<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1998
REGISTRATION NO. 333-59751
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
THEGLOBE.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7310 14-1781422
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
----------------
31 WEST 21ST STREET
NEW YORK, NEW YORK 10010
(212) 886-0800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
TODD V. KRIZELMAN
STEPHAN J. PATERNOT
THEGLOBE.COM, INC.
31 WEST 21ST STREET
NEW YORK, NEW YORK 10010
(212) 886-0800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF CO-AGENTS FOR SERVICE)
----------------
COPIES TO:
VALERIE FORD JACOB, ESQ. ALLEN L. WEINGARTEN, ESQ.
STUART H. GELFOND, ESQ. MORRISON & FOERSTER LLP
FRIED, FRANK, HARRIS, SHRIVER & 1290 AVENUE OF THE AMERICAS
JACOBSON NEW YORK, NEW YORK 10104
ONE NEW YORK PLAZA (212) 468-8000
NEW YORK, NEW YORK 10004
(212) 859-8000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO 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 (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the registration statement for the same
offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Common Stock, $.001 par val-
ue(2)......................... $50,000,000 $14,750
</TABLE>
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- -------------------------------------------------------------------------------
(1) Estimated pursuant to Rule 457(o) solely for the purpose of calculating
the registration fee.
(2) The Common Stock offered hereby includes Preferred Stock Purchase Rights
(the "Rights"). The Rights will be associated and trade with the Common
Stock. The value, if any, of the Rights will be reflected in the market
price of the Common Stock.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 29, 1998
PRELIMINARY PROSPECTUS
3,100,000 SHARES
COMMON STOCK
All of the 3,100,000 shares of Common Stock, par value $0.001 per share (the
"Common Stock"), offered hereby are being sold by theglobe.com, inc. (the
"Company" or "theglobe.com"). Of the shares offered hereby, the Company is
offering (the "Concurrent Offering") directly to certain investors, including
officers and directors of the Company, their relatives and their business
associates (collectively, the "Concurrent Purchasers"), shares having an
aggregate initial public offering price of up to approximately $5 million
(416,667 shares assuming an initial public offering price of $12.00 per share,
which is the midpoint of the estimated initial public offering price range set
forth below). If the Concurrent Offering is consummated, the balance of the
3,100,000 shares of Common Stock offered hereby will be included in the initial
public offering (the "Initial Public Offering"). The price per share will be
the same in the Initial Public Offering and the Concurrent Offering. The
consummation of the Concurrent Offering and the Initial Public Offering are
contingent upon each other. If the Concurrent Offering is not consummated for
the proposed amount, the shares of Common Stock not sold to the Concurrent
Purchasers will not be offered to purchasers in the Initial Public Offering.
See "Concurrent Offering." References herein to the "Offerings" include the
Initial Public Offering and the Concurrent Offering.
Prior to the Offerings, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price for the Common Stock will be between $11.00 and $13.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The shares of Common Stock have been
approved for quotation on the Nasdaq National Market under the symbol "TGLO,"
subject to official notice of issuance.
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING NET
PRICE TO AND PLACEMENT PROCEEDS TO
PUBLIC AGENT FEES(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share
Initial Public Offering................... $ $ $
Concurrent Offering....................... $ $ $
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Total(3).................................... $ $ $
</TABLE>
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(1) Bear, Stearns & Co. Inc. and Volpe Brown Whelan & Company are acting as the
Company's placement agents (the "Placement Agents") in connection with the
Concurrent Offering, for which they will receive the Placement Agent fees
indicated above. The Company has agreed to indemnify the Underwriters and
the Placement Agents against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,275,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
402,500 additional shares of Common Stock on the same terms and conditions
as set forth above, to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting and Placement
Agent Fees and Net Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
----------
The shares of Common Stock included in the Initial Public Offering are being
offered by the Underwriters, subject to prior sale, when, as and if delivered
to and accepted by the Underwriters against payment therefor and subject to
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify the Initial Public Offering and to reject orders in whole or
in part. It is expected that delivery of the Common Stock will be made against
payment therefor on or about , 1998 at the offices of Bear, Stearns & Co.
Inc., 245 Park Avenue, New York, New York 10167.
----------
BEAR, STEARNS & CO. INC. VOLPE BROWN WHELAN & COMPANY
The date of this Prospectus is , 1998.
<PAGE>
theglobe.com is one of the world's leading online communities with over 6.5
million unique users+ and over 1.9 million members.*
+ ABC Interactive, August 1998 Site Report
* as determined by management of
theglobe.com
theglobe.com [Logo] [ORBIT LOGO]
Focus on social dynamics of a community:
home work family travel
entertainment special interests
day-to-day conversation
[graphics of face photographs, screen shots of Web site pages]
[FOLD-OUT COVER]
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OF-
FERINGS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK
IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB-
SEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 4
Risk Factors......................... 7
Cautionary Notice Regarding Forward-
Looking Statements.................. 24
Concurrent Offering.................. 25
Use of Proceeds...................... 25
Dividend Policy...................... 25
Capitalization....................... 26
Dilution............................. 27
Selected Financial Data.............. 28
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 29
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business........................... 39
Management......................... 52
Certain Relationships and Related
Transactions...................... 61
Principal Stockholders............. 63
Description of Capital Stock....... 65
Shares Eligible for Future Sale.... 72
Underwriting....................... 74
Legal Matters...................... 75
Experts............................ 75
Additional Information............. 75
Index to Financial Statements...... F-1
</TABLE>
----------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS AND
SUBSCRIPTIONS.
----------------
The Company has a registered United States trademark for theglobe. The
Company has filed United States trademark applications for theglobe.com and
theglobe.com logo. Additionally, the Company has submitted trademark
applications in various foreign countries for theglobe.com and theglobe.com
logo. See "Business--Intellectual Property and Proprietary Rights."
----------------
This Prospectus includes statistical data regarding the Company and the
Internet industry. Such data are based on Company records or are taken or
derived from information published by various sources, including Media Metrix,
Inc., a media research firm specializing in market and technology measurement
on the Internet ("Media Metrix"), Jupiter Communications, LLC, a media
research firm focusing on the Internet industry ("Jupiter Communications"),
International Data Corporation, a provider of market information and strategic
information for the information technology industry ("IDC") and ABC
Interactive, an auditor of statistical information for the Internet industry.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the Financial Statements
and Notes related thereto appearing elsewhere in this Prospectus. Except where
the context otherwise requires, all references in this Prospectus to (a) the
"Company" or "theglobe.com" refer to theglobe.com, inc., a Delaware
corporation, (b) the "Web" refer to the World Wide Web and (c) the "site" refer
to the Company's Web site. Unless otherwise indicated or unless the context
otherwise requires, all information in this Prospectus reflects, upon the
closing of the Offerings, (i) the automatic conversion of all outstanding
shares of the Company's Preferred Stock into shares of Common Stock, (ii) no
exercise of the Underwriters' over-allotment option and (iii) the Company's 1
for 2 reverse split of the Company's capital stock effected as of September 24,
1998.
THE COMPANY
theglobe.com is one of the world's leading online communities with over 1.9
million members in the United States and abroad. In August 1998, over 6.5
million unique users visited the site. theglobe.com is a destination on the
Internet where users are able to personalize their online experience by
publishing their own content and interacting with others having similar
interests. theglobe.com facilitates this interaction by providing various free
services, including home page building, discussion forums, chat, e-mail and a
marketplace where members can purchase a variety of products and services.
Additionally, theglobe.com provides its users news, weather, movie and music
reviews, multi-player gaming, horoscopes and personals. By satisfying its
users' personal and practical needs, theglobe.com seeks to become their online
home. The Company's primary revenue source is the sale of advertising, with
additional revenues generated through e-commerce arrangements and the sale of
membership subscriptions for enhanced services.
The Company was founded by Todd V. Krizelman and Stephan J. Paternot in May
1995 to capitalize on the growing demand for online destinations that allow
users to develop their own identities and establish relationships with other
Internet users. theglobe.com offers users the ability to become active
participants in its community and provides users set-up tools and guidance to
build a personal Web site quickly and easily. theglobe.com community is
organized in an intuitive hierarchy modeled after the real world. There are six
"Themes of Interest": Arts and Entertainment, Business and Finance, Lifestyles,
Romance, Special Interests and Geographical Interests. Themes of Interest are
subdivided into 24 "Cities," which are further divided into 75 "Districts."
Within each District members have the ability to create or join "Interest
Groups," theglobe.com's smallest form of community. There are currently 325
Interest Groups. Interest Groups, once proposed by any member, are posted for
petition. Those groups that garner enough votes then go "live" on the site.
Members are not limited as to the number of communities they can join and are
able to leave an Interest Group at any time. Because of this, the communities
are dynamic and evolve as member interests change. "Community Leaders" are
elected to manage communities and are able to highlight member content,
communicate directly to constituents and organize events. The community focus
of theglobe.com offers several advantages to the Company that include (i)
member loyalty, (ii) member-developed content at a low cost to the Company and
(iii) the ability to offer advertising targeted to specific user interests. In
the last three months, the Company had approximately 110 advertisers, including
Coca Cola, Dunkin' Donuts, J. Crew, Procter & Gamble, Sony, 3Com and Visa.
