Master Venture Agreement, dated February 9, 1999, by and
among Quokka, NBC Olympics, Inc. and NBC/Quokka Ventures,
LLC.........................................................
10.15+* Agreement, dated January 1, 1999, between Championship Auto
Racing Teams, Inc. and CART Digital Media Enterprises,
LLC.........................................................
10.16+* Operating Agreement of NBC/Quokka Ventures, LLC, dated
February 9, 1999, between Quokka and NBC Olympics, Inc., as
amended.....................................................
10.17+* Digital Entertainment Partnership Agreement, dated January
1, 1999, between Quokka and Compaq Computer Corporation.....
10.18* Lease, dated April 23, 1999, between Quokka and 1301 Evans
Street Associates, LLC......................................
10.19* Office Lease Agreement, dated May 27, 1999, between Quokka
and EOP-Mission Street, L.L.C...............................
10.20 Lease, dated July 16, 1999, between SKS Brannan Associates,
LLC and Quokka..............................................
</TABLE>
<PAGE> 116
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT TITLE PAGE
- ------- ------------- ------------
<C> <S> <C>
16.01* Letter from KPMG LLP regarding change in certifying
accountant..................................................
21.01* List of Subsidiaries........................................
23.01* Consent of Cooley Godward LLP (included in Exhibit 5.01)....
23.02 Consent of PricewaterhouseCoopers LLP, independent
accountants.................................................
24.01* Power of Attorney...........................................
27.01* Financial Data Schedule.....................................
</TABLE>
- ---------------
* Previously filed with the Commission.
+ Certain portions of this Exhibit have been omitted pursuant to a request for
confidential treatment. A full copy of this Exhibit has been filed with the
Commission.
<PAGE> 1
EXHIBIT 1.01
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
QUOKKA SPORTS, INC.
a Delaware Corporation
5,000,000 Shares of Common Stock
PURCHASE AGREEMENT
Dated: __________, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 1. Representations and Warranties.............................................................................3
(a) Representations and Warranties by the Company.......................................................3
(b) Officer's Certificates..............................................................................9
SECTION 2. Sale and Delivery to Underwriters; Closing.................................................................9
(a) Initial Securities..................................................................................9
(b) Option Securities..................................................................................10
(c) Payment............................................................................................10
(d) Denominations; Registration........................................................................11
SECTION 3. Covenants of the Company..................................................................................11
(a) Compliance with Securities Regulations and Commission Requests.....................................11
(b) Filing of Amendments...............................................................................11
(c) Delivery of Registration Statements................................................................11
(d) Delivery of Prospectuses...........................................................................12
(e) Continued Compliance with Securities Laws..........................................................12
(f) Blue Sky Qualifications............................................................................12
(g) Rule 158...........................................................................................13
(h) Use of Proceeds....................................................................................13
(i) Listing............................................................................................13
(j) Restriction on Sale of Securities..................................................................13
(k) Reporting Requirements.............................................................................13
(l) Compliance with NASD Rules.........................................................................13
(m) Compliance with Rule 463...........................................................................14
SECTION 4. Payment of Expenses.......................................................................................14
(a) Expenses...........................................................................................14
(b) Termination of Agreement...........................................................................14
SECTION 5. Conditions of Underwriters' Obligations...................................................................14
(a) Effectiveness of Registration Statement............................................................15
(b) Opinion of Counsel for Company.....................................................................15
(c) Opinion of Counsel for Underwriters................................................................15
(d) Officers' Certificate..............................................................................15
(e) Accountant's Comfort Letter........................................................................16
(f) Bring-down Comfort Letter..........................................................................16
(g) Approval of Listing................................................................................16
(h) No Objection.......................................................................................16
(i) Lock-up Agreements.................................................................................16
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
(j) Conditions to Purchase of Option Securities........................................................16
(k) Additional Documents...............................................................................17
(l) Termination of Agreement...........................................................................17
SECTION 6. Indemnification...........................................................................................17
(a) Indemnification of Underwriters....................................................................17
(b) Indemnification of Company, Directors and Officers.................................................19
(c) Actions against Parties; Notification..............................................................19
(d) Settlement without Consent if Failure to Reimburse.................................................20
(e) Indemnification for Reserved Securities............................................................20
SECTION 7. Contribution..............................................................................................20
SECTION 8. Representations, Warranties and Agreements to Survive Delivery............................................21
SECTION 9. Termination of Agreement..................................................................................21
(a) Termination; General...............................................................................21
(b) Liabilities........................................................................................22
SECTION 10. Default by One or More of the Underwriters...............................................................22
SECTION 11. Notices..................................................................................................23
SECTION 12. Parties..................................................................................................23
SECTION 13. GOVERNING LAW AND TIME...................................................................................23
SECTION 14. Effect of Headings.......................................................................................23
</TABLE>
ii
<PAGE> 4
SCHEDULES
<TABLE>
<S> <C>
Schedule A - List of Underwriters..................................................................Sch A-1
Schedule B - Pricing Information...................................................................Sch B-1
Schedule C - List of Persons Subject to Lock-up....................................................Sch C-1
EXHIBITS
Exhibit A - Form of Opinion of Company's Counsel.......................................................A-1
Exhibit B - Form of Lock-up Letter.....................................................................B-1
</TABLE>
iii
<PAGE> 5
QUOKKA SPORTS, INC.
(a Delaware corporation)
5,000,000 Shares of Common Stock
(Par Value $0.0001 Per Share)
PURCHASE AGREEMENT
July [ ], 1999
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Lehman Brothers, Inc.
BancBoston Robertson Stephens Inc.
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith,
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Quokka Sports, Inc., a Delaware corporation (the "Company"), confirms its
agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and each of the other Underwriters named in
Schedule A hereto (collectively, the "Underwriters", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Lehman Brothers, Inc. and BancBoston Robertson
Stephens Inc. are acting as representative(s) (in such capacity, the
"Representatives"), with respect to the issue and sale by the Company and the
purchase by the Underwriters, acting severally and not jointly, of the
respective numbers of shares of Common Stock, par value $0.0001 per share, of
the Company (the "Common Stock") set forth in said Schedule A, and with respect
to the grant by the Company to the Underwriters, acting severally and not
jointly, of the option described in Section 2(b) hereof to purchase all or any
part of 750,000 additional shares of Common Stock to cover over-allotments, if
any. The aforesaid 5,000,000 shares of Common Stock (the "Initial Securities")
to be purchased by the Underwriters and all or any part of the 750,000 shares of
Common Stock subject to the option described in Section 2(b) hereof (the
<PAGE> 6
"Option Securities") are hereinafter called, collectively, the "Securities".
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
The Company and the Underwriters agree that up to 500,000 shares of the
Securities to be purchased by the Underwriters (the "Reserved Securities") shall
be reserved for sale by the Underwriters to certain eligible employees and
persons having business relationships with the Company, as part of the
distribution of the Securities by the Underwriters, subject to the terms of this
Agreement, the applicable rules, regulations and interpretations of the National
Association of Securities Dealers, Inc. (the "NASD") and all other applicable
laws, rules and regulations. To the extent that such Reserved Securities are not
orally confirmed for purchase by such eligible employees and persons having
business relationships with the Company by the end of the first business day
after the date of this Agreement, such Reserved Securities may be offered to the
public as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-76981) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated July 6, 1999 together with the Term
Sheet and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet.
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For purposes of this Agreement, all references to the Registration Statement,
any preliminary prospectus, the Prospectus or any Term Sheet or any amendment or
supplement to any of the foregoing shall be deemed to include the copy filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties
(a) Representations and Warranties by the Company
The Company represents and warrants to each Underwriter as of the date
hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of
each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees
with each Underwriter, as follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of
the Commission for additional information has been complied with. At the
respective times the Registration Statement, any Rule 462(b) Registration
Statement and any post-effective amendments thereto became effective and at
the Closing Time (and, if any Option Securities are purchased, at the Date
of Delivery), the Registration Statement, the Rule 462(b) Registration
Statement and any amendments and supplements thereto complied and will
comply in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations and did not and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, and the Prospectus, any preliminary prospectus and any
supplement thereto or prospectus wrapper prepared in connection therewith,
at their respective times of issuance and at the Closing Time, complied and
will comply in all material respects with any applicable laws or
regulations of foreign jurisdictions in which the Prospectus and such
preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the offer and sale of Reserved Securities.
Neither the Prospectus nor any amendments or supplements thereto (including
any prospectus wrapper), at the time the Prospectus or any such amendment
or supplement was issued and at the Closing Time (and, if any Option
Securities are purchased, at the Date of Delivery), included or will
include an untrue statement of a material fact or omitted or will omit to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
If Rule 434 is used, the Company will comply with the requirements of Rule
434 and the Prospectus shall not be "materially different", as such term is
used in Rule 434, from the prospectus included in the Registration
Statement at the time it became effective. The representations and
warranties in this subsection shall not apply to
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<PAGE> 8
statements in or omissions from the Registration Statement or the
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through Merrill
Lynch expressly for use in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectus delivered to the Underwriters for
use in connection with this offering was identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included in the
Registration Statement and the Prospectus, together with the related
schedules and notes, present fairly the financial position of the Company
and its consolidated subsidiaries at the dates indicated and the statements
of operations, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods involved. The supporting schedules included in the Registration
Statement present fairly in accordance with GAAP the information required
to be stated therein. The selected consolidated financial data and the
summary consolidated financial information included in the Prospectus
present fairly the information shown therein and have been compiled on a
basis consistent with that of the audited financial statements included in
the Registration Statement. The pro forma consolidated financial statements
and the related notes thereto included in the Registration Statement and
the Prospectus present farily the information shown therein, have been
prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements and have been properly compiled
on the bases described therein, and the assumptions used in the preparation
thereof are reasonable and the adjustments used therein are appropriate to
give effect to the transactions and circumstances referred to therein.
(iv) No Material Adverse Change in Business. Since the respective
dates as of which information is given in the Registration Statement and
the Prospectus, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business (a "Material Adverse Effect"),
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<PAGE> 9
(B) there have been no transactions entered into by the Company or any of
its subsidiaries, other than those in the ordinary course of business,
which are material with respect to the Company and its subsidiaries
considered as one enterprise, and (C) there has been no dividend or
distribution of any kind declared, paid or made by the Company on any class
of its capital stock.
(v) Good Standing of the Company. The Company has been duly organized
and is validly existing as a corporation in good standing under the laws of
the State of Delaware and has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under this
Agreement; and the Company is duly qualified as a foreign corporation to
transact business and is in good standing in each other jurisdiction in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so
to qualify or to be in good standing would not result in a Material Adverse
Effect.
(vi) Good Standing of Subsidiaries. Each "significant subsidiary" of
the Company (as such term is defined in Rule 1-02 of Regulation S-X) (each
a "Subsidiary" and, collectively, the "Subsidiaries") has been duly
organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not result
in a Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock of
each such Subsidiary has been duly authorized and validly issued, is fully
paid and non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity; none of the outstanding shares of
capital stock of any Subsidiary was issued in violation of the preemptive
or similar rights of any securityholder of such Subsidiary. The only
subsidiaries of the Company are (a) the subsidiaries listed on Exhibit 21
to the Registration Statement.
(vii) Capitalization. The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus in the column
entitled "Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to this Agreement, pursuant to reservations,
agreements or employee benefit plans referred to in the Prospectus or
pursuant to the exercise of convertible securities or options referred to
in the Prospectus). The shares of issued and outstanding capital stock of
the Company have been duly authorized and validly issued and are fully paid
and non-assessable; none of the outstanding shares of capital stock of the
Company was issued in violation of the preemptive or other similar rights
of any securityholder of the
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<PAGE> 10
Company.
(viii) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
(ix) Authorization and Description of Securities. The Securities have
been duly authorized for issuance and sale to the Underwriters pursuant to
this Agreement and, when issued and delivered by the Company pursuant to
this Agreement against payment of the consideration set forth herein, will
be validly issued and fully paid and non-assessable; the Common Stock
conforms to all statements relating thereto contained in the Prospectus and
such description conforms to the rights set forth in the instruments
defining the same; no holder of the Securities will be subject to personal
liability for obligations of the Company solely by reason of being such a
holder; and the issuance of the Securities is not subject to the preemptive
or other similar rights of any securityholder of the Company.
(x) Absence of Defaults and Conflicts. Neither the Company nor any of
its subsidiaries is in violation of its charter or by-laws or in default in
the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company or any subsidiary is subject (collectively, "Agreements and
Instruments"), except for such defaults that would not result in a Material
Adverse Effect; and the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated herein and
in the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectus under the caption "Use of Proceeds") and the
compliance by the Company with its obligations hereunder have been duly
authorized by all necessary corporate action and do not and will not,
whether with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of, or default or Repayment Event (as
defined below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
subsidiary pursuant to, the Agreements and Instruments (except for such
conflicts, breaches, defaults or Repayment Events or liens, charges or
encumbrances that would not result in a Material Adverse Effect), nor will
such action result in any violation of the provisions of the charter or
by-laws of the Company or any subsidiary or any applicable law, statute,
rule, regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any subsidiary or any of their assets,
properties or operations. As used herein, a "Repayment Event" means any
event or condition which gives the holder of any note, debenture or other
evidence of indebtedness (or any person acting on such holder's behalf) the
right to require the repurchase, redemption or repayment of all or a
portion of such indebtedness by the Company or any subsidiary.
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<PAGE> 11
(xi) Absence of Labor Dispute. No labor dispute with the employees of
the Company or any subsidiary exists or, to the knowledge of the Company,
is imminent, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its or any subsidiary's principal
suppliers, manufacturers, customers or contractors, which, in either case,
may reasonably be expected to result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any
subsidiary, which is required to be disclosed in the Registration Statement
or the Prospectus (other than as disclosed therein), or which might
reasonably be expected to result in a Material Adverse Effect, or which
might reasonably be expected to materially and adversely affect the Company
or the consummation of the transactions contemplated in this Agreement or
the performance by the Company of its obligations hereunder; the aggregate
of all pending legal or governmental proceedings to which the Company or
any subsidiary is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material Adverse
Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents which
are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) Possession of Intellectual Property. The Company and its
subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, and neither the Company nor any of its subsidiaries
has received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of its subsidiaries therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy, singly or in the aggregate, would result in a
Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the
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<PAGE> 12
offering, issuance or sale of the Securities hereunder or the consummation
of the transactions contemplated by this Agreement, except (i) such as have
been already obtained or as may be required under the 1933 Act or the 1933
Act Regulations or state securities laws (ii) such as may be required by
the rules and regulations of the NASD and (iii) such as have been obtained
under the laws and regulations of jurisdictions outside the United States
in which the Reserved Securities are offered.
(xvi) Possession of Licenses and Permits. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them; the Company and its
subsidiaries are in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure so to comply would not,
singly or in the aggregate, have a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except when
the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect; and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a Material Adverse Effect.
(xvii) Title to Property. The Company and its subsidiaries have good
and marketable title to all real property owned by the Company and its
subsidiaries and good title to all other properties owned by them, in each
case, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except such as (a) are
described in the Prospectus or (b) do not, singly or in the aggregate,
materially affect the value of such property and do not interfere with the
use made and proposed to be made of such property by the Company or any of
its subsidiaries; and all of the leases and subleases material to the
business of the Company and its subsidiaries, considered as one enterprise,
and under which the Company or any of its subsidiaries holds properties
described in the Prospectus, are in full force and effect (except where the
failure to be in full force and effect would not, singly or in the
aggregate, result in a Material Adverse Effect), and neither the Company
nor any subsidiary has any notice of any material claim of any sort that
has been asserted by anyone adverse to the rights of the Company or any
subsidiary under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or such subsidiary to
the continued possession of the leased or subleased premises under any such
lease or sublease that (if the subject of an unfavorable decision or
finding) would result in a Material Adverse Effect.
(xviii) Compliance with Cuba Act. The Company has complied with, and
is and will be in compliance with, the provisions of that certain Florida
act relating to disclosure of doing business with Cuba, codified as Section
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517.075 of the Florida statutes, and the rules and regulations thereunder
(collectively, the "Cuba Act") or is exempt therefrom.
(xix) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xx) Environmental Laws. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of its
subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment, relating to
pollution or protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater, land surface
or subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements, (C)
there are no pending or threatened administrative, regulatory or judicial
actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigation or proceedings relating to any
Environmental Law against the Company or any of its subsidiaries and (D)
there are no events or circumstances that might reasonably be expected to
form the basis of an order for clean-up or remediation, or an action, suit
or proceeding by any private party or governmental body or agency, against
or affecting the Company or any of its subsidiaries relating to Hazardous
Materials or any Environmental Laws.
(xxi) Registration Rights. There are no persons with registration
rights or other similar rights to have any securities registered pursuant
to the Registration Statement or otherwise registered by the Company under
the 1933 Act that have not been waived.
(xxii) Year 2000 Compliance. Except where failure to be Year 2000
Compliant (as defined below) would not have a Material Adverse Effect on
the Company, all of the products and services of the Company and its
subsidiaries (including any products and systems under development) will
record, store, process, calculate and present calendar dates falling on and
after (and if applicable, spans of time including) January 1, 2000, and
will calculate any information dependent on or relating to
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<PAGE> 14
such dates in substantially the same manner, and with the same
functionality, data integrity and performance, as such products and
services record, store, process, calculate and present calendar dates on or
before December 31, 1999, or calculate any information dependent on or
relating to such dates (collectively, "Year 2000 Compliant"). Except where
failure to be Year 2000 Compliant would not have a Material Adverse Effect
on the Company, the Company's internal computer and technology products,
equipment and systems are Year 2000 Compliant.
(xxiii) Systems and Controls. The Company maintains a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit timely preparation of financial statements in conformity in all
material respects with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to any
differences.
(b) Officer's Certificates
Any certificate signed by any officer of the Company or any of its
subsidiaries delivered to the Representatives or to counsel for the Underwriters
shall be deemed a representation and warranty by the Company to each Underwriter
as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing
(a) Initial Securities
On the basis of the representations and warranties herein contained and
subject to the terms and conditions herein set forth, the Company agrees to sell
to each Underwriter, severally and not jointly, and each Underwriter, severally
and not jointly, agrees to purchase from the Company, at the price per share set
forth in Schedule B, the respective number of Initial Securities set forth in
Schedule A opposite the name of such Underwriter, plus any additional number of
Initial Securities which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 10 hereof.
(b) Option Securities
In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
hereby grants an option to the Underwriters, severally and not jointly, to
purchase up to an additional 750,000 shares of Common Stock at the price per
share set forth in Schedule B, less an amount per share equal to
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any dividends or distributions declared by the Company and payable on the
Initial Securities but not payable on the Option Securities. The option hereby
granted will expire 30 days after the date hereof and may be exercised in whole
or in part from time to time only for the purpose of covering over-allotments
which may be made in connection with the offering and distribution of the
Initial Securities upon notice by the Representatives to the Company setting
forth the number of Option Securities as to which the several Underwriters are
then exercising the option and the time and date of payment and delivery for
such Option Securities. Any such time and date of delivery (a "Date of
Delivery") shall be determined by the Representatives, but shall not be later
than seven full business days after the exercise of said option, nor in any
event prior to the Closing Time, as hereinafter defined. If the option is
exercised as to all or any portion of the Option Securities, each of the
Underwriters, acting severally and not jointly, will purchase that proportion of
the total number of Option Securities then being purchased which the number of
Initial Securities set forth in Schedule A opposite the name of such Underwriter
bears to the total number of Initial Securities, subject in each case to such
adjustments as the Representatives in their discretion shall make to eliminate
any sales or purchases of fractional shares.
(c) Payment
Payment of the purchase price for, and delivery of certificates for, the
Initial Securities shall be made at the offices of Cooley Godward LLP, One
Maritime Plaza, 20th Floor, San Francisco, CA 94111 or at such other place as
shall be agreed upon by the Representatives and the Company, at 7:00 A.M.
(California time) on the third (fourth, if the pricing occurs after 4:30 P.M.
(Eastern time) on any given day) business day after the date hereof (unless
postponed in accordance with the provisions of Section 10), or such other time
not later than ten business days after such date as shall be agreed upon by the
Representatives and the Company (such time and date of payment and delivery
being herein called the "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company, on each Date of Delivery as specified in the notice from the
Representatives to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Representatives for the respective accounts of the Underwriters of
certificates for the Securities to be purchased by them. It is understood that
each Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually and not as Representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Initial Securities or the Option Securities, if any, to be
purchased by any Underwriter whose funds have not been received by the Closing
Time or the relevant Date of Delivery, as the case may be, but such payment
shall not relieve such Underwriter from its obligations hereunder.
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(d) Denominations; Registration
Certificates for the Initial Securities and the Option Securities, if any,
shall be in such denominations and registered in such names as the
Representatives may request in writing at least one full business day before the
Closing Time or the relevant Date of Delivery, as the case may be. The
certificates for the Initial Securities and the Option Securities, if any, will
be made available for examination and packaging by the Representatives in The
City of New York not later than 10:00 A.M. (Eastern time) on the business day
prior to the Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company
The Company covenants with each Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests
The Company, subject to Section 3(b), will comply with the requirements of
Rule 430A or Rule 434, as applicable, and will notify the Representatives
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the Prospectus or any amended Prospectus shall have been filed,
(ii) of the receipt of any comments from the Commission, (iii) of any request by
the Commission for any amendment to the Registration Statement or any amendment
or supplement to the Prospectus or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
preliminary prospectus, or of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes. The Company will
promptly effect the filings necessary pursuant to Rule 424(b) and will take such
steps as it deems necessary to ascertain promptly whether the form of prospectus
transmitted for filing under Rule 424(b) was received for filing by the
Commission and, in the event that it was not, it will promptly file such
prospectus. The Company will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) Filing of Amendments
The Company will give the Representatives notice of its intention to file
or prepare any amendment to the Registration Statement (including any filing
under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to
either the prospectus included in the Registration Statement at the time it
became effective or to the Prospectus; and will furnish the Representatives with
copies of any such documents a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file or use any such document to
which the Representatives or counsel for the Underwriters shall object.
(c) Delivery of Registration Statements
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<PAGE> 17
The Company has furnished or will deliver to the Representatives and
counsel for the Underwriters, without charge, signed copies of the Registration
Statement as originally filed and of each amendment thereto (including exhibits
filed therewith or incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the
Representatives, without charge, a conformed copy of the Registration Statement
as originally filed and of each amendment thereto (without exhibits) for each of
the Underwriters. The copies of the Registration Statement and each amendment
thereto furnished to the Underwriters will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses
The Company has delivered to each Underwriter, without charge, as many
copies of each preliminary prospectus as such Underwriter reasonably requested,
and the Company hereby consents to the use of such copies for the purposes
permitted by the 1933 Act. The Company will furnish to each Underwriter, without
charge, during the period when the Prospectus is required to be delivered under
the 1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"), such
number of copies of the Prospectus (as amended or supplemented) as such
Underwriter may reasonably request. The Prospectus and any amendments or
supplements thereto furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws
The Company will comply with the 1933 Act and the 1933 Act Regulations so
as to permit the completion of the distribution of the Securities as
contemplated in this Agreement and in the Prospectus. If at any time when a
prospectus is required by the 1933 Act to be delivered in connection with sales
of the Securities, any event shall occur or condition shall exist as a result of
which it is necessary, in the opinion of counsel for the Underwriters or for the
Company, to amend the Registration Statement or amend or supplement the
Prospectus in order that the Prospectus will not include any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein not misleading in the light of the circumstances existing at
the time it is delivered to a purchaser, or if it shall be necessary, in the
opinion of such counsel, at any such time to amend the Registration Statement or
amend or supplement the Prospectus in order to comply with the requirements of
the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and
file with the Commission, subject to Section 3(b) hereof, such amendment or
supplement as may be necessary to correct such statement or omission or to make
the Registration Statement or the Prospectus comply with such requirements, and
the Company will furnish to the Underwriters such number of copies of such
amendment or supplement as the Underwriters may reasonably request.
(f) Blue Sky Qualifications
The Company will use its best efforts, in cooperation with the
Underwriters, to qualify
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the Securities for offering and sale under the applicable securities laws of
such states and other jurisdictions (domestic or foreign) as the Representatives
may designate and to maintain such qualifications in effect for a period of not
less than one year from the later of the effective date of the Registration
Statement and any Rule 462(b) Registration Statement; provided, however, that
the Company shall not be obligated to file any general consent to service of
process or to qualify as a foreign corporation or as a dealer in securities in
any jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is not
otherwise so subject. In each jurisdiction in which the Securities have been so
qualified, the Company will file such statements and reports as may be required
by the laws of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the effective date of the Registration
Statement and any Rule 462(b) Registration Statement.
(g) Rule 158
The Company will timely file such reports pursuant to the 1934 Act as are
necessary in order to make generally available to its securityholders as soon as
practicable an earnings statement for the purposes of, and to provide the
benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds
The Company will use the net proceeds received by it from the sale of the
Securities in the manner specified in the Prospectus under "Use of Proceeds".
(i) Listing
The Company will use its best efforts to effect and maintain the quotation
of the Securities on the Nasdaq National Market and will file with the Nasdaq
National Market all documents and notices required by the Nasdaq National Market
of companies that have securities that are traded in the over-the-counter market
and quotations for which are reported by the Nasdaq National Market.
(j) Restriction on Sale of Securities
During a period of 180 days from the date of the Prospectus, the Company
will not, without the prior written consent of Merrill Lynch, (i) directly or
indirectly, offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any share of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or file any registration statement under the 1933 Act with respect
to any of the foregoing or (ii) enter into any swap or any other agreement or
any transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Securities to be sold hereunder, (B) any
shares of Common Stock
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<PAGE> 19
issued by the Company upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof and referred to in the
Prospectus, (C) any shares of Common Stock issued or options to purchase Common
Stock granted pursuant to existing employee benefit plans of the Company
referred to in the Prospectus (including the filing of one or more registration
statements on Form S-8 with respect thereto) or (D) any shares of Common Stock
or warrants or options to purchase Common Stock issued or granted in connection
with one or more strategic alliances or business combinations that are
consistent with the Company's strategy as summarized in the Prospectus under the
caption "Business - Strategy."
(k) Reporting Requirements
The Company, during the period when the Prospectus is required to be
delivered under the 1933 Act or the 1934 Act, will file all documents required
to be filed with the Commission pursuant to the 1934 Act within the time periods
required by the 1934 Act and the rules and regulations of the Commission
thereunder.
(l) Compliance with NASD Rules
The Company hereby agrees that it will ensure that the Reserved Securities
will be restricted as required by the NASD or the NASD rules from sale,
transfer, assignment, pledge or hypothecation for a period of three months
following the date of this Agreement. The Underwriters will notify the Company
as to which persons will need to be so restricted. At the request of the
Underwriters, the Company will direct the transfer agent to place a stop
transfer restriction upon such securities for such period of time. Should the
Company release, or seek to release, from such restrictions any of the Reserved
Securities, the Company agrees to reimburse the Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
(m) Compliance with Rule 463
The Company will file with the Commission such reports or take such other
actions as may be required pursuant to Rule 463 of the 1933 Act Regulations.
SECTION 4. Payment of Expenses
(a) Expenses
The Company will pay all expenses incident to the performance of its
obligations under this Agreement, including (i) the preparation, printing and
filing of the Registration Statement (including financial statements and
exhibits) as originally filed and of each amendment thereto, (ii) the
preparation, printing and delivery to the Underwriters of this Agreement, any
Agreement among Underwriters and such other documents as may be required in
connection with the offering, purchase, sale, issuance or delivery of the
Securities, (iii) the preparation, issuance and
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<PAGE> 20
delivery of the certificates for the Securities to the Underwriters, including
any stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery of the Securities to the Underwriters, (iv) the fees
and disbursements of the Company's counsel, accountants and other advisors, (v)
the qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectus and any amendments
or supplements thereto, (vii) the preparation, printing and delivery to the
Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii)
the fees and expenses of any transfer agent or registrar for the Securities and
(ix) the filing fees incident to, and the reasonable fees and disbursements of
counsel to the Underwriters in connection with, the review by the NASD of the
terms of the sale of the Securities, (x) the fees and expenses incurred in
connection with the inclusion of the Securities in the Nasdaq National Market
and (xi) all costs and expenses of the Underwriters, including the fees and
disbursements of counsel for the Underwriters, in connection with matters
related to the Reserved Securities which are designated by the Company for sale
to employees and others having a business relationship with the Company.
(b) Termination of Agreement.
If this Agreement is terminated by the Representatives in accordance with
the provisions of Section 5 or Section 9(a)(i) hereof, the Company shall
reimburse the Underwriters for all of their out-of-pocket expenses, including
the reasonable fees and disbursements of counsel for the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations.
The obligations of the several Underwriters hereunder are subject to the
accuracy of the representations and warranties of the Company contained in
Section 1 hereof or in certificates of any officer of the Company or any
subsidiary of the Company delivered pursuant to the provisions hereof, to the
performance by the Company of its covenants and other obligations hereunder, and
to the following further conditions:
(a) Effectiveness of Registration Statement.
The Registration Statement, including any Rule 462(b) Registration
Statement, has become effective and at Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the
1933 Act or proceedings therefor initiated or threatened by the Commission, and
any request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of counsel to the
Underwriters. A prospectus containing the Rule 430A Information shall have been
filed with the Commission in accordance with Rule 424(b) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the Company
has elected to rely upon Rule 434, a Term Sheet shall have been
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<PAGE> 21
filed with the Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for Company.
At Closing Time, the Representatives shall have received the favorable
opinion, dated as of Closing Time, of Cooley Godward LLP, counsel for the
Company, in form and substance satisfactory to counsel for the Underwriters,
together with signed or reproduced copies of such letter for each of the other
Underwriters to the effect set forth in Exhibit A hereto and to such further
effect as counsel to the Underwriters may reasonably request. In giving such
opinion such counsel may rely, as to all matters governed by the laws of
jurisdictions other than the law of the State of California, the federal law of
the United States and the General Corporation Law of the State of Delaware, upon
the opinions of counsel satisfactory to the Representatives. Such counsel may
also state that, insofar as such opinion involves factual matters, they have
relied, to the extent they deem proper, upon certificates of officers of the
Company and its subsidiaries and certificates of public officials.
(c) Opinion of Counsel for Underwriters.
At Closing Time, the Representatives shall have received the favorable
opinion, dated as of Closing Time, of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, counsel for the Underwriters, together with signed or
reproduced copies of such letter for each of the Underwriters with respect to
the matters set forth in clauses (i), (ii), (v), (vi) (solely as to preemptive
or other similar rights arising by operation of law or under the charter or
by-laws of the Company), (viii) through (x), inclusive, (xii), (xiv) (solely as
to the information in the Prospectus under "Description of Capital Stock--Common
Stock") and the penultimate paragraph of Exhibit A hereto. In giving such
opinion such counsel may rely, as to all matters governed by the laws of
jurisdictions other than the law of the State of California, the federal law of
the United States and the General Corporation Law of the State of Delaware, upon
the opinions of counsel satisfactory to the Representatives. Such counsel may
also state that, insofar as such opinion involves factual matters, they have
relied, to the extent they deem proper, upon certificates of officers of the
Company and its subsidiaries and certificates of public officials.
(d) Officers' Certificate.
At Closing Time, there shall not have been, since the date hereof or since
the respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, and the Representatives shall have received a
certificate of the President or a Vice President of the Company and of the chief
financial or chief accounting officer of the Company, dated as of Closing Time,
to the effect that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1(a) hereof are true and correct with
the same force and effect as though expressly made at and as of Closing Time,
(iii) the Company has complied with all agreements and satisfied all conditions
on its part to be performed or satisfied at or prior to Closing Time, and (iv)
no stop order suspending the effectiveness of the
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<PAGE> 22
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or are contemplated by the Commission.
(e) Accountant's Comfort Letter.
At the time of the execution of this Agreement, the Representatives shall
have received from PricewaterhouseCoopers LLP a letter dated such date, in form
and substance satisfactory to the Representatives, together with signed or
reproduced copies of such letter for each of the Underwriters containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and the
Prospectus.
(f) Bring-down Comfort Letter.
At Closing Time, the Representatives shall have received from
PricewaterhouseCoopers LLP a letter, dated as of Closing Time, to the effect
that they reaffirm the statements made in the letter furnished pursuant to
subsection (e) of this Section, except that the specified date referred to shall
be a date not more than three business days prior to Closing Time.
(g) Approval of Listing.
At Closing Time, the Securities shall have been approved for inclusion in
the Nasdaq National Market, subject only to official notice of issuance.
(h) No Objection.
The NASD shall have confirmed that it has not raised any objection with
respect to the fairness and reasonableness of the underwriting terms and
arrangements.
(i) Lock-up Agreements.
At the date of this Agreement, the Representatives shall have received an
agreement substantially in the form of Exhibit B hereto signed by each person
listed on Schedule C hereto.
(j) Conditions to Purchase of Option Securities.
In the event that the Underwriters exercise their option provided in
Section 2(b) hereof to purchase all or any portion of the Option Securities, the
representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company or any subsidiary of the
Company hereunder shall be true and correct as of each Date of Delivery and, at
the relevant Date of Delivery, the Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such Date of Delivery,
of the President or a Vice President of the Company and of the chief
financial or chief accounting officer of the Company confirming that the
certificate delivered at the
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Closing Time pursuant to Section 5(d) hereof remains true and correct as of
such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion of Cooley
Godward LLP, counsel for the Company, in form and substance satisfactory to
counsel for the Underwriters, dated such Date of Delivery, relating to the
Option Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(b) hereof.
(iii) Opinion of Counsel for Underwriters. The favorable opinion of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the
Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to the
same effect as the opinion required by Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from PricewaterhouseCoopers
LLP in form and substance satisfactory to the Representatives and dated
such Date of Delivery, substantially in the same form and substance as the
letter furnished to the Representatives pursuant to Section 5(f) hereof,
except that the "specified date" in the letter furnished pursuant to this
paragraph shall be a date not more than five days prior to such Date of
Delivery.
(l) Additional Documents.
At Closing Time and at each Date of Delivery, counsel for the Underwriters
shall have been furnished with such documents and opinions as they may require
for the purpose of enabling them to pass upon the issuance and sale of the
Securities as herein contemplated, or in order to evidence the accuracy of any
of the representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company in
connection with the issuance and sale of the Securities as herein contemplated
shall be satisfactory in form and substance to the Representatives and counsel
for the Underwriters.
(m) Termination of Agreement.
If any condition specified in this Section shall not have been fulfilled
when and as required to be fulfilled, this Agreement, or, in the case of any
condition to the purchase of Option Securities, on a Date of Delivery which is
after the Closing Time, the obligations of the several Underwriters to purchase
the relevant Option Securities, may be terminated by the Representatives by
notice to the Company at any time at or prior to Closing Time or such Date of
Delivery, as the case may be, and such termination shall be without liability of
any party to any other party except as provided in Section 4 and except that
Sections 1, 6, 7 and 8 shall survive any such termination and remain in full
force and effect.
SECTION 6. Indemnification.
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<PAGE> 24
(a) Indemnification of Underwriters.
The Company agrees to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact included in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of (A) the violation of any applicable
laws or regulations of foreign jurisdictions where Reserved Securities have
been offered and (B) any untrue statement or alleged untrue statement of a
material fact included in the supplement or prospectus wrapper material
distributed in foreign jurisdictions in connection with the reservation and
sale of the Reserved Securities to eligible employees, directors and other
persons having relationships with the Company or the omission or alleged
omission therefrom of a material fact necessary to make the statements
therein, when considered in conjunction with the Prospectus or preliminary
prospectus, not misleading;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission or in connection with any violation of
the nature referred to in Section 6(a)(ii)(A) hereof; provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the Company; and
(iv) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission,
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or any such alleged untrue statement or omission or in connection with any
violation of the nature referred to in Section 6(a)(ii)(A) hereof, to the
extent that any such expense is not paid under (i), (ii) or (iii) above;
provided, however, that this indemnity agreement shall not apply to any
loss, liability, claim, damage or expense to the extent arising out of 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 any Underwriter through Merrill Lynch expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) and,
provided further, that the Company will not be liable to any Underwriter with
respect to any Prospectus to the extent that the Company shall sustain the
burden of proving that any such loss, liability, claim, damage or expense
resulted from the fact that such Underwriter, in contravention of a requirement
of this Agreement or applicable law, sold securities to a person to whom such
Underwriter failed to send or give, at or prior to the Closing Date, a copy of
the Prospectus, as then amended or supplemented if: (i) the Company has
previously furnished copies thereof (sufficiently in advance of the Closing Date
to allow for distribution by the Closing Date) to the Underwriter and the loss,
liability, claim, damage or expense of such Underwriter resulted from an untrue
statement or omission of a material fact contained in or omitted from the
preliminary prospectus which was corrected in the Prospectus as, if applicable,
amended or supplemented prior to the Closing Date and such Prospectus was
required by law to be delivered at or prior to the written confirmation of sale
to such person and (ii) such failure to give or send such Prospectus by the
Closing Date to the party or parties asserting such loss, liability, claim,
damage, or expense would have constituted a valid defense to the claim asserted
by such person.
(b) Indemnification of Company, Directors and Officers.
Each Underwriter severally agrees to indemnify and hold harmless the
Company, its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such Underwriter through Merrill Lynch expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification.
Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be
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sought hereunder, but the failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it is
not materially prejudiced as a result thereof and in any event shall not relieve
it from any liability which it may have otherwise than on account of this
indemnity agreement. In the case of parties indemnified pursuant to Section 6(a)
above, counsel to the indemnified parties shall be selected by Merrill Lynch,
and, in the case of parties indemnified pursuant to Section 6(b) above, counsel
to the indemnified parties shall be selected by the Company. An indemnifying
party may participate at its own expense in the defense of any such action;
provided, however, that counsel to the indemnifying party shall not (except with
the consent of the indemnified party) also be counsel to the indemnified party.
In no event shall the indemnifying parties be liable for fees and expenses of
more than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse.
If at any time an indemnified party shall have requested an indemnifying
party to reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(iii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
(e) Indemnification for Reserved Securities.
In connection with the offer and sale of the Reserved Securities, the
Company agrees, promptly upon a request in writing, to indemnify and hold
harmless the Underwriters from and against any and all losses, liabilities,
claims, damages and expenses incurred by them as a result of the failure of
employees, directors and other persons having relationships with the Company to
pay for and accept delivery of Reserved Securities which, by the end of the
first business day following the date of this Agreement, were subject to a
properly confirmed agreement to purchase.
SECTION 7. Contribution.
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If the indemnification provided for in Section 6 hereof is for any reason
unavailable to or insufficient to hold harmless an indemnified party in respect
of any losses, liabilities, claims, damages or expenses referred to therein,
then each indemnifying party shall contribute to the aggregate amount of such
losses, liabilities, claims, damages and expenses incurred by such indemnified
party, as incurred, (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other hand from the offering of the Securities pursuant to this Agreement
or (ii) if the allocation provided by clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company on the one hand and of the Underwriters on the other hand in connection
with the statements or omissions, or in connection with any violation of the
nature referred to in Section 6(a)(ii)(A) hereof, which resulted in such losses,
liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Underwriters, in each case
as set forth on the cover of the Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet, bear to the aggregate initial public
offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters on
the other hand shall be determined by reference to, among other things, whether
any such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission or any violation of the nature referred to in Section 6(a)(ii)(A)
hereof.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such
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untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement
or in certificates of officers of the Company or any of its subsidiaries
submitted pursuant hereto, shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of any Underwriter or
controlling person, or by or on behalf of the Company, and shall survive the
delivery of the Securities to the Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General.
The Representatives may terminate this Agreement, by notice to the Company,
at any time at or prior to Closing Time (i) if there has been, since the time of
execution of this Agreement or since the respective dates as of which
information is given in the Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, or (ii)
if there has occurred any material adverse change in the financial markets in
the United States, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the
Representatives, impracticable to market the Securities or to enforce contracts
for the sale of the Securities, or (iii) if trading in any securities of the
Company has been suspended or materially limited by the Commission or the Nasdaq
National Market, or if trading generally on the American Stock Exchange or the
New York Stock Exchange or in the Nasdaq National Market has been suspended or
materially limited, or minimum or maximum prices for trading have been fixed, or
maximum ranges for prices have been required, by any of said exchanges or by
such system or
-24-
<PAGE> 29
by order of the Commission, the NASD or any other governmental authority, or
(iv) if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities.
If this Agreement is terminated pursuant to this Section, such termination
shall be without liability of any party to any other party except as provided in
Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive
such termination and remain in full force and effect.
SECTION 10. Default by One or More of the Underwriters.
If one or more of the Underwriters shall fail at Closing Time or a Date of
Delivery to purchase the Securities which it or they are obligated to purchase
under this Agreement (the "Defaulted Securities"), the Representatives shall
have the right, within 24 hours thereafter, to make arrangements for one or more
of the non-defaulting Underwriters, or any other underwriters, to purchase all,
but not less than all, of the Defaulted Securities in such amounts as may be
agreed upon and upon the terms herein set forth; if, however, the
Representatives shall not have completed such arrangements within such 24-hour
period, then:
(i) if the number of Defaulted Securities does not exceed 10% of the
number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not jointly,
to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting Underwriters, or
(ii) if the number of Defaulted Securities exceeds 10% of the number
of Securities to be purchased on such date, this Agreement or, with respect
to any Date of Delivery which occurs after the Closing Time, the obligation
of the Underwriters to purchase and of the Company to sell the Option
Securities to be purchased and sold on such Date of Delivery shall
terminate without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the Representatives or the Company shall have the
right to postpone the Closing Time or the relevant Date of Delivery, as the case
may be, for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or the Prospectus or in any other
documents or arrangements. As used herein, the term "Underwriter" includes any
person substituted for an Underwriter under this Section 10.
-25-
<PAGE> 30
SECTION 11. Notices.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any standard
form of telecommunication. Notices to the Underwriters shall be directed to the
Representatives at North Tower, World Financial Center, New York, New York
10281-1201, attention of Thomas Mazzucco; and notices to the Company shall be
directed to it at Quokka Sports, Inc., 525 Brannan Street, Ground Floor, San
Francisco, CA 94107, attention of Chief Financial Officer.
SECTION 12. Parties.
This Agreement shall inure to the benefit of and be binding upon the
Underwriters and the Company and their respective successors. Nothing expressed
or mentioned in this Agreement is intended or shall be construed to give any
person, firm or corporation, other than the Underwriters and the Company and
their respective successors and the controlling persons and officers and
directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the Underwriters and the Company and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Securities from any Underwriter shall be deemed to
be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK. EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings.
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
-26-
<PAGE> 31
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriters and the Company in accordance with its terms.
Very truly yours,
QUOKKA SPORTS, INC.
By _______________________________________
Title:
CONFIRMED AND ACCEPTED, as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
LEHMAN BROTHERS, INC.
BANCBOSTON ROBERTSON STEPHENS INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By __________________________________________
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
SIGNATURE PAGE TO PURCHASE AGREEMENT
-27-
<PAGE> 32
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial
Name of Underwriter Securities
- ------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated....................
Lehman Brothers, Inc..................................................
BancBoston Robertson Stephens Inc.....................................
---------
Total................................................................. 5,000,000
=========
</TABLE>
Schedule A-1
<PAGE> 33
SCHEDULE B
QUOKKA SPORTS, INC.
5,000,000 Shares of Common Stock
(Par Value $.0001 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $_______.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $________, being an amount equal to the initial
public offering price set forth above less $________ per share; provided that
the purchase price per share for any Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be reduced
by an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial Securities but not payable on the Option
Securities.
Schedule B-1
<PAGE> 34
SCHEDULE C
[List of persons and entities
subject to lock-up]
Schedule C-1
<PAGE> 35
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.
(iv) The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus in the column entitled "Actual" under the caption
"Capitalization" (except for subsequent issuances, if any, pursuant to the
Purchase Agreement or pursuant to reservations, agreements or employee benefit
plans referred to in the Prospectus or pursuant to the exercise of convertible
securities or options referred to in the Prospectus); the shares of issued and
outstanding capital stock of the Company have been duly authorized and validly
issued and are fully paid and non-assessable; and none of the outstanding shares
of capital stock of the Company was issued in violation of the preemptive or, to
the best of our knowledge, other similar rights of any securityholder of the
Company.
(v) The Securities have been duly authorized for issuance and sale to the
Underwriters pursuant to the Purchase Agreement and, when issued and delivered
by the Company pursuant to the Purchase Agreement against payment of the
consideration set forth in the Purchase Agreement, will be validly issued and
fully paid and non-assessable and no holder of the Securities is or will be
subject to personal liability for the obligations of the Company solely by
reason of being such a holder.
(vi) The issuance of the Securities is not subject to preemptive or, to the
best of our knowledge, other similar rights of any securityholder of the
Company.
(vii) Each Subsidiary has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required, whether
by reason
A-1
<PAGE> 36
of the ownership or leasing of property or the conduct of business, except where
the failure so to qualify or to be in good standing would not result in a
Material Adverse Effect; except as otherwise disclosed in the Registration
Statement, all of the issued and outstanding capital stock of each Subsidiary
has been duly authorized and validly issued, is fully paid and non-assessable
and, to the best of our knowledge, is owned of record by the Company, directly
or through subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity relating to the Company's interest
therein; none of the outstanding shares of capital stock of any Subsidiary was
issued in violation of the preemptive or, to the best of our knowledge, similar
rights of any securityholder of such Subsidiary.
(viii) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
(ix) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the Prospectus pursuant to Rule 424(b) has been made in the manner and within
the time period required by Rule 424(b); and, to the best of our knowledge, no
stop order suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or threatened
by the Commission.
(ix) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus and each amendment or supplement to the Registration
Statement and Prospectus as of their respective effective or issue dates (except
for financial statements and schedules and other financial data and statistical
data derived therefrom included therein or omitted therefrom, as to which we
express no opinion) complied as to form in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations.
(xi) If Rule 434 has been relied upon, the Prospectus was not "materially
different," as such term is used in Rule 434, from the prospectus included in
the Registration Statement at the time it became effective.
(xii) The form of certificate used to evidence the Common Stock complies in
all material respects with all applicable statutory requirements, with any
applicable requirements of the charter and by-laws of the Company and the
requirements of the Nasdaq National Market.
(xiii) To the best of our knowledge, there is not pending or overtly
threatened any action, suit, proceeding, inquiry or investigation, to which the
Company or any subsidiary is a party, or to which the property of the Company or
any subsidiary is subject, before or brought by any court or governmental agency
or body, domestic or foreign, which might reasonably be expected to result in a
Material Adverse Effect, or which might reasonably be expected to materially and
adversely affect the properties or assets thereof or the consummation of the
transactions contemplated in the Purchase Agreement or the performance by the
Company of its obligations thereunder.
A-2
<PAGE> 37
(xiv) The information in the Prospectus under the captions
"Business--Facilities", "Business--Governmental Regulation", "Description of
Capital Stock--Common Stock" and "Description of Capital Stock--Preferred Stock"
and in the Registration Statement under Item 14, to the extent that it
constitutes matters of law, summaries of legal matters, the Company's charter
and by-laws or legal proceedings, or legal conclusions, has been reviewed by us
and is correct in all material respects.
(xv) To the best of our knowledge, there are no statutes or regulations
that are required to be described under the 1933 Act or the 1933 Act Regulations
that are not described as required.
(xvi) To the best of our knowledge, there are no franchises, contracts,
indentures, mortgages, loan agreements, notes, leases or other instruments to
which the Company is a party required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto, under the
requirements of the 1933 Act or the 1933 Act Regulations, that are not described
or filed as required.
(xvii) To the best of our knowledge, neither the Company nor any subsidiary
is in violation of its charter or by-laws.
(xviii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and the
1933 Act Regulations, which have been obtained, or as may be required under the
securities or blue sky laws of the various states, as to which we need express
no opinion) is necessary or required in connection with the due authorization,
execution and delivery of the Purchase Agreement or for the offering, issuance
or sale of the Securities.
(xix) The execution, delivery and performance of the Purchase Agreement and
the consummation of the transactions contemplated in the Purchase Agreement and
in the Registration Statement (including the issuance and sale of the Securities
and the use of the proceeds from the sale of the Securities as described in the
Prospectus under the caption "Use Of Proceeds") and compliance by the Company
with its obligations under the Purchase Agreement do not and will not, whether
with or without the giving of notice or lapse of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined in Section
1(a)(x) of the Purchase Agreement) under or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the Company or
any subsidiary pursuant to any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or any other agreement or instrument,
known to us, to which the Company or any subsidiary is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company or any subsidiary is subject (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not have a Material
Adverse Effect), nor will such action result in any violation of the provisions
of the charter or by-laws of the Company or any subsidiary, or any applicable
law, statute, rule, regulation, judgment, order, writ or decree, known to us, of
any government, government instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any subsidiary or any of their respective
properties, assets or operations.
A-3
<PAGE> 38
(xx) To the best of our knowledge, there are no persons with registration
rights or other similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under the 1933 Act
which have not been waived.
(xxi) The Company is not an "investment company" or an entity "controlled"
by an "investment company," as such terms are defined in the 1940 Act.
(xxii) Nothing has come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time such Registration
Statement or any such amendment became effective, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time the Prospectus
was issued, at the time any such amended or supplemented prospectus was issued
or at the Closing Time, included or includes an untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact (but
not as to legal conclusions), to the extent they deem proper, on certificates of
responsible officers of the Company and public officials. Such opinion shall not
state that it is to be governed or qualified by, or that it is otherwise subject
to, any treatise, written policy or other document relating to legal opinions,
including, without limitation, the Legal Opinion Accord of the ABA Section of
Business Law (1991).
Such counsel's opinion letter shall also include substantially the
following statement (which shall not constitute a part of such counsel's legal
opinion):
We have participated in conferences with officials of the Company, the
Representatives, counsel for the Underwriters and the Company's independent
accountants, at which conferences the contents of the Registration Statement and
the Prospectus and related matters were discussed, and although we have not
verified and are not passing upon the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, on the basis of the
foregoing no facts have come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data and statistical data derived
therefrom included therein or omitted therefrom, as to which we make no
statement), at the time such Registration Statement or any such amendment became
effective, contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus or any amendment or
supplement thereto (except for financial statements and other financial data and
statistical data derived therefrom included therein or omitted therefrom,
A-4
<PAGE> 39
as to which we make no statement), at the time this Prospectus was issued, at
the time any such amended or supplemented prospectus was issued or at the
Closing Time, included or includes an untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
A-5
<PAGE> 40
Exhibit B
QUOKKA SPORTS, INC.
Lock-Up Agreement
_____________, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith, Incorporated
Lehman Brothers, Inc.
BancBoston Robertson Stephens Inc.
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith, Incorporated
North Tower
World Financial Center
250 Vesey Street
New York, New York 10281
RE: PROPOSED INITIAL PUBLIC OFFERING BY QUOKKA SPORTS, INC.
Dear Sirs:
The undersigned, a stockholder or warrantholder of Quokka Sports, Inc.
(the "Company"), understands that Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith, Incorporated ("Merrill Lynch"), Lehman Brothers, Inc. and
BancBoston Robertson Stevens Inc. (collectively, the "Underwriters") propose to
enter into a Purchase Agreement (the "Purchase Agreement") with the Company
providing for the initial public offering of shares (the "Securities") of the
Company's common stock, par value $.0001 per share (the "Common Securities"). In
recognition of the benefit that such an offering will confer upon the
undersigned as a stockholder of the Company, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
undersigned agrees with each underwriter to be named in the Purchase Agreement
that, during a period of 180 days from the date of the Purchase Agreement the
undersigned will not, without the prior written consent of Merrill Lynch
directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of, or otherwise dispose of or
transfer any shares of the Company's Common Stock or any securities convertible
into or exchangeable or exercisable for Common Stock, whether now owned or
hereafter acquired by the undersigned or with respect to which the undersigned
has or hereafter acquires the power of disposition, or file any registration
statement under the Securities Act of 1933, as amended, with respect to any of
the foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock or other securities, in
cash or otherwise.
In addition, the undersigned agrees that it will not, without the prior
written consent of Merrill Lynch, during a period of 180 days from the date of
the Purchase Agreement, make any demand for, or exercise any right with respect
to, the registration of any shares of Common Stock or any securities convertible
into or exchangeable or exercisable for Common Stock.
The undersigned understands that the Company and the Underwriters are
relying upon this agreement in proceeding toward consummation of the initial
public offering. The undersigned further understands and agrees that this
agreement is irrevocable and shall be binding upon the undersigned's heirs,
legal representatives, successors and assigns.
Very truly yours,
By: ______________________________________
(Signature)
Name: ____________________________________
(Printed name of Signatory)
Name of Entity: __________________________
(If Applicable)
Title of Signatory: ______________________
(If Applicable)
<PAGE> 1
EXHIBIT 5.01
[COOLEY GODWARD LLP LETTERHEAD]
www.cooley.com
KENNETH L. GUERNSEY
415 693-2091
[email protected]
July 20, 1999
Quokka Sports, Inc.
525 Brannan Street, Ground Floor
San Francisco, CA 94107
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Quokka Sports, Inc. (the "Company") of a Registration
Statement on Form S-1 (the "Registration Statement") with the Securities and
Exchange Commission, including a related prospectus filed with the Registration
Statement (the "Prospectus"), covering an underwritten public offering of up to
5,000,000 shares of the Company's common stock, including 750,000 shares of
common stock that may be sold pursuant to the exercise of an over-allotment
option.
In connection with this opinion, we have examined and relied upon the
Registration Statement and related Prospectus, the Company's Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws, and the
originals or copies certified to our satisfaction of such records, documents,
certificates, memoranda and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinion expressed below.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Shares to be sold by the Company, when sold and issued in accordance
with the Registration Statement and the related Prospectus will be validly
issued, fully paid and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
Prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
Cooley Godward LLP
By: /s/ KENNETH L. GUERNSEY
------------------------
Kenneth L. Guernsey
<PAGE> 1
Exhibit 10.07
QUOKKA SPORTS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN OFFERING
ADOPTED BY BOARD OF DIRECTORS APRIL 2, 1999
1. GRANT; OFFERING DATE.
(a) The Board of Directors of Quokka Sports, Inc., a Delaware
corporation (the "Company"), pursuant to the Company's 1999 Employee Stock
Purchase Plan (the "Plan"), hereby authorizes the grant of rights to purchase
shares of the common stock of the Company ("Common Stock") to all Eligible
Employees (an "Offering"). The first day of an Offering is that Offering's
"Offering Date." An Offering may consist of one (1) or more consecutive
"Purchase Periods." The last day of each Purchase Period during an Offering
shall be a "Purchase Date" for that Offering. If an Offering Date or Purchase
Date does not fall on a day during which the Company's Common Stock is actively
traded, then the Offering Date or Purchase Date, as the case may be, shall be
the next subsequent day during which the Company's Common Stock is actively
traded.
(b) Unless otherwise specifically provided herein, the first Purchase
Period of an Offering shall begin on the Offering Date and shall end
approximately six (6) months thereafter on the next October 31 or April 30, as
the case may be. Subsequent Purchase Periods during the Offering shall begin
each May 1 and November 1 and shall end six (6) months thereafter on October 31
or April 30, as the case may be.
(c) The first Offering shall begin on the effective date of the initial
public offering of the Company's Common Stock and end on April 30, 2000, unless
terminated sooner as herein provided (the "Initial Offering"). The Initial
Offering shall be divided into two (2) shorter Purchase Periods of approximately
six (6) months in duration. The first such Purchase Period shall begin on the
Offering Date and shall end on October 31, 1999, and the second Purchase Period
shall begin on November 1, 1999, and end on April 30, 2000. Thereafter, an
Offering shall begin on May 1st of every year and shall end twelve (12) months
later on the day prior to the next Offering Date.
(d) Prior to the commencement of any Offering, the Board of Directors
(or the Committee described in subparagraph 2(c) of the Plan, if any) may change
any or all terms of such Offering and any subsequent Offerings. The granting of
rights pursuant to each Offering hereunder shall occur on each respective
Offering Date unless, prior to such date (a) the Board of Directors (or such
Committee) determines that such Offering shall not occur, or (b) no shares
remain available for issuance under the Plan in connection with the Offering.
(e) Notwithstanding any other provisions of an Offering, if the terms of
an Offering as previously established by the Board of Directors of the Company
would, as a result of a change to applicable accounting standards, generate a
charge to earnings, such Offering shall
1.
<PAGE> 2
terminate effective as of the day prior to the date such change of accounting
standards would otherwise first apply to the Offering (the "Offering Termination
Date"), and such Offering Termination Date shall be the final Purchase Date of
such Offering. A subsequent Offering shall commence on such date and on such
terms as shall be provided by the Board of Directors of the Company.
2. ELIGIBLE EMPLOYEES.
All employees of the Company and each of its Affiliates (as defined in
the Plan) incorporated in the United States, shall be granted rights to purchase
Common Stock under each Offering on the Offering Date (an "Eligible Employee").
Notwithstanding the foregoing, the following employees shall not be Eligible
Employees or be granted rights under an Offering: (i) part-time or seasonal
employees whose customary employment is less than 20 hours per week or five
months per calendar year or (ii) 5% stockholders (including ownership through
unexercised options) described in subparagraph 5(c) of the Plan.
3. RIGHTS.
(a) Subject to the limitations contained herein and in the Plan, on each
Offering Date each Eligible Employee shall be granted the right to purchase the
number of shares of Common Stock purchasable with up to fifteen percent (15%) of
such Eligible Employee's Earnings paid during such Offering; provided, however,
that no employee may purchase Common Stock on a particular Purchase Date that
would result in more than fifteen percent (15%) of such employee's Earnings in
the period from the Offering Date to such Purchase Date having been applied to
purchase shares under all ongoing Offerings under the Plan and all other Company
plans intended to qualify as "employee stock purchase plans" under Section 423
of the Internal Revenue Code of 1986, as amended (the "Code").
(b) For purposes of this Offering, "Earnings" means the total
compensation paid to an employee including all salary, wages (including amounts
elected to be deferred by the employee, that would otherwise have been paid,
under any cash or deferred arrangement established by the Company); overtime
pay, commissions, bonuses, and other remuneration paid directly to the employee,
but excluding profit sharing, the cost of employee benefits paid for by the
Company, education or tuition reimbursements, imputed income arising under any
Company group insurance or benefit program, traveling expenses, business and
moving expense reimbursements, income received in connection with stock options,
contributions made by the Company under any employee benefit plan, and similar
items of compensation.
(c) Subject to the limitations contained herein and in the Plan, each
employee who was not eligible on the Offering Date but who first becomes an
Eligible Employee during the Offering and prior to October 23 during the
Offering shall (upon delivery of the designated enrollment form, at least ten
days before November 1, to the Company or designated Affiliate) on November 1
during that Offering, be granted the right to purchase the number of shares of
Common Stock purchasable with up to fifteen percent (15%) of such employee's
Earnings paid
2.
<PAGE> 3
during his or her participation in such Offering, which right shall be deemed to
be a part of the Offering. Such right shall have the same characteristics as any
rights originally granted under the Offering, except that (i) the date on which
such a right is granted shall be the "Offering Date" of such right for all
purposes, including determination of the exercise price of such right; and (ii)
the Offering for such right shall begin on its Offering Date and end coincident
with the end of the ongoing Offering.
(d) The maximum number of shares of Common Stock an Eligible Employee
may purchase on any Purchase Date in an Offering shall be such number of shares
as has a fair market value (determined as of the Offering Date for such
Offering) equal to (x) $25,000 multiplied by the number of calendar years in
which the right under such Offering has been outstanding at any time, minus (y)
the fair market value of any other shares of Common Stock (determined as of the
relevant Offering Date with respect to such shares) which, for purposes of the
limitation of Section 423(b)(8) of the Code, are attributed to any of such
calendar years in which the right is outstanding. The amount in clause (y) of
the previous sentence shall be determined in accordance with regulations
applicable under Section 423(b)(8) of the Code based on (i) the number of shares
previously purchased with respect to such calendar years pursuant to such
Offering or any other Offering under the Plan, or pursuant to any other Company
plans intended to qualify as "employee stock purchase plans" under Section 423
of the Code, and (ii) the number of shares subject to other rights outstanding
on the Offering Date for such Offering pursuant to the Plan or any other such
Company plan. In any event, an Eligible Employee may purchase no more than two
thousand (2,000) shares of Common Stock on any Purchase Date in an Offering.
(e) The maximum aggregate number of shares available to be purchased by
all Eligible Employees under an Offering shall be the number of shares remaining
available under the Plan on the Offering Date. If the aggregate purchase of
shares of Common Stock upon exercise of rights granted under the Offering would
exceed the maximum aggregate number of shares available, the Board shall make a
pro rata allocation of the shares available in a uniform and equitable manner.
4. PURCHASE PRICE.
The purchase price of the Common Stock under the Offering shall be the
lesser of eighty-five percent (85%) of the fair market value of the Common Stock
on the Offering Date or eighty-five percent (85%) of the fair market value of
the Common Stock on the Purchase Date, in each case rounded up to the nearest
whole cent per share. For the Initial Offering, the fair market value of the
Common Stock at the time when the Offering commences shall be the price per
share at which shares of Common Stock are first sold to the public in the
Company's initial public offering as specified in the final prospectus with
respect to that offering.
5. PARTICIPATION.
(a) An Eligible Employee may elect to participate in an Offering only at
the beginning of the Offering, or such later date specified in subparagraph
3(c). An Eligible
3.