Since its founding, theglobe.com has experienced strong growth. According to
Media Metrix, theglobe.com was ranked as the fourth fastest-growing Web site in
terms of audience reach for the first half of 1998. Over 6.5 million unique
users visited the site in August 1998, according to ABC Interactive.
Additionally, the site has added approximately 100,000 new members every month
since October 1997. Approximately 25% to 35% of theglobe.com's monthly traffic
originates from abroad, reflecting the site's international appeal.
theglobe.com's goal is to be the leading online community site. The Company
seeks to attain this goal through the following key strategies: (i) improving
user experience, (ii) developing brand identity and awareness, (iii) increasing
new membership acquisition through strategic alliances, (iv) expanding
globally, (v) further developing e-commerce and (vi) enhancing membership
services.
4
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock offered by the
Company..................... 3,100,000 shares
Common Stock to be
outstanding after the
Offerings................... 9,791,339 shares(1)(2)
Use of Proceeds.............. The Company will use the net proceeds of the
Offerings for advertising, brand name promotions
and other general corporate purposes, including
investment in the development and functionality
of theglobe.com Web site, enhancements of the
Company's network infrastructure and working
capital. The Company may also use a portion of
the proceeds for strategic alliances and
acquisitions. See "Use of Proceeds."
Proposed Nasdaq National
Market Symbol............... "TGLO"
</TABLE>
- --------
(1) Based on the number of shares of Common Stock outstanding as of June 30,
1998, including 5,473,735 shares of Common Stock that will be issued upon
the automatic conversion of the Company's existing preferred stock (the
"Preferred Stock") upon consummation of the Offerings. Excludes 2,023,009
shares of Common Stock issuable upon the exercise of outstanding warrants
(the "Warrants") to acquire Common Stock at an exercise price of
approximately $2.91 per share following consummation of the Offerings. If
the Underwriters' over-allotment option is exercised in full, an additional
402,500 shares of Common Stock would be offered by the Company, and
10,193,839 shares of Common Stock would be outstanding after the Offerings.
(2) Also excludes (i) 822,650 and 693,771 shares of Common Stock issuable upon
the exercise of stock options that would be outstanding after the Offerings
under the Company's 1998 Stock Option Plan and 1995 Stock Option Plan,
respectively, at a weighted average exercise price of $11.81 per share
(assuming an initial public offering price of $12.00 per share) and $0.72
per share, respectively; and (ii) 377,350 and 4,625 shares of Common Stock
reserved for future issuance under the 1998 Stock Option Plan and the 1995
Stock Option Plan, respectively. See "Capitalization," "Management--
Executive Compensation," "Description of Capital Stock" and the Financial
Statements and the Notes related thereto appearing elsewhere in this
Prospectus.
RISK FACTORS
Purchasers of the Common Stock in the Offerings should carefully consider the
risk factors set forth under the caption "Risk Factors" beginning on page 7 and
the other information included in this Prospectus prior to making an investment
decision regarding the Common Stock. An investment in the shares of Common
Stock offered hereby involves a high degree of risk. The Company has a limited
operating history and anticipates losses and negative operating cash flow for
the foreseeable future. The Company's operations are dependent on the growth
and commercial viability of the Internet and an unproven business model, and
are subject to government regulation and legal uncertainties associated with
the Internet, security risks and intense competition. See "Risk Factors" for a
description of these and other risks.
----------------
The Company was incorporated in May 1995 in the State of Delaware. The
Company's principal executive offices are located at 31 West 21st Street, New
York, New York 10010, and its telephone number is (212) 886-0800.
5
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth certain summary financial data for the
Company. This information should be read in conjunction with the Financial
Statements and Notes related thereto appearing elsewhere in this Prospectus.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
MAY 1, 1995 SIX MONTHS
(INCEPTION) YEAR ENDED ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, ---------------------- ----------------------
1995 1996 1997 1997 1998
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.............. $ 27 $ 229 $ 770 $ 208 $ 1,173
Gross profit.......... 14 113 347 102 670
Loss from operations.. (66) (772) (3,883) (779) (6,470)
Net loss.............. (66) (750) (3,584) (767) (5,824)
Basic and diluted net
loss per share(1).... (0.06) (0.67) (3.13) (0.67) (5.01)
Weighted average
shares outstanding
used in basic and
diluted per share
calculation(1)....... 1,125,000 1,125,000 1,146,773 1,140,960 1,161,389
Pro forma basic and
diluted net loss per
share(2)............. $ (0.91) $ (0.95)
Weighted average
shares used in
computing pro forma
basic and diluted net
loss per share
calculation(2)....... 3,920,095 6,115,148
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments.. $13,155 46,651
Working capital....................................... 10,452 43,948
Total assets.......................................... 15,603 49,099
Capital lease obligations, excluding current
installments......................................... 629 629
Total stockholders' equity............................ 11,571 45,067
</TABLE>
- --------
(1) Weighted average shares do not include any common stock equivalents because
such inclusion would have been anti-dilutive. See the Financial Statements
and Notes related thereto appearing elsewhere in this Prospectus for the
determination of shares used in computing basic and diluted loss per share.
(2) Pro forma gives effect to the conversion of all outstanding shares of the
Company's Preferred Stock into Common Stock upon the closing of the
Offerings as if such conversion had occurred on January 1, 1997, or the
date of issuance, if later.
(3) As adjusted to reflect the sale of 3,100,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $12.00 per share (the
midpoint of the estimated initial public offering price range set forth on
the front cover of this Prospectus) after deducting the estimated
underwriting and Placement Agent fees and estimated offering expenses
payable by the Company. See "Use of Proceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
Investing in the Common Stock will provide investors with an equity
ownership in the Company. As Company stockholders, investors will be subject
to risks inherent in the Company's business. The performance of the shares of
Common Stock will reflect the performance of the Company's business relative
to, among other things, competition, general economic and market conditions
and industry conditions. In addition, the stock market in general, and the
market prices for Internet-related companies in particular, have experienced
extreme volatility that has often been unrelated to the operating performance
of such companies. The value of an investment in the Common Stock may increase
or decline and could result in a loss. Prospective investors should carefully
consider the following factors as well as other information contained in this
Prospectus before deciding to invest in shares of the Common Stock.
LIMITED OPERATING HISTORY
The Company was founded in May 1995. Accordingly, the Company has a limited
operating history upon which an evaluation of the Company, its current
business and its prospects can be based, each of which must be considered in
light of the risks, expenses and problems frequently encountered by all
companies in the early stages of development, and particularly by such
companies entering new and rapidly developing markets like the Internet. Such
risks include, without limitation, the lack of broad acceptance of the
community model on the Internet, the possibility that the Internet will fail
to achieve broad acceptance as an advertising and commercial medium, the
inability of the Company to attract or retain members, the inability of the
Company to generate significant e-commerce-based revenues or subscription
service revenues from its members, a new and relatively unproven business
model, the Company's ability to anticipate and adapt to a developing market,
the failure of the Company's network infrastructure (including its server,
hardware and software) to efficiently handle its Internet traffic, changes in
laws that adversely affect the Company's business, the ability of the Company
to manage effectively its rapidly expanding operations, including the amount
and timing of capital expenditures and other costs relating to the expansion
of the Company's operations, the introduction and development of different or
more extensive communities by direct and indirect competitors of the Company,
including those with greater financial, technical and marketing resources, the
inability of the Company to maintain and increase levels of traffic on its Web
site, the inability of the Company to attract, retain and motivate qualified
personnel and general economic conditions. To address these risks, the Company
must, among other things, attract and retain members, maintain its customer
base and attract a significant number of new advertising customers, respond to
competitive developments, develop and extend its brand, continue to form and
maintain relationships with strategic partners, continue to attract, retain
and motivate qualified personnel, and continue to develop and upgrade its
technologies and commercialize its services incorporating such technologies.
There can be no assurance that the Company will be successful in addressing
such risks, and any failure to do so could have a material adverse effect on
the Company's business, results of operations and financial condition.
FLUCTUATING RATES OF REVENUE GROWTH
There can be no assurance the Company's revenue growth in recent periods
will continue or increase. The Company's limited operating history makes the
prediction of future results difficult or impossible and, therefore, the
Company's recent revenue growth should not be taken as an indication of any
growth that can be expected in the future. Furthermore, its limited operating
history leads the Company to believe that period-to-period comparisons of its
operating results are not meaningful and that the results for any period
should not be relied upon as an indication of future performance. To the
extent that revenues do not grow at anticipated rates, the Company's business,
results of operations and financial condition would be materially and
adversely affected.
ANTICIPATED LOSSES FOR THE FORSEEABLE FUTURE
The Company has not achieved profitability to date, and the Company
anticipates that it will continue to incur net losses for the foreseeable
future. The extent of these losses will depend, in part, on the amount of
growth in the Company's revenues from advertising sales, e-commerce and
membership subscription fees. As of June 30, 1998, the Company had an
accumulated deficit of $10.2 million. The Company expects that its operating
expenses will increase significantly during the next several years, especially
in the areas of sales and marketing,
7
<PAGE>
and brand promotion. Thus, the Company will need to generate increased
revenues to achieve profitability. To the extent that increases in its
operating expenses precede or are not subsequently followed by commensurate
increases in revenues, or that the Company is unable to adjust operating
expense levels accordingly, the Company's business, results of operations and
financial condition would be materially and adversely affected. There can be
no assurance that the Company will ever achieve or sustain profitability or
that the Company's operating losses will not increase in the future.
DEPENDENCE ON CONTINUED GROWTH IN USE AND COMMERCIAL VIABILITY OF THE INTERNET
The Company's future success is substantially dependent upon continued
growth in the use of the Internet. To support advertising sales, e-commerce
and membership service fees on theglobe.com, the Internet's recent and rapid
growth must continue, and e-commerce on the Internet must become widespread.
None of these can be assured. The Internet may prove not to be a viable
commercial marketplace. Additionally, due to the ability of consumers to
easily compare prices of similar products or services on competing Web sites,
gross margins for e-commerce transactions may narrow in the future and,
accordingly, the Company's revenues from e-commerce arrangements may be
materially negatively impacted. If use of the Internet does not continue to
grow, the Company's business, results of operations and financial condition
would be materially and adversely affected.
Additionally, to the extent that the Internet continues to experience
significant growth in the number of users and the level of use, there can be
no assurance that its technical infrastructure will continue to be able to
support the demands placed upon it. The necessary technical infrastructure for
significant increases in e-commerce, such as a reliable network backbone, may
not be timely and adequately developed. In addition, performance improvements,
such as high-speed modems, may not be introduced in a timely fashion.
Furthermore, security and authentication concerns with respect to transmission
over the Internet of confidential information, such as credit card numbers,
may remain. Issues like these could lead to resistance against the acceptance
of the Internet as a viable commercial marketplace. Also, the Internet could
lose its viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of activity, or
due to increased governmental regulation. Changes in or insufficient
availability of telecommunications services could result in slower response
times and adversely affect usage of the Internet. To the extent the Internet's
technical infrastructure does not effectively support the growth that may
occur, the Company's business, results of operations and financial condition
would be materially and adversely affected.
DEPENDENCE ON MEMBERS FOR CONTENT AND PROMOTION
The Company depends substantially upon member involvement for content and
for word-of-mouth promotion. Particularly, the Company depends upon the
voluntary efforts of certain highly motivated members who are most active in
developing content to attract other Internet users to the site. The Company
expects such member involvement to reduce the need for the Company to expend
resources on content development and site promotion. There can be no assurance
that members will continue to generate significant content or to promote the
site or that the member-generated content or promotional efforts will continue
to attract other Internet users. There also can be no assurance that the
Company's business would not be materially and adversely affected if its most
highly active members became dissatisfied with the Company's services or its
focus on the commercialization of those services.
UNPROVEN BUSINESS MODEL; DEVELOPING MARKET; UNPROVEN ACCEPTANCE OF THE
COMPANY'S PRODUCTS
The Company's business model is new and relatively unproven. The model
depends upon the Company's ability to generate multiple revenue streams by
leveraging its community platform. To be successful, the Company must, among
other things, develop and market products and services that achieve broad
market acceptance by its users, advertisers and e-commerce vendors. There can
be no assurance that any Internet community, including theglobe.com, will
achieve broad market acceptance. Accordingly, no assurance can be given that
the Company's business model will be successful or that it can sustain revenue
growth or be profitable.
The market for the Company's products and services is new, rapidly
developing and characterized by an increasing number of market entrants. As is
typical of any new and rapidly evolving market, demand and market acceptance
for recently introduced products and services are subject to a high level of
uncertainty and risk.
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Moreover, because this market is new and rapidly evolving, it is difficult to
predict its future growth rate, if any, and its ultimate size. If the market
fails to develop, develops more slowly than expected or becomes saturated with
competitors, or if the Company's products and services do not achieve or
sustain market acceptance, the Company's business, results of operations and
financial condition would be materially and adversely affected. See
"Business--Industry Background."
BRAND IDENTITY IS CRITICAL TO THE COMPANY; RISKS ASSOCIATED WITH BRAND
DEVELOPMENT
The Company believes that establishing and maintaining brand identity is a
critical aspect of efforts to attract and expand its member base, Internet
traffic and advertising and commerce relationships. Furthermore, the Company
believes that the importance of brand recognition will increase as low
barriers to entry encourage the proliferation of Internet sites. In order to
attract and retain members, advertisers and commerce vendors, and in response
to competitive pressures, the Company intends to increase substantially its
financial commitment to the creation and maintenance of brand loyalty among
these groups. The Company plans to accomplish this, although not exclusively,
through advertising campaigns in several forms of media, including television,
print, billboards, buses, telephone kiosks, online media, and other marketing
and promotional efforts. If the Company does not generate a corresponding
increase in revenue as a result of its branding efforts or otherwise fails to
promote its brand successfully, or if the Company incurs excessive expenses in
an attempt to promote and maintain its brand, the Company's business, results
of operations and financial condition would be materially and adversely
affected.
Promotion and enhancement of theglobe.com brand will also depend, in part,
on the Company's success in providing a high-quality "community experience."
Such success cannot be assured. If members, other Internet users, advertisers
and commerce vendors do not perceive theglobe.com community experience to be
of high quality, or if the Company introduces new services or enters into new
business ventures that are not favorably received by such parties, the value
of the Company's brand could be diluted. Such brand dilution could decrease
the attractiveness of theglobe.com to such parties, and could materially and
adversely affect the Company's business, results of operations and financial
condition.
SUBSTANTIAL RELIANCE ON ADVERTISING REVENUES; SHORT-TERM NATURE OF ADVERTISING
CONTRACTS; COMPANY GUARANTEE OF MINIMUM IMPRESSION LEVELS
The Company derives a substantial portion of its revenues from the sale of
advertisements on its site, and expects to continue to do so for the
foreseeable future. For the year ended December 31, 1997 and the six months
ended June 30, 1998, advertising revenues represented 77% and 89%,
respectively, of the Company's net revenues. The Company's business model
therefore is highly dependent on the amount of "traffic" on theglobe.com,
which has a direct effect on the Company's advertising revenues. The Company
is in the early stages of implementing its advertising sales programs which,
if not successful, could materially and adversely affect the Company's
business, results of operations and financial condition.
To date, substantially all of the Company's advertising contracts have been
for terms averaging one to two months in length, with relatively few longer-
term advertising contracts. Many of the Company's advertising customers have
limited experience with Internet advertising, have not devoted a significant
portion of their advertising expenditures to Internet advertising and may not
believe Internet advertising to be effective relative to traditional
advertising media. Also, the Company's advertising customers may object to the
placement of their advertisements on certain members' personal homepages, the
content of which they deem undesirable. There can be no assurance that the
Company's current advertisers will continue to purchase advertisements on
theglobe.com.
The Company's contracts with advertisers typically guarantee the advertiser
a minimum number of "impressions," or times that an advertisement is seen by
users of theglobe.com. To the extent that minimum impression levels are not
achieved for any reason, the Company may be required to "make good" or provide
additional impressions after the contract term, which may adversely affect the
availability of advertising inventory and which could have a material adverse
effect on the Company's business, results of operations and financial
condition. To the extent minimum guaranteed impressions are not met, the
Company defers recognition of the corresponding revenues until guaranteed
impression levels are achieved.
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Additionally, the process of managing advertising within a large, high-
traffic Web site such as the Company's is an increasingly important and
complex task. The Company licenses from DoubleClick, Inc. ("DoubleClick") its
advertising management system ("D.A.R.T."). Under the license agreement,
DoubleClick provides the Company an Internet advertising administration system
to facilitate the Company's management of advertising on its Web site. The
D.A.R.T. service is intended to permit the Company to generate ad tags,
schedule advertising to run in the online environments in which the Company
places the ad tags and generate reports on such advertising. The DoubleClick
agreement is for a term of three years and will expire on April 15, 2000,
subject to DoubleClick's right to terminate the agreement upon 30 days' notice
following the Company's breach of the terms of the agreement or if
DoubleClick, in its reasonable good faith discretion, determines that the
Company has used, could use or intends to use the D.A.R.T. technology in a
manner that could damage or cause injury to the D.A.R.T. technology or
reflects unfavorably on the reputation of DoubleClick. No assurance can be
given that DoubleClick will not elect to terminate the agreement. Any such
termination and replacement could disrupt the Company's ability to manage its
advertising operations for a period of time. In addition, to the extent that
the Company encounters system failures or material difficulties in the
operation of this system, the Company could be unable to deliver banner
advertisements and sponsorships through its site. Any extended failure of, or
material difficulties encountered in connection with, the Company's
advertising management system may expose the Company to "make good"
obligations with its advertisers, which, by displacing saleable advertising
inventory, among other consequences, would reduce revenues and could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company's ability to generate significant advertising revenues will
depend, in part, on its ability to create new advertising programs without
diluting the perceived value of its existing programs. The Company's ability
to generate advertising revenues will depend also, in part, on advertisers'
acceptance of the Internet as an attractive and sustainable medium, the
development of a large base of users of the Company's products and services,
the effective development of Web site content that provides user demographic
characteristics that will be attractive to advertisers, and government
regulation. The adoption of Internet-based advertising, particularly by those
advertisers that have historically relied upon traditional advertising media,
requires the acceptance of a new way of conducting business and exchanging
information. There can be no assurance that the market for Internet
advertising will continue to emerge or become sustainable. If the market
develops more slowly than expected, the Company's business, results of
operations and financial condition could be materially and adversely affected.