<PAGE> 4
Employee shall become a participant in an Offering by delivering an agreement
authorizing payroll deductions. Such deductions must be in whole dollars or
whole percentages, with a maximum percentage of fifteen percent (15%) of
Earnings. A participant may not make additional payments into his or her
account. The agreement shall be made on such enrollment form as the Company or a
designated Affiliate provides, and must be delivered to the Company or
designated Affiliate at least ten (10) days before the Offering Date, or before
such later date specified in subparagraph 3(c), to be effective, unless a later
time for filing the enrollment form is set by the Board for all Eligible
Employees with respect to a given Offering Date. For the Initial Offering, the
time for filing an enrollment form and commencing participation for individuals
who are Eligible Employees on the Offering Date for the Initial Offering may be
after the Offering Date, as determined by the Company and communicated to such
Eligible Employees. (If the agreement authorizing payroll deductions is required
to be delivered to the Company or designated Affiliate a specified number of
days before the Offering Date to be effective, then an employee who becomes
eligible during the required delivery period shall not be considered to be an
Eligible Employee at the beginning of the Offering but may elect to participate
during the Offering as provided in subparagraph 3(c).)
(b) A participant may increase or reduce (including to zero) his or her
participation level effective as of the November 1 following the October 31
Purchase Date during the course of an Offering. Any such change in participation
shall be made by delivering a notice to the Company or a designated Affiliate in
such form and at such time as the Company provides. In addition, a participant
may increase or decrease his or her deductions prior to the beginning of a new
Offering to be effective at the beginning of such new Offering. Except as
otherwise specifically provided herein, a participant may not increase or
decrease his or her participation level during the course of an Offering.
(c) A participant may (1) withdraw from an Offering and receive his or
her accumulated payroll deductions from the Offering (reduced to the extent, if
any, such deductions have been used to acquire Common Stock for the participant
on any prior Purchase Dates), without interest; or (2) withdraw from an Offering
but elect to purchase stock on the next Purchase Date in the amount of his or
her payroll deductions accumulated during the Offering up to and including the
date of withdrawal (reduced to the extent, if any, such deductions have been
used to acquire Common Stock for the participant on any prior Purchase Dates);
at any time prior to the end of the Offering, excluding only each ten (10) day
period immediately preceding a Purchase Date (or such shorter period of time
determined by the Company and communicated to participants) by delivering a
withdrawal notice to the Company in such form as the Company provides. A
participant who has withdrawn from an Offering shall not again participate in
such Offering but may participate in subsequent Offerings under the Plan by
submitting a new participation agreement in accordance with the terms thereof.
(d) A participant shall automatically participate in the Offering
commencing immediately after the final Purchase Date of each Offering in which
the participant participates until such time as such participant (i) ceases to
be an Eligible Employee, (ii) withdraws from the Offering or (iii) terminates
employment. A participant who automatically participates in a subsequent
Offering is not required to file any additional enrollment form for such
subsequent Offering in order to continue participation in the Plan. However, a
participant may file an enrollment form with respect to such subsequent Offering
if the participant desires to change any of the participant's elections
contained in the participant's then effective enrollment form.
4.
<PAGE> 5
6. PURCHASES.
Subject to the limitations contained herein, on each Purchase Date, each
participant's accumulated payroll deductions (without any increase for interest)
shall be applied to the purchase of whole shares of Common Stock, up to the
maximum number of shares permitted under the Plan and the Offering.
7. NOTICES AND AGREEMENTS.
Any notices or agreements provided for in an Offering or the Plan shall
be given in writing, in a form provided by the Company, and unless specifically
provided for in the Plan or this Offering shall be deemed effectively given upon
receipt or, in the case of notices and agreements delivered by the Company, five
(5) days after deposit in the United States mail, postage prepaid.
8. EXERCISE CONTINGENT ON STOCKHOLDER APPROVAL.
The rights granted under an Offering are subject to the approval of the
Plan by the stockholders as required for the Plan to obtain treatment as a
tax-qualified employee stock purchase plan under Section 423 of the Code.
9. OFFERING SUBJECT TO PLAN.
Each Offering is subject to all the provisions of the Plan, and its provisions
are hereby made a part of the Offering, and is further subject to all
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan. In the event of any conflict
between the provisions of an Offering and those of the Plan (including
interpretations, amendments, rules and regulations that may from time to time be
promulgated and adopted pursuant to the Plan), the provisions of the Plan shall
control.
5.
<PAGE> 1
EXHIBIT 10.20
OFFICE LEASE
SUMMARY OF LEASE TERMS
<TABLE>
<S> <C>
475 Brannan Street San Francisco, California
A. Date: July 16, 1999
B. Landlord: SKS Brannan Associates, LLC, a Delaware
limited liability company
Landlord's address for notices: c/o SKS Investments
[Paragraph 23(k)] 500 Treat Avenue
Suite 200
San Francisco, CA 94110
Attn: Mr. Paul Stein
C. Tenant: Quokka Sports, Inc., a Delaware corporation
Tenant's address for notices: 525 Brannan Street
[Paragraph 23(k)] San Francisco, CA 94107
with a copy to:
Paul Churchill, Esq.
Cooley Godward, LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Tenant Contact Person: Les Schmidt
D. Floor(s) on which Premises are 1st and 2nd
situated: [Paragraph 1(f)]
E. Rentable area of Premises: 88,386 square feet
[Paragraph 1(f)]
F. Tenant's Percentage Share:
[Paragraph 1(j)]
Operating Expenses: 36.16%
Real Property Taxes: 36.16%
</TABLE>
i
<PAGE> 2
<TABLE>
<S> <C>
G. Term; Estimated Commencement and Ten (10) years; March 1, 2000 to February 28,
Expiration Dates: [Paragraph 2] 2010
H. Basic Monthly Rental: Years Basic Monthly Rental
[Paragraph 3(a)]
1-3 $206,233.00
4-7 $232,013.00
8-10 $261,475.00
Basic Annual Rental: Years Basic Annual Rental
1-3 $2,474,802.00
4-7 $2,784,159.00
8-10 $3,137,703.00
I. Security Deposit: $2,500,000.00
[Paragraph 3(e)]
J. Broker(s): Triton Commercial Real Estate, Inc.
[Paragraph 23(q)]
K. Exhibits and addenda: Exhibit A - Floor Plan
[Paragraph 23(u)] Exhibit B - Building Rules and Regulations
Exhibit C - Construction Agreement for the
Initial Improvement of the
Premises
Exhibit D - Commencement Date Memorandum
</TABLE>
The provisions of the Lease identified above in brackets are those provisions
where references to particular Lease Terms appear. Each such reference shall
incorporate the applicable Lease
ii
<PAGE> 3
Terms. In the event of any conflict between the Summary of Lease Terms and the
Lease, the latter shall control.
LANDLORD:
SKS BRANNAN ASSOCIATES, LLC,
a Delaware limited liability company
By SKS Investments LLC,
a Delaware limited liability company,
Member
By: /s/ PAUL STEIN
-------------------------------------
Paul E. Stein , Member
-----------------------------
TENANT:
QUOKKA SPORTS, INC.,
a Delaware corporation
By: /s/ ALAN RAMADAN
-------------------------------------
Its: President and CEO
-------------------------------------
By: /s/ LES SCHMIDT
-------------------------------------
Its: CFO/EVP
-------------------------------------
iii
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
1. DEFINITIONS...............................................................................1
2. TERM......................................................................................5
3. RENTAL; SECURITY DEPOSIT..................................................................6
4. TENANT'S SHARE OF OPERATING EXPENSES AND REAL PROPERTY TAXES; ADDITIONAL RENT.............9
5. OTHER TAXES PAYABLE BY TENANT............................................................11
6. USE .................................................................................... 12
7. COMPLIANCE WITH LAWS/ENVIRONMENTAL MATTERS...............................................12
8. ALTERATIONS; LIENS.......................................................................14
9. MAINTENANCE AND REPAIR...................................................................15
10. SERVICES................................................................................16
11. ACCESS CONTROL..........................................................................19
12. ASSIGNMENT AND SUBLETTING...............................................................19
(a) Restriction on Transfers........................................................19
(b) Landlord's Right of First Offer; Termination Right..............................21
(c) Landlord's Approval Process.....................................................22
(d) Consideration for Transfer......................................................22
(e) Merger or Consolidation of Tenant; Major Changes................................23
(f) Transfer of Partnership Interest or Corporate Stock.............................23
(g) Transfer of Controlling Interest................................................23
(h) Permitted Transfers.............................................................23
(i) Documentation...................................................................24
(j) Options Personal to Original Tenant.............................................24
(k) Encumbrance of Lease............................................................24
(l) No Merger.......................................................................25
(m) Landlord's Costs................................................................25
13. WAIVER; INDEMNIFICATION.................................................................25
14. INSURANCE...............................................................................26
15. PROTECTION OF LENDERS...................................................................28
16. ENTRY BY LANDLORD.......................................................................29
17. ABANDONMENT.............................................................................30
18. DEFAULT AND REMEDIES....................................................................30
19. DAMAGE BY FIRE OR OTHER CASUALTY........................................................32
</TABLE>
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<TABLE>
<CAPTION>
Page
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<S> <C>
20. EMINENT DOMAIN..........................................................................34
21. HOLDING OVER............................................................................35
22. BUILDING PLANNING. Omitted.............................................................35
23. MISCELLANEOUS...........................................................................35
(a) Limitation of Landlord's Liability..............................................35
(b) Sale by Landlord................................................................36
(c) Estoppel Letter.................................................................36
(d) Financial Statements............................................................37
(e) Right of Landlord To Perform....................................................37
(f) Rules and Regulations...........................................................37
(g) Attorneys' Fees.................................................................38
(h) Waiver of Jury Trial............................................................38
(i) Waiver..........................................................................38
(j) Light, Air and View.............................................................38
(k) Notices.........................................................................39
(l) Name............................................................................39
(m) Governing Law; Severability.....................................................39
(n) Definitions and Paragraph Headings; Successors..................................39
(o) Time............................................................................39
(p) Examination of Lease............................................................39
(q) Brokerage.......................................................................39
(r) Directory Board.................................................................40
(s) Authority.......................................................................40
(t) Amendments......................................................................40
(u) Exhibits and Addenda; Entire Agreement..........................................40
24. OPTION TO EXTEND........................................................................41
25. RIGHT OF FIRST OFFER....................................................................42
26. LANDLORD'S RIGHT OF TERMINATION.........................................................44
27. PARKING.................................................................................45
28. SATELLITE DISHES........................................................................46
29. UNDERGROUND STORAGE TANK................................................................46
EXHIBIT A FLOOR PLAN
EXHIBIT B BUILDING RULES AND REGULATIONS
EXHIBIT C CONSTRUCTION AGREEMENT FOR INITIAL IMPROVEMENT OF THE PREMISES
EXHIBIT D COMMENCEMENT DATE MEMORANDUM
</TABLE>
v
<PAGE> 6
475 BRANNAN STREET
OFFICE LEASE
THIS LEASE is dated for reference purposes only as of
July 16, 1999, between SKS BRANNAN ASSOCIATES, LLC ("Landlord"), and Quokka
Sports, Inc., a Delaware corporation ("Tenant").
W I T N E S S E T H:
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord
the Premises described in Paragraph 1(g) below, for the term and subject to the
terms, covenants, agreements and conditions hereinafter set forth.
1. DEFINITIONS.
In addition to terms that are defined elsewhere in this Lease,
unless the context otherwise specifies or requires, the following terms shall
have the meanings herein specified:
(a) The term "Building" shall mean the office building
located at 475 Brannan Street in San Francisco, California.
(b) The term "Base Building Improvements" shall mean those
improvements installed in the Premises at Landlord's expense pursuant to the
Construction Agreement for the Initial Improvement of the Premises (the
"Construction Agreement") attached hereto as Exhibit C.
(c) Omitted.
(d) The term "Land" means the parcel(s) of land on which the
Building and the adjacent below grade parking lot ("Parking Lot") are located.
(e) The term "Operating Expenses" shall mean, subject to
certain exclusions set forth herein, the total costs and expenses incurred by
Landlord in connection with the management, operation, maintenance, repair and
ownership of the Real Property (as defined in Paragraph 1(g) hereof), including,
without limitation, the following costs: (1) salaries, wages, bonuses and other
compensation (including hospitalization, medical, surgical, retirement plan,
pension plan, union dues, life insurance, including group life insurance,
welfare and other fringe benefits, and vacation, holidays and other paid absence
benefits) relating to employees of Landlord or its agents, to the extent engaged
in the management, operation, repair, or maintenance of the Real Property and
costs of training such employees; (2) payroll, social security, workers'
compensation, unemployment and similar taxes with respect to such employees of
Landlord or its agents, and the cost of providing disability or other benefits
imposed by law or otherwise, with respect to such employees; (3) uniforms
(including the cleaning, replacement and pressing thereof) provided to such
employees; (4) except as provided
1
<PAGE> 7
in Paragraph 14(f) below, premiums and other charges incurred by Landlord with
respect to fire, other casualty, boiler and machinery, theft, rent interruption
liability insurance, any other insurance as is deemed necessary or advisable in
the reasonable judgment of Landlord and commonly maintained by owners of
comparable buildings, or any insurance required by the holder of any Superior
Interest (as defined in Paragraph 15), all in such amounts as Landlord
reasonably determines to be appropriate, and the actual costs paid by Landlord
(and not reimbursed by insurance) in repairing an insured casualty to the
Building to the extent of the deductible amount under the applicable insurance
policy; (5) water charges and sewer rents or fees; (6) license, permit and
inspection fees and charges; (7) sales, use and excise taxes on goods and
services purchased by Landlord in connection with the operation, maintenance or
repair of the Real Property and Building systems and equipment; (8) telephone,
telegraph, postage, stationery supplies and other expenses incurred in
connection with the operation, maintenance, or repair of the Real Property; (9)
market rate management fees and expenses (including fees and expenses for
accounting, financial management, data processing and information services) and
costs of tenant service programs; (10) repairs to and physical maintenance of
the Real Property, including Building systems and appurtenances thereto and
normal repair and replacement of worn-out equipment, facilities and
installations, but excluding the replacement of major Building systems (except
to the extent otherwise included as an Operating Expense pursuant to this
Paragraph 1(e)); (11) janitorial, window cleaning, guard, extermination, water
treatment, rubbish removal, plumbing and other services and inspection or
service contracts for elevator, electrical, mechanical, sanitary, heating,
ventilation and air conditioning, and other building equipment and systems or as
may otherwise be necessary or proper for the operation or maintenance of the
Real Property; (12) supplies, tools, materials and equipment used in connection
with the operation, maintenance or repair of the Real Property; (13) accounting,
legal and other professional, consulting or service fees and expenses incurred
in connection with the Real Property; (14) painting the exterior or the public
or common areas of the Building and the cost of maintaining the sidewalks,
landscaping and other common areas of the Real Property; (15) all costs and
expenses for electricity, chilled water, air conditioning, water for heating,
gas, fuel, steam, heat, lights, sewer service, communications service, power and
other energy related utilities required in connection with the operation,
maintenance and repair of the Real Property; (16) the cost of any capital
improvements made by Landlord to the Real Property or capital assets acquired by
Landlord during the Term of this Lease required under any governmental law,
regulation or insurance requirement with which the Real Property was not
required to comply prior to the Commencement Date (as defined in Paragraph 2),
such cost or allocable portion to be amortized over the useful life thereof,
together with interest on the unamortized balance at a rate per annum equal to
the Reference Rate (as defined in Paragraph 3(c)) charged at the time such
capital improvements or capital assets are constructed or acquired or such
higher rate as may have been paid by Landlord on funds borrowed for the purpose
of constructing or acquiring such capital improvements or capital assets, but in
either case not more than the maximum rate permitted by law at the time such
capital improvements or capital assets are constructed or acquired; (17) the
cost of any capital improvements made by Landlord to the Building or capital
assets acquired by Landlord during the Term of this Lease for the protection of
the health and safety of the occupants of the Real Property or that are designed
to reduce other Operating Expenses, such cost or allocable portion thereof to be
amortized over the useful life thereof (except that with respect to capital
improvements or capital assets designed to reduce other Operating Expenses,
2
<PAGE> 8
Landlord may include as an Operating Expense in any calendar year only the
portion of the cost of such capital improvement or capital asset equal to the
reduction in other Operating Expenses or Landlord's reasonable estimate of the
reduction in other Operating Expenses realized during such calendar year as a
result of such capital improvement or capital asset), together with interest on
the unamortized balance at a rate per annum equal to the Reference Rate charged
at the time such capital improvements or capital assets are constructed or
acquired or such higher rate as may have been paid by Landlord on funds borrowed
for the purpose of constructing or acquiring such capital improvements or
capital assets, but in either case not more than the maximum rate permitted by
law at the time such capital improvements or capital assets are constructed or
acquired; (18) the cost of furniture, window coverings, carpeting, decorations,
landscaping and other customary and ordinary items of personal property provided
by Landlord for use in common areas of the Real Property or in the Building
office (to the extent that such Building office is dedicated to the operation
and management of the Real Property), such costs to be amortized over the useful
life thereof; (19) the cost of any capital improvements made by Landlord to the
Real Property or capital assets acquired by Landlord and used solely in
connection with the Real Property during the Term of this Lease to the extent
that the cost of any such improvement or asset is less than five thousand
dollars ($5,000); (20) the cost of any capital improvements made by Landlord to
the Real Property or capital assets acquired by Landlord and reasonably
allocated to the Real Property during the Term of this Lease which have a useful
life of five (5) years or less (and the cost of which is not otherwise included
in Operating Expenses pursuant to this Paragraph 1(e)), such cost to be
amortized over the useful life thereof, together with interest on the
unamortized balance at a rate per annum equal to the Reference Rate charged at
the time such capital improvements or capital assets are constructed or acquired
or such higher rate as may have been paid by Landlord on funds borrowed for the
purpose of constructing or acquiring such capital improvements or capital
assets, but in either case not more than the maximum rate permitted by law at
the time such capital improvements or capital assets are constructed or
acquired; (21) any such expenses and costs resulting from substitution of work,
labor, material or services in lieu of any of the above itemizations, or for any
such additional work, labor, services or material resulting from compliance with
any governmental laws, rules, regulations or orders applicable to the Real
Property or any part thereof not in effect at the Commencement Date; (22)
property management office rent or rental value; and (23) cost of operation,
repair and maintenance of the parking lot serving the Building, including
resurfacing, restriping and cleaning, in excess of parking lot revenues.
To the extent costs and expenses described above relate to both the Real
Property and other property, such costs and expenses shall, in determining the
amount of Operating Expenses, be allocated equitably based upon the percentage
attributable to each property.
Operating Expenses shall not include the following: (i) depreciation on
the Building or Real Property; (ii) debt service, loan fees or other carrying
cost attributable to any mortgage or deed of trust; (iii) rental under any
ground or underlying lease; (iv) interest (except as expressly provided in this
Paragraph 1(e)); (v) Real Property Taxes; (vi) attorneys' fees and expenses
incurred in connection with lease negotiations with prospective Building
tenants; (vii) the cost of any improvements or equipment which would be properly
classified as capital expenditures (except for any capital expenditures
expressly included in Operating Expenses pursuant to this
3
<PAGE> 9
Paragraph 1(e)); (viii) the cost of decorating, improving for tenant occupancy,
painting or redecorating portions of the Building to be demised to tenants; (ix)
advertising expenses relating to vacant space; (x) real estate brokers' or other
leasing commissions; or (xi) costs of utilities for tenants' premises; (xii) the
cost of any service sold to any tenant (including Tenant) or other occupant for
which Landlord is entitled to be reimbursed as an additional charge or rental
over and above the basic rent and escalations payable under the lease with such
tenant; (xiii) expenses in connection with services or other benefits of a type
that are not provided to Tenant but which are provided another tenant or
occupant of the Building or Real Property; (xiv) costs incurred due to
Landlord's violation of any terms or conditions of this Lease or any other lease
relating to the Building or Real Property; (xv) overhead or profit increments
paid to Landlord's subsidiaries or affiliates for management or other services
on or to the Building or for supplies or other materials to the extent that the
cost of the services, supplies, or materials exceeds the cost that would have
been paid had the services, supplies, or materials been provided by unaffiliated
parties on a competitive basis; (xvi) any compensation paid to clerks,
attendants, or other persons in commercial concessions operated by Landlord
(excluding the Parking Lot); (xvii) costs of repairs and other work occasioned
by fire, windstorm, or other casualty (except as provided in Paragraph 1(e)(4)
above); (xviii) any costs, fines, or penalties incurred due to violations by
Landlord of any governmental rule or authority, or due to Landlord's gross
negligence or willful misconduct; (xix) management costs to the extent they
exceed management costs charged for similar facilities in the area; (xx) costs
for sculpture, paintings, or other objects of art; (xxi) wages, salaries, or
other compensation paid to any executive employees; (xxii) the cost of
correcting any building code or other violations which were violations on or
prior to the Commencement Date; or (xxiii) the cost of containing, removing, or
otherwise remediating any contamination of the Real Property (including the
underlying land and ground water) by any toxic or hazardous materials
(including, without limitation, asbestos and "PCB's") where such contamination
was not caused by Tenant.
(f) The term "Premises" shall mean the space in the Building
designated by cross-hatching on the floor plan(s) attached hereto as Exhibit A
(exclusive of the areas, if any, shown by shading) and situated on the floor(s)
of the Building specified in Paragraph D of the Summary of Lease Terms, together
with the appurtenant right to the use, in common with others, of lobbies,
entrances, stairs, elevators and other public portions of the Building. Landlord
and Tenant agree that the Premises contain the number of square feet of rentable
area specified in Paragraph E of the Summary of Lease Terms. All the outside
walls and windows of the Premises and any space in the Premises used for shafts,
stacks, pipes, conduits, ducts, electric or other utilities, sinks or other
Building facilities, and the use thereof and access thereto through the Premises
for the purposes of operation, maintenance and repairs, are reserved to
Landlord.
(g) The term "Real Property" shall mean, collectively, the
Land, the Building, the Parking Lot, and the other improvements on the Land.
(h) The term "Real Property Taxes" shall mean all taxes,
assessments (whether general or special), excises, transit charges, housing fund
assessments or other housing charges, levies or fees, ordinary or extraordinary,
unforeseen as well as foreseen, of any kind, which are assessed, levied,
charged, confirmed or imposed on the Real Property or any part
4
<PAGE> 10
thereof, on the Landlord with respect to the Real Property, on the act of
entering into this Lease or any other lease of space in the Real Property, on
the use or occupancy of the Real Property or any part thereof, with respect to
services or utilities consumed in the use, occupancy or operation of the Real
Property, or on or measured by the rent payable under this Lease or in
connection with the business of renting space in the Real Property, including,
without limitation, any gross receipts tax or payroll tax levied with respect to
the receipt of such rent, by the City and County of San Francisco, any political
subdivision, public corporation, district or other political or public entity or
public authority, and shall also include any other tax, fee or other excise,
however described, which may be levied or assessed in lieu of, as a substitute
(in whole or in part) for, or as an addition to, any other Real Property Taxes.
Real Property Taxes shall include reasonable attorneys' fees, costs and
disbursements reasonably incurred in connection with proceedings to contest,
determine or reduce Real Property Taxes.
Real Property Taxes shall not include income, franchise, transfer,
inheritance or capital stock taxes, unless, due to a change in the method of
taxation, any of such taxes is levied or assessed against Landlord in lieu of,
as a substitute (in whole or in part) for, or as an addition to, any other
charge which would otherwise constitute a part of Real Property Taxes.
Notwithstanding the foregoing or any other provision of this Lease to the
contrary, Tenant's obligation, if any, to pay any assessments included within
Real Property Taxes shall be calculated on the basis of the amount due if
Landlord had allowed the assessment to go to bond and the same were to be paid
over the longest period available.
(i) The term "Rental" shall include the Basic Monthly Rental
set forth in Paragraph H of the Summary of Lease Terms, all additional rent, and
any other charges payable by Tenant to Landlord hereunder.
(j) The term "Tenant's Percentage Share" shall mean the
percentage figures specified in Paragraph F of the Summary of Lease Terms with
respect to Operating Expenses and with respect to Real Property Taxes, as
applicable.
2. TERM.
(a) The term of this Lease (the "Term") shall commence (the
"Commencement Date") on the first to occur of (i) the date the Tenant
Improvements are substantially complete, or (ii) March 1, 2000, extended by the
sum of (A) the number of days, if any, after December 1, 1999, until the date
the Base Building Improvements are substantially complete, or, if earlier, the
date the Base Building Improvements would have been substantially complete
absent Tenant Delay (as defined in Paragraph 13(b) of the Construction
Agreement), plus (B) the number of days of delay in substantial completion of
the Tenant Improvements (as defined in Paragraph 1 of the Construction
Agreement) due to Force Majeure Events (as defined in Paragraph 14(g) of the
Construction Agreement) and/or Landlord Delay (as defined in Paragraph 13(a) of
the Construction Agreement). In no event, however, shall the Commencement Date
be earlier than January 15, 2000. The Tenant Improvements shall be deemed
"substantially complete" when all Tenant Improvements have been constructed,
except for minor details of construction, decoration or mechanical adjustment
that, individually or in the
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aggregate, do not materially interfere with Tenant's use and enjoyment of the
Premises, and Tenant can legally occupy the Premises. The Base Building
Improvements shall be deemed "substantially complete" when all Base Building
Improvements have been constructed, except for minor details of construction or
mechanical adjustment that, individually or in the aggregate, do not materially
interfere with the Contractor's ability to construct the Tenant Improvements
("punch list items"). The Term shall expire (the "Expiration Date") ten (10)
years after the Commencement Date unless sooner terminated as herein provided or
unless extended pursuant to the provisions of Paragraph 24 hereof. Landlord and
Tenant hereby agree to confirm the actual Commencement and Expiration Dates
prior to the commencement of the Term, if those dates differ from the dates
specified in Paragraph G of the Summary of Lease Terms, by executing and
delivering to each other counterparts of a Commencement Date Memorandum in the
form of Exhibit D attached hereto, but the Term of this Lease shall commence on
the Commencement Date and end on the Expiration Date whether or not such
amendment is executed.
(b) Notwithstanding anything in the foregoing to the
contrary, should Landlord fail to complete the Base Building Improvements and
deliver the Premises to Tenant by May 1, 2000, as extended by any delays due to
Force Majeure Events and/or Tenant Delay, Tenant may elect to terminate this
Lease by giving written notice thereof to Landlord no later than ten (10)
business days thereafter; provided such notice shall be of no force or effect if
Landlord completes the Base Building Improvements and delivers the Premises to
Tenant on or before the expiration of such ten (10) business days.
3. RENTAL; SECURITY DEPOSIT.
(a) Tenant agrees to pay to Landlord as Basic Monthly Rental
for the Premises the sums specified in Paragraph H of the Summary of Lease
Terms.
(b) Basic Monthly Rental shall be paid to Landlord, in
advance, on or before the first day of each and every successive calendar month
during the Term hereof. In the event the Term of this Lease commences on a day
other than the first day of a calendar month, or ends on a day other than the
last day of a calendar month, then the Basic Monthly Rental for the first and/or
last fractional months of the Term shall be appropriately prorated. All such
prorations shall be made on the basis of a 360-day year consisting of twelve
30-day months.
(c) Rental shall be paid to Landlord without notice, demand,
deduction or offset in lawful money of the United States in immediately
available funds or by good check as described below at the office of Landlord at
Landlord's address for notices specified in the Summary of Lease Terms, or to
such other person or at such other place as Landlord from time to time may
designate in writing by notice delivered in accordance with this Lease. Payments
made by check must be drawn either on a California financial institution or on a
financial institution that is a member of the federal reserve system. All
amounts of Rental, if not paid when due, shall bear interest from the due date
until paid at an annual rate of interest (the "Interest Rate") equal to the
lesser of (i) the maximum annual interest rate allowed by law on such due date
for business loans (not primarily for personal, family or household purposes)
not exempt from the usury law, or (ii) a rate equal to the sum of five (5)
percentage points over the
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publicly announced reference rate (the "Reference Rate") charged on such due
date by the San Francisco Main Office of Bank of America NT & SA (or any
successor bank thereto) (or if there is no such publicly announced rate, the
rate quoted by such bank in pricing ninety (90) day commercial loans to
substantial commercial borrowers). In addition, Tenant acknowledges that late
payment by Tenant to Landlord of Rental will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of such costs being extremely
difficult to fix. Such costs include, without limitation, processing and
accounting charges, and late charges that may be imposed on Landlord by the
terms of any encumbrance and/or note secured by an encumbrance covering the
Premises. Therefore, if any installment of Rental due from Tenant is not
received within seven (7) days after Tenant's receipt of notice from Landlord
that Rental is past due, Tenant shall pay to Landlord an additional sum of ten
percent (10%) of the overdue Rental as a late charge; provided that, if Rental
is not paid when due two (2) times during any 12 month period during the Term of
this Lease and if Landlord shall have notified Tenant in writing that Tenant
shall thereafter be entitled to no further grace periods, then thereafter Tenant
shall not be entitled to such ten (10) day grace period, and such late charge
shall be assessed on any Rental not paid by 5:00 p.m. on the date due. The
parties agree that this late charge represents a fair and reasonable estimate of
the costs that Landlord will incur by reason of late payment of Rental by
Tenant. Acceptance of any late charge shall not constitute a waiver of Tenant's
default with respect to the overdue amount, or prevent Landlord from exercising
any of the other rights and remedies available to Landlord.
(d) Prior to taking occupancy of the Premises, Tenant shall
pay Landlord an amount equal to the Basic Monthly Rental for the first month of
the Term of this Lease, which amount Landlord shall apply to the Basic Monthly
Rental for such first month.
(e) (i) The security deposit specified in Paragraph I of
the Summary of Lease Terms (the "Deposit") shall be paid to Landlord in
accordance with the following schedule: Five Hundred Thousand Dollars
($500,000.00) shall be paid on execution of this Lease; an additional Five
Hundred Thousand Dollars ($500,000.00) shall be paid concurrently with the first
disbursement of Landlord's Contribution pursuant to Exhibit C attached hereto,
and the balance thereof shall be paid on December 1, 1999. The Deposit shall be
held by Landlord as security for the faithful performance by Tenant of all of
the provisions of this Lease to be performed or observed by Tenant. If Tenant
fails to pay any Rental, or otherwise defaults with respect to any provision of
this Lease, Landlord may (but shall not be obligated to) use, apply or retain
all or any portion of the Deposit for the payment of any Rental in default or
for the payment of any other sum to which Landlord may become obligated by
reason of Tenant's default, or to compensate Landlord for any loss or damage
which Landlord may suffer thereby. If Landlord so uses or applies all or any
portion of the Deposit, Tenant shall within ten (10) days after demand therefor
deposit cash with Landlord in an amount sufficient to restore the Deposit to the
full amount thereof, and Tenant's failure to do so shall, at Landlord's option,
be an Event of Default (as defined in Paragraph 18(a)) under this Lease.
Landlord shall keep the Deposit in a money market account separate from its
general accounts. If Tenant performs all of Tenant's obligations hereunder, the
Deposit, or so much thereof as has not theretofore been applied by Landlord,
shall be returned, together with interest earned thereon, to Tenant (or, at
Landlord's option, to the last assignee, if any, of Tenant's interest hereunder)
at the expiration of the Term hereof and after
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Tenant has vacated the Premises. Landlord's return of the Deposit or any part
thereof shall not be construed as an admission that Tenant has performed all of
its obligations under this Lease. No trust relationship is created herein
between Landlord and Tenant with respect to the Deposit.
(ii) The amount of the Deposit may be reduced as of
the commencement of the thirteenth (13th) full calendar month of the Term to
equal Two Million One Hundred Forty-Two Thousand Eight Hundred Fifty-Seven
Dollars ($2,142,857.00); as of the commencement of the twenty-fifth (25th) full
calendar month of the Term to equal One Million Seven Hundred Eighty-Five
Thousand Seven Hundred Fourteen Dollars ($1,785,714.00); as of the commencement
of the thirty-seventh (37th) full calendar month of the Term to equal One
Million Four Hundred Twenty-Eight Thousand Five Hundred Seventy-One Dollars
($1,428,571.00); as of the commencement of the forty-ninth (49th) full calendar
month of the Term to equal One Million Seventy-One Thousand Four Hundred
Twenty-Eight Dollars ($1,071,428.00); as of the commencement of the sixty-first
(61st) full calendar month of the Term to equal Seven Hundred Fourteen Thousand
Two Hundred Eighty-Five Dollars ($714,285.00); as of the commencement of the
seventy-third (73rd) full calendar month of the Term to equal Three Hundred
Fifty-Seven Thousand One Hundred Forty-Two Dollars ($357,142.00); and as of the
commencement of the eighty-fifth (85th) full calendar month of the Term may be
eliminated (the dates of such permitted reductions are herein referred to as the
"Adjustment Dates"); provided, however, in no event shall any such reduction be
permitted hereunder if (A) more than one Event of Default under this Lease has
occurred prior to the applicable Adjustment Date or (B) Tenant is in default of
any of its obligations under this Lease as of the applicable Adjustment Date.
(iii) To the extent not previously reduced pursuant to
Paragraph 3(e)(ii) above, the amount of the Deposit shall be reduced to One
Million Five Hundred Thousand Dollars ($1,500,000.00) at such time as Tenant has
maintained for three consecutive fiscal quarters a net worth of not less than
Fifty Million Dollars ($50,000,000.00), as determined by financial statements
prepared in accordance with the requirements of Paragraph 23(d) below. The
amount of the Deposit shall be further reduced to One Million Dollars
($1,000,000.00) at such time as Tenant has maintained for three consecutive
fiscal quarters a net worth of not less than Eighty Million Dollars
($80,000,000.00) as determined by such financial statements. Furthermore, should
Landlord exercise its right of termination pursuant to Paragraph 26 hereof, the
amount of the Deposit then held by Landlord shall be reduced in the same
proportion as the rentable square footage of the Premises are so reduced.
(iv) Tenant may elect to maintain the Deposit in the
form of a letter of credit ("Letter of Credit") in lieu of cash, provided the
following conditions are met: The Letter of Credit shall be issued by and
drawable upon a commercial bank, trust company, national banking association or
savings and loan association (hereinafter referred to as the "Issuing Bank"),
with offices for banking purposes in the City of San Francisco, which shall have
outstanding unsecured, uninsured and unguaranteed indebtedness, or shall have
issued a letter of credit or other credit facility that constitutes the primary
security for any outstanding indebtedness (which is otherwise uninsured and
unguaranteed), that is then rated, without regard to qualification of such
rating by symbols such as "+" or "-" or numerical notation, "Aa" or
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better by Moody's Investors Service and "AA" or better by Standard & Poor's
Corporation, and has combined capital, surplus and undivided profits of not less
than Five Hundred Million Dollars ($500,000,000.00). Notwithstanding the
foregoing, Landlord hereby agrees that the following institutions are acceptable
as the Issuing Bank: San Francisco branches of Bank of America NT&SA, Wells
Fargo Bank, N.A. or Citibank, N.A., or Santa Clara County branches of Silicon
Valley Bank. The Letter of Credit shall name Landlord as beneficiary, be in the
amount of the Deposit, have a term of not less than one (1) year, permit
multiple drawings, be fully transferable by Landlord, and otherwise be in form
and content reasonably satisfactory to Landlord. If upon any transfer, any fees
or charges shall be imposed, then such fees or charges shall be payable solely
by Tenant and the Letter of Credit shall so specify. Tenant shall not less than
forty-five (45) days prior to its expiry date replace the Letter of Credit with
a new Letter of Credit with a term of not less than one (1) year and otherwise
complying with the requirements of this Paragraph 3(e). In lieu thereof, the
Letter of Credit shall provide that it shall be deemed automatically renewed,
without amendment, for consecutive periods of one (1) year thereafter during the
Term of this Lease, unless the Issuing Bank sends notice (the "Non-Renewal
Notice") to Landlord by certified mail, return receipt requested, not less than
forty-five (45) days preceding the then expiration date of the Letter of Credit
that it elects not to have such Letter of Credit renewed. If Landlord has
received a Non-Renewal Notice, or not later than fifteen (15) days prior to the
expiry date of the Letter of Credit Tenant fails to furnish to Landlord a
replacement letter of credit in accordance with the terms of this Paragraph
3(e), then Landlord shall have the right to draw the full amount of the Letter
of Credit, by sight draft on the Issuing Bank, and shall hold the proceeds of
the Letter of Credit pursuant to the terms of this Paragraph 3(e) as a cash
security deposit; provided, however, should Tenant thereafter furnish to
Landlord a Letter of Credit meeting the requirements of this Paragraph 3(e),
such cash proceeds, less all expenses incurred by Landlord, shall be returned to
Tenant.
4. TENANT'S SHARE OF OPERATING EXPENSES AND REAL PROPERTY TAXES;
ADDITIONAL RENT.
(a) In addition to the Basic Monthly Rental payable during
the Term of this Lease, Tenant shall pay to Landlord, as additional rent, the
applicable Tenant's Percentage Share specified in the Summary of Lease Terms of
(i) Operating Expenses paid or incurred by Landlord in any calendar year during
the Term of this Lease, and (ii) Real Property Taxes paid or incurred by
Landlord to the extent relating to any tax year (July 1 through June 30) during
the Term of this Lease. If it shall not be lawful for Tenant to reimburse
Landlord for any increase in Real Property Taxes as defined herein, the Basic
Monthly Rental payable to Landlord prior to the imposition of such increases in
Real Property Taxes shall be increased to net Landlord the same net Basic
Monthly Rental after imposition of such increases in Real Property Taxes as
would have been received by Landlord prior to the imposition of such increases
in Real Property Taxes.
(b) During December of each calendar year or as soon
thereafter as practicable, Landlord shall give Tenant notice of its estimate of
the amounts payable pursuant to Paragraph 4(a) above for the succeeding calendar
year. On or before the first day of each month during the succeeding calendar
year, Tenant shall pay to Landlord, as additional rent, one twelfth (1/12) of
such estimated amounts. If Landlord fails to deliver such notice to Tenant in
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December, Tenant shall continue to pay the applicable Tenant's Percentage Share
specified in the Summary of Lease Terms of Operating Expenses and Real Property
Taxes on the basis of the prior year's estimate until the first day of the next
calendar month after such notice is given, provided that on such date Tenant
shall pay to Landlord the amount of such estimated adjustment payable to
Landlord for prior months during the year in question, less any portion thereof
previously paid by Tenant. If at any time it reasonably appears to Landlord that
the amounts payable under this Paragraph 4(b) for the current calendar year will
vary from Landlord's estimate, Landlord may, by giving written notice to Tenant,
revise Landlord's estimate for such year, and subsequent payments by Tenant for
such year shall be based on such revised estimate.
(c) Within ninety (90) days after the close of each calendar
year or as soon after such ninety (90) day period as practicable, Landlord shall
deliver to Tenant a statement of the amounts payable under Paragraph 4(a) above
for such calendar year. If on the basis of such statement Tenant owes an amount
that is more than the estimated payments for such calendar year previously made
by Tenant, Tenant shall pay the deficiency to Landlord within fifteen (15) days
after delivery of the statement. If on the basis of such statement Tenant has
paid to Landlord an amount in excess of the amounts payable under Paragraph 4(a)
above for the preceding calendar year, then Landlord, at its option, shall
either promptly refund such excess to Tenant or credit the amount thereof to (i)
the Basic Monthly Rental next becoming due from Tenant until such credit has
been exhausted, or (ii) if Tenant is in default under this Lease, to the curing
of such default.
(d) Tenant shall have the right to examine, to copy and to
have an audit conducted of all books and records of Landlord as shall pertain to
Operating Expenses and Real Property Taxes. Such audit shall be conducted by an
auditing firm retained by Tenant. All expenses of such audit shall be borne by
Tenant unless such audit discloses an overstatement of Operating Expenses or
Real Property Taxes of four percent (4%) or more, and Landlord agrees with the
results of Tenant's audit, in which case all reasonable expenses of such audit
shall be borne by Landlord, and Tenant's Operating Expense payment or Real
Property Tax payment shall be adjusted accordingly. If Landlord agrees with the
results of Tenant's audit and Landlord fails to pay the reasonable cost of such
audit, Tenant shall be entitled to pay the same and deduct such cost against
future installments of Rental. In the event Landlord disputes the findings of
said audit, then Landlord and Tenant agree to submit any disputed items to a
firm of real estate audit professionals mutually acceptable to Landlord and
Tenant ("Audit Professionals"). The determination of the Audit Professionals
shall be final and binding upon both Landlord and Tenant and the Audit
Professionals' expenses shall be borne by the party against whom the decision is
rendered. In addition, if the Audit Professionals shall determine that Operating
Expenses or Real Property Taxes were overstated by four percent (4%) or more,
Landlord shall pay the reasonable expenses of Tenant's initial audit. If it is
determined that Tenant has made an underpayment, Tenant shall promptly reimburse
Landlord for the amount of such underpayment. If it is determined that Tenant
has made an overpayment, Tenant shall promptly receive, at Tenant's option,
either (i) a credit against the Rental next due and payable; or (ii) a lump sum
payment from Landlord in such amount. Landlord shall maintain all books and
records for a period of not less than three (3) years following the applicable
calendar year.
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(e) If this Lease terminates on a day other than the last
day of a calendar year, the amounts payable by Tenant under Paragraph 4(a) above
with respect to the calendar year in which such termination occurs shall be
prorated on the basis which the number of days from the commencement of such
calendar year, to and including such termination date, bears to 360. The
termination of this Lease shall not affect the obligations of Landlord and
Tenant pursuant to Paragraph 4(c) above to be performed after such termination,
provided that Tenant shall not be responsible for any portion of the Real
Property Taxes or Operating Expenses not billed to Tenant within one (1) year of
such termination.
(f) It is the intention of Landlord and Tenant that the
Basic Monthly Rental paid to Landlord throughout the Term of this Lease shall be
absolutely net of Real Property Taxes and Operating Expenses, and the foregoing
provisions of this Paragraph 4 are intended to so provide.
5. OTHER TAXES PAYABLE BY TENANT.
Tenant shall reimburse Landlord upon demand for any and all
taxes, but not including Real Property Taxes, payable by Landlord (other than
net income taxes) whether or not now customary or within the contemplation of
the parties hereto:
(a) imposed upon, measured by or reasonably attributable to
the cost or value of Tenant's equipment, furniture, fixtures and other personal
property located in the Premises or by the cost or value of any leasehold
improvements made in or to the Premises by or for Tenant, other than Base
Building Improvements made by Landlord, regardless of whether title to such
improvements shall be in Tenant or Landlord;
(b) imposed upon or measured by the Basic Monthly Rental
payable hereunder, including, without limitation, any gross receipts tax or
payroll tax levied by the City and County of San Francisco, the State of
California, the federal government or any other governmental body with respect
to the receipt of such rental;
(c) imposed upon or with respect to the possession, leasing,
operation, management, maintenance, alteration, repair, use or occupancy by
Tenant of the Premises or any portion thereof; or
(d) imposed upon this transaction or any document to which
Tenant is a party creating or transferring an interest or an estate in the
Premises.
In the event that it shall not be lawful for Tenant to so reimburse
Landlord, the Basic Monthly Rental payable to Landlord under this Lease shall be
revised to net Landlord the same income after imposition of any such tax upon
Landlord as would have been received by Landlord hereunder prior to the
imposition of any such tax.
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6. USE.
Tenant agrees to use the Premises for general office, broadcast
studio, and reception, production and dissemination of digital media purposes
and lawful purposes ancillary thereto ("Permitted Use"), and agrees not to use
nor permit the use of the Premises or any part thereof for any other purpose.
Tenant agrees not to do or permit to be done in or about the Premises or the
Building, nor to bring or keep or permit to be brought or kept in or about the
Premises or the Building, anything which is prohibited by or will in any way
conflict with any law, statute or governmental regulation now or hereafter in
effect, or which would subject Landlord or Landlord's agents to any liability,
or which is prohibited by the standard form of fire insurance policy, or which
will in any way increase the existing rate of (or otherwise affect) fire or any
other insurance on the Building or any of its contents. If any act or omission
of Tenant results in any such increase in premium rates, Tenant shall pay to
Landlord, as additional rent, upon demand the amount of such increase. Tenant
agrees not to do or permit those persons under its control to do anything in, on
or about the Premises or the Building which will in any way obstruct or
interfere with the rights of other tenants or occupants of the Building, or
injure or unreasonably annoy them, or use or allow the Premises to be used for
any improper, immoral or unlawful purpose. Tenant agrees not to cause, maintain
or permit any nuisance in, on or about the Premises or the Building, nor to use
or permit to be used any loudspeaker or other device, system or apparatus which
can be heard outside the Premises without the prior written consent of Landlord,
which shall not be unreasonably withheld, nor to permit any objectionable odors,
bright lights or electrical or radio interference which may annoy or interfere
with the rights of other tenants of the Building or the public. Tenant agrees
not to commit or suffer to be committed any waste in or upon the Premises. The
provisions of this Paragraph 6 are for the benefit of Landlord only and shall
not be construed to be for the benefit of any tenant or occupant of the Building
or the public.
7. COMPLIANCE WITH LAWS/ENVIRONMENTAL MATTERS.
(a) Tenant agrees at its sole cost and expense to promptly
comply with all laws, statutes, ordinances and governmental rules, regulations
or requirements now or hereafter constituted; with any direction or occupancy
certificate issued pursuant to law by any public officer; and with the
provisions of all recorded documents affecting the Premises, insofar as any
thereof relates to or affects the condition, use or occupancy of the Premises,
excluding structural changes not related to or affected by Tenant's
improvements, acts or particular use of the Premises. The judgment of any court
of competent jurisdiction or the admission of Tenant in any action against
Tenant (whether Landlord be a party thereto or not) that Tenant has violated any
such law, statute, ordinance or governmental rule, regulation, requirement,
direction or provision, shall be conclusive of that fact as between Landlord and
Tenant. If Tenant's use or operation of the Premises or any of Tenant's
equipment therein requires a governmental permit, license or other authorization
or any notice to any governmental agency, Tenant shall promptly provide a copy
thereof to Landlord.
(b) Except as set forth in Paragraph 29, Tenant shall not
bring or keep, or permit to be brought or kept, in the Premises or in or on the
Real Property any "hazardous
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substance" (as hereinafter defined). Tenant shall not manufacture, generate,
treat, handle, store or dispose of any hazardous substance in the Premises or in
or on the Real Property, or use the Premises for any such purpose, or emit,
release or discharge any hazardous substance into any air, soil, surface water
or groundwater comprising the Premises or the Real Property, or permit any
person using or occupying the Premises to do any of the foregoing. Tenant shall
comply, and shall cause all persons using or occupying the Premises to comply,
with all "environmental laws" (as hereinafter defined) applicable to the
Premises, the use or occupancy of the Premises or any operation or activity
therein. As used in this Lease, "hazardous substance" shall mean any substance
or material that is described as a toxic, hazardous, corrosive, ignitable,
flammable or reactive substance, waste or material or a pollutant or
contaminant, or words of similar import, in any of the environmental laws, and
includes asbestos, petroleum, petroleum products, polychlorinated biphenyls,
radon gas, radioactive matter, and chemicals which may cause cancer or
reproductive toxicity. As used in this Lease, "environmental laws" shall mean
all federal, state and local laws, ordinances, rules and regulations now or
hereafter in force, as amended from time to time, in any way relating to or
regulating human health or safety, or industrial hygiene or environmental
conditions, or protection of the environment, or pollution or contamination of
the air, soil, surface water or groundwater. Notwithstanding the foregoing or
anything to the contrary contained in this Lease, Tenant shall have no
obligation to clean up, monitor, abate, or comply with any law regarding, or to
reimburse, release, indemnify or defend Landlord with respect to any hazardous
substances which Tenant, its agents, employees, invitees or subtenants, did not
store, dispose of, transport, use or cause to be on the Premises or the Real
Property.
(c) Tenant shall immediately furnish Landlord with any (i)
notices received from any insurance company or governmental agency or inspection
bureau regarding any unsafe or unlawful conditions within the Premises, and (ii)
notices or other communications sent by or on behalf of Tenant to any person
relating to environmental laws or hazardous substances.
(d) California law requires landlords to disclose to tenants
the existence of certain hazardous substances. Accordingly, the existence of
gasoline and other automotive fluids, asbestos containing materials, maintenance
fluids, copying fluids and other office supplies and equipment, certain
construction and finish materials, tobacco smoke, cosmetics and other personal
items must be disclosed. Gasoline and other automotive fluids are found in the
parking area of the Real Property. Cleaning, lubricating and hydraulic fluids
used in the operation and maintenance of the Building are found in the utility
areas of the Building not generally accessible to Building occupants or the
public. Many Building occupants use copy machines and printers with associated
fluids and toners, and pens, markers, inks, and office equipment that may
contain hazardous substances. Certain adhesives, paints and other construction
materials and finishes used in portions of the Building may contain hazardous
substances. Although smoking is prohibited in the public areas or the Building,
these areas may from time to time be exposed to tobacco smoke. Building
occupants and other persons entering the Building from time to time may use or
carry prescription and non-prescription drugs, perfumes, cosmetics and other
toiletries, and foods and beverages, some of which may contain hazardous
substances. Landlord warrants to Tenant that except as provided in this
paragraph, to be the best of Landlord's knowledge, the Premises, the Building,
and the Land are free from any contamination by any hazardous substance and
otherwise are in compliance with all environmental laws.
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(e) The City and County of San Francisco adopted a City-wide
"First Source Hiring Program" on August 3, 1998 by Ordinance No. 264-98,
codified at San Francisco Administrative Code Sections 83.1-83.18. The First
Source Hiring Program ("FSHP") is designed to identify entry level positions
associated with commercial activities and provide first interview opportunities
to graduates of City-sponsored training programs. Tenant acknowledges that its
activities on the Premises may be subject to FSHP. Although Landlord makes no
representation or warranty as to the interpretation or application of FSHP to
the Premises, or to Tenant's activities thereon, Tenant acknowledges that if
FSHP is applicable to the Premises: (i) FSHP may impose obligations on Tenant,
including good faith efforts to meet requirements and goals regarding
interviewing, recruiting, hiring and retention of individuals for entry level
positions; (ii) FSHP requirements could also apply to certain contracts and
subcontracts entered into by Tenant regarding the Premises, including
construction contracts; and (iii) FSHP requirements, if applicable, may be
imposed as a condition of permits, including building permits, issued for
construction or occupancy of the Premises.
(f) The provisions of this Paragraph 7 are for the benefit
of Landlord and Tenant only and shall not be construed to be for the benefit of
any tenant or occupant of the Building.
8. ALTERATIONS; LIENS.
(a) Tenant agrees not to make or suffer to be made any
alteration, addition or improvement to or of the Premises (hereinafter referred
to as "Alterations"), or any part thereof, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld; provided, however,
that Landlord's consent shall not be required for non-structural improvements of
a decorative nature that do not require a building permit. Tenant shall give at
least five (5) days prior written notice to Landlord of any Alterations for
which its consent is not required. Any such Alterations made by Tenant,
including without limitation any permanent partitions or carpeting, shall become
a part of the Building and belong to Landlord; provided, however, that
equipment, trade fixtures, movable furniture, and other property installed by
Tenant which can be removed without damage to the Premises, shall remain the
property of Tenant. If Landlord consents to the making of any Alterations, the
same shall be designed and constructed or installed by Tenant at its expense
(including expenses incurred in complying with applicable laws, including laws
relating to the handling and disposal of ACM, if applicable). Tenant shall use a
general contractor, subcontractors, engineers and architects which are on
Landlord's approved list of design and construction professionals. All
Alterations shall be made in accordance with plans and specifications approved
in writing by Landlord in its reasonable discretion and shall be designed and
constructed in compliance with all applicable codes, laws, ordinances, rules and
regulations. The design and construction of any Alterations shall be performed
in accordance with Landlord's reasonable rules, regulations and requirements.
Under no circumstances shall Landlord be liable to Tenant for any damage, loss,
cost or expense incurred by Tenant on account of Tenant's plans and
specifications, Tenant's contractors or subcontractors, design of any work,
construction of any work, or delay in completion of any work. Tenant shall pay
to Landlord a fee in the amount of five percent (5%) of the cost of the
Alterations for Landlord's review of plans and its management and supervision of
the progress of
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the work. All sums due to such contractors, if paid by Landlord due to Tenant's
failure to pay such sums when due, shall bear interest payable to Landlord at
the Interest Rate until fully paid. Upon the expiration or sooner termination of
this Lease, Tenant, at its expense, shall promptly remove any such Alterations
made by Tenant if the same were designated by Landlord at the time it granted
its approval to be removed, and repair any damage to the Premises caused by such
removal. Tenant shall use a general contractor approved by Landlord in its
reasonable discretion for such removal and repair.
(b) Tenant agrees to keep the Premises and the Real Property
free from any liens arising out of any work performed, materials furnished or
obligations incurred by Tenant. Tenant shall promptly and fully pay and
discharge all claims on which any such lien could be based. In the event that
Tenant does not, within ten (10) days following the receipt of actual notice of
any such lien, cause the same to be released of record, Landlord shall have, in
addition to all other remedies provided herein and by law, the right, but not
the 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 sums paid
by Landlord for such purpose, and all expenses incurred by it in connection
therewith, shall be payable to Landlord by Tenant, as additional rent, on
demand, together with interest at the Interest Rate from the date such expenses
are incurred by Landlord to the date of the payment thereof by Tenant to
Landlord. Landlord shall have the right at all times to post and keep posted on
the Premises any notices permitted or required by law, or which Landlord shall
deem proper for the protection of Landlord, the Premises, the Building, or the
Real Property, from mechanic's and materialmen's and like liens. Tenant shall
give Landlord at least ten (10) days' prior written notice of the date of
commencement of any construction on the Premises in order to permit the posting
of such notices.
9. MAINTENANCE AND REPAIR.
(a) By taking possession of the Premises, Tenant accepts the
Premises as being in the condition in which Landlord is obligated to deliver the
Premises, subject to punch list items as provided in Paragraph 2 (provided that
Tenant's early access to the Premises pursuant to Paragraph 8(c) of Exhibit C
shall not be deemed to be taking possession thereof). Tenant, at its expense,
shall at all times keep the Premises and every part thereof and all equipment,
fixtures and improvements therein in good and sanitary order, condition and
repair, damage thereto by fire, the perils of the extended coverage endorsement,
and earthquake excepted, and Tenant waives all rights under, and benefits of,
subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil
Code and under any similar law or ordinance now or hereafter in effect. Upon the
expiration or sooner termination of this Lease, Tenant shall surrender the
Premises and (unless designated by Landlord to be removed in accordance with
Paragraph 8 above) all Alterations thereto to Landlord in the same condition as
when received, ordinary wear and tear (except such as Tenant is obligated to
repair to keep the Premises in good condition and repair) and damage thereto by
fire, the perils of the extended coverage endorsement, and earthquake excepted.
In addition, at Landlord's option, prior to the end of the Term, Tenant shall
remove all or any portion of the broadcast studio and related facilities,
equipment and cabling ("Specialty Improvements") installed as part of the Tenant
Improvements (including, without limitation, special purpose acoustic walls and
doors), and repair any damage
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to the Premises caused by such removal. Within thirty (30) days after request by
Tenant, which request shall be made no earlier than during the last six (6)
months of the Term, Landlord shall advise Tenant in writing whether Landlord
requires Tenant to remove any or all of such Specialty Improvements. It is
agreed that, except as may be specifically set forth herein: (i) Landlord has no
obligation, and has made no promises, to alter, add to, remodel, improve,
repair, decorate or paint the Premises or any part thereof, and that (ii) no
representations respecting the condition of the Premises, the Building or the
Real Property have been made by Landlord to Tenant. Except as otherwise set
forth in this Lease, no representation or warranty, express or implied, is made
with respect to (i) the condition of the Premises or the Building, (ii) the
fitness of the Premises for Tenant's intended use, (iii) the degree of sound
transfer within the Building, (iv) the absence of electrical or radio
interference in the Premises or the Building, (v) the condition, capacity or
performance of electrical or communications systems or facilities, or (vi) the
absence of objectionable odors, bright lights or other conditions which may
affect Tenant's use and enjoyment of the Premises or the Building.
(b) Landlord agrees to make all necessary repairs to the
structure, the exterior, and the public and common areas of the Building and the
Building systems therein, and to maintain the same in reasonably good order and
condition. Any damage arising from the acts of Tenant, its agents, employees,
contractors or invitees shall be repaired by Landlord at Tenant's sole expense.
Tenant shall pay Landlord on demand the cost of any such repair.
10. SERVICES.
(a) Provided that this Lease has not terminated, Landlord,
subject to the terms of this Paragraph 10 and the Building Rules and Regulations
attached hereto as Exhibit B and subject to applicable laws, regulations and
rules of public utilities, shall furnish to the Premises water, electrical power
and elevator service suitable for the use of the Premises for ordinary office
purposes; heating and air conditioning suitable for the comfortable use and
occupation of the Premises (assuming normal office use thereof and subject to
any restrictions on use as may be prescribed by any applicable policies or
regulations of any utility or governmental agency); and basic janitorial service
on weekdays (excluding union holidays). Tenant agrees to pay, as additional
rent, promptly on demand any and all costs incurred by Landlord in connection
with providing any additional utilities and services Landlord may provide.
Unless otherwise specifically provided in this Lease, all means of distribution
of all utilities within the Premises shall be supplied by Tenant at its expense,
and Tenant shall bear the cost of water, gas, electricity, sewerage and other
utilities. Landlord shall install, at Tenant's expense, a separate meter in the
Premises for electricity. Tenant agrees that at all times it will cooperate
fully with Landlord and abide by all regulations and requirements that Landlord
may reasonably prescribe for the proper functioning and protection of the
Building heating, ventilating and air conditioning systems. Landlord shall not
be liable for and Tenant shall not be entitled to any abatement or reduction of
Rental by reason of Landlord's failure to furnish any of the foregoing or any
other utilities or services when such failure is caused by accident, breakage,
repairs, strikes, lockouts or other labor disturbances or disputes of any
character, by the limitation, curtailment, rationing or restrictions on use of
electricity, gas or any form of energy, or by any other cause, similar or
dissimilar, beyond the reasonable control of Landlord. No such failure and no
interruption of
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utilities or services from any cause whatsoever shall constitute an eviction of
Tenant, constructive or otherwise, or impose upon Landlord any liability
whatsoever, including, but not limited to, liability for consequential damages
or loss of business by Tenant. Tenant hereby waives the provisions of California
Civil Code Section 1932(1) or any other applicable existing or future law,
ordinance or governmental regulation permitting the termination of this Lease
due to such failure or interruption. Landlord shall not be liable under any
circumstances for injury to or death of any person or damage to or destruction
of property, however occurring, through or in connection with or incidental to
the furnishing of or the failure to furnish any of the foregoing utilities or
services or any other utilities or services. Notwithstanding the foregoing: (i)
in the event that Landlord is unable to supply any of the Building's sanitary,
electrical, heating, air conditioning, water, elevator, life safety or other
essential systems servicing the Premises (collectively, the "Essential
Services") by reason of acts of god, accidents, breakage, repairs, strikes,
lockouts, labor disputes, inability to obtain utilities or materials or by any
other reason beyond Landlord's reasonable control, and such inability of
Landlord materially impairs Tenant's ability to carry on its business in the
Premises for a period of fifteen (15) consecutive days, the Rental shall be
abated commencing with the sixteenth (16th) day of such material interference
with Tenant's business, based upon the extent to which such inability to supply
Essential Services materially impairs Tenant's ability to carry on its business
in the Premises. Such abatement shall continue until the Essential Services have
been restored to such extent that the lack of any remaining services no longer
materially impairs Tenant's ability to carry on its business in the Premises.
Tenant shall not be entitled to such an abatement to the extent that Landlord's
inability to supply Essential Services to Tenant is caused by Tenant, its
employees, contractors, agents, licensees or invitees; and (ii) in the event of
any stoppage or interruption of Essential Services to the Premises, Landlord
shall use its best efforts to restore Essential Services to the Premises as soon
as possible; provided, that Tenant shall have the right, at its option, to
terminate this Lease by written notice to Landlord if such failure to provide
Essential Services by Landlord continues for any reason (other than the actions
of Tenant, its employees, contractors, agents, licensees or invitees) for more
than one hundred eighty (180) consecutive calendar days and such failure
materially impairs Tenant's ability to carry on its business in the Premises.
(b) Landlord makes no representation to Tenant regarding the
adequacy or fitness of the heating, air conditioning or ventilation equipment in
the Building to maintain temperatures that may be required for, or because of,
any of Tenant's equipment which uses other than the fractional horsepower
normally required for office equipment, and Landlord shall have no liability for
loss or damage suffered by Tenant or others in connection therewith. If Tenant's
use of the heating, air conditioning or ventilation system exceeds normal office
use and thereby causes damages to any of the air conditioning units or other
equipment, the cost to repair or replace any such units or equipment due to such
use shall be paid by Tenant to Landlord, as additional rent, upon demand by
Landlord. If the temperature otherwise maintained in any portion of the Premises
by the heating, air conditioning or ventilation system is affected as a result
of (i) any lights, machines or equipment (including without limitation
electronic data processing machines) used by Tenant in the Premises, (ii) the
occupancy of the Premises by more than one person per two hundred (200) square
feet of rentable area therein, (iii) an electrical load for lighting or power in
excess of the limits per square foot of rentable area of the Premises specified
in Paragraph 10(c) below, or (iv) any rearrangement of partitioning or other
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improvements, Landlord shall have the right to install supplementary air
conditioning units or other equipment Landlord deems appropriate in the
Premises, and the cost thereof, including the cost of installation, operation
and maintenance thereof, shall be paid by Tenant to Landlord, as additional
rent, upon demand by Landlord.