The Internet as an advertising medium has not been available for a
sufficient period of time to gauge its effectiveness as compared with
traditional advertising media. No standards have been widely accepted for the
measurement of the effectiveness of Internet-based advertising, and there can
be no assurance that any such standards will become widely accepted in the
future. Internet advertising rates are based in part on third-party estimates
of users of an Internet site. Such estimates are often based on sampling
techniques or other imprecise measures, and may materially differ from Company
estimates. There can be no assurance that advertisers will accept the
Company's or other parties' measurements of impressions. The rejection by
advertisers of such measurements could have a material adverse effect on the
Company's business, results of operations and financial condition.
The sale of Internet advertising is subject to intense competition that has
resulted in a wide variety of pricing models, rate quotes and advertising
services. This has made it difficult to project future levels of advertising
revenues and rates. It is also difficult to predict which pricing models, if
any, will achieve broad acceptance among advertisers. As described above, to
date, the Company has based its advertising rates on providing advertisers
with a guaranteed number of impressions, and any failure of the Company's
advertising model to achieve broad market acceptance, would have a material
adverse effect on the Company's business, results of operations and financial
condition.
"Filter" software programs that limit or remove advertising from an Internet
user's desktop are available to consumers. Widespread adoption or increased
use of such software by users or the adoption of such software by certain
Internet access providers could have a material adverse effect upon the
viability of advertising on the Internet and on the Company's business,
results of operations and financial condition.
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POTENTIAL FLUCTUATIONS IN OPERATING RESULTS; QUARTERLY FLUCTUATIONS
The Company's operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside the Company's
control. See "--Limited Operating History" and "--Fluctuating Rates of Revenue
Growth." As a strategic response to changes in the competitive environment,
the Company may from time to time make certain pricing, service or marketing
decisions or acquisitions that could have a material short-term or long-term
adverse effect on the Company's business, results of operations and financial
condition. In particular, in order to accelerate the promotion of theglobe.com
as a brand, the Company intends to significantly increase its marketing budget
after consummation of the Offerings. See "--Brand Identity Is Critical to the
Company; Risks Associated with Brand Development."
The Company believes that it may experience seasonality in its business,
with use of the Internet and theglobe.com being somewhat lower during the
summer vacation and year-end holiday periods. Advertising impressions (and
therefore revenues) may be expected to decline accordingly in those periods.
Additionally, seasonality may affect significantly the Company's advertising
revenues during the first and third calendar quarters, as advertisers
historically spend less during these periods. Because Internet advertising is
an emerging market, additional seasonal and other patterns in Internet
advertising may develop as the market matures, and there can be no assurance
that such patterns will not have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company derives a significant portion of its revenues from the sale of
advertising under short-term contracts, averaging one to two months in length.
As a result, the Company's quarterly revenues and operating results are, to a
significant extent, dependent on advertising revenues from contracts entered
into within the quarter, and on the Company's ability to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. See "--
Substantial Reliance on Advertising Revenues; Short-term Nature of Advertising
Contracts; Company Guarantee of Minimum Impression Levels."
In addition to selling advertising, a key element of the Company's strategy
is to generate revenues through e-commerce arrangements. To date, the revenues
received by the Company under the revenue-sharing portions of these
arrangements have not been material, and there can be no assurance that the
Company will receive a material amount of revenue under these agreements in
the future. Each of the Company's existing e-commerce arrangements is
terminable upon short notice. As a result, the Company's revenues from e-
commerce may fluctuate significantly from period to period depending on the
continuation of its key e-commerce arrangements.
The foregoing factors, in some future quarters, may lead the Company's
operating results to fall below the expectations of securities analysts and
investors. In such event, the trading price of the Common Stock would likely
be materially and adversely affected.
BROAD DISCRETION IN USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of Common Stock
offered hereby for advertising, brand name promotions and other general
corporate purposes, including investment in the development and functionality
of theglobe.com Web site, enhancements of the Company's network infrastructure
and working capital. The Company may also use a portion of the proceeds for
potential strategic alliances and acquisitions. The Company has not yet
determined the amount of the net proceeds that will be used specifically for
each of the foregoing purposes. Accordingly, management will have significant
flexibility in applying the net proceeds of the Offerings. The failure of
management to apply such funds effectively could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Use of Proceeds."
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of
its senior management and key technical personnel. In particular, the
Company's success depends on the continued efforts of its senior
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management team, especially its Co-Chief Executive Officers and Co-Presidents
(and co-founders), Todd V. Krizelman and Stephan J. Paternot. The Company does
not carry key person life insurance on any of its personnel. The loss of the
services of any of its executive officers or other key employees could have a
material adverse effect on the business, results of operations and financial
condition of the Company.
The Company's future success also depends on its continuing ability to
retain and attract highly qualified technical and managerial personnel. As of
August 31, 1998, the Company had grown to 93 full-time employees from
approximately 20 in June 1997, and the Company anticipates that the number of
its employees will increase significantly in the next 12 months. Wages for
managerial and technical employees are increasing and are expected to continue
to increase in the foreseeable future due to the competitive nature of this
job market. There can be no assurance that the Company will be able to retain
its key managerial and technical personnel or that it will be able to attract
and retain additional highly qualified technical and managerial personnel in
the future. The Company has experienced difficulty from time to time in
attracting the personnel necessary to support the growth of its business, and
there can be no assurance that the Company will not experience similar
difficulty in the future. The inability to attract and retain the technical
and managerial personnel necessary to support the growth of the Company's
business, due to, among other things, a large increase in the wages demanded
by such personnel, could have a material adverse effect upon the Company's
business, results of operations and financial condition. See "Business--
Employees" and "--Technology" and "Management."
MANAGEMENT OF GROWTH; INEXPERIENCED MANAGEMENT
The Company's recent growth has placed, and is expected to continue to
place, a significant strain on its managerial, operational and financial
resources. To manage its potential growth, the Company must continue to
implement and improve its operational and financial systems, and must expand,
train and manage its employee base. The Company's Chief Operating Officer and
Chief Financial Officer joined the Company during August and July 1998,
respectively. In addition, each of the Company's Director of Advertising
Sales, Director of Technology, Director of Communications and Director of
Human Resources has been with the Company for less than two years.
Furthermore, the members of the Company's current senior management (other
than the Chairman) have not had any previous experience managing a public
company or a large operating company. There can be no assurance that the
Company will be able to effectively manage the expansion of its operations,
that the Company's systems, procedures or controls will be adequate to support
the Company's operations or that Company management will be able to achieve
the rapid execution necessary to fully exploit the market opportunity for the
Company's products and services. Any inability to manage growth effectively
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business."
COMPETITION FOR MANAGEMENT TIME; POTENTIAL CONFLICTS OF INTEREST
Michael S. Egan is the Chairman of the Company and, as such, Mr. Egan serves
as Chairman of the Board of Directors and as an executive officer of the
Company with primary responsibility for day-to-day strategic planning and
financing arrangements. After the Offerings, Mr. Egan will also continue to be
the controlling investor of Dancing Bear Investments, Inc. ("Dancing Bear
Investments"), which will hold a controlling interest in the Company after the
Offerings, and Chairman and Chief Executive Officer of Certified Vacations, an
entity affiliated with Dancing Bear Investments. Dancing Bear Investments may
also acquire other entities in the future. Edward A. Cespedes is the Vice
President of Corporate Development of the Company with primary responsibility
for corporate development opportunities including mergers and acquisitions.
After the Offerings, Mr. Cespedes will also continue to serve as a Managing
Director of Dancing Bear Investments. Messrs. Egan and Cespedes have not
committed to devote any specific percentage of their business time with the
Company. Accordingly, the Company will compete with Dancing Bear Investments
and related entities for the time of Messrs. Egan and Cespedes. The Company
has recently begun e-commerce arrangements with certain entities controlled by
Dancing Bear Investments or by Republic Industries, Inc. ("Republic
Industries"), an entity affiliated with H. Wayne Huizenga, a director of the
Company, which are not currently material to the Company.
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See "Certain Relationships and Related Transactions." These arrangements are
not the result of arm's-length negotiations. Due to their relationships with
their related entities, Messrs. Egan, Cespedes and Huizenga will have an
inherent conflict of interest in making any decision related to transactions
between their related entities and the Company. The Company intends to review
related party transactions in the future on a case-by-case basis.