(c) Tenant agrees it will not, without the written consent
of Landlord, knowingly use any equipment, apparatus or device in the Premises
(including, without limitation, electronic data processing machines, computers
or machines using current in excess of 110 volts) which will, individually or in
the aggregate, cause the amount of electricity, water or heating, ventilation or
air conditioning supplied to the Premises to exceed regularly and materially the
amount usually furnished or supplied to premises being used as general office
space, or connect with electric current (except through existing electrical
outlets in the Premises) or with water pipes any equipment, apparatus or device
for the purposes of using electric current or water. Landlord shall not, in any
way, be liable or responsible to Tenant for any loss or damage or expense which
Tenant may incur or sustain if, for any reasons beyond Landlord's reasonable
control, either the quantity or character of electric service is changed or is
no longer available or suitable for Tenant's requirements. Tenant covenants that
at all times its use of electric current shall never exceed the capacities of
the feeders, risers or electrical installations of the Building, which capacity
is currently 400 amps at 480V. If submetering of electricity in the Building
will not be permitted under future laws or regulations, the Basic Monthly Rental
will then be equitably adjusted to include an additional payment to Landlord
reflecting the cost to Landlord for furnishing electricity to the Premises.
Notwithstanding the provisions of this Paragraph 10, Tenant reserves the right
to procure separate utility service from the applicable utility supplier,
provided that (i) Tenant, at Tenant's expense, shall install, maintain, and
operate any independent infrastructure necessary to ensure that the Building,
the Building systems, and other tenants in the Building will not be materially
adversely affected and (ii) Tenant shall pay any additional costs incurred by
Landlord as a result of such separate utility service within ten (10) days after
receipt of an invoice thereof, accompanied by reasonable supporting
documentation. Tenant shall furnish Landlord with reasonably detailed plans
relating to any such separate utility service at least twenty (20) days prior to
the commencement of any construction relating to such service for the purpose of
Landlord's confirming that there will be no material adverse effect on the
Building, the Building systems, or other tenants in the Building as a result of
such proposed separate utility service.
(d) In the event any governmental authority having
jurisdiction over the Real Property or the Building promulgates or revises any
law, ordinance or regulation or building, fire or other code or imposes
mandatory or voluntary controls or guidelines on Landlord or the Real Property
or the Building relating to the use or conservation of energy or utilities or
the reduction of automobile or other emissions (collectively "Controls") or in
the event Landlord is required or elects to make alterations to the Real
Property or the Building in order to comply with such mandatory or voluntary
Controls, Landlord may, in its sole discretion, comply with such Controls or
make such alterations to the Real Property or the Building related thereto. Such
compliance and the making of such alterations shall not constitute an eviction
of Tenant, constructive or otherwise, or impose upon Landlord any liability
except to the extent such
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alterations were non-mandatory and the loss or damage was reasonably
foreseeable. In any event, Landlord shall not be liable for consequential
damages or loss of business by Tenant.
11. ACCESS CONTROL.
(a) Landlord shall have the right from time to time to adopt
such policies, procedures and programs as it shall, in Landlord's sole
discretion, deem necessary or appropriate for the security of the Building. In
adopting such policies, procedures and programs, Landlord shall endeavor to
minimize the interference with Tenant's use of the Premises. Tenant shall
cooperate with Landlord in the enforcement of, and shall comply with, the
policies, procedures and programs adopted by Landlord insofar as the same
pertain to Tenant, its agents, employees, contractors and invitees.
(b) In no event shall Landlord be liable for damages
resulting from any error with regard to the admission to or the exclusion from
the Building of any person. In the case of invasion, mob, riot, public
demonstration or other circumstances rendering such action advisable in
Landlord's opinion, Landlord reserves the right to prevent access to the
Building during the continuance of the same by such action as Landlord may deem
appropriate, including closing doors.
(c) In the event of any picketing, public demonstration or
other threat to the security of the Building that is attributable in whole or in
part to Tenant, Tenant shall reimburse Landlord for any costs incurred by
Landlord in connection with such picketing, demonstration or other threat in
order to protect the security of the Building, and Tenant shall indemnify and
hold Landlord harmless from and protect and defend Landlord against any and all
claims, demands, suits, liability, damage or loss and against all reasonable
costs and expenses, including reasonable attorneys' fees incurred in connection
therewith, arising out of or relating to any such picketing, demonstration or
other threat. Tenant agrees not to employ any person, entity or contractor for
any construction work in the Premises (including moving Tenant's equipment and
furnishings in, out or around the Premises) whose presence may give rise to a
labor or other disturbance in the Building and, if necessary to prevent such a
disturbance in a particular situation, Landlord may require Tenant to employ
union labor for the construction work.
12. ASSIGNMENT AND SUBLETTING.
(a) Restriction on Transfers. Tenant shall not, either
voluntarily or by operation of law, (i) assign or transfer this Lease or any
interest herein, (ii) sublet the Premises, or any part thereof, or (iii) enter
into a license agreement or other arrangement whereby the Premises, or any
portion thereof, are held or utilized by another party (each of the foregoing
defined herein as a "Transfer"), without the express prior written consent of
Landlord, which consent Landlord shall not unreasonably withhold, delay,
condition or deny. Any such act (whether voluntary or involuntary, by operation
of law or otherwise) without the consent of Landlord pursuant to the provisions
of this Paragraph 12 shall, at Landlord's option, be void and/or constitute an
Event of Default under this Lease. Consent to any Transfer shall neither relieve
Tenant of the necessity of obtaining Landlord's consent to any future Transfer
nor relieve Tenant from any liability under this Lease.
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By way of example and without limitation, the failure to satisfy any of
the following conditions or standards shall be deemed to constitute sufficient
grounds for Landlord to refuse to grant its consent to the proposed Transfer.
(1) The proposed Transferee must expressly assume all of the
provisions, covenants and conditions of this Lease on the part of Tenant
to be kept and performed.
(2) The proposed Transferee must satisfy Landlord's then
current credit and other standards for tenants of the Building (taking
into account Tenant's continuing liability under this Lease and taking
into account whether or not Tenant is continuing in occupancy of a
material portion of the Premises) and, in Landlord's reasonable opinion,
have the financial strength and stability to perform all of the
obligations of the Tenant under this Lease (as they apply to the
transferred space) as and when they fall due.
(3) The proposed Transferee must be reasonably satisfactory
to Landlord as to character and professional standing.
(4) The proposed use of the Premises by the proposed
Transferee must be, in Landlord's opinion: (a) lawful; (b) appropriate
to the location and configuration of the Premises; (c) unlikely to cause
an increase in insurance premiums for insurance policies applicable to
the Building; (d) a use not requiring any new tenant improvements that
Landlord would be entitled to disapprove pursuant to Paragraph 8 hereof;
(e) unlikely to cause any material increase in services to be provided
to the Premises; (f) unlikely to create any materially increased burden
in the operation of the Building, or in the operation of any of its
facilities or equipment; and (g) unlikely to impair the dignity,
reputation or character of the Building.
(5) The proposed use of the Premises must not result in the
division of the Premises into more than three (3) parcels or tenant
spaces.
(6) At the time of the proposed Transfer, an Event of
Default (as defined in paragraph 18(a) below) shall not have occurred
and be continuing, and no event may have occurred that with notice, the
passage of time, or both, would become an Event of Default.
(7) The proposed Transferee shall not be a governmental
entity or hold any exemption from the payment of ad valorem or other
taxes which would prohibit Landlord from collecting from such Transferee
any amounts otherwise payable under this Lease.
(8) The proposed Transferee shall not be a then present
tenant or affiliate or subsidiary of a then present tenant in the
Building unless there is no other suitable space available in the
Building in such Transferee's reasonable opinion.
(9) Landlord shall not be negotiating with, and shall not
have at any time within the past thirty (30) days negotiated with, the
proposed Transferee for space in the Building (unless Landlord, in its
reasonable judgment, believes that it is unlikely that any
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further discussions between Tenant and such proposed Transferee will
lead to a lease transaction).
(b) Landlord's Right of First Offer; Termination Right.
Except in the event of a Transfer pursuant to Paragraphs 12(g) or 12(h) below,
Landlord shall have no obligation to consent or consider granting its consent to
any proposed Transfer unless Tenant has first delivered to Landlord a written
offer to enter into such Transfer with Landlord, which offer shall include the
base rent and other economic terms of the proposed Transfer, the date upon which
Tenant desires to effect such Transfer and all of the other material terms of
the proposed Transfer ("Tenant's Offer"). Landlord shall have twenty (20) days
from receipt of Tenant's Offer within which to notify Tenant in writing of its
decision to accept or reject such Transfer on the terms set forth in Tenant's
Offer. If Landlord does not accept Tenant's Offer within such period, Tenant may
enter into such Transfer with any bona fide independent third-party Transferee
(as defined in Paragraph 12(c) below) within one hundred twenty (120) days of
the end of such twenty (20) day period, so long as such Transfer is for the same
base rent offered to Landlord in Tenant's Offer and such Transfer otherwise
contains terms not more than five percent (5%) more favorable economically to
the Transferee than the terms stated in Tenant's Offer, taking into account all
rent concessions, tenant improvements, and any other terms which have an
economic impact on the Transfer; provided, however, that the prior written
approval of Landlord for such Transfer must be obtained, and the other
provisions of this Paragraph 12 must be complied with, all in accordance with
this Paragraph 12. If Landlord accepts Tenant's Offer, Landlord and Tenant shall
enter into an agreement for such Transfer within thirty (30) days of the date
Landlord makes its election. If Landlord accepts Tenant's Offer, then after
completing such Transfer, (i) notwithstanding any other provision of this Lease
to the contrary, Tenant shall have no liability for rent or otherwise with
respect to the portion of the Premises transferred, (ii) Landlord may enter into
a new lease, sublease or other agreement covering the portion of the Premises
which was the subject of the Transfer with the intended Transferee on such terms
as Landlord and such Transferee may agree, or enter into a new lease or
agreement covering the portion of the Premises which was the subject of the
Transfer with any other person or entity, and in any such event, Tenant shall
not be entitled to any portion of the profit, if any, which Landlord may realize
on account of such new lease or agreement, and (iii) Landlord may, at Landlord's
sole cost, construct improvements in the subject space and, so long as the
improvements are suitable for general office purposes, neither Landlord nor
Tenant shall have any obligation to restore the subject space to its original
condition following the termination of a sublease.
Except in the event of a Transfer pursuant to Paragraphs 12(g) or 12(h)
below, in the case of a proposed assignment of this Lease or a sublease of
substantially the entire Premises for substantially the balance of the Term of
this Lease, then in addition to the foregoing rights of Landlord, Landlord shall
have the right, by notice to Tenant within fifteen (15) days after receipt of
Tenant's Offer, to terminate this Lease, which termination shall be effective as
of the date on which the intended assignment or sublease would have been
effective if Landlord had not exercised such termination right. If Landlord
elects to terminate this Lease, then from and after the date of such
termination, Landlord and Tenant each shall have no further obligation to the
other under this Lease with respect to the Premises except for matters occurring
or obligations arising hereunder prior to the date of such termination.
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Landlord's foregoing rights and options shall continue throughout the
entire Term of this Lease.
(c) Landlord's Approval Process. Tenant shall, in each
instance of a proposed Transfer, give written notice to Landlord at least
forty-five (45) days prior to the effective date of any proposed Transfer,
specifying in such notice (i) the nature of the proposed Transfer, (ii) the
portion of the Premises to be transferred, (iii) the intended use of the
transferred Premises, (iv) all economic terms of the proposed Transfer, (v) the
effective date thereof, (vi) the identity of the transferee under the proposed
Transfer (the "Transferee"), (vii) the most current financial statements of the
Transferee, and (viii) detailed documentation relating to the business
experience of the Transferee (collectively, "Tenant's Notice"). Tenant shall
also promptly furnish Landlord with any other information reasonably requested
by Landlord relating to the proposed Transfer or the proposed Transferee. Within
fifteen (15) days after receipt by Landlord of Tenant's Notice and any
additional information and data requested by Landlord, Landlord shall notify
Tenant of its determination to either (i) consent to the proposed Transfer, or
(ii) refuse to consent to such proposed Transfer specifying the reasons for such
refusal.
(d) Consideration for Transfer. Fifty percent (50%) of all
(i) consideration paid or payable by Transferee to Tenant as consideration for
any such Transfer, and (ii) rents received in connection with the Transfer by
Tenant from Transferee in excess of the Rental payable by Tenant to Landlord
under this Lease, after deducting "Permitted Transfer Costs" (as defined in this
Paragraph 12(d) below) incurred by Tenant in connection with such Transfer,
shall be paid by Tenant to Landlord immediately upon receipt thereof by Tenant.
For purposes hereof, "Permitted Transfer Costs" means the actual costs incurred
and paid by Tenant for (1) any Alterations to the Premises made by Tenant in
connection with the Transfer, and (2) any customary leasing commissions and
reasonable legal fees and expenses in connection with the Transfer, provided
that Tenant shall furnish Landlord with copies of bills or other documentation
substantiating such costs. The cost of such Alterations, if any, shall be
amortized on a straight-line basis over the relevant term, without interest. The
cost of such leasing commissions and legal fees and expenses may be deducted
immediately, without amortization. If there is more than one sublease under this
Lease, the amounts (if any) to be paid by Tenant to Landlord pursuant to the
preceding sentence shall be separately calculated for each sublease and amounts
due Landlord with regard to any one sublease may not be offset against rental
and other consideration pertaining to or due under any other sublease. Upon
Landlord's request, Tenant shall assign to Landlord fifty percent (50%) of such
consideration or excess rents to be paid to Tenant by any Transferee and shall
direct such Transferee to pay the same directly to Landlord.
If this Lease is assigned, whether or not in violation of the terms of
this Lease, Landlord may collect rent from the assignee. If the Premises or any
part thereof is sublet, Landlord may, upon an Event of Default by Tenant
hereunder, collect rent from the subtenant. In either event, Landlord may apply
the amount collected from the assignee or subtenant to Tenant's monetary
obligations hereunder. Neither Landlord's collection of rent from a Transferee
nor any course of dealing between Landlord and any Transferee shall constitute
or be deemed to constitute Landlord's consent to any Transfer.
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(e) Merger or Consolidation of Tenant; Major Changes. Any
Transfer to any corporation or entity controlled (as hereinafter defined) by
Tenant, or to the surviving corporation in the event of a consolidation or
merger to which Tenant shall be a party and any Major Change (as hereinafter
defined) must be approved by Landlord in accordance with Paragraph 12(c) above
and, without such approval, shall at Landlord's election be void and/or
constitute an Event of Default. The term "control" or "controlled" shall mean
ownership of more than fifty percent (50%) of the voting stock of a corporation
or more than fifty percent (50%) of all of the legal and equitable interest in
any other business entity. The term "Major Change" as used herein shall mean any
reorganization, recapitalization, refinancing or other transaction or series of
transactions involving Tenant which results in the net worth of Tenant and its
consolidated subsidiaries immediately after such transaction(s) being less than
fifty percent (50%) of the net worth of Tenant and its consolidated subsidiaries
as of the end of the fiscal year immediately preceding the date of this Lease.
(f) Transfer of Partnership Interest or Corporate Stock. A
sale, transfer or assignment of a general partner's interest or any portion
thereof in Tenant, if Tenant is a partnership, or a sale, transfer or assignment
of twenty-five percent (25%) or more of the voting stock of Tenant if Tenant is
a corporation, whether such sale, transfer or assignment occurs in a single
transaction or a series of transactions, shall be deemed a Transfer and require
Landlord's consent in accordance with the procedures specified in Paragraph
12(c) above; provided, however, that notwithstanding any provision of this Lease
to the contrary, a sale or transfer of the capital stock of Tenant shall not be
deemed a Transfer if (i) such sale or transfer occurs in connection with any
bona fide financing or capitalization for the benefit of Tenant, or (ii) Tenant
becomes a publicly traded corporation.
(g) Transfer of Controlling Interest. Subject to Paragraph
12(f) above, if Tenant is a corporation, limited liability company, partnership,
or similar entity, and if the entity, if any, which owns or controls a majority
of the voting shares/rights at any time changes for any reason, such change of
ownership or control shall constitute a Transfer; provided that if Tenant's net
worth after such change in the ownership or control of a majority of the voting
shares/rights is equal to the greater of Tenant's net worth at the date of this
Lease or the net worth of the Tenant on the day prior to such change in the
ownership or control of a majority of the voting shares/rights, and the
provisions of clauses (1), (4) and (5) of Paragraph 12(h) below are otherwise
satisfied, such change of ownership or control shall constitute a "Permitted
Transfer." Furthermore, a change in the ownership or control of a majority of
the voting shares/rights of Tenant shall not constitute a Transfer so long as
Tenant is an entity whose outstanding stock is listed on a recognized security
exchange, or if at least eighty percent (80%) of its voting stock is owned by
another entity, the voting stock of which is so listed.
(h) Permitted Transfers. Notwithstanding anything in this
Paragraph 12 to the contrary, use of a portion of the Premises by any of
Tenant's Affiliates shall not be deemed a Transfer requiring Landlord's consent.
For purposes of this Lease, the term "Affiliate" shall mean any corporation,
limited liability company or partnership which controls, is controlled by, or is
under common control with Tenant. In addition, Tenant may assign its entire
interest under this Lease to a successor to Tenant by purchase, merger,
consolidation or reorganization without
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the consent of Landlord, provided that all of the following conditions are
satisfied (a "Permitted Transfer"): (1) Tenant is not in default under this
Lease; (2) Tenant's successor shall own all or substantially all (which for
purposes of this Lease shall be deemed to be at least eighty percent (80%)) of
the assets of Tenant; (3) Tenant's successor shall have a net worth which is at
least equal to the greater of Tenant's net worth at the date of this Lease or
Tenant's net worth as of the day prior to the proposed purchase, merger,
consolidation or reorganization; (4) the use of the Premises by such successor
to Tenant will not violate the Permitted Use; and (5) Tenant shall give Landlord
written notice at least 15 days prior to the date the proposed purchase, merger,
consolidation or reorganization actually occurs. Tenant's notice to Landlord
shall include information and documentation showing that each of the above
conditions has been satisfied. If requested by Landlord, Tenant's successor
shall sign a commercially reasonable form of assumption agreement.
(i) Documentation. Tenant agrees that any instrument by
which Tenant assigns this Lease or any interest therein or sublets or otherwise
Transfers all or any portion of the Premises shall expressly provide that the
Transferee may not further assign this Lease or any interest therein or sublet
the sublet space without Landlord's prior written consent (which consent shall
be subject to the provisions of this Paragraph 12), and that the Transferee will
comply with all of the provisions of this Lease and that Landlord may enforce
the Lease provisions directly against such Transferee. No permitted subletting
by Tenant shall be effective until there has been delivered to Landlord a
counterpart of the sublease in which the subtenant agrees to be and remain
jointly and severally liable with Tenant for the payment of rent pertaining to
the sublet space and for the performance of all of the terms and provisions of
this Lease pertaining to the sublet space; provided, however, that the subtenant
shall be liable to Landlord for rent only in the amount set forth in the
sublease. No permitted assignment shall be effective unless and until there has
been delivered to Landlord a counterpart of the assignment in which the assignee
assumes all of Tenant's obligations under this Lease arising on or after the
date of the assignment. The failure or refusal of a subtenant or assignee to
execute any such instrument shall not release or discharge the subtenant or
assignee from its liability as set forth above.
(j) Options Personal to Original Tenant. If Landlord
consents to a Transfer hereunder, and this Lease contains any renewal options,
expansion options, rights of first refusal, rights of first negotiation or any
other rights or options pertaining to additional space in the Building, such
rights and/or options shall not run to the Transferee, it being agreed by the
parties hereto that any such rights and options are personal to the original
Tenant named herein and may not be transferred (except pursuant to a Permitted
Transfer pursuant to Paragraphs 12(g) or 12(h) above).
(k) Encumbrance of Lease. Subject to Paragraph 12(f) above,
and notwithstanding any other provision of this Lease to the contrary, Tenant
shall not mortgage, encumber or hypothecate this Lease or any interest herein
without the prior written consent of Landlord, which consent may be withheld in
Landlord's sole and absolute discretion. Any such act without the prior written
consent of Landlord (whether voluntary or involuntary, by operation
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of law or otherwise) shall, at Landlord's option, be void and/or constitute an
Event of Default under this Lease.
(l) No Merger. The voluntary or other surrender of this
Lease or of the Premises by Tenant or a mutual cancellation of this Lease shall
not work a merger, and at the option of Landlord any existing subleases may be
terminated or be deemed assigned to Landlord in which latter event the subleases
or subtenants shall become tenants of Landlord.
(m) Landlord's Costs. Tenant shall pay to Landlord the
amount of Landlord's reasonable cost of processing each proposed Transfer
(including, without limitation, attorneys' and other professional fees, and the
cost of Landlord's administrative, accounting and clerical time (excluding such
costs associated with Landlord's right of first refusal pursuant to Paragraph
12(b), above); collectively "Processing Costs"), and the amount of all direct
and indirect expenses incurred by Landlord arising from the assignee or
sublessee taking occupancy of the subject space (including, without limitation,
costs of freight elevator operation for moving of furnishings and trade
fixtures, security service, janitorial and cleaning service, and rubbish removal
service). Notwithstanding anything to the contrary herein, Landlord shall not be
required to process any request for Landlord's consent to a Transfer until
Tenant has paid to Landlord the amount of Landlord's estimate of the Processing
Costs.
13. WAIVER; INDEMNIFICATION.
(a) Neither Landlord nor Landlord's agents, nor any
shareholder, constituent partner or other owner of Landlord or any agent of
Landlord, nor any contractor, officer, director or employee of any thereof shall
be liable to Tenant and Tenant waives all claims against Landlord and such other
persons for any injury to or death of any person or for loss of use of or damage
to or destruction of property in or about the Premises or the Building by or
from any cause whatsoever, including without limitation, earthquake or earth
movement, gas, fire, oil, electricity or leakage from the roof, walls, basement
or other portion of the Premises or the Building, except to the extent caused by
the gross negligence or willful misconduct of Landlord, its agents or employees.
Tenant agrees to indemnify and hold Landlord, Landlord's agents, the
shareholders, constituent partners and/or other owners of Landlord or any agent
of Landlord, and all officers, directors and employees of any thereof
(collectively, "Landlord Indemnitees"), and each of them, harmless from and to
protect and defend each Landlord Indemnitee against any and all claims, demands,
suits, liability, damage or loss and against all costs and expenses, including
reasonable attorneys' fees incurred in connection therewith, (i) arising out of
any injury or death of any person or damage to or destruction of property
occurring in, on or about the Premises, from any cause whatsoever, except to the
extent caused by the gross negligence or willful misconduct of such Landlord
Indemnitee, or (ii) occurring in, on or about any facilities (including without
limitation elevators, stairways, passageways or hallways) the use of which
Tenant has in common with other tenants, or elsewhere in or about the Building
or in the vicinity of the Building, to the extent such claim, injury or damage
is caused by the act, neglect, default, or omission of any duty by Tenant, its
former or current agents, contractors, employees, invitees, or subtenants or
other persons in or about the Building by reason of Tenant's occupancy of the
Premises, or otherwise by any conduct of any of said persons in or about the
Premises or the Real
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Property, or (iii) arising from any failure of Tenant to observe or perform any
of its obligations hereunder. If any action or proceeding is brought against any
of the Landlord Indemnitees by reason of any such claim or liability, Tenant,
upon notice from Landlord, covenants to resist and defend at Tenant's sole
expense such action or proceeding by counsel reasonably satisfactory to
Landlord. The provisions of this Paragraph shall survive the termination of this
Lease with respect to any claims or liability occurring prior to such
termination.
(b) Landlord agrees to indemnify and hold Tenant, Tenant's
agents, the shareholders, constituent partners and/or other owners of Tenant and
all officers, directors and employees thereof (collectively, "Tenant
Indemnitees"), and each of them, harmless from and to protect and defend each
Tenant Indemnitee against any and all claims, demands, suits, liability, damage
or loss and against all costs and expenses, including reasonable attorneys' fees
incurred in connection therewith, (i) arising out of any injury or death of any
person or damage to or destruction of property occurring in, on or about the
Premises, to the extent caused by the gross negligence or willful misconduct of
Landlord, or (ii) arising from any failure of Landlord to observe or perform any
of its obligations hereunder. If any action or proceeding is brought against any
Tenant Indemnitees by reason of any such claim or liability, Landlord, upon
notice from Tenant, covenants to resist and defend at Landlord's sole expense
such action or proceeding by counsel reasonably satisfactory to Tenant. The
provisions of this Paragraph shall survive the termination of this Lease with
respect to any claims or liability occurring prior to such termination.
14. INSURANCE.
(a) At Tenant's expense, Tenant shall procure, carry and
maintain in effect throughout the Term of this Lease, in a form acceptable to
Landlord and with such insurance companies as are acceptable to Landlord (which
companies shall have a Best's rating of A-X or better), the following insurance
coverage:
(i) Commercial general liability insurance on an
occurrence basis, with limits in an amount not less than $5,000,000 combined
single limit per occurrence, for claims or losses arising out of or resulting
from personal injury (including bodily injury), death and/or property damage
sustained or alleged to have been sustained by any person for any reason on the
Premises, for liability arising out of or resulting from Tenant's covenant in
Paragraph 13 to indemnify Landlord and all Landlord Indemnitees, and for
contractual liability;
(ii) All Risk Replacement Cost insurance with an
agreed amount endorsement upon property of every description and kind owned by
Tenant and located in the Premises and for Tenant's Alterations in an amount
equal to 100% of the full replacement value thereof; and
(iii) Workers' compensation insurance, in accordance
with applicable law.
(b) Not more often than once every two (2) years and upon
not less than sixty (60) days' prior written notice, Landlord, in its reasonable
discretion, may require Tenant to
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increase the insurance limits set forth in Paragraphs 14(a)(i) and 14(a)(ii)
above and Paragraph 29(l) below to their then reasonable and customary levels.
(c) All policies of liability insurance so obtained and
maintained shall be carried in the name of Tenant, name Landlord and Landlord's
designated agents as additional insureds, and shall provide that the insurance
policy so endorsed will be the primary insurance providing coverage for
Landlord, and contain a cross-liability endorsement stating that the rights of
insureds shall not be prejudiced by one insured making a claim or commencing an
action against another insured. Any other liability insurance maintained by
Landlord shall be excess and non-contributing. At Landlord's election, such
policies shall name the holder of any Superior Interest or any other interested
party as an insured party under a standard mortgagee endorsement.
(d) All insurance policies required under this Lease shall
provide that the insurer shall not cancel, reduce, modify or fail to renew such
coverage without thirty (30) days prior written notice to Landlord. Tenant shall
deliver certificates of all insurance required hereunder upon the commencement
of the Term of this Lease. In the event Tenant does not comply with the
requirements of this Paragraph 14, Landlord may, at its option and at Tenant's
expense, purchase such insurance coverage to protect Landlord. The cost of such
insurance shall be paid to Landlord by Tenant, as additional rent, immediately
upon demand therefor, together with interest at the Interest Rate until paid.
(e) The parties release each other, and their respective
authorized representatives, from any claims for loss or damage that are caused
by or result from perils insured under any insurance policies carried by the
parties in force at the time of any such damage. Each party shall cause each
insurance policy obtained by it to provide that the insurer waives all right of
recovery by way of subrogation against either party in connection with any loss
or damage covered by the policy. Neither party shall be liable to the other for
any loss or damage caused by the insured risks under any insurance policy
required by this Lease.
(f) Subject to reimbursement as provided herein, Landlord
shall maintain insurance covering loss or damage to the Building itself, the
Base Building Improvements and the Tenant Improvements by fire and the perils
included within "all risk" coverage commonly available in California from time
to time in an amount not less than ninety percent (90%) of the replacement cost
(exclusive of foundations), provided that the foregoing minimum insurance
requirement shall not limit Landlord with respect to the amounts or types of
insurance coverage that Landlord may from time to time carry with respect to the
Real Property. The cost of all such insurance carried by Landlord shall be
included in Operating Expenses, except that as of the Commencement Date, Tenant
shall pay to Landlord, as additional rent, within fifteen (15) days after
receipt of an invoice therefor, the entire amount of the insurance premiums
reasonably allocable to (i) the all risk coverage, in effect from time to time,
insuring the Tenant Improvements and (ii) if Landlord elects to carry earthquake
insurance, the additional earthquake insurance (in the form of higher policy
limits and/or lower deductibles), in effect from time to time, that Landlord
reasonably determines to be necessary because of the cost of the Tenant
Improvements. In determining whether Landlord acted reasonably in deciding
whether to carry
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additional earthquake insurance because of the cost of the Tenant Improvements,
the parties shall consider the particular circumstances of Landlord and the
requirements of Landlord's lender, and Landlord shall not necessarily be deemed
to have acted unreasonably because Landlord's earthquake insurance coverage is
higher than that commonly maintained by owners of comparable buildings.
Notwithstanding the preceding sentence, Tenant may elect, at Tenant's expense,
to maintain the additional earthquake insurance that Landlord reasonably
determines to be necessary because of the cost of the Tenant Improvements, as
set forth in clause (ii) above, provided that such insurance shall be in a form
and issued by companies reasonably satisfactory to Landlord, and Tenant shall
pay any penalty incurred by Landlord by reason of early cancellation of
Landlord's earthquake insurance coverage. Upon request by Tenant, Landlord shall
advise Tenant of the expiration date of Landlord's earthquake policy then in
effect, so as to avoid the imposition of any such cancellation penalty. Landlord
may maintain its insurance under one or more blanket policies of insurance
covering the Building and other properties.
15. PROTECTION OF LENDERS.
(a) Subject to the provisions of this Paragraph 15, this
Lease shall be subject and subordinate at all times to all ground or underlying
leases which may now or hereafter exist affecting the Building or the Real
Property, or both, and to the lien of any mortgage or deed of trust in any
amount or amounts whatsoever now or hereafter placed on or against the Building
or the Real Property, or both, or on or against Landlord's interest or estate
therein (such mortgages, deeds of trust and leases are referred to herein,
collectively, as "Superior Interests"), all without the necessity of any further
instrument executed or delivered by or on the part of Tenant for the purpose of
effectuating such subordination. Notwithstanding the foregoing, Tenant covenants
and agrees to execute and deliver, upon demand, such further instruments
evidencing such subordination of this Lease to any such Superior Interest as may
be required by Landlord.
(b) Notwithstanding the foregoing, in the event of a
foreclosure of any such mortgage or deed of trust or of any other action or
proceeding for the enforcement thereof, or of any sale thereunder, this Lease
shall not be terminated or extinguished, nor shall the rights and possession of
Tenant hereunder be disturbed by reason of such foreclosure, and Tenant shall
attorn to the person who acquires Landlord's interest hereunder through any such
mortgage or deed of trust.