NEED TO ENHANCE AND DEVELOP THEGLOBE.COM TO REMAIN COMPETITIVE
To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality and features of theglobe.com and develop other
products and services. Enhancements of or improvements to the Web site may
contain undetected programming errors that require significant design
modifications, resulting in a loss of customer confidence and user support and
a decrease in the value of the Company's brand name recognition.
The Company plans to develop and introduce new features and functions, such
as increased capabilities for user personalization and interactivity. This
will require the development or licensing of increasingly complex
technologies. There can be no assurance that the Company will be successful in
developing or introducing such features and functions or that such features
and functions will achieve market acceptance or enhance the Company's brand
name recognition. Any failure of the Company to effectively develop and
introduce new features and functions, or the failure of such new features and
functions to achieve market acceptance, could have a material adverse effect
on the Company's business, results of operations and financial condition.
The Company also plans to develop and introduce new products and services,
such as new content targeted for specific user groups with particular
demographic and geographic characteristics. There can be no assurance that the
Company will be successful in developing or introducing such products and
services or that such products and services will achieve market acceptance or
enhance the Company's brand name recognition. Any failure of the Company to
effectively develop and introduce these products and services, or the failure
of such products and services to achieve market acceptance, could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Products and Services."
INTERNET INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE
The market for Internet products and services is characterized by rapid
technological developments, evolving industry standards and customer demands,
and frequent new product introductions and enhancements. These market
characteristics are exacerbated by the emerging nature of the market and the
fact that many companies are expected to introduce new Internet products and
services in the near future. The Company's future success will depend in
significant part on its ability to continually improve the performance,
features and reliability of the site in response to both evolving demands of
the marketplace and competitive product and service offerings, and there can
be no assurance that the Company will be successful in doing so. In addition,
the widespread adoption of developing multimedia enabling technologies could
require fundamental and costly changes in the Company's technology and could
fundamentally affect the nature, viability and measurability of Internet-based
advertising, which could adversely affect the Company's business, results of
operations and financial condition. See "Business--Products and Services."
RISK OF CAPACITY CONSTRAINTS AND SYSTEMS FAILURES
A key element of the Company's strategy is to generate a high volume of user
traffic. The Company's ability to attract advertisers and to achieve market
acceptance of its products and services, and its reputation, depend
significantly upon the performance of the Company and its network
infrastructure (including its server, hardware and software). Any system
failure that causes interruption or slower response time of the Company's
products and services could result in less traffic to the Company's Web site
and, if sustained or repeated, could reduce the attractiveness of the
Company's products and services to advertisers and licensees. An increase in
the volume of user traffic could strain the capacity of the Company's
technical infrastructure, which could lead to slower response time or system
failures, and could adversely affect the delivery of the number of impressions
that are owed to advertisers and thus the Company's advertising revenues. In
addition, as the number of Web pages on
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and users of theglobe.com increase, there can be no assurance that the Company
and its technical infrastructure will be able to grow accordingly, and the
Company faces risks related to its ability to scale up to its expected
customer levels while maintaining superior performance. Any failure of the
Company's server and networking systems to handle current or higher volumes of
traffic would have a material adverse effect on the Company's business,
results of operations and financial condition.
The Company is also dependent upon third parties to provide potential users
with Web browsers and Internet and online services necessary for access to the
site. In the past, users have occasionally experienced difficulties with
Internet and online services due to system failures, including failures
unrelated to the Company's systems. Any disruption in Internet access provided
by third parties could have a material adverse effect on the Company's
business, results of operations and financial condition. Furthermore, the
Company is dependent on hardware suppliers for prompt delivery, installation
and service of equipment used to deliver the Company's products and services.
The Company's operations are dependent in part upon its ability to protect
its operating systems against damage from human error, fire, floods, power
loss, telecommunications failures, break-ins and similar events. The Company
does not presently have redundant, multiple-site capacity in the event of any
such occurrence. The Company's servers are also vulnerable to computer
viruses, break-ins and similar disruptions from unauthorized tampering with
the Company's computer systems. The occurrence of any of these events could
result in the interruption, delay or cessation of service, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, the Company's reputation and theglobe.com
brand could be materially and adversely affected. See "Business--Facilities."
SECURITY RISKS
Experienced programmers ("hackers") have attempted on occasion to penetrate
the Company's network security. The Company expects that these attempts, some
of which have succeeded, will continue to occur from time to time. Because a
hacker who is able to penetrate the Company's network security could
misappropriate proprietary information or cause interruptions in the Company's
products and services, the Company may be required to expend significant
capital and resources to protect against or to alleviate problems caused by
such parties. Additionally, the Company may not have a timely remedy against a
hacker who is able to penetrate its network security. Such purposeful security
breaches could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition to purposeful
security breaches, the inadvertent transmission of computer viruses could
expose the Company to a material risk of loss or litigation and possible
liability.
In offering certain payment services through its "globeStores" program, the
Company could become increasingly reliant on encryption and authentication
technology licensed from third parties to provide the security and
authentication necessary to effect secure transmission of confidential
information, such as customer credit card numbers. Advances in computer
capabilities, discoveries in the field of cryptography and other discoveries,
events, or developments could lead to a compromise or breach of the algorithms
that the Company's licensed encryption and authentication technology used to
protect such confidential information. If such a compromise or breach of the
Company's licensed encryption authentication technology occurs, it could have
a material adverse effect on the Company's business, results of operations and
financial condition. The Company may be required to expend significant capital
and resources and engage the services of third parties to protect against the
threat of such security, encryption and authentication technology breaches or
to alleviate problems caused by such breaches. Concerns over the security of
Internet transactions and the privacy of users may also inhibit the growth of
the Internet generally, particularly as a means of conducting commercial
transactions.
INTENSE COMPETITION
The market for members, users and Internet advertising is new and rapidly
evolving, and competition for members, users and advertisers, as well as
competition in the e-commerce market, is intense and is expected to increase
significantly. Barriers to entry are relatively insubstantial and the Company
may face competitive pressures from many additional companies both in the
United States and abroad.
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The Company believes that the principal competitive factors for companies
seeking to create communities on the Internet are critical mass, functionality
of the Web site, brand recognition, member affinity and loyalty, broad
demographic focus and open access for visitors. Other companies that are
primarily focused on creating Internet communities are Tripod, Inc., a
subsidiary of Lycos, Inc. ("Tripod"), and GeoCities, Inc. ("GeoCities"), and,
in the future, Internet communities may be developed or acquired by companies
currently operating Web directories, search engines, shareware archives and
content sites, and by commercial online service providers ("OSPs"), Internet
service providers ("ISPs") and other entities, certain of which may have more
resources than the Company. The Company competes for users and advertisers
with other content providers and with thousands of Web sites operated by
individuals, the government and educational institutions. Such providers and
sites include America Online, Inc. ("AOL"), Angelfire Communications
("Angelfire"), CNET, Inc. ("CNET"), CNN/Time Warner, Inc. ("CNN/Time Warner"),
Excite, Inc. ("Excite"), Hotmail Corporation ("Hotmail"), Infoseek Corporation
("Infoseek"), Lycos, Inc. ("Lycos"), Microsoft Corporation ("Microsoft"),
Netscape Communications Corporation ("Netscape"), Switchboard Inc.
("Switchboard"), Xoom Inc. ("Xoom") and Yahoo! Inc. ("Yahoo!"). In addition,
the Company could face competition in the future from traditional media
companies, such as newspaper, magazine, television and radio companies, a
number of which, including The Walt Disney Company ("Disney"), CBS Corporation
("CBS") and The National Broadcasting Company ("NBC"), have recently made
significant acquisitions of or investments in Internet companies.
The Company believes that the principal competitive factors in attracting
advertisers include the amount of traffic on its Web site, brand recognition,
customer service, the demographics of the Company's members and users, the
Company's ability to offer targeted audiences and the overall cost
effectiveness of the advertising medium offered by the Company. The Company
believes that the number of Internet companies relying on Internet-based
advertising revenue, as well as the number of advertisers on the Internet and
the number of users, will increase substantially in the future. Accordingly,
the Company will likely face increased competition, resulting in increased
pricing pressures on its advertising rates, which could have a material
adverse effect on the Company.
Many of the Company's existing and potential competitors, including
companies operating Web directories and search engines, and traditional media
companies, have longer operating histories in the Internet market, greater
name recognition, larger customer bases and significantly greater financial,
technical and marketing resources than the Company. Such competitors may be
able to undertake more extensive marketing campaigns for their brands and
services, adopt more aggressive advertising pricing policies and make more
attractive offers to potential employees, distribution partners, e-commerce
companies, advertisers and third-party content providers. Furthermore, the
Company's existing and potential competitors may develop communities that are
equal or superior in quality to, or that achieve greater market acceptance
than, theglobe.com. There can be no assurance that the Company will be able to
compete successfully against its current or future competitors or that
competition will not have a material adverse effect on the Company's business,
results of operations and financial condition.
Additionally, the e-commerce market is new and rapidly evolving, and
competition among e-commerce merchants is expected to increase significantly.
The Company will rely primarily on e-commerce partners to generate e-commerce
revenues. The Company's ability to generate revenues from any of its present
or future e-commerce partners may be adversely affected by competition between
any such partner and other Internet retailers.
There can be no assurance that Web sites maintained by the Company's
existing and potential competitors will not be perceived by advertisers as
being more desirable for placement of advertisements than theglobe.com. In
addition, many of the Company's current advertising customers and strategic
partners have established collaborative relationships with certain of the
Company's existing or potential competitors. There can be no assurance that
the Company will be able to retain or grow its membership base, traffic levels
and advertising customer base at historical levels, or that competitors will
not experience better retention or greater growth in these areas than the
Company. Accordingly, there can be no assurance that any of the Company's
advertising customers, strategic partners or e-commerce partners will not
sever or will elect not to renew their agreements with the Company, the result
of which could have a material adverse effect on the Company's business,
results of operations and financial condition.
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DEPENDENCE ON THIRD-PARTY RELATIONSHIPS
The Company is and will continue to be significantly dependent on a number
of third-party relationships to increase traffic on theglobe.com and thereby
generate advertising revenues, maintain the current level of service and
variety of content for its members, and meet future milestones. The Company is
generally dependent on other Web site operators that provide links to
theglobe.com. The Company also has relationships with several online retailers
whereby the Company is paid for providing to them online storefronts and
promotional materials on theglobe.com. See "Business--Business Strategy--
Increase New Membership Acquisition through Strategic Alliances."
Most of the Company's arrangements with third-party Internet sites and other
third-party service providers do not require future minimum commitments to use
the Company's services or to provide access or links to the Company's services
or products, are not exclusive and are short-term or may be terminated at the
convenience of the other party. Moreover, the Company does not have agreements
with the majority of other Web site operators that provide links to
theglobe.com, and such Web site operators may terminate such links at any time
without notice to the Company. There can be no assurance that third parties
regard their relationship with the Company as important to their own
respective businesses and operations, that they will not reassess their
commitment to the Company at any time in the future or that they will not
develop their own competitive services or products.
There can be no assurance that the Company will be able to maintain
relationships with third parties that supply the Company with software or
products that are crucial to the Company's success, or that such software or
products will be able to sustain any third-party claims or rights against
their use. Furthermore, there can be no assurance that the software, services
or products of those companies that provide access or links to the Company's
services or products will achieve market acceptance or commercial success.
Accordingly, there can be no assurance that the Company's existing
relationships will result in sustained business partnerships, successful
service or product offerings or the generation of significant revenues for the
Company. Failure of one or more of the Company's strategic relationships to
achieve or maintain market acceptance or commercial success or the termination
of one or more successful strategic relationships could have a material
adverse effect on the Company's business, results of operations and financial
condition. In particular, the elimination of a pre-installed bookmark on a Web
browser that directs traffic to the Company's Web site could significantly
reduce traffic on the Company's Web site, which would have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business--Corporate Alliances and Relationships."
ADDITIONAL FINANCING REQUIREMENTS; ABILITY TO INCUR DEBT; EXPECTED NEGATIVE
OPERATING CASH FLOW FOR THE FORESEEABLE FUTURE
The Company currently anticipates that the net proceeds of the Offerings,
together with available funds and cash flows generated from advertising
revenues, will be sufficient to meet its anticipated needs for working
capital, capital expenditures and business expansion for the next 12 months.
The Company expects that it will continue to experience negative operating
cash flow for the foreseeable future as a result of significant spending on
advertising and infrastructure. Accordingly, the Company may need to raise
additional funds in a timely manner in order to fund its anticipated
expansion, develop new or enhanced services or products, respond to
competitive pressures or acquire complementary products, businesses or
technologies. If additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of the stockholders of
the Company will be reduced, stockholders may experience additional dilution
and such securities may have rights, preferences or privileges senior to those
of the holders of the Common Stock. The Company does not currently have any
contractual restrictions on its ability to incur debt and, accordingly, the
Company could incur significant amounts of indebtedness to finance its
operations. Any such indebtedness could contain covenants which would restrict
the Company's operations. There can be no assurance that additional financing
will be available on terms favorable to the Company, or at all. If adequate
funds are not available or are not available on acceptable terms, the Company
may not be able to fund its expansion, take advantage of acquisition
opportunities, develop or enhance services or products or respond to
competitive pressures. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
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RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
As part of its business strategy, the Company expects to review acquisition
prospects that would complement its existing business, augment the
distribution of its community or enhance its technological capabilities.
Future acquisitions by the Company could result in potentially dilutive
issuances of equity securities, large and immediate write-offs, the incurrence
of debt and contingent liabilities or amortization expenses related to
goodwill and other intangible assets, any of which could materially and
adversely affect the Company's business, results of operations and financial
condition.
Furthermore, acquisitions entail numerous risks and uncertainties, including
difficulties in the assimilation of operations, personnel, technologies,
products and information systems of the acquired companies, the diversion of
management's attention from other business concerns, the risks of entering
geographic and business markets in which the Company has no or limited prior
experience and the potential loss of key employees of acquired organizations.
The Company has not made any acquisitions in the past. No assurance can be
given as to the ability of the Company to successfully integrate any
businesses, products, technologies or personnel that might be acquired in the
future, and the failure of the Company to do so could have a material adverse
effect on the Company's business, results of operations and financial
condition.
RELIANCE ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards substantial elements of its Web site and underlying
technology as proprietary and attempts to protect them by relying on
trademark, service mark, copyright and trade secret laws and restrictions on
disclosure and transferring title and other methods. The Company also
generally enters into confidentiality agreements with its employees and
consultants and in connection with its license agreements with third parties
and generally seeks to control access to and distribution of its technology,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's proprietary information without authorization or to develop similar
technology independently. The Company pursues the registration of its
trademarks in the United States and internationally. The Company has
registered a United States trademark for theglobe. The Company has filed
United States trademark applications for theglobe.com and theglobe.com logo.
Additionally, the Company has submitted trademark applications for
theglobe.com and theglobe.com logo in Australia, Brazil, Canada, China, the
European Union (covering Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Italy, Ireland, Luxembourg, the Netherlands, Portugal, Spain, Sweden
and the United Kingdom), Hong Kong, Israel, Japan, New Zealand, Norway,
Russia, Singapore, South Africa, Switzerland and Taiwan. Effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which the Company's services are distributed or made
available through the Internet, and policing unauthorized use of the Company's
proprietary information is difficult. See "Business--Intellectual Property and
Proprietary Rights."
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related businesses are
uncertain and still evolving, and no assurance can be given as to the future
viability or value of any of the Company's proprietary rights. There can be no
assurance that the steps taken by the Company will prevent misappropriation or
infringement of its proprietary information, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets or to
determine the validity and scope of the proprietary rights of others. Such
litigation might result in substantial costs and diversion of resources and
management attention. Furthermore, there can be no assurance that the
Company's business activities will not infringe upon the proprietary rights of
others, or that other parties will not assert infringement claims against the
Company, including claims that by directly or indirectly providing hyperlink
text links to Web sites operated by third parties. Moreover, from time to
time, the Company may be subject to claims of alleged infringement by the
Company or its members of the trademarks, service marks and other intellectual
property rights of third parties. Such claims and any resultant litigation,
should it occur, might subject the Company to significant liability for
damages, might result in
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invalidation of the Company's proprietary rights and, even if not meritorious,
could result in substantial costs and diversion of resources and management
attention and could have a material adverse effect on the Company's business,
results of operations and financial condition.
The Company currently licenses from third parties certain technologies
incorporated into theglobe.com. As the Company continues to introduce new
services that incorporate new technologies, it may be required to license
additional technology from others. There can be no assurance that these third-
party technology licenses will continue to be available to the Company on
commercially reasonable terms, if at all. Additionally, there can be no
assurance that the third parties from which the Company currently licenses its
technology will be able to defend their proprietary rights successfully
against claims of infringement. As a result, any inability of the Company to
obtain any of these technology licenses could result in delays or reductions
in the introduction of new services or could adversely affect the performance
of its existing services until equivalent technology can be identified,
licensed and integrated. See "Business--Intellectual Property and Proprietary
Rights."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES ASSOCIATED WITH THE INTERNET
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws
or regulations concerning various aspects of the Internet, including, but not
limited to, online content, user privacy, taxation, access charges, liability
for third-party activities and jurisdiction. Additionally, it is uncertain as
to how existing laws will be applied by the judiciary to the Internet. The
adoption of new laws or the application of existing laws may decrease the
growth in the use of the Internet, which could in turn decrease the demand for
the Company's services, increase the Company's cost of doing business or
otherwise have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Government Regulation and
Legal Uncertainties" for a description of various legislative and regulatory
proposals which could be material to the Company.
There can be no assurance that the United States or foreign nations will not
enact legislation or seek to enforce existing laws prohibiting or restricting
certain content, such as online gambling, from the Internet. Currently, online
gambling advertisers account for under ten percent of the Company's
advertising revenues. Prohibition and restriction of Internet content could
dampen the growth of Internet use, decrease the acceptance of the Internet as
a communications and commercial medium, expose the Company to liability,
and/or require substantial modification of theglobe.com, and thereby have a
material adverse effect on the Company's business, results of operations and
financial condition.