(c) Within ten (10) days after Landlord's written request,
Tenant shall deliver to Landlord, or to any actual or prospective holder of a
Superior Interest ("Holder") that Landlord designates, such of Tenant's then
most current audited financial statements as are reasonably required by such
Holder to verify the financial condition of Tenant (or any assignee, subtenant
or guarantor of Tenant). All financial statements shall be confidential, and
used only for the purposes stated herein.
(d) If Landlord is in default, Tenant will accept cure of
any default by any Holder whose name and address shall have been furnished to
Tenant in writing. Tenant may not exercise any rights or remedies for Landlord's
default unless Tenant gives notice thereof to each such Holder and the default
is not cured within thirty (30) days thereafter or such greater time as
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may be reasonably necessary to cure such default. A default which cannot
reasonably be cured within said 30-day period shall be deemed cured within said
period if work necessary to cure the default is commenced within such time and
proceeds diligently thereafter until the default is cured.
(e) In the event this Lease or the leasehold estate created
hereunder is subject to the prior rights of any mortgagee or ground lessor, then
Landlord shall use reasonable efforts to secure within thirty (30) days after
the execution of this Lease by Tenant ("SNDA Deadline") from such mortgagee or
lessor an agreement ("SNDA") in writing, whereby Tenant, so long as Tenant is
not in default hereunder, may remain in possession of the Premises pursuant to
the terms hereof and without any reduction of Tenant's rights should Landlord
become in default with respect to such mortgage or ground lease or should the
Premises become the subject of any action to foreclose any mortgage or to
dispossess Landlord. If Landlord fails to deliver such SNDA to Tenant prior to
the SNDA Deadline, Landlord shall not be liable to Tenant for any loss or damage
resulting therefrom, but Tenant, as its sole remedy, shall thereafter have the
right to cancel this Lease by giving written notice of such cancellation to
Landlord within fifteen (15) days after the SNDA Deadline, in which case this
Lease shall be cancelled effective ten (10) days after Landlord's receipt of
Tenant's cancellation notice, unless Landlord delivers such SNDA to Tenant
within said ten (10) day period. In the event of such cancellation by Tenant,
neither party shall have any further obligations to the other under this Lease,
except for obligations arising before such cancellation which survive
termination. Landlord covenants and represents that it has full and complete
authority to enter into this Lease under all of the terms, covenants and
provisions set forth herein and so long as Tenant performs each and every
material term, provision and condition herein contained on the part of Tenant to
be performed, Tenant may peacefully and quietly enjoy the Premises without
hindrance or molestation by Landlord or by any other person claiming by, through
or under Landlord.
16. ENTRY BY LANDLORD.
(a) Landlord reserves, and shall at all times have, the
right, after reasonable advance notice of not less than twenty-four (24) hours
(except in an emergency), to enter the Premises during normal business hours to
inspect them; to supply janitorial service and any other service to be provided
by Landlord hereunder; to submit the Premises to prospective purchasers,
mortgagees, or, during the last eighteen (18) months of the Term, to prospective
tenants; to post notices of nonresponsibility; and to alter, improve or repair
the Premises and any portion of the Building as permitted or provided hereunder,
all without abatement of Rental; and may erect scaffolding and other necessary
structures in or through the Premises where reasonably required by the character
of the work to be performed; provided, however, that any such entrance or work
shall not unreasonably interfere with Tenant's use of the Premises. If such
entry is made as aforesaid, Tenant hereby waives any claim for damages for any
injury or inconvenience to or interference with Tenant's business, any loss of
occupancy or quiet enjoyment of the Premises, and any other loss occasioned by
such entry. For each of the foregoing purposes, Landlord shall at all times have
and retain a key and/or other access device with which to unlock all of the
doors in, on and about the Premises (excluding Tenant's vaults, safes and
similar areas designated in writing by Tenant in advance and approved by
Landlord); and Landlord shall have the right to
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use any and all means which Landlord may deem proper to open said doors in an
emergency in order to obtain entry to the Premises, and any entry to the
Premises obtained by Landlord by any of said means, or otherwise, shall not
under any circumstances be construed or deemed to be a forcible or unlawful
entry into or a detainer of the Premises, or any portion thereof.
(b) So long as it does not materially interfere with
Tenant's use and enjoyment of the Premises, Landlord shall also have the right
at any time to change the arrangement or location of entrances or passageways,
doors and doorways, and corridors, elevators, stairs, toilets or other public
parts of the Building, and to change the name, number or designation by which
the Building is commonly known, and none of the foregoing shall be deemed an
actual or constructive eviction of Tenant, nor shall it entitle Tenant to any
reduction of Rental hereunder or result in any liability of Landlord to Tenant.
17. ABANDONMENT.
Tenant shall not vacate (unless Tenant provides for adequate
security) or abandon the Premises or any part thereof at any time during the
Term hereof. Tenant understands that if Tenant abandons the Premises, the risk
of fire, other casualty and vandalism to the Premises and the Building will be
increased. Accordingly, such action by Tenant shall constitute an Event of
Default hereunder regardless of whether Tenant continues to pay Basic Monthly
Rental and other Rental under this Lease. If Tenant abandons, or is dispossessed
of the Premises by process of law, or otherwise, any movable furniture,
equipment, trade fixtures, or other personal property belonging to Tenant and
left on the Premises shall at the option of Landlord be deemed to be abandoned
and, whether or not the property is deemed abandoned, Landlord shall have the
right to remove such property from the Premises and charge Tenant for the
removal and any restoration of the Premises as provided in Paragraph 8(a).
Landlord may charge Tenant for the storage of Tenant's property left on the
Premises at such rates as Landlord may from time to time reasonably determine,
or, Landlord may, at its option, store Tenant's property in a public warehouse
at Tenant's expense. Notwithstanding the foregoing, neither the provisions of
this Paragraph 17 nor any other provision of this Lease shall impose upon
Landlord any obligation to care for or preserve any of Tenant's property left
upon the Premises, and Tenant hereby waives and releases Landlord from any claim
or liability in connection with the removal of such property from the Premises
and the storage thereof and specifically waives the provisions of California
Civil Code Section 1542 with respect to such release. Landlord's action or
inaction with regard to the provisions of this Paragraph 17 shall not be
construed as a waiver of Landlord's right to require Tenant to remove its
property, restore any damage to the Building caused by such removal, and make
any restoration required pursuant to Paragraph 8(a) hereof.
18. DEFAULT AND REMEDIES.
(a) The occurrence of any one or more of the following
events (each an "Event of Default") shall constitute a breach of this Lease by
Tenant:
(i) Tenant fails to pay any Basic Monthly Rental or
additional monthly rent under Paragraph 4(b) hereof as and when such rent
becomes due and payable and such failure continues for more than three (3) days
after Tenant receives or is deemed to have
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received written notice thereof; provided, however, that after the second such
failure in a calendar year, only the passage of time, but no further notice,
shall be required to establish an Event of Default in the same calendar year; or
(ii) Tenant fails to pay any additional rent or other
amount of money or charge payable by Tenant hereunder as and when such
additional rent or amount or charge becomes due and payable and such failure
continues for more than ten (10) days after Tenant receives or is deemed to have
received written notice thereof; provided, however, that after the second such
failure in a calendar year, only the passage of time, but no further notice,
shall be required to establish an Event of Default in the same calendar year; or
(iii) Tenant fails to perform or breaches any other
agreement or covenant of this Lease to be performed or observed by Tenant as and
when performance or observance is due and such failure or breach continues for
more than ten (10) days after Tenant receives or is deemed to have received
written notice thereof; provided, however, that if, by the nature of such
agreement or covenant, such failure or breach cannot reasonably be cured within
such period of ten (10) days, an Event of Default shall not exist as long as
Tenant commences with due diligence and dispatch the curing of such failure or
breach within such period of ten (10) days and, having so commenced, thereafter
prosecutes with diligence and dispatch and completes the curing of such failure
or breach within a reasonable time; or
(iv) Tenant (A) files, or consents by answer or
otherwise to the filing against it of, a petition for relief or reorganization
or arrangement or any other petition in bankruptcy or for liquidation or to take
advantage of any bankruptcy, insolvency or other debtors' relief law of any
jurisdiction, (B) makes an assignment for the benefit of its creditors, (C)
consents to the appointment of a custodian, receiver, trustee or other officer
with similar powers of Tenant or of any substantial part of Tenant's property,
or (D) takes action for the purpose of any of the foregoing; or
(v) Without consent by Tenant, a court or government
authority enters an order, and such order is not vacated within sixty (60) days,
(A) appointing a custodian, receiver, trustee or other officer with similar
powers with respect to Tenant or with respect to any substantial part of
Tenant's property, or (B) constituting an order for relief or approving a
petition for relief or reorganization or arrangement or any other petition in
bankruptcy or for liquidation or to take advantage of any bankruptcy, insolvency
or other debtors' relief law of any jurisdiction, or (C) ordering the
dissolution, winding-up or liquidation of Tenant; or
(vi) This Lease or any estate of Tenant hereunder is
levied upon under any attachment or execution and such attachment or execution
is not vacated within thirty (30) days; or
(vii) Tenant abandons the Premises.
(b) If an Event of Default occurs, Landlord shall have the
right at any time to give a written termination notice to Tenant and, on the
date specified in such notice, which shall be at least five (5) days after the
date Tenant receives or is deemed to have received such notice,
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Tenant's right to possession shall terminate and this Lease shall terminate if
such Event of Default has not then been fully cured. Upon such termination,
Landlord shall have the right to recover from Tenant:
(i) The worth at the time of award of all unpaid
rent which had been earned at the time of termination;
(ii) The worth at the time of award of the amount by
which all unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that Tenant proves could
have been reasonably avoided;
(iii) The worth at the time of award of the amount by
which all unpaid rent for the balance of the Term of this Lease after the time
of award exceeds the amount of such rental loss that Tenant proves could be
reasonably avoided; and
(iv) All other amounts necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to perform
all of Tenant's obligations under this Lease or which in the ordinary course of
things would be likely to result therefrom.
The "worth at the time of award" of the amounts referred to in clauses (i) and
(ii) above shall be computed by allowing interest at the maximum annual interest
rate allowed by law for business loans (not primarily for personal, family or
household purposes) not exempt from the usury law at the time of termination or,
if there is no such maximum annual interest rate, at the rate of eighteen
percent (18%) per annum. The "worth at the time of award" of the amount referred
to in clause (iii) above shall be computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of award
plus one percent (1%). For the purpose of determining unpaid rent under clauses
(i), (ii) and (iii) above, the rent reserved in this Lease shall be deemed to be
the total rent payable by Tenant under Paragraphs 3 and 4 hereof.
(c) Even though Tenant has breached this Lease, this Lease
shall continue in effect for so long as Landlord does not terminate Tenant's
right to possession, and Landlord shall have all of its rights and remedies,
including the right, pursuant to California Civil Code section 1951.4, to
recover all rent as it becomes due under this Lease. Acts of maintenance or
preservation or efforts to relet the Premises or the appointment of a receiver
upon initiative of Landlord to protect Landlord's interest under this Lease
shall not constitute a termination of Tenant's right to possession unless
written notice of termination is given by Landlord to Tenant.
(d) The remedies provided for in this Lease are in addition
to all other remedies available to Landlord at law or in equity by statute or
otherwise.
19. DAMAGE BY FIRE OR OTHER CASUALTY.
(a) If the Premises are partially destroyed or damaged by
fire or other casualty, Landlord shall, subject to Paragraphs 19(b), 19(c),
19(d) and 19(e) below, promptly repair such damage if, in Landlord's judgment,
such repair can be completed within ninety (90) days from commencement of
construction under the laws and regulations of the state, federal,
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county and municipal authorities having jurisdiction, and this Lease shall
remain in full force and effect, provided that if there shall be damage to the
Premises from any such cause and such damage is not the result of the act,
neglect, default or omission of Tenant, its agents, employees, contractors or
invitees, Tenant shall be entitled to a reduction of Basic Monthly Rental while
such repair is being made in the proportion that the area of the Premises
rendered untenantable or unusable for Tenant's permitted purposes by such damage
bears to the total area of the Premises. Tenant's right to a reduction of Basic
Monthly Rental under this Paragraph 19 shall be Tenant's sole remedy in
connection with any such damage.
(b) If such repairs cannot, in Landlord's judgment, be
completed within ninety (90) days from commencement of construction, or if such
damage occurs during the last six (6) months of the Term of this Lease, Landlord
shall have the option either (i) to repair such damage, this Lease continuing in
full force and effect, but with the Basic Monthly Rental proportionately reduced
(subject to the condition set forth in Paragraph 19(a) above), or (ii) to give
notice to Tenant at any time within thirty (30) days after the occurrence of
such damage terminating this Lease as of a date specified in such notice, which
shall not be less than thirty (30) nor more than sixty (60) days after the
giving of such notice. If such notice of termination is so given, the Lease and
all interest of Tenant in the Premises shall terminate on the date specified in
such notice, and the Basic Monthly Rental, reduced (subject to the condition set
forth in Paragraph 19(a) above) in proportion to the area of the Premises
rendered untenantable by the damage, shall be paid up to the date of such
termination, Landlord hereby agreeing to refund to Tenant any Rental theretofore
paid for any period of time subsequent to the termination date.
(c) If the Building is damaged by fire or other casualty to
the extent that the repair cost would exceed twenty percent (20%) or more of its
replacement value, or if more than twenty percent (20%) of the rentable area of
the Building is affected by fire or other casualty and repairs to the Building
cannot, in Landlord's judgment, be completed within ninety (90) days from
commencement of construction, or if insurance proceeds sufficient to complete
the repairs are not available due to exercise of rights of a Holder to collect
such proceeds, then in any such case, whether the Premises are damaged or not,
Landlord shall have the right, at its option, to terminate this Lease by giving
Tenant notice thereof within thirty (30) days of such casualty specifying the
date of termination which shall not be less than thirty (30) nor more than sixty
(60) days after the giving of such notice.
(d) If the Premises are damaged by fire or other casualty
not resulting in whole or in part from the negligence or willful misconduct of
Tenant or its employees, agents, contractors or subtenants and the repair to the
Premises, in Landlord's reasonable judgment, either (i) cannot be completed
within forty-five (45) days and the damage or other casualty occurred in the
last year of the Term, or (ii) cannot be completed within one hundred eighty
(180) days after the commencement of construction, assuming the availability of
labor and materials; Tenant at its option may terminate this Lease. Tenant's
notice to Landlord of its election to terminate the Lease under (i) or (ii)
above must be delivered to Landlord within thirty (30) days after the occurrence
of such damage, and the termination shall be as of a date specified in such
notice which shall be no less than thirty (30) nor more than sixty (60) days
after the giving of such notice. In the event of a termination of this Lease by
Tenant under this Paragraph
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19(d), the Rental shall be reduced from the date of damage to the date of
termination in the same manner as provided under Paragraph 19(b) above.
(e) Notwithstanding any of the provisions of this Lease,
Landlord shall in no event be required to repair any injury or damage by fire or
other cause whatsoever to, or to make any repairs or replacements of, any
panelings, decorations, partitions, railings, ceilings, floor coverings, trade
or office fixtures or any other property of, or improvements (including the
Tenant Improvements and any Alterations) installed on the Premises by or at the
election of Tenant. Tenant hereby agrees to promptly repair any damage to the
Tenant Improvements and any Alterations at its sole cost and expense in the
event that Landlord is required to, or elects to, repair the remainder of the
Premises pursuant to Paragraphs 19(a) and 19(b) above, and Landlord agrees to
furnish to Tenant for such repairs any available insurance proceeds under
policies carried by Landlord with respect to the Tenant Improvements. In
repairing the Premises, Tenant shall have the right to modify the Tenant
Improvements and/or Alterations existing immediately prior to the date of the
damage, provided that Tenant shall comply with the provisions of Paragraph 8
with respect to such modifications, and in Landlord's reasonable judgment, such
modifications will not cause material delays or impair the recovery of insurance
proceeds.
(f) Tenant hereby waives the provisions of subsection 2 of
Section 1932, subsection 4 of Section 1933, and Sections 1941 and 1942 of the
California Civil Code.
20. EMINENT DOMAIN.
(a) If all or part of the Premises shall be taken by any
public or quasi-public authority under the power of eminent domain or conveyance
in lieu thereof, this Lease shall terminate as to any portion of the Premises so
taken or conveyed on the date when title or the right to possession vests in the
condemnor.
(b) If (i) a part of the Premises shall be taken by any
public or quasi-public authority under the power of eminent domain or conveyance
in lieu thereof; and (ii) Tenant is reasonably able to continue the operation of
Tenant's business without material impairment in that portion of the Premises
remaining; then this Lease shall remain in effect as to said portion of the
Premises remaining, Landlord shall restore the Premises to an architectural
whole, and the Basic Monthly Rental payable from the date of the taking shall be
reduced in the same proportion as the area of the Premises taken bears to the
total area of the Premises. If, after a partial taking, Tenant is not reasonably
able to continue the operation of its business without material impairment in
the Premises or Landlord elects not to restore the Premises as hereinabove
described, this Lease may be terminated by either Landlord or Tenant by giving
written notice to the other party within thirty (30) days of the date of the
taking. Such notice shall specify the date of termination which shall be not
less than thirty (30) nor more than sixty (60) days after the date of said
notice.
(c) If a portion of the Building is taken, whether any
portion of the Premises is taken or not, and Landlord determines that it is not
economically feasible and therefore elects not to continue operating the portion
of the Building remaining, then Landlord shall have the option for a period of
thirty (30) days after such determination to terminate this Lease. If Landlord
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determines that it is economically feasible to continue operating the portion of
the Building remaining after such taking, then this Lease shall remain in
effect, with Landlord, at Landlord's cost, restoring the Building to an
architectural whole.
(d) Landlord shall be entitled to any and all payment,
income, rent, award, or any interest therein whatsoever which may be paid or
made in connection with such taking or conveyance, and Tenant shall have no
claim, except as provided herein, against Landlord for the value of any
unexpired Term of this Lease or for the value of any improvements not paid for
by Tenant in or to the Premises. Tenant hereby assigns any such claim to the
Landlord. Notwithstanding the foregoing, nothing herein contained shall be
deemed or construed to prevent Tenant from interposing and prosecuting in any
condemnation proceedings a claim for the value of any fixtures or improvements
installed in or made to the Premises by Tenant, or for its costs of moving or
loss of business by reason of such condemnation. In addition, and
notwithstanding anything to the contrary set forth in this paragraph, in the
event that Tenant's leasehold estate only shall be so taken or appropriated, and
the taking or appropriation shall be for a period of less than the balance of
the Lease Term, this Lease shall continue in full force and effect. In such
event, Tenant shall receive any award or consideration paid by the condemning or
appropriating authority and Tenant shall continue to pay Landlord all sums due
under this Lease.
(e) Tenant hereby waives sections 1265.110 through 1265.160
of the California Code of Civil Procedure.
21. HOLDING OVER.
Any holding over after the expiration or other termination of
the Term with the written consent of Landlord delivered to Tenant shall be
construed to be a tenancy from month to month at the Basic Monthly Rental in
effect on the date of such expiration or termination (subject to adjustment as
provided in Paragraph 3(c) hereof) on the terms, covenants and conditions herein
specified so far as applicable. Any holding over after the expiration or other
termination of the Term of this Lease without the written consent of Landlord
shall be construed to be a tenancy at sufferance on all the terms set forth
herein, except that the Basic Monthly Rental shall be an amount equal to one
hundred fifty percent (150%) of the Basic Monthly Rental payable by Tenant
immediately prior to such holding over. Acceptance by Landlord of Rental after
the expiration or termination of this Lease shall not constitute a consent by
Landlord to any such tenancy from month to month or result in any other tenancy
or any renewal of the Term hereof. The provisions of this Paragraph are in
addition to, and do not affect, Landlord's right to re-entry or other rights
hereunder or provided by law.
22. BUILDING PLANNING. Omitted.
23. MISCELLANEOUS.
(a) Limitation of Landlord's Liability. Any liability of
Landlord (including without limitation Landlord's partners, shareholders,
affiliates, agents, and employees) to Tenant under this Lease shall be limited
to the equity interest of Landlord in the Building and the Real Property, and
Tenant agrees to look solely to such interest for the recovery of any judgment,
it
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being intended that Landlord and such other persons shall not be personally
liable for any deficiency or judgment. Notwithstanding any other provision of
this Lease, Landlord shall not be liable for any consequential damages, nor
shall Landlord be liable for loss of or damage to artwork, currency, jewelry,
bullion, unique or valuable documents, securities or other valuables, or for
other property not in the nature of ordinary fixtures, furnishings and equipment
used in general administrative and executive office activities and functions.
Wherever in this Lease Tenant (i) releases Landlord from any claim or liability,
(ii) waives or limits any right of Tenant to assert any claim against Landlord
or to seek recourse against any property of Landlord or (iii) agrees to
indemnify Landlord against any matters, the relevant release, waiver, limitation
or indemnity shall run in favor of and apply to Landlord, its agents, the
constituent shareholders, partners or other owners of Landlord or its agents,
and the directors, officers, and employees of Landlord and its agents and each
such constituent shareholder, partner or other owner.
(b) Sale by Landlord. In the event of a sale or conveyance
of the Building by any owner of the reversion then constituting Landlord, the
transferor shall thereby be released from any liability, arising out of events
occurring after the date of sale or conveyance, upon any of the terms, covenants
or conditions (express or implied) herein contained in favor of Tenant, and in
such event, insofar as such transferor is concerned, Tenant agrees to look
solely to the successor in interest of such transferor in and to the Building
and this Lease for such liability. Tenant agrees to attorn to the successor in
interest of such transferor. If Tenant provides Landlord with any security for
Tenant's performance of its obligations hereunder, and Landlord transfers, or
provides a credit with respect to, such security to the grantee or transferee of
Landlord's interest in the Real Property, Landlord shall be released from any
further responsibility or liability for such security.
(c) Estoppel Letter. Tenant shall, at any time and from time
to time within ten (10) days following request from Landlord, execute,
acknowledge and deliver to Landlord a statement in writing, (i) certifying that
this Lease is unmodified and in full force and effect (or, if modified, stating
the nature of such modification and certifying that this Lease as so modified is
in full force and effect), (ii) certifying that there are not, to Tenant's
knowledge, any uncured defaults on the part of the Landlord hereunder, and that
Tenant has no defenses to or offsets against its obligations under this Lease,
or specifying such defaults, defenses or offsets if any are claimed, (iii)
certifying the date that Tenant entered into occupancy of the Premises and that
Tenant is open for business in the Premises, (iv) certifying the amount of the
Basic Monthly Rental and the Rental payable under Paragraph 4(b) and the date to
which Rental is paid in advance, if any, and certifying that Tenant is entitled
to no rent abatement or other economic concessions not specified in the Lease
(v) certifying the amount of the Deposit, if any, (vi) certifying that all
improvements to be constructed in the Premises by Landlord are completed (or
specifying any obligations of Landlord respecting improvements), and (vii)
certifying such other matters relating to this Lease and/or the Premises as may
be requested by a lender making a loan to Landlord or a purchaser of the
Premises, the Building, the Real Property or any interest therein from Landlord,
including without limitation the matters referred to in Paragraph 29(k) hereof.
Any such statement may be relied upon by, and shall upon Landlord's request be
addressed to, any prospective purchaser or encumbrancer of all or any portion of
the Real Property or any interest therein, provided that such statement shall
create no liability on the part of Tenant, but
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shall estop Tenant from asserting against such purchaser or encumbrancer a
position contrary to the position(s) certified to in such statement. Tenant
shall, within ten (10) days following request of Landlord, deliver such other
documents including Tenant's financial statements as are reasonably requested in
connection with the sale of, or loan to be secured by, the Real Property or any
part thereof or interest therein. Tenant's failure to deliver said statement in
the time required shall be conclusive upon Tenant that: (i) the Lease is in full
force and effect, without modification except as may be represented by Landlord,
(ii) there are no uncured defaults in Landlord's performance and Tenant has no
right of offset, counterclaim or deduction against Rental under the Lease and
(iii) no more than one month's Basic Monthly Rental has been paid in advance.
(d) Financial Statements. On or before April 1 of each year
(or as soon thereafter as reasonably practicable) throughout the Term, Tenant
shall deliver to Landlord Tenant's financial statements ("Financial Statements")
for the fiscal year of Tenant ended on the previous December 31, which Financial
Statements shall include a combined balance sheet of Tenant and its combined
subsidiaries as at the end of such fiscal year, a combined statement of
operations of Tenant and its combined subsidiaries for such fiscal year, and a
certificate of Tenant's auditor (or, if audited Financial Statements are not
available, then a certificate of Tenant's Chief Financial Officer) to the effect
that such Financial Statements were prepared in accordance with generally
accepted accounting principles consistently applied and fairly present the
financial condition and operations of Tenant and its combined subsidiaries for
and as at the end of such fiscal year.
(e) Right of Landlord To Perform. All terms and covenants of
this Lease to be performed or observed by Tenant shall be performed or observed
by Tenant at Tenant's expense and without any reduction of Rental. If Tenant
fails to pay any Rental hereunder or fails to perform any other term or covenant
hereunder on its part to be performed, and such failure shall continue for ten
(10) days beyond any applicable grace or cure periods provided in Paragraph 18,
above (or such shorter period as may be reasonable under emergency
circumstances), after written notice thereof by Landlord, accompanied by
reasonable supporting documentation, Landlord, without waiving or releasing
Tenant from any obligation of Tenant hereunder, may make any such payment or
perform any such other term or covenant on Tenant's part to be performed but
shall not be obligated to do so. All sums so paid by Landlord and all necessary
costs of such performance by Landlord, together with interest thereon at the
Interest Rate from the date of such payment or performance by Landlord, shall be
paid (and Tenant covenants to make such payment) to Landlord on demand by
Landlord, and Landlord shall have (in addition to any other right or remedy of
Landlord) the same rights and remedies in the event of non-payment thereof by
Tenant as in the case of failure by Tenant in the payment of Rental hereunder.
(f) Rules and Regulations. Tenant agrees to faithfully
observe and to comply with the Building Rules and Regulations attached hereto as
Exhibit B and incorporated herein by this reference, and all reasonable
modifications of and additions thereto from time to time put into effect by
Landlord which are applicable to all tenants of the Building and of which Tenant
shall have notice, to the extent such modifications or additions do not
materially interfere with
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Tenant's use and enjoyment of the Premises or the conduct of Tenant's business
at the Premises. Landlord shall not be responsible to Tenant for the
non-performance by any other tenant or occupant of the Building of any of said
Building Rules and Regulations. In the event any of the Building Rules and
Regulations conflict with any express provision of this Lease, the provisions of
this Lease shall govern.
(g) Attorneys' Fees. In case any suit or other proceeding
shall be brought for an unlawful detainer of the Premises or for the recovery of
any Rental due under the provisions of this Lease or because of the failure of
performance or observance of any other term or covenant herein contained on the
part of Landlord or Tenant, the unsuccessful party in such suit or proceeding
shall pay to the prevailing party therein reasonable attorneys' fees and costs
which shall include fees and costs of any appeal, all as fixed by the Court. Any
attorneys' fees and other expenses incurred by either party in enforcing a
judgment in its favor under this Lease shall be recoverable separately from and
in addition to any other amount included in such judgment, and such attorneys'
fees obligation is intended to be severable from the other provisions of this
Lease and shall survive and not be merged into any such judgments.
(h) Waiver of Jury Trial. If any action or proceeding
between Landlord and Tenant to enforce the provisions of this Lease (including
an action or proceeding between Landlord and the trustee or debtor in possession
while Tenant is a debtor in a proceeding under any bankruptcy law) proceeds to
trial, Landlord and Tenant hereby waive their respective rights to a jury in
such trial.
(i) Waiver. The failure of Landlord to object to or to
assert any remedy by reason of Tenant's failure to perform or observe any
covenant or term hereof or its failure to assert any rights by reason of the
happening or non-happening of any condition hereof shall not be deemed a waiver
of its right to assert and enforce any remedy it may have by reason of such
failure on the part of Tenant or the happening or non-happening of such
condition or a waiver of its rights to enforce any of its rights by reason of
any subsequent failure of Tenant to perform or observe the same or any other
term or covenant or by reason of the subsequent happening or non-happening of
the same or any other condition. No custom or practice which may develop between
the parties hereto during the Term hereof shall be deemed a waiver of, or in any
way affect, the right of Landlord to insist upon performance and observance by
Tenant in strict accordance with the terms hereof. The acceptance of Rental
hereunder by Landlord shall not be deemed to be a waiver of any preceding
failure of Tenant to perform or observe any term or covenant of this Lease,
other than the failure of Tenant to pay the particular Rental so accepted,
irrespective of any knowledge on the part of Landlord of such preceding failure
at the time of acceptance of such Rental.
(j) Light, Air and View. Tenant agrees that no diminution or
shutting off of light, air or view by any structure which may be erected
(whether or not by Landlord) on property adjacent to the Building shall in any
way affect this Lease, entitle Tenant to any reduction of Rental hereunder or
result in any liability of Landlord to Tenant.
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(k) Notices. All notices, approvals, consents, and other
communications ("Notices") to be given under this Lease must be in writing and
may be given by any method of delivery which provides evidence or confirmation
of receipt including but not limited to personal delivery, express courier (such
as Federal Express), telecopy, and prepaid certified or registered mail with
return receipt requested, and shall be addressed to the party's address for
notices specified in the Summary of Lease Terms. Notices shall be deemed to have
been given and received on the earlier of actual receipt or refusal to accept
delivery. Either party may change its address for notices by giving notice of
such new address in accordance with the provisions of this Paragraph 23(k).
(l) Name. Tenant agrees that it shall not, without first
obtaining the written consent of Landlord (which consent may be withheld in
Landlord's sole and absolute discretion): (i) use the name of the Building for
any purpose other than as the address of the business conducted by Tenant in the
Premises, or (ii) use for any purpose any image of, rendering of, or design
based on, the exterior appearance or profile of the Building.
(m) Governing Law; Severability. This Lease shall in all
respects be governed by and construed in accordance with the laws of California.
If any provision of this Lease shall be invalid, unenforceable or ineffective
for any reason whatsoever, all other provisions hereof shall be and remain in
effect.
(n) Definitions and Paragraph Headings; Successors. The
words "include," "includes" and "including" shall be deemed to be followed by
the phrase "without limitation." The term "Landlord" or any pronoun used in
place thereof includes the plural as well as the singular and the successors and
assigns of Landlord. The term "Tenant" or any pronoun used in place thereof
includes the plural as well as the singular and individuals, firms,
associations, partnerships and corporations, and their and each of their
respective heirs, executors, administrators, successors and permitted assigns,
according to the context hereof. The provisions of this Lease shall inure to the
benefit of and bind Landlord and Tenant and their respective heirs, executors,
administrators, successors and permitted assigns. The term "person" includes the
plural as well as the singular and individuals, firms, associations,
partnerships and corporations. Words used in any gender include other genders.
If there be more than one Tenant the obligations of Tenant hereunder are joint
and several. The paragraph headings of this Lease are for convenience of
reference only and shall have no effect upon the construction or interpretation
of any provision hereof.
(o) Time. Time is of the essence of this Lease with respect
to the payment of Rental and the performance of all obligations.
(p) Examination of Lease. Submission of this instrument for
examination or signature by Tenant does not constitute a reservation of or
option for a lease, and this instrument is not effective as a lease or otherwise
until its execution and delivery by both Landlord and Tenant.
(q) Brokerage. Except for the Broker listed in Paragraph J
of the Summary of Lease Terms, Tenant agrees to protect, defend, indemnify and
hold Landlord harmless from any
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and all claims, loss, cost, damage and/or expense (including, without
limitation, attorneys' fees and court costs) by any real estate broker or
salesperson or other entity or party for a commission or finder's fee as a
result of Tenant's entering into this Lease. Landlord shall be responsible for
the payment of the commission owed to the Broker listed in Paragraph J of the
Summary of Lease Terms. In addition, Landlord shall pay the commission or fee of
any other broker, salesperson, entity or party claiming any commissions or fees
on the basis of contacts or dealings with Landlord.
(r) Directory Board. Landlord agrees to list Tenant's name
on the directory board in the lobby of the Building, and on the Building
standard signage in the elevator lobby, at Landlord's cost and expense;
provided, however, any change to the initial listing or any additional listings
shall be at Tenant's cost and expense. Landlord's acceptance of any name for
listing on the directory board or the standard signage shall in no event be, or
be deemed to be, nor will it substitute for, Landlord's consent, as required by
this Lease, to any sublease, assignment, or other occupancy of the Premises.
(s) Authority. If Tenant is a corporation (or other business
organization), Tenant represents and warrants to Landlord that (i) Tenant is
duly incorporated (or organized) and validly existing under the laws of its
state of incorporation (or organization), (ii) Tenant is qualified to do
business in California, (iii) Tenant has full right, power and authority to
enter into this Lease and to perform all of Tenant's obligations hereunder, and
(iv) the execution, delivery and performance of this Lease has been duly
authorized by Tenant and each person signing this Lease on behalf of the Tenant
is duly and validly authorized to do so. Concurrently with signing this Lease,
Tenant shall deliver to Landlord a true and correct copy of resolutions duly
adopted by the board of directors or constituent partners or members of Tenant,
certified by the secretary of Tenant to be true and correct, unmodified and in
full force, which authorize and approve this Lease and authorize each person
signing this Lease on behalf of Tenant to do so.
(t) Amendments. This Lease may not be amended or modified in
any respect whatsoever except by an instrument in writing signed by Landlord and
Tenant.
(u) Exhibits and Addenda; Entire Agreement. The Exhibits and
Addenda referenced in the Summary of Lease Terms are a part of this Lease and
are incorporated herein by this reference. In the event of any discrepancy
between the Lease and any such Exhibit or Addendum, the Exhibit or Addendum
shall control. This Lease is the entire and integrated agreement between
Landlord and Tenant with respect to the subject matter of this Lease, the
Premises and the Building. There are no oral agreements between Landlord and
Tenant affecting this Lease, and this Lease supersedes and cancels any and all
previous negotiations, arrangements, brochures, offers, agreements and
understandings, oral or written, if any, between Landlord and Tenant or
displayed by Landlord to Tenant with respect to the subject matter of this
Lease, the Premises or the Building. There are no representations between
Landlord and Tenant or between any real estate broker and Tenant other than
those expressly set forth in this Lease and all reliance with respect to any
representations is solely upon representations expressly set forth in this
Lease.
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24. Option to Extend.
Landlord hereby grants to Tenant one (1) option (the "Option")
to extend the Term of the Lease for an additional period of five (5) years (the
"Option Term"), all on the following terms and conditions:
(a) The Option must be exercised, if at all, by written
notice irrevocably exercising the Option ("Option Notice") delivered by Tenant
to Landlord no later than twelve (12) months prior to the Expiration Date.
Further, the Option shall not be deemed to be properly exercised if, as of the
date of the Option Notice or at the Expiration Date (i) an Event of Default has
occurred and is continuing, (ii) Tenant has assigned this Lease or its interest
therein other than to an Affiliate as provided in Paragraph 12(h) or pursuant to
a Permitted Transfer in accordance with Paragraphs 12(g) or 12(h), above, or
(iii) Tenant and/or its Affiliates is occupying less than fifty percent (50%) of
the square footage of the Premises. Provided Tenant has properly and timely
exercised the Option, the Term of this Lease shall be extended for the period of
the Option Term and all terms, covenants and conditions of this Lease shall
remain unmodified and in full force and effect, except that the Basic Monthly
Rental shall be modified as set forth in Paragraphs 24(b) and 24(c) below.
(b) The Basic Monthly Rental per rentable square foot
("RSF") payable for the Option Term shall be equal to the then-current net
rental rate per RSF (as further defined below, "FMRR") being agreed to in new
leases by the Landlord or the owner ("Comparable Landlords") of office buildings
in the South of Market District of San Francisco which are comparable in
quality, location and prestige to the Building (the "Comparable Buildings") and
tenants leasing space in the Building or the Comparable Buildings or the monthly
rental payable by Tenant during the final month of the initial Term, whichever
is greater. As used herein, "FMRR" shall mean the net rental rate per RSF for
which Landlord and Comparable Landlords are entering into new leases within the
time period of fifteen (15) to nine (9) months prior to the Expiration Date
("Market Determination Period"), with new tenants leasing from Landlord and/or
Comparable Landlords office space in the Building and/or the Comparable
Buildings which space is comparable to the Premises in views, tenant
improvements and other material factors ("Comparative Transactions"). Landlord
shall provide its determination of the FMRR to Tenant on the later to occur of
fourteen (14) months prior to the Expiration Date or twenty (20) days after
Landlord receives the Option Notice. Tenant shall have fifteen (15) days
("Tenant's Review Period") after receipt of Landlord's notice of the FMRR within
which to accept such FMRR or to object thereto in writing. In the event Tenant
objects to the FMRR submitted by Landlord, Landlord and Tenant shall attempt to
agree upon such FMRR. If Landlord and Tenant fail to reach agreement on such
FMRR within fifteen (15) days following Tenant's Review Period (the "Outside
Agreement Date"), then each party shall place in a separate sealed envelope its
final proposal as to FMRR and such determination shall be submitted to
arbitration in accordance with Paragraph 24(c) below.
(c) (1) Landlord and Tenant shall meet with each other
within five (5) business days of the Outside Agreement Date and exchange the
sealed envelopes and then open such envelopes in each other's presence. If
Landlord and Tenant do not mutually agree upon the
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FMRR within one (1) business day of the exchange and opening of envelopes, then,
within ten (10) business days of the exchange and opening of envelopes, Landlord
and Tenant shall agree upon and jointly appoint one arbitrator who shall be by
profession be a real estate appraiser or broker who shall have been active over
the five (5) year period ending on the date of such appointment in the leasing
of comparable commercial properties in the vicinity of the Building. Neither
Landlord nor Tenant shall consult with such broker or appraiser as to his or her
opinion as to FMRR prior to the appointment. The determination of the arbitrator
shall be limited solely to the issue of whether Landlord's or Tenant's submitted
FMRR for the Premises is the closer to the actual net rental rate per RSF for
new leases within the Market Determination Period for Comparative Transactions.
Such arbitrator may hold such hearings and require such briefs as the
arbitrator, in his or her sole discretion, determines is necessary. In addition,
Landlord or Tenant may submit to the arbitrator with a copy to the other party
within five (5) business days after the appointment of the arbitrator any data
and additional information that such party deems relevant to the determination
by the arbitrator ("Data") and the other party may submit a reply in writing
within five (5) business days after receipt of such Data.
(2) The arbitrator shall, within thirty (30) days of
his or her appointment, reach a decision as to whether the parties shall use
Landlord's or Tenant's submitted FMRR, and shall notify Landlord and Tenant of
such determination.
(3) The decision of the arbitrator shall be binding
upon Landlord and Tenant.
(4) If Landlord and Tenant fail to agree upon and
appoint such arbitrator, then the appointment of the arbitrator shall be made by
the Presiding Judge of the Superior Court for the City and County of San
Francisco, or, if he or she refuses to act, by any judge having jurisdiction
over the parties.
(5) The cost of arbitration shall be paid by
Landlord and Tenant equally.
25. RIGHT OF FIRST OFFER.
(a) Subject to the conditions set forth in this Paragraph
25, and to the rights of Platinum and Netcentives, Inc. and their successors and
assigns, Tenant shall have an on-going right of first offer to lease all or any
portion of the remainder of the Building, (the "First Offer Space"), in the
event the First Offer Space becomes available for lease to third parties during
the Term (including the Option Term). Provided that (i) Tenant's current net
worth is not less than $50,000,000, (ii) Tenant is then in actual possession of
at least 90% of the Premises, and (iii) no Event of Default exists, then prior
to leasing all or any portion of the First Offer Space to a third party,
Landlord will give notice to Tenant (an "Offering Notice") specifying Landlord's
good faith estimate of (i) the Basic Monthly Rental which Landlord proposes to
charge for the First Offer Space, (ii) the approximate date upon which the First
Offer Space is anticipated to be available for delivery (which shall be not less
than two (2) months after the date of the Offering Notice), and (iii) any other
material conditions or provisions relating to the leasing of the First Offer
Space which vary from the provisions of this Lease, including market concessions
and
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allowances. If Tenant wishes to lease the First Offer Space on the terms
specified by Landlord in the Offering Notice, Tenant shall so notify Landlord
within fourteen (14) days after receipt thereof, which notice shall be
unconditional and irrevocable. Tenant may exercise its right of first offer only
with respect to all of the First Offer Space identified in the Offering Notice.
Tenant acknowledges that the First Offer Space shall not be "available for
lease" for purposes hereof so long as Landlord is negotiating with the existing
tenant of the First Offer Space.
(b) If Tenant timely exercises its right to lease the First
Offer Space, then except as specified in this Paragraph or in the Offering
Notice (which shall govern to the extent of any conflict with this Lease), the
First Offer Space shall become a portion of the Premises on all of the terms and
conditions of this Lease for the remainder of the Term (including the Option
Term, if applicable), provided that (i) Basic Monthly Rental for the First Offer
Space shall be determined as specified above, (ii) Tenant's Percentage Share of
Operating Expenses and Real Property Taxes shall be adjusted to reflect the
addition of the First Offer Space, and (iii) the First Offer Space shall be
delivered in its then existing "as is" condition, without obligation on the part
of Landlord to make any repairs or construct any improvements to the First Offer
Space in connection with Tenant's contemplated use, or to demolish existing
improvements therein, and Tenant shall be responsible for the construction and
installation in accordance with the provisions of Paragraph 8 hereof of any
tenant improvements it desires to install within the First Offer Space, at
Tenant's sole cost and expense (except as specified in the Offering Notice,
which shall govern to the extent of any conflict with this Lease regarding the
condition of such space and the parties' obligations with respect to the
improvement thereof). Tenant shall commence paying Basic Monthly Rental and all
additional Rental with respect to the First Offer Space on the date thirty (30)
days after delivery of the First Offer Space to Tenant (except as specified in
the Offering Notice, which shall govern to the extent of any conflict with this
Lease regarding the commencement of payment obligations). Landlord shall
promptly prepare and Landlord and Tenant shall promptly execute an amendment to
this Lease reflecting the parties' agreement with respect to the addition of the
First Offer Space. If Tenant fails to timely notify Landlord that it wishes to
lease the First Offer Space, or if Tenant fails to execute and deliver said
lease amendment to Landlord within five (5) days following receipt thereof by
Tenant, Landlord may thereafter lease the First Offer Space to any person on
terms and conditions it may deem appropriate, on the condition that the
effective monthly rent agreed to by Landlord (without reference to any other
terms) may be up to eight percent (8%) more favorable to the third party than
the effective monthly rent set forth in the Offering Notice, and Tenant shall
have no further rights with respect to the First Offer Space at such time,
unless the effective monthly rent becomes more than eight percent (8%) more
favorable to the third party in which case Landlord must again offer the space
to Tenant in accordance with the provisions of this Paragraph 25. For purposes
of this Paragraph 25(b), the "effective" monthly rent shall mean the contract
monthly rent for the First Offer Space, adjusted to take into account any free
rent, but without regard to any tenant improvement allowances or other monetary
concessions or terms granted by Landlord. Should the First Offer Space
subsequently become available for Lease to third parties during the Term,
Landlord shall again offer such space to Tenant in accordance with the
provisions of this Paragraph 25.
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(c) If Tenant timely exercises its right to lease the First
Offer Space, and Landlord fails to deliver possession of all or any portion of
the First Offer Space to Tenant on or before the scheduled date for delivery of
possession for any reason, this Lease shall not be void or voidable and except
as herein provided Landlord shall not be deemed in default or otherwise liable
to Tenant for any claims, damages, or liabilities in connection therewith or by
reason thereof, but Tenant shall have no obligation to pay Basic Monthly Rental
or Tenant's Percentage Share of Operating Expenses or Real Property Taxes with
respect to the First Offer Space until possession of the First Offer Space has
been delivered to Tenant. Notwithstanding anything to the contrary set forth
herein, if Tenant is in default under this Lease beyond applicable notice and
cure periods at the time an Offering Notice would otherwise be required to be
sent under this Paragraph 25, Landlord shall have, in addition to any other
remedies, the right to terminate Tenant's exercise of an option under this
Paragraph 25, and in such event for the duration of such Event of Default until
same is cured, Landlord shall not be required to deliver the Offering Notice or
to deliver possession of the First Offer Space to Tenant. If not earlier
terminated, the rights of Tenant pursuant to this Paragraph 25 shall
automatically terminate upon the Expiration Date, as the same may be extended
pursuant to Paragraph 24, above.
26. Landlord's Right of Termination.
Tenant acknowledges that the portion of the Premises which are located
on the second floor of the Building (the "Second Floor Premises") is subject to
an expansion option held by Platinum Technology, Inc. ("Platinum"). The
commencement date of the Platinum lease has not yet been established. Landlord
currently estimates that if Platinum exercises its expansion option, the Second
Floor Premises will not be required to be delivered to Platinum until after the
eighty-fourth (84th) full calendar month of the Term. In the event Platinum
elects to exercise such expansion option, Landlord shall notify Tenant within
ten (10) business days of receipt that such option has been exercised and shall
specify the date on which this Lease shall terminate with respect to the Second
Floor Premises, which date shall be not less than twelve (12) months after the
date such notice is given. This Lease shall so terminate with respect to the
Second Floor Premises on the date specified by Landlord. If this Lease
terminates with respect to the Second Floor Premises, the Basic Monthly Rental
and Tenant's Percentage Share of Operating Expenses and Real Property Taxes
shall be adjusted to reflect the deletion of the Second Floor Premises from the
Premises, and Tenant shall surrender the Second Floor Premises to Landlord on or
before the termination date therefor in accordance with the provisions of
Paragraph 9(a) of this Lease. Tenant shall save, indemnify, defend and hold
Landlord harmless from any and all liability arising out of Tenant's failure to
surrender the Second Floor Premises on or before the date so specified by
Landlord in accordance with the provisions of this Paragraph 26. Notwithstanding
the foregoing, if the Platinum lease shall terminate or the Platinum expansion
option should otherwise become ineffective for any reason, Landlord shall
promptly notify Tenant thereof. Within five (5) business days after receipt of
Landlord's notice, Tenant shall notify Landlord that Tenant elects either (i) to
have this Lease terminate with respect to the Second Floor Premises on the
termination date originally specified by Landlord or (ii) to keep this Lease in
full force and effect with respect to the Second Floor Premises, in which case
Landlord's prior termination notice shall be null and void.
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27. PARKING.
(a) Upon payment of the parking rental being charged
therefor from time to time, Tenant shall have the right to use on a nonexclusive
basis the number of parking spaces in the Parking Lot which represents its pro
rata share (based upon the rentable area of the Premises) of the rentable area
of the Building, but not less than one parking space per 1,000 rentable square
feet in the Premises. In the event additional parking spaces become available
during the Term of this Lease, Landlord will offer such spaces to Tenant on the
same terms and conditions. The use of such spaces shall be for the parking of
motor vehicles used by Tenant, its officers, employees and customers only, and
shall be subject to all applicable laws and the reasonable, uniform and
non-discriminatory rules and regulations adopted by Landlord from time to time
for the use of the Parking Lot. The parking rental payable by Tenant hereunder
shall include all taxes imposed on the use of the parking spaces by any
governmental or quasi-governmental authority, and such rental may be increased
by Landlord at any time and from time to time; provided, however, the monthly
parking rental rates charged to Tenant from time to time shall not exceed the
prevailing monthly rates being charged generally to comparable users of such
parking facilities or for similar parking spaces in the area. Parking rentals
shall be due and payable in advance, as additional rent, on the first day of
each month during which parking spaces are leased hereunder. Tenant may decrease
the number of parking spaces leased from time to time upon sixty (60) days prior
written notice to Landlord or Landlord's designated parking operator, provided
that after any such decrease, Landlord shall only be obligated to restore such
spaces to Tenant after Tenant's written request if and when such parking spaces
are or become available. Parking spaces may not be assigned or transferred
separate and apart from this Lease, and upon the expiration or earlier
termination of this Lease, Tenant's rights with respect to all leased parking
spaces shall immediately terminate. Tenant and its agents, employees,
contractors, invitees or licensees shall not unreasonably interfere with the
rights of Landlord or others entitled to similar use of the Parking Lot. Access
to the Parking Lot will generally be available on a 24 hour basis, with in and
out privileges.
(b) The Parking Lot shall be subject to the reasonable
control and management of Landlord, who may, from time to time, establish,
modify and enforce reasonable, uniform and non-discriminatory rules and
regulations with respect thereto. Landlord reserves the right to change,
reconfigure, or rearrange the parking areas, to reconstruct or repair any
portion thereof, and to restrict the use of any parking areas and do such other
acts in and to such areas as Landlord deems necessary or desirable without such
actions being deemed an eviction of Tenant or a disturbance of Tenant's use of
the Premises and without Landlord being deemed in default hereunder; provided
that Landlord shall use commercially reasonable efforts to minimize (to the
extent consistent with applicable laws) the extent and duration of any resulting
interference with Tenant's parking rights and in no event shall Tenant pay any
rent for such parking stalls while its use of same is materially affected.
Landlord may, in its sole discretion, convert the parking facilities to a
reserved and/or controlled parking facility, or operate the parking facility (or
a portion thereof) as an attendant assisted and/or valet parking facility.
If parking spaces are not assigned pursuant to the terms of this Lease, Landlord
reserves the right at any time to assign parking spaces in a reasonable manner,
and Tenant shall thereafter be
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responsible to insure that its employees park in the designated areas. Tenant
shall, if requested by Landlord, comply with all reasonable parking practices
and otherwise furnish Landlord with such information as Landlord reasonably
requests. Landlord shall not be liable for any damage of any nature to, or any
theft of, vehicles, or contents thereof, in or about the Parking Lot. At
Landlord's request, Tenant shall cause its employees and agents using Tenant's
parking spaces to execute an agreement confirming the foregoing.
28. Satellite Dishes.
Tenant shall have the non-exclusive right, during the Term of this
Lease, to install and maintain at its expense on the Building roof up to nine
(9) satellite dishes, none of which shall exceed three (3) meters in diameter,
provided that (i) if such installation involves penetration of the roof,
installation shall be completed prior to the completion of the roof in a manner
satisfactory to Landlord and there shall be no impairment or voiding of
Landlord's roof warranty; (ii) such dishes are placed in a location satisfactory
to Landlord, in Landlord's reasonable discretion; (iii) the dishes are
installed, maintained and operated in accordance with all governmental
requirements and such Rules and Regulations as Landlord may prescribe; and (iv)
Tenant pays Landlord the sum of One Thousand Dollars ($1,000.00) per month rent.
Tenant shall indemnify Landlord from any and all liability arising in connection
with the satellite dishes in accordance with Paragraph 13 of this Lease.
Tenant's access to the roof must be scheduled in advance with the Building
manager (except in an emergency), and Tenant's employees, agents, or contractors
shall not be permitted access to the roof unless accompanied by a representative
of Landlord. Tenant shall provide Landlord with at least twenty-four (24) hours'
prior written notice (except in an emergency) of the need to access the roof. If
Tenant requires access to the roof during non-business hours, Tenant shall
reimburse Landlord, within ten (10) days after request (accompanied by
reasonable supporting documentation), for the cost of having the Building
security guard or engineer accompany Tenant's employees, agents or contractors
onto the roof. Such costs shall be billed at the hourly rate of such security
guard or engineer (including overtime rates, if applicable). Prior to the
expiration or earlier termination of this Lease, Tenant, at Tenant's expense,
shall remove the satellite dishes and all related installations, equipment and
cabling, and repair the roof in a manner satisfactory to Landlord. Tenant's
obligations under this Paragraph 28 shall survive the expiration or earlier
termination of this Lease. Tenant shall have no right to assign or otherwise
transfer its rights under this Paragraph 28, except in connection with a
Permitted Transfer or a transfer approved by Landlord pursuant to Paragraph 12.
Nothing contained in this Paragraph 28 shall be construed to give Landlord or
any other tenants of the Building the right to use Tenant's satellite dishes.
29. UNDERGROUND STORAGE TANK.
In the event Tenant, as part of its Tenant Improvements, installs an
underground diesel storage tank ("UST") on the Premises, Tenant shall comply
with each of the following requirements:
(a) Tenant shall apply for and obtain all required permits
and other governmental registrations and approvals applicable to the UST,
including without limitation
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permits from the San Francisco Fire Department, San Francisco Department of
Public Health, and the Bay Area Air Quality Management District;
(b) Tenant shall maintain copies of all permits and other
required documentation at the Premises, which shall be available for inspection
by Landlord on reasonable notice;
(c) Tenant shall be responsible for and shall comply with
all applicable requirements of law relating to the location, design,
construction and operation of the UST, including without limitation,
requirements pertaining to leak detection, secondary containment, corrosion
protection and integrity testing, general inspections, spill control and
response, and inventory control;
(d) Tenant shall not modify the UST in any manner, and shall
not change the materials stored in the UST, without the prior written consent of
Landlord, which may be withheld in Landlord's sole and absolute discretion, and
obtaining all necessary governmental approvals for such modification or change;
(e) Tenant shall respond to any releases from the UST
immediately after Tenant becomes aware of such release, regardless of amount,
and shall make all required governmental notifications in the event of a
release;
(f) In the event of any release from the UST, Tenant shall
notify Landlord in writing of such release within twenty-four (24) hours after
Tenant becomes aware thereof;
(g) On or before September 1 of each year during the Term,
Tenant shall file a report with Landlord identifying any incidents involving the
UST such as overfills, releases or fires;
(h) Tenant shall indemnify, defend and hold harmless
Landlord and the Landlord Indemnitees in accordance with the provisions of
Paragraph 13(a) of this Lease in connection with any loss, damage or claim
related to or arising out of, directly or indirectly, the design, installation,
operation, maintenance or removal of the UST;
(i) In the event of a release from the UST, Tenant shall be
the responsible party for all purposes under applicable law;
(j) In the event the UST is no longer desirable for Tenant's
use, and in any event prior to the expiration of the Term, Tenant shall remove
the UST from the Premises in accordance with applicable law, provide Landlord
with copies of all applicable closure documents, and, to the extent practicable,
at commercially reasonable expense, restore the area in the vicinity of the UST
to the condition existing prior to installation of the UST;
(k) Within ten (10) days of request by Landlord, Tenant
shall certify in writing to Landlord, the holder of a superior interest, and any
prospective purchaser of the Real Property or tenant of the Premises, that there
have been no releases from the UST during the
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Term or that any releases from the UST during the Term have been fully
remediated to the satisfaction of all applicable governmental entities having
jurisdiction;
(l) Prior to installation of the UST, Tenant shall provide
to Landlord, and maintain in effect until such time as the UST is removed from
the Premises in accordance with applicable law (i) an Underground Storage Tank
Compliance policy in the minimum amount of One Million Dollars ($1,000,000.00)
and (ii) a Pollution Legal Liability Policy in the minimum amount of Five
Million Dollars ($5,000,000.00), naming Landlord and the holder of any Superior
Interest (if so designated by Landlord) as additional insureds and otherwise in
a form and issued by companies reasonably satisfactory to Landlord; and
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(m) Tenant acknowledges that the provisions of this
Paragraph 29 shall survive the expiration or sooner termination of this Lease,
and may be enforced by Landlord as well as any successor-in-interest of
Landlord.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
Lease as of the day and year first above written.
LANDLORD:
SKS BRANNAN ASSOCIATES, LLC,
Delaware limited company
By SKS Investments LLC, a Delaware
limited liability company, Member
By: /s/ PAUL STEIN
-------------------------------------
Paul E. Stein, Member
-----------------------------
TENANT:
QUOKKA SPORTS, INC.,
a Delaware corporation
By: /s/ ALAN RAMADAN
-------------------------------------
Its: President and CEO
-------------------------------------
By: /s/ LES SCHMIDT
-------------------------------------
Its: CFO/EVP
-------------------------------------
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EXHIBIT A
FLOOR PLAN
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EXHIBIT B
BUILDING RULES AND REGULATIONS
1. Sidewalks, halls, passages, exits, entrances, elevators,
escalators and stairways shall not be obstructed by tenants or used by them for
any purpose other than for ingress to and egress from their respective premises.
The halls, passages, exits, entrances, elevators, escalators and stairways are
not for the use of the general public and Landlord shall in all cases retain the
right to control and prevent access thereto by all persons whose presence, in
the judgment of Landlord, would be prejudicial to the safety, character,
reputation and interests of the Building and its tenants.
2. No sign, placard, picture, name, advertisement or notice,
visible from the exterior of leased premises shall be inscribed, painted,
affixed or otherwise displayed by any tenant either on its premises or any part
of the Building without the prior written consent of Landlord, and Landlord
shall have the right to remove any such sign, placard, picture, name,
advertisement, or notice without notice to and at the expense of the tenant.
If Landlord shall have given such consent to any tenant at any
time, whether before or after the execution of the Lease, such consent shall in
no way operate as a waiver or release of any of the provisions hereof or of such
Lease, and shall be deemed to relate only to the particular sign, placard,
picture, name, advertisement or notice so consented to by Landlord and shall not
be construed as dispensing with the necessity of obtaining the specific written
consent of Landlord with respect to any other such sign, placard, picture, name,
advertisement or notice.
No signs will be permitted on any entry door unless the door is
glass. All glass door signs must be approved by Landlord. Signs or lettering
shall be printed, painted, affixed or inscribed at the expense of the tenant by
a person approved by Landlord.
3. The bulletin board or directory of the Building will be provided
exclusively for the display of the name and location of tenants only and
Landlord reserves the right to exclude any other names therefrom. Landlord
reserves the right to restrict the amount of directory space utilized by Tenant.
4. No curtains, draperies, blinds, shutters, shades, screens or
other coverings, hangings or decorations shall be attached to, hung or placed
in, or used in connection with, any window on any premises without the prior
written consent of Landlord. In any event, with the prior written consent of
Landlord, all such items shall be installed inside of Landlord's standard
draperies and shall in no way be visible from the exterior of the Building. No
articles shall be placed or kept on the window sills so as to be visible from
the exterior of the Building.
5. Landlord reserves the right to exclude from the Building between
the hours of 6 P.M. and 6 A.M. and at all hours on Saturdays, Sundays and
holidays all persons who do not present a pass to the Building signed by
Landlord. Landlord will furnish passes to persons for
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whom any tenant requests the same in writing. Each tenant shall be responsible
for all persons for whom it requests passes and shall be liable to Landlord for
all acts of such persons.
Landlord shall in no case be liable for damages for any error
with regard to the admission to or exclusion from the Building of any person.
During any invasion, mob, riot, public excitement or other
circumstance rendering such action advisable in Landlord's opinion, Landlord
reserves the right to prevent access to the Building by closing the doors, or
otherwise, for the safety of tenants and protection of the Building and property
in the Building.
6. No tenant shall employ any person or persons other than the
janitor of Landlord for the purpose of cleaning the premises unless otherwise
agreed to by Landlord in writing. Except with the written consent of Landlord,
no person or persons other than those approved by Landlord shall be permitted to
enter the Building for the purpose of cleaning the same. No tenant shall cause
any unnecessary labor by reason of such tenant's carelessness or indifference in
the preservation of good order and cleanliness. Landlord shall in no way be
responsible to any tenant for any loss of property on the premises, however
occurring, or for any damage done to the property of any tenant by the janitor
or any other employee or any other person. Janitorial service shall include
ordinary dusting and cleaning by the janitor assigned to such work and shall not
include beating or cleaning of carpets or rugs or moving of furniture or other
special services. Janitorial service will not be furnished on nights when rooms
are occupied after 9:30 p.m. Window cleaning shall be done only by Landlord, and
at such intervals and such hours as Landlord shall deem appropriate. Any
janitorial service employed by Landlord shall be insured and bonded.
7. No tenant shall obtain for use upon its premises ice, drinking
water, food, beverage, towel or other similar services, or accept barbering or
bootblacking services in its premises, except from persons authorized by
Landlord, and at hours and under regulations fixed by Landlord.
8. Each tenant shall see that the doors of its premises are closed
and securely locked and must observe strict care and caution that all water
faucets or water apparatus are entirely shut off before the tenant or its
employees leave such premises, and that all utilities shall likewise be
carefully shut off, so as to prevent waste or damage, and for any default or
carelessness the Tenant shall make good all injuries sustained by other tenants
or occupants of the Building or Landlord. On multiple-tenancy floors all tenants
shall keep the door or doors to the Building corridors closed at all times
except for ingress and egress.
9. No tenant shall alter any lock or install a new or additional
lock or any bolt on any door of its premises without the prior written consent
of Landlord. If Landlord shall give its consent, the tenant shall in each case
furnish Landlord with a key for any such lock.
10. Landlord will furnish Tenant without charge with two (2) keys to
each door lock provided in the Premises by Landlord. Landlord may make a
reasonable charge for any
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additional keys. Tenant shall not have any such keys copied or any keys made.
Each tenant, upon the termination of the tenancy, shall deliver to Landlord all
the keys of or to the Building, offices, rooms and toilet rooms which shall have
been furnished to the Tenant or which the Tenant shall have had made. In the
event of the loss of any keys so furnished by Landlord, Tenant shall pay
Landlord therefor.
11. The toilet rooms, toilets, urinals, wash bowls and other
apparatus shall not be used for any purpose other than that for which they were
constructed 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 tenant who, or whose employees or
invitees, shall have caused it.
12. Except as provided in Paragraph 29 of the Lease, no tenant shall
use or keep in its premises or the Building any kerosene, gasoline or
inflammable or combustible fluid or material or use any method of heating or air
conditioning other than that supplied by Landlord. Tenant shall have the right,
however, subject to Landlord's prior written approval, which shall not be
unreasonably withheld, to install uninterrupted power supply units in the
Premises and supplementary HVAC units on the roof of the Building.