Internet user privacy has become an issue both in the United States and
abroad. Current United States privacy law consists of a few disparate statutes
directed at specific industries that collect personal data, none of which
specifically covers the collection of personal information online. There can
be no assurance that the United States or foreign nations will not adopt
legislation purporting to protect such privacy. Any such action could affect
the way in which the Company is allowed to conduct its business, especially
those aspects that involve the collection or use of personal information, and
could have a material adverse effect on the Company's business, results of
operations and financial condition.
The tax treatment of the Internet and e-commerce is currently unsettled. A
number of proposals have been made at the federal, state and local level and
by certain foreign governments that could impose taxes on the sale of goods
and services and certain other Internet activities. The United States Congress
is considering legislation that would place a temporary moratorium on certain
types of taxation on Internet commerce. There can be no assurance that any
such legislation will be adopted by Congress or what form it will take, or
that current attempts at taxing or regulating commerce over the Internet would
not substantially impair the growth of e-commerce and as a result have a
material adverse effect on the Company's business, results of operations and
financial condition.
Certain local telephone carriers have asserted that the growing popularity
and use of the Internet has burdened the existing telecommunications
infrastructure, and that many areas with high Internet use have begun
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to experience interruptions in telephone service. These carriers have
petitioned the Federal Communications Commission (the "FCC") to impose access
fees on ISPs and OSPs. If such access fees are imposed, the costs of
communicating on the Internet could increase substantially, potentially
slowing the growth in use of the Internet, which could in turn decrease demand
for the Company's services or increase the Company's cost of doing business,
and thus have a material adverse effect on the Company's business, results of
operations and financial condition.
Although the Company's server is located in the State of New York, the
governments of other states and foreign countries might attempt to take action
against the Company for violations of their laws. There can be no assurance
that violations of such laws will not be alleged or charged by state or
foreign governments and that such laws will not be modified, or new laws
enacted, in the future. Any of the foregoing could have a material adverse
effect on the Company's business, results of operations and financial
condition.
LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED OVER THE INTERNET;
LIABILITY FOR PRODUCTS SOLD OVER THE INTERNET
Because materials may be downloaded by the online or Internet services
operated or facilitated by the Company or the Internet access providers with
which it has relationships and may be subsequently distributed to others,
there is a potential that claims will be made against the Company for
defamation, negligence, copyright or trademark infringement or other theories
based on the nature and content of such materials. Such claims have been
brought against online services in the past and, from time to time, the
Company has received inquiries from third parties regarding such matters. Such
claims could be material in the future. In addition, the increased attention
focused upon liability issues and legislative proposals could materially
impact the overall growth of Internet use.
The Company could also be exposed to liability with respect to third-party
information that may be accessible through the Company's Web site, or through
content and materials that may be posted by members on their personal Web
sites or on chat rooms or bulletin boards offered by the Company. Such claims
might include, among others, that, by directly or indirectly providing
hyperlink text links to Web sites operated by third parties or by providing
hosting services for members' sites, the Company is liable for copyright or
trademark infringement or other wrongful actions by such third parties through
such Web sites. It is also possible that, if any third-party content
information provided on the Company's Web site contains errors, third parties
could make claims against the Company for losses incurred in reliance on such
information.
The Company offers e-mail service, which is provided by a third party. See
"--Dependence on Third-Party Relationships." Such service may expose the
Company to potential risk, such as liabilities or claims resulting from
unsolicited e-mail ("spamming"), lost or misdirected messages, illegal or
fraudulent use of e-mail or interruptions or delays in e-mail service.
The Company also enters into agreements with commerce partners and sponsors
under which the Company is entitled to receive a share of any revenue from the
purchase of goods and services through direct links from the Company's Web
site. Such arrangements may expose the Company to additional legal risks and
uncertainties, including pursuant to regulation by local, state, federal and
foreign authorities and potential liabilities to consumers of such products
and services, even if the Company does not itself provide such products or
services. There can be no assurance that any indemnification provided to the
Company in its agreements with these parties, if available, will be adequate.
Even to the extent such claims do not result in liability to the Company,
the Company could incur significant costs in investigating and defending
against such claims. The imposition on the Company of potential liability for
information carried on or disseminated through its systems could require the
Company to implement measures to reduce its exposure to such liability, which
may require the expenditure of substantial resources and limit the
attractiveness of the Company's services to members and users.
The Company's general liability insurance may not cover all potential claims
to which it is exposed or may not be adequate to indemnify the Company for all
liability that may be imposed. Any imposition of liability that
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is not covered by insurance or is in excess of insurance coverage could have a
material adverse effect on the Company's business, results of operations and
financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND EXPANSIONS
A part of the Company's strategy is to continue to develop theglobe.com
community model in international markets. Approximately 25% to 35% of the
Company's monthly traffic originates from abroad. There can be no assurance
that the Internet or the Company's community model will become widely accepted
for advertising and e-commerce in any international markets. In addition, the
Company expects that the success of any additional foreign operations it
initiates in the future will also be substantially dependent upon local
partners. If revenues from international ventures are not adequate to cover
the investments in such activities, the Company's business, results of
operations and financial condition could be materially and adversely affected.
The Company may experience difficulty in managing international operations as
a result of difficulty in locating an effective foreign partner, competition,
technical problems, local laws and regulations, distance and language and
cultural differences, and there can be no assurance that the Company or its
international partners will be able to successfully market and operate the
Company's community model in foreign markets. The Company also believes that,
in light of substantial anticipated competition, it will be necessary to move
quickly into international markets in order to effectively obtain market
share, and there can be no assurance that the Company will be able to do so.
There are certain risks inherent in doing business on an international level,
such as unexpected changes in regulatory requirements, trade barriers,
difficulties in staffing and managing foreign operations, fluctuations in
currency exchange rates, longer payment cycles in general, problems in
collecting accounts receivable, difficulty in enforcing contracts, political
and economic instability, seasonal reductions in business activity in certain
other parts of the world and potentially adverse tax consequences. There can
be no assurance that one or more of such factors will not have a material
adverse effect on the Company's future international operations and,
consequently, on the Company's business, results of operations and financial
condition.
CONTROL BY CURRENT STOCKHOLDERS
Following consummation of the Offerings, it is anticipated that Michael S.
Egan, the Chairman of the Company, will beneficially own or control, directly
or indirectly, 6,071,024 shares of Common Stock which in the aggregate will
represent approximately 51.4% of the outstanding shares of Common Stock.
Following the consummation of the Offerings, it is anticipated that Messrs.
Krizelman and Paternot, collectively, will beneficially own 15.7% of the
Common Stock. Messrs. Egan, Krizelman and Paternot and certain directors of
the Company will also hold outstanding Warrants exercisable for 2,023,009
shares of Common Stock in the aggregate. See "Description of Capital Stock--
Warrants." Messrs. Egan, Krizelman, Paternot and Cespedes and Rosalie V.
Arthur, a director of the Company, expect to enter into a stockholders'
agreement (the "Stockholders' Agreement") pursuant to which Dancing Bear
Investments, Mr. Egan or entities controlled by Mr. Egan and certain permitted
transferees (collectively, the "Egan Group") will agree to vote for certain
nominees of Messrs. Krizelman and Paternot or entities controlled by Messrs.
Krizelman and Paternot and certain permitted transferees (the "Krizelman and
Paternot Groups") to the Board of Directors and the Krizelman and Paternot
Groups will agree to vote for the nominees of the Egan Group to the Board, who
will represent a majority of the Board of Directors. Accordingly, the Egan
Group will have the ability to elect a majority of the directors of the
Company and the Egan Group and the Krizelman and Paternot Groups will also
have the ability to control the outcome of all issues submitted to a vote of
the stockholders of the Company requiring majority approval. See "Principal
Stockholders." The Stockholders' Agreement will also provide that the Egan
Group, the Krizelman and Paternot Groups, Mr. Cespedes and Ms. Arthur will be
subject to certain "tag-along" and "drag-along" rights in connection with any
private sale of securities of the Company after the Offerings. Voting control
by the Egan Group and the Krizelman and Paternot Groups may discourage certain
types of transactions involving an actual or potential change of control of
the Company, including transactions in which the holders of Common Stock might
receive a premium for their shares over prevailing market prices. See "Certain
Relationships and Related Transactions."
IMPACT OF THE YEAR 2000
The Year 2000 issue is the potential for system and processing failures of
date-related data and the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example,
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computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
The Company may be affected by Year 2000 issues related to non-compliant
information technology ("IT") systems or non-IT systems operated by the
Company or by third parties. The Company has substantially completed
assessment of its internal and external (third-party) IT systems and non-IT
systems. At this point in its assessment, the Company is not currently aware
of any Year 2000 problems relating to systems operated by the Company or by
third parties that would have a material effect on the Company's business,
results of operations or financial condition, without taking into account the
Company's efforts to avoid such problems. Based on its assessment to date, the
Company does not anticipate that costs associated with remediating the
Company's non-compliant IT systems or non-IT systems will be material,
although there can be no assurance to such effect. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Impact of the Year 2000."