13. No tenant shall use, keep or permit to be used or kept in its
premises any foul or noxious gas or substance or permit or suffer such premises
to be occupied or used in a manner offensive or objectionable to Landlord 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 therein, nor
shall any animals or birds be brought or kept in or about any premises or the
Building.
14. No cooking shall be done or permitted by any tenant on its
premises, except in a microwave oven, or for the preparation of coffee, tea, hot
chocolate and similar items for tenants and their employees, nor shall such
premises be used for lodging.
15. Except with the prior written consent of Landlord, no tenant
shall sell, or permit the sale, at retail of newspapers, magazines, periodicals,
theater tickets or any other goods or merchandise in or on any premises, nor
shall any tenant carry on, or permit or allow any employee or other person to
carry on, the business of stenography, typewriting or any similar business in or
from any premises for the service or accommodation of occupants of any other
portion of the Building, nor shall the premises of any tenant be used for the
storage of merchandise or for manufacturing of any kind, or the business of a
public barber shop, beauty parlor, or any business or activity other than that
specifically provided for in such tenant's lease.
16. Landlord will direct electricians as to where and how telephone,
telegraph and electrical wires are to be introduced or installed. No boring or
cutting for wires will be allowed without the prior written consent of Landlord.
The location of telephones, call boxes and other office equipment affixed to all
premises shall be subject to the written approval of Landlord. All electrical
appliances must be grounded and must meet UL Label Standards.
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17. No tenant shall install any radio or television antenna,
loudspeaker or any other device on the exterior walls of the Building.
18. No tenant shall lay linoleum, tile, carpet or any other floor
covering so that the same shall be affixed to the floor of its premises in any
manner except as approved in writing by Landlord. The expense of repairing any
damage resulting from a violation of this rule or the removal of any floor
covering shall be borne by the tenant by whom, or by whose contractors,
employees or invitees, the damage shall have been caused.
19. No furniture, freight, equipment, packages or merchandise will
be received in the Building or carried up or down the elevators, except between
such hours, through such entrances and in such elevators as shall be designated
by Landlord. Landlord reserves the right to require that moves be scheduled and
carried out during non-business hours of the Building. Landlord shall have the
right to reasonably prescribe the weight, size and position of all safes and
other heavy equipment brought into the Building. Safes or other heavy objects
shall, if considered necessary by Landlord, stand on wood strips of such
thickness as is necessary to properly distribute the weight thereof. Landlord
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 by moving or maintaining any such
safe or other property shall be repaired at the expense of the Tenant.
20. No tenant shall overload the floor of its premises or mark, or
drive nails, screw or drill into, the partitions, woodwork or plaster or in any
way deface such premises or any part thereof.
21. There shall not be used in any space, or in the public areas of
the Building, either by any tenant or others, any hand trucks except those
equipped with rubber tires and side guards. No other vehicles of any kind shall
be brought by any tenant into or kept in or about any premises in the Building.
22. Each tenant shall store all its trash and garbage within the
interior of its premises. No material shall be placed in the trash boxes or
receptacles if such material is of such nature that it may not be disposed of in
the ordinary and customary manner of removing and disposing of trash and garbage
in the City of San Francisco without violation of any law or ordinance governing
such disposal. All trash, garbage and refuse disposal shall be made only through
entryways and elevators provided for such purposes and at such times as Landlord
shall designate.
23. Canvassing, soliciting, distribution of handbills and other
written materials and peddling in the Building are prohibited and each tenant
shall cooperate to prevent the same.
24. Landlord shall have the right, exercisable without notice and
without liability to any tenant, to change the name and address of the Building.
25. The requirements of tenants will be attended to only upon
application at the office of the Building. Employees of Landlord shall not
perform any work or do anything outside of
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their regular duties unless under special instructions from Landlord, and no
employee will admit any person (tenant or otherwise) to any office without
specific instructions from Landlord.
26. Landlord may waive any one or more of these Rules and
Regulations for the benefit of any particular tenant or tenants, but no such
waiver by Landlord shall be construed as a waiver of such Rules and Regulations
in favor of any other tenant or tenants, nor prevent Landlord from thereafter
enforcing any such Rules and Regulations against any or all tenants of the
Building.
27. These Rules and Regulations may be changed from time to time, as
Landlord may deem appropriate, and are in addition to, and shall not be
construed to in any way modify, alter or amend, in whole or in part, the terms,
covenants and conditions of the Lease. No such modification shall materially
impair Tenant's rights under the Lease unless Tenant consents thereto.
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EXHIBIT C
CONSTRUCTION AGREEMENT FOR
INITIAL IMPROVEMENT OF THE PREMISES
This Construction Agreement for Initial Improvement of the Premises
(this "Construction Agreement") is a part of the Office Lease between SKS
Brannan Associates, LLC ("Landlord") and Quokka Sports, Inc. ("Tenant") for
premises located at 475 Brannan Street.
1. Improvements. The Base Building Improvements described in
Paragraph 2 shall be furnished and installed within the Premises substantially
in accordance with the plans and specifications for the Building without cost or
expense to Tenant. Any work in addition to Base Building Improvements is
referred to herein as "Tenant Improvements" and shall be furnished and installed
within the Premises substantially in accordance with plans and specifications to
be prepared by Tenant and approved by Landlord in accordance with this
Construction Agreement and shall be furnished and installed at the expense of
Tenant, except for the amount of the Landlord's Contribution described in
Paragraph 12. For purposes hereof, the cost of the Tenant Improvements shall
include all costs associated with the design and construction of the Tenant
Improvements, including, without limitation, all building permit fees, payments
to design consultants for services and disbursements, all demolition and other
preparatory work premiums for insurance and bonds, general conditions, such
inspection fees as Landlord may incur, reimbursement to Landlord for permit and
other fees Landlord may incur that are fairly attributable to the Tenant
Improvement work and the cost of installing any additional electrical capacity
or telecommunications capacity required by Tenant.
2. Base Building Improvements. Base Building Improvements shall
consist of those items listed on the attached Schedule 1 and, to the extent
Landlord agrees to such modifications, the proposed modifications listed on the
attached Schedule 2.
3. Tenant's Architect, Engineers and Contractors. Tenant shall
select its own architects and general contractor ("Contractor"), subject to the
consent of Landlord. Tenant shall use Mazzetti & Associates as its mechanical
engineer, F.W. Associates as its electrical engineer and Stephen Tipping &
Associates as its structural engineer (collectively, "Landlord's Consultants").
The cost of preparing all plans and specifications for the Tenant Improvements
(including without limitation the Conceptual Plans referred to in Paragraph 4 of
this Construction Agreement and the Working Drawings referred to in Paragraph 5
of this Construction Agreement), and the cost of preparing any changes thereto
shall be paid by Tenant, although Tenant may apply the Landlord's Contribution
to the payment of such costs in accordance with the provisions of Paragraph 12
of this Construction Agreement.
4. Submittal of Conceptual Plans. Tenant shall submit to Landlord
conceptual plans for the Tenant Improvements (the "Conceptual Plans"), including
architectural, electrical and reflected ceiling drawings within a reasonable
time after the full execution of the Lease. Such Conceptual Plans shall be for
the general information of Landlord, and to assist in the coordination of the
design and construction of the Tenant Improvements, but receipt of such
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Conceptual Plans by Landlord shall not constitute an approval by Landlord of the
design or specifications shown thereon. As soon as reasonably practicable, or,
if Tenant has engaged Landlord's Consultants to assist in coordinating the Base
Building Improvements and the Tenant Improvements, then within fifteen (15) days
following receipt by Landlord of such plans from Tenant, Landlord shall review,
comment on and return the Conceptual Plans to Tenant, marked "Approved,"
"Approved as Noted" or "Disapproved as Noted, Revise and Resubmit." If the
Conceptual Plans are returned to Tenant marked "Approved," the Conceptual Plans
shall be deemed approved by Landlord and the procedure set forth in Paragraph 5
below shall be followed. If the Conceptual Plans are returned to Tenant marked
"Approved as Noted," the Conceptual Plans so submitted shall be deemed approved
by Landlord and the procedure set forth in Paragraph 5 below shall be followed;
provided however, in preparing the Working Drawings, Tenant shall cause Tenant's
Architect to incorporate Landlord's noted items into the Working Drawings. If
the Conceptual Plans are returned to Tenant marked "Disapproved as Noted, Revise
and Resubmit," Tenant shall cause such plans to be revised, taking into account
the reasons for Landlord's disapproval, and shall resubmit revised plans to
Landlord for review within five (5) days after return of the Conceptual Plans to
Tenant by Landlord. The same procedure shall be repeated until Landlord fully
approves the Conceptual Plans. Notwithstanding the foregoing, however, at either
party's request, Landlord and Tenant shall meet and confer in an attempt to
resolve any disagreements before Tenant is required to revise the Conceptual
Plans. All disapprovals by Landlord shall be made in Landlord's reasonable
discretion.
5. Submittal of Working Drawings. Within a reasonable time after
Landlord's approval of the Conceptual Plans, Tenant shall deliver to Landlord
one (1) set of reproducible sepia and three (3) sets of bluelined prints of
working drawings and specifications, which drawings and specifications shall
include the architectural, mechanical, electrical and plumbing components of the
design (hereinafter referred to collectively as the "Working Drawings") for the
Tenant Improvements prepared at Tenant's sole cost and expense (although Tenant
may apply the Landlord's Contribution to the payment of such cost in accordance
with the provisions of Paragraph 12 of this Construction Agreement) by an
architect ("Tenant's Architect") licensed in the State of California and
approved in writing by Landlord. If the draft of the Working Drawings was
prepared on a computer-assisted design ("CAD") system, Tenant shall also deliver
to Landlord a diskette containing the Working Drawings in the AutoCAD format. As
soon as reasonably practicable, or, if Tenant has engaged Landlord's Consultants
to assist in coordinating the Base Building Improvements and the Tenant
Improvements, then within fifteen (15) days following the receipt by Landlord of
a draft of Working Drawings from Tenant, Landlord shall return to Tenant one (1)
sepia set of the Working Drawings marked "Approved," "Approved as Noted" or
"Disapproved as Noted, Revise and Resubmit." If the Working Drawings are
returned to Tenant marked "Approved," the Working Drawings, as so submitted,
shall be deemed approved by Landlord. If the Working Drawings are returned to
Tenant marked "Approved as Noted," the draft of the Working Drawings shall be
deemed approved by Landlord; provided however, in preparing the final approved
Working Drawings, Tenant shall cause Tenant's Architect to incorporate
Landlord's noted items into the Working Drawings. If the Working Drawings are
returned to Tenant marked "Disapproved as Noted, Revise and Resubmit," Tenant
shall cause such Working Drawings to be revised, taking into account the reasons
for Landlord's
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disapproval and shall resubmit revised plans to Landlord for review. The same
procedure shall be repeated until Landlord fully approves the Working Drawings.
The Working Drawings shall be consistent with, and a logical extension of, the
Conceptual Plans approved by Landlord in accordance with Paragraph 4 of this
Construction Agreement. Tenant shall be solely responsible for: (i) the
completeness of the Working Drawings; (ii) the conformity of the Working
Drawings with the existing conditions in the Building and the Premises; (iii)
the compatibility of the Working Drawings with the shell or the core or the
mechanical, plumbing, life safety or electrical systems of the Building; and
(iv) the compliance of the Working Drawings with all applicable regulations,
laws, ordinances, codes and rules, including, without limitation, the Americans
With Disabilities Act. When the Working Drawings are approved by Landlord and
Tenant, they shall be acknowledged as such by Landlord and Tenant signing each
sheet of the Working Drawings. If the Working Drawings were prepared on a
computer-assisted design ("CAD") system, Tenant shall also deliver to Landlord a
diskette containing the approved Working Drawings in the AutoCAD format.
Notwithstanding the foregoing, however, at either party's request, Landlord and
Tenant shall meet and confer in an attempt to resolve any disagreements before
Tenant is required to revise the Working Drawings. All disapprovals by Landlord
shall be made in Landlord's reasonable discretion.
6. Landlord's Review Responsibilities. Tenant acknowledges and
agrees that Landlord's review and approval, if granted, of all Conceptual Plans
and Working Drawings by Landlord is solely for the benefit of Landlord and to
protect the interests of Landlord in the Building and the Premises, and Landlord
shall not be the guarantor of, nor in any way or to any extent responsible for:
(i) the correctness or accuracy of any Conceptual Plans or Working Drawings;
(ii) the compliance of the Conceptual Plans or Working Drawings with applicable
regulations, laws, ordinances, codes and rules; (iii) the conformance or
compatibility of the Conceptual Plans or Working Drawings with existing
conditions in the Building or Premises or with the shell or the core or the
mechanical, plumbing, life safety or electrical systems of the Building; or (iv)
the suitability for Tenant's needs and business of the design and function of
all Tenant Improvements, unless Landlord requires over Tenant's objection a
change in the Conceptual Plans or Working Drawings and such change violates
applicable codes or is incompatible with the shell or core or Building systems,
in which event Landlord shall be responsible for the cost of remedying such
condition. Tenant shall require and be solely responsible for insuring that its
architects, engineers and contractors verify all existing conditions in the
Building, insofar as they are relevant to, or may affect, the design and
construction of the Tenant Improvements, and Landlord shall have no liability to
Tenant for any inaccuracy or incorrectness in any of the information supplied by
Landlord with regard to existing conditions. Landlord shall, however, use
reasonable efforts to provide the most recent drawings and specifications.
Tenant shall be solely responsible for, and Landlord specifically reserves the
right to require Tenant to make at any time and from time to time during the
construction of the Tenant Improvements, any reasonable changes to the
Conceptual Plans and the Working Drawings necessary to obtain any permit or to
comply with all applicable regulations, laws, ordinances, codes and rules or to
achieve the compatibility, as reasonably determined by Landlord, of the
Conceptual Plans and Working Drawings with the shell and the core and the
mechanical, plumbing, life safety and electrical systems of the Building and any
third-party warranties.
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7. Pricing The Work; Landlord's Supervision Fee. Upon completion of
the Working Drawings for the Tenant Improvements, Tenant shall solicit bids for
construction of the Tenant Improvements and select one (the "Contractor's Bid").
Upon Tenant agreeing on a price, Tenant shall deliver a copy of the construction
contract (or other documentation verifying the final bid and work to be
performed) to Landlord, such delivery to occur no later than fifteen (15) days
after Landlord's approval of the Working Drawings. Landlord shall not be
entitled to receive a fee for the supervision of Contractor if Swinerton &
Walberg is the Contractor; if Tenant employs another Contractor, Landlord shall
receive a supervision fee of five percent (5%) of the cost of the Tenant
Improvements (excluding the fees of architects, engineers and other
consultants).
8. Administration of Work.
(a) After acceptance of bids, Contractor shall administer
the construction of Tenant Improvements in accordance with the Working Drawings.
If Tenant requests the installation of any Tenant Improvements that do not
conform to the approved Working Drawings or conflict with elements of the
approved Working Drawings after such administration begins, such request shall
be deemed a change and shall be subject to the provisions of Paragraph 13 below.
Tenant Improvements shall comply with all applicable regulations, laws,
ordinances, codes and rules, such compliance being the obligation of Tenant.
(b) Contractor and its subcontractors and materialmen shall
maintain commercial general liability insurance in an amount of not less than
Three Million Dollars ($3,000,000) on a combined single limit basis and all
worker's compensation insurance required by law.
(c) If Tenant employs Swinerton & Walberg as the Contractor,
Landlord shall provide access and entry to the Premises to Tenant twelve (12)
weeks prior to the estimated completion date of the Base Building Improvements
(estimated to occur on December 1, 1999) for installation of the Tenant
Improvements, subject to all the terms and conditions of the Lease and this
Construction Agreement. If Tenant does not employ Swinerton & Walberg as the
Contractor, Landlord shall provide access and entry to the Premises to Tenant
upon substantial completion of the Base Building Improvements. Upon and
following any entry into the Premises by Tenant prior to the commencement of the
Lease Term, Tenant shall perform all of the obligations of Tenant applicable
under the Lease during the Term (except the obligation to pay Basic Monthly
Rental and Tenant's Percentage Share of Operating Expenses and Real Property
Taxes), including, without limitation, obligations pertaining to insurance,
indemnity, compliance with laws and hazardous substances. In addition to the
indemnity obligations of Tenant under the Lease, Tenant shall indemnify, defend
and protect Landlord and hold Landlord harmless from any and all claims,
proceedings, loss, cost, damage, causes of action, liabilities, injury or
expense arising out of or related to claims of injury to or death of persons or
damage to property to the extent occurring or resulting from the presence in the
Premises or the Building of Tenant or its representatives in or about the
Premises or Building during the construction period, except to the extent caused
by the negligence of Landlord, such indemnity to include, but without
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limitation, the obligation to provide all costs of defense against any such
claims. This indemnity shall survive the expiration or sooner termination of the
Lease.
9. Obligation of Tenant To Provide As-Built Plans. Within thirty
(30) days of substantial completion of the Tenant Improvements, Tenant shall
cause Tenant's Architect to provide Landlord with a complete set of plans on
mylar and specifications reflecting the actual conditions of the Tenant
Improvements as constructed in the Premises, together with a copy of such plans
on diskette in the AutoCAD format or such other format as may then be in common
use for computer assisted design purposes.
10. Reimbursement and Compensation. Tenant shall reimburse Landlord
for all actual out-of-pocket costs incurred by Landlord in connection with the
design and review of the Conceptual Plans and Working Drawings, provided
Landlord gives Tenant prior notice that a specific cost will be incurred.
Landlord may obtain any reimbursement, payment or compensation required to be
paid by Tenant hereunder by deducting the amount of such reimbursement, payment
or compensation from Landlord's Contribution.
11. Contractor Payments. Tenant shall be responsible for payment of
the difference between (a) Landlord's Contribution (as defined in Paragraph 12)
and (b) the Contractor's Bid, as such Contractor's Bid may be modified to
reflect change orders (such difference to be referred to herein as the "Tenant's
Contribution"). Landlord shall make progress payments on a pro rata basis from
Landlord's Contribution (in the proportion that the Landlord's Contribution
bears to the Contractor's Bid, modified to reflect change orders) from time to
time as the Tenant Improvements are constructed, based upon statements and
invoices submitted from Contractor and provided Tenant makes a proportionate
payment from Tenant's Contribution. Landlord shall pay the balance of Landlord's
Contribution upon receipt of properly executed mechanics lien releases in
compliance with California Civil Code Section 3262(d)(4) (Unconditional Waiver
and Release Upon Final Payment) and upon Landlord's determination that no
substandard work exists which adversely affects the mechanical, electrical,
plumbing, heating, ventilating and air conditioning, life-safety or other
systems of the Building, the curtain wall of the Building, the structure or
exterior appearance of the Building, or any other tenant's use of such other
tenant's premises in the Building. Tenant shall pay the balance due on any
invoice or statement to the extent Landlord's payments do not fully cover such
amount. Landlord shall be entitled to suspend or terminate construction of the
Tenant Improvements and to declare Tenant in default in accordance with the
terms of the Lease if payment by Tenant of any amounts required to be paid by
Tenant under this Paragraph 11 are not received by Contractor when due or
properly contested or bonded by Tenant.
12. Landlord's Contribution. Landlord shall provide a total of
$2,209,650.00 (which is based on a Landlord Contribution of $25.00 per rentable
square foot) ("Landlord's Contribution"), as provided in this Paragraph 12
toward the payment for the design and construction of the Tenant Improvements in
the Premises. Landlord shall in accordance with this Construction Agreement
apply Landlord's Contribution to the cost of designing and constructing the
Tenant Improvements and for the other purposes specifically provided in this
Construction Agreement. The obligation of Landlord to make any one or more
payments pursuant to the
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provisions of this Paragraph 12 or to proceed with the construction of the Base
Building Improvements shall be suspended without further act of the parties
during any such time as there exists an Event of Default under the Lease or this
Construction Agreement. Nothing in this Paragraph 12 shall affect the
obligations of Tenant under the Lease with respect to any alterations, additions
and improvements within the Premises, including, without limitation, any
obligation to obtain the prior written consent of Landlord hereto.
13. Delays.
(a) Landlord Delay. The term "Landlord Delay" shall mean a
delay in substantial completion of the Tenant Improvements as a result of
Landlord's failure to approve the Conceptual Plans or the Working Drawings
within the time periods provided for such approval. Tenant and Landlord
acknowledge that subject to Paragraph 2(a) of the Lease, Rental shall commence
on or before March 1, 2000 regardless of whether or not the Tenant Improvements
are complete and ready for occupancy by such date. Tenant assumes full
responsibility for possible self-imposed delay and acknowledges that Rental may
commence 2 to 4 months prior to actual completion and occupancy of all or part
of the Premises.
(b) Tenant Delay. The term "Tenant Delay" shall mean a delay
in substantial completion of the Base Building Improvements, to the extent
caused by (i) Tenant's request for changes to the Base Building Improvements
pursuant to Schedule 2 attached hereto or (ii) entry into the Premises prior to
substantial completion of the Base Building Improvements by Tenant, or any of
Tenant's agents, employees, licensees, contractors or subcontractors.
14. Miscellaneous.
(a) Tenant's Representative. Tenant hereby designates Jim
Barrett as its sole representative with respect to the matters set forth in this
Construction Agreement, who shall have full authority and responsibility to act
on behalf of the Tenant as required in this Construction Agreement, and Landlord
shall be entitled to rely upon the decisions and agreements made by such
representative as binding upon Tenant.
(b) Landlord's Representative. Landlord hereby designates
Drew Gordon as its sole representatives with respect to the matters set forth in
this Construction Agreement, who, until further notice to Tenant, shall have
full authority and responsibility to act on behalf of the Landlord as required
in this Construction Agreement.
(c) Tenant's Default. If Tenant fails to make any payments
when due under this Construction Agreement or otherwise fails to perform any
obligation hereunder in a timely manner, which failure is not remedied after
notice and expiration of the cure period, if any, specified in Paragraph 18 of
the Lease, such failure shall constitute an Event of Default. Notwithstanding
any provision to the contrary contained in this Lease, if an Event of Default as
described in Paragraph 18 of the Lease or an Event of Default under this
Construction Agreement has occurred at any time on or before the Commencement
Date, then until such Event of Default is cured, (i) in addition to all other
rights and remedies granted to Landlord pursuant to the Lease, Landlord shall
have the right to withhold payment of all or any portion of the Landlord's
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Contribution, and (ii) all other obligations of Landlord under the terms of this
Construction Agreement shall be suspended until such time as such default is
cured (in which case, Tenant shall be responsible for any delay in the
substantial completion of the Premises caused by such inaction by Landlord).
(d) Completion of Building. The Tenant Improvements may be
deemed substantially complete even though improvements in certain portions of
the Building have not been fully completed (so long as such does not interfere
with Tenant's efficient conduct of its business), and even though Tenant's
personal property may have not been installed.
(e) Merger. Except as expressly set forth in this
Construction Agreement or the Lease, Landlord has no other agreement with Tenant
and has no other obligation to do any work or pay any amounts with respect to
the Premises. Any other work in the Premises which may be permitted by Landlord
pursuant to the terms and conditions of the Lease shall be done at Tenant's sole
cost and expense and in accordance with the terms and conditions of the Lease.
(f) Applicability of Construction Agreement. This
Construction Agreement shall not be deemed applicable to any additional space
added to the original Premises at any time or from time to time, whether by any
options under the Lease or otherwise, or to any portion of the original Premises
or any additions thereto in the event of damage or destruction of the Premises,
condemnation of the Premises, or renewal or extension of the initial Term of the
Lease, whether by any options under the Lease or otherwise, unless expressly so
provided in the Lease or any amendment or supplement thereto.
(g) Force Majeure. Subject to the provisions of this
Paragraph 14(g), Landlord and Tenant shall be excused for the period of any
delay in the performance of any obligations hereunder, when prevented from so
doing by cause or causes beyond Landlord's or Tenant's, as the case may be,
reasonable control which shall mean any prevention, delay or stoppage due to
strikes, lockouts, labor disputes, acts of god, inability to obtain services,
labor, or materials or reasonable substitutes therefor, governmental actions,
civil commotions, fire or other casualty, and other causes beyond Landlord's or
Tenant's reasonable control; (individually, a "Force Majeure Event" and
collectively, "Force Majeure Events"). Landlord and Tenant, as the case may be,
shall be excused for delay in the performance of obligations hereunder provided:
(i) neither Landlord nor Tenant shall be entitled to
rely upon this Paragraph 14(g) unless it shall advise the other in writing of
the existence of any Force Majeure Event preventing the performance of any
obligation of Landlord or Tenant, as the case may be, within two (2) business
days after becoming aware of the commencement of the Force Majeure Event; and
(ii) neither Landlord nor Tenant shall be excused
from performance of any obligation for a period beyond the first to occur of (x)
90 days after the commencement of the Force Majeure Event; or (y) the
termination of the Force Majeure Event.
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SCHEDULE 1 TO CONSTRUCTION AGREEMENT
BASE BUILDING IMPROVEMENTS
1) All common areas including elevator lobbies and, if required, any
multi-tenant corridors finished on corridor side only and in compliance
with all local, state and federal code requirements including the
Americans with Disabilities Act.
2) Hot water loop installed to each unoccupied tenant zone or a respective
credit (Landlord's cost) for same work as detailed on Core and Shell
design. Empty condenser water chases stubbed to each tenant zone.
3) Vertical floor deflection not to exceed 3/4" over 20' under total loads,
non-cumulative.
4) Floors shall be designed to accommodate no less than 50 pounds per
square foot (psf) live load plus 20 psf partition loads for a total of
70 psf. Egress corridors up to 6 feet in width with a 100 psf live load
may be located anywhere on the floor.
5) Supply air delivered to floor shall be no lower than one CFM per USF and
temperature no higher than fifty-five degrees at discharge shaft, on
floor.
6) Floors shall include a fire sprinkler system, including a main loop,
branch mains and upright heads installed to provide full coverage for an
unoccupied floor.
7) Operational freight elevator.
8) Public area water fountains as required by code and ADA for unoccupied
floors.
9) Building electrical service rated at 277/480 volt, 3-phase, 4-wire
system, 8.0 watts psf of connected load provided to tenant zones. Meter
sockets and main disconnects will originate in main electrical room in
basement and in electrical closet on each floor with one (1) 3-inch
conduit stubbed to each tenant zone.
10) A telephone terminal room will be located on each floor with one (1)
3-inch conduit stubbed to each tenant zone.
11) Two (2) 20-amperes, 277 volt circuits for emergency egress lighting and
exist signs stubbed to each tenant zone. A "tenant zone" is one-quarter
of a floor.
12) A main building fire alarm system complete with control panels, LED
annunciator panel, manual pull stations, smoke detectors, magnetic door
holders, horns and strobes provided on every floor. Fire alarm circuits
provided in each tenant zones will be sized at a ratio of 5 amps of fire
alarm current per 200 amps of power.
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13) Finished men's and women's restrooms on each floor of the Premises.
14) Finished fire stairs designed to meet current governmental codes.
15) Abatement of all asbestos in the Premises.
16) Fireproofing on structural steel members as required by code.
17) All core walls and perimeter walls to be insulated and drywalled, taped,
sanded and ready to accept tenant's finishes.
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SCHEDULE 2 TO CONSTRUCTION AGREEMENT
TENANT'S PROPOSED MODIFICATIONS TO BASE BUILDING IMPROVEMENTS
1. Landlord acknowledges that Tenant desires to modify the Base
Building Improvements in the manner shown on Schedule 2A attached hereto, and
Landlord and Tenant agree to employ the same spirit of cooperation in resolving
any issues arising pursuant to this Schedule 2 as the parties employed in
negotiation of the Lease. Specifically, Landlord agrees to review in good faith
the modifications proposed by Tenant, but Landlord, in its sole discretion, may
determine whether to make any such modifications. By way of example and not
limitation, Landlord may decline to make any proposed modification if Landlord,
in its sole discretion (exercised in good faith), determines that one or more of
the following situations apply: (a) the proposed modification would cause delay
in the delivery of premises to other tenants in the Building; (b) the proposed
modification may impair the structural strength of the Building or adversely
affect the Building's electrical, plumbing, mechanical or life safety systems;
(c) the proposed modification would increase the cost of maintaining or
operating the Building, unless Tenant agrees to pay such additional cost; (d)
the proposed modification would detract from the image of the Building or is not
consistent with the architectural design of the Building; or (e) the proposed
modification is otherwise not in the best interests of Landlord and/or other
tenants in the Building.
2. If Landlord agrees to make any of the proposed modifications on
Schedule 2A, Tenant shall be responsible for all costs directly or indirectly
incurred as a result of such modifications, including, without limitation,
alterations to existing Base Building Improvements necessitated by such changes
and architectural and engineering fees and costs incurred in reviewing or
implementing the proposed modifications ("Additional Costs"). Tenant shall pay
the estimated amount of the Additional Costs within five (5) days after request
by Landlord, accompanied by reasonable supporting documentation. As soon as
reasonably practical following completion of the Base Building Improvements,
Landlord shall provide to Tenant a final accounting of the Additional Costs.
Landlord shall refund any overpayments to Tenant, or Tenant shall pay any
additional amount owing to Landlord, within thirty (30) days after such
accounting is delivered to Tenant.
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EXHIBIT D
COMMENCEMENT DATE MEMORANDUM
THIS MEMORANDUM is entered into as of __________ __, ____ by and between
SKS BRANNAN ASSOCIATES, LLC, a Delaware limited liability company ("Landlord"),
and ___________________________ ("Tenant"), with respect to that certain Office
Lease dated as of _____________ __, 1999 (the "Lease") respecting certain
premises (the "Premises") located in the building known as 475 Brannan Street,
San Francisco, California.
Pursuant to Paragraph 2 of the Lease, Landlord and Tenant hereby confirm
and agree that the Commencement Date (as defined in the Lease) is ______________
__, _____ and that the Expiration Date (as defined in the Lease) is
_____________ __, 20__.
This Memorandum supplements, and shall be a part of, the Lease.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
Memorandum as of the day and year first above written.
LANDLORD:
SKS BRANNAN ASSOCIATES, LLC,
a Delaware limited liability company
By SKS Investments LLC, a Delaware
limited liability company, Member
By:
-------------------------------------
, Member
-----------------------------
TENANT:
QUOKKA SPORTS, INC.,
a Delaware corporation
By:
-------------------------------------
Its:
-------------------------------------
By:
-------------------------------------
Its:
-------------------------------------
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EXHIBIT 23.02
We consent to the inclusion in this registration statement on Form S-1 of our
report dated January 22, 1999, except as to Note 12 for which the date is July
1, 1999, on our audits of the financial statements of Quokka Sports, Inc. We
also consent to the references to our firm under the caption "Experts."
/s/ PricewaterhouseCoopers
- ------------------------------------
PricewaterhouseCoopers LLP
San Francisco, California
July 16, 1999