To the extent that the Company's assessment is finalized without identifying
any additional material non-compliant IT systems operated by the Company or by
third parties, the most reasonably likely worst case Year 2000 scenario is a
systemic failure beyond the control of the Company, such as a prolonged
telecommunications or electrical failure. Such a failure could prevent the
Company from operating its business, prevent users from accessing the
Company's Web site, or change the behavior of advertising customers or persons
accessing the Company's Web site. The Company believes that the primary
business risks, in the event of such failure, would include, but not be
limited to, lost advertising revenues, increased operating costs, loss of
customers or persons accessing the Company's Web site, or other business
interruptions of a material nature, as well as claims of mismanagement,
misrepresentation, or breach of contract, any of which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
IMPACT OF GENERAL ECONOMIC CONDITIONS
Time spent on the Internet by individuals, purchases of new computers and
purchases of membership subscriptions to Internet sites are typically
discretionary for consumers and may be particularly affected by adverse trends
in the general economy. The success of the Company's operations depends to a
significant extent upon a number of factors relating to discretionary consumer
spending, including economic conditions (and perceptions of such conditions by
consumers) affecting disposable consumer income such as employment, wages and
salaries, business conditions, interest rates, availability of credit and
taxation, for the economy as a whole and in regional and local markets where
the Company operates. There can be no assurance that consumer spending will
not be adversely affected by general economic conditions, which could
negatively impact the Company's results of operations or financial condition.
Any significant deterioration in general economic conditions or increases in
interest rates may inhibit consumers' use of credit and cause a material
adverse effect on the Company's revenues and profitability. In addition, the
Company's business strategy relies on advertising by and agreements with other
Internet companies. Any significant deterioration in general economic
conditions that adversely affected these companies could also have a material
adverse effect on the Company's business, results of operations and financial
condition.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offerings, there has been no public market for the Common
Stock. The shares of Common Stock have been approved for quotation on the
Nasdaq National Market, subject to official notice of issuance; however, there
can be no assurance as to the development or liquidity of any trading market
for the Common Stock or that investors in the Common Stock will be able to
resell their shares at or above the initial public offering price. The initial
public offering price for the shares of Common Stock will be determined
through negotiations between the Company and representatives of the
Underwriters and may not be indicative of the market price of the Common Stock
after the Offerings. See "Underwriting." The trading price of the Company's
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Common Stock could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products and services by the Company or its competitors, changes in
financial estimates by securities analysts, the operating and stock price
performance of other companies that investors may deem comparable to the
Company and other events or factors. In addition, the stock market in general,
and the market prices for Internet-related companies in particular, have
experienced extreme volatility that often has been unrelated to the operating
performance of such companies. These broad market and industry fluctuations
may adversely affect the trading price of the Company's Common Stock,
regardless of the Company's operating performance. In the past, following
periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such
company. Such litigation, if instituted, whether or not successful, could
result in substantial costs and a diversion of management's attention and
resources, which would have a material adverse effect on the Company's
business, results of operations and financial condition.
SHARES ELIGIBLE FOR FUTURE SALE; NO PRIOR TRADING MARKET; REGISTRATION RIGHTS
Upon consummation of the Offerings, the Company will have outstanding a
total of 9,791,339 shares of Common Stock (10,193,839 if the Underwriters'
over-allotment option is exercised in full), and 822,650 and 693,771 shares of
Common Stock subject to stock options granted under the Company's 1998 Stock
Option Plan and 1995 Stock Option Plan, respectively. See "Management--
Executive Compensation." In addition, upon consummation of the Offerings,
2,023,009 shares of Common Stock will be issuable upon exercise of outstanding
Warrants. Of the outstanding shares, the 3,100,000 shares of Common Stock
being sold in the Offerings (3,502,500 if the Underwriters' over-allotment
option is exercised in full) will be immediately eligible for sale in the
public market without restriction or further registration under the Securities
Act, unless purchased by or issued to any "affiliate" of the Company (within
the meaning of the Securities Act). All of the shares of Common Stock
outstanding prior to the Offerings are "restricted securities" as such term is
defined under Rule 144 under the Securities Act ("Rule 144") in that such
shares were issued in private transactions not involving a public offering.
Restricted securities may be sold in the public market only if registered or
if they qualify for an exemption from registration under Rules 144, 144(k) or
701 promulgated under the Securities Act or another exemption from
registration. Of the 5,628,884 shares of capital stock issued prior to the
Offerings, and not registered under the Securities Act, approximately
1,062,455 shares are not subject to the volume limitations of Rule 144 and are
currently eligible for sale in the public market without restriction. Holders
of substantially all of the Company's Common Stock and outstanding preferred
equity have been granted registration rights with respect to the shares of
Common Stock into which their securities are convertible. See "Description of
Capital Stock--Registration Rights." However, pursuant to the terms of the
agreements pursuant to which the registration rights were granted, such
holders have agreed not to sell or otherwise transfer or dispose of any shares
of Common Stock or other securities of the Company held by them without the
consent of the Company for a period of seven days prior to and up to 180 days
after the date of this Prospectus. Additionally, the Company and members of
the Company's management who are stockholders of the Company and certain other
stockholders have agreed that, subject to certain exceptions, for a period of
180 days after the date of this Prospectus, without the prior written consent
of Bear, Stearns & Co. Inc., they will not, directly or indirectly, issue,
sell, offer or agree to sell, grant any option for the sale, pledge, make any
short sale, establish an open "put equivalent position" within the meaning of
Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or otherwise dispose of any shares of Common Stock (or
securities convertible into, exercisable for or exchangeable for Common Stock)
of the Company or of any of its subsidiaries. The Company intends to file a
registration statement on Form S-8 for the shares held pursuant to its option
plans that may make those shares freely tradeable. Such registration statement
will become effective immediately upon filing, and shares covered by that
registration statement will thereupon be eligible for sale in the public
markets, subject to the applicable lock-up agreements and Rule 144 limitations
applicable to affiliates. See "Shares Eligible for Future Sale."
No information is currently available and no prediction can be made as to
the timing or amount of future sales of such shares or the effect, if any,
that future sales of shares, or the availability of shares for future sale,
will have on the market price of the Common Stock prevailing from time to
time. Sales of substantial amounts
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of Common Stock (including shares issuable upon the exercise of stock
options), or the perception that such sales could occur, could materially
adversely affect prevailing market prices for the Common Stock and the ability
of the Company to raise equity capital in the future. See "Shares Eligible for
Future Sale" and "Description of Capital Stock--Registration Rights."
ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
Prior to the consummation of the Offerings, the Board of Directors expects
to adopt a Rights Agreement (defined below), to be effective upon the
consummation of the Offerings, that may have the effect of discouraging,
delaying or preventing a change in control of the Company or unsolicited
acquisition proposals. Further, certain provisions of the Company's Fourth
Amended and Restated Certificate of Incorporation and By-Laws and of Delaware
law could have the effect of delaying or preventing a change in control of the
Company. See "Description of Capital Stock."
SIGNIFICANT DILUTION; ABSENCE OF DIVIDENDS
Investors purchasing shares of Common Stock in the Offerings will incur
immediate and substantial dilution of $7.39 per share (assuming an initial
public offering price of $12.00 per share) in net tangible book value per
share of the Common Stock from the initial public offering price. To the
extent outstanding options to purchase Common Stock are exercised, there will
be further dilution. In addition, the Company does not anticipate paying any
cash dividends in the foreseeable future. See "Dividend Policy" and
"Dilution."
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains statements that constitute "forward-looking
statements." These forward-looking statements can be identified by the use of
predictive, future-tense or forward-looking terminology, such as "believes,"
"anticipates," "expects," "estimates," "may," "will," or similar terms. These
statements appear in a number of places in this Prospectus and include
statements regarding the intent, belief or current expectations of the
Company, its directors or its officers with respect to, among other things:
(i) trends affecting the Company's financial condition or results of
operations, (ii) the Company's business and growth strategies, (iii) the
Internet and Internet commerce and (iv) the Company's financing plans.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements as a result of various factors.
Factors that could adversely affect actual results and performance include,
among others, the Company's limited operating history, dependence on continued
growth in the use of the Internet, the Company's unproven business model,
dependence on members, reliance on advertising revenues, potential
fluctuations in quarterly operating results, security risks of transmitting
information over the Internet, government regulation, technological change and
competition. The accompanying information contained in this Prospectus,
including, without limitation, the information set forth under the heading
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" identifies important additional
factors that could materially adversely affect actual results and performance.
Prospective investors are urged to carefully consider such factors. All
forward-looking statements attributable to the Company are expressly qualified
in their entirety by the foregoing cautionary statement.
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CONCURRENT OFFERING
Concurrent with the shares offered hereby in the Initial Public Offering,
the Company intends to sell to the Concurrent Purchasers up to approximately
$5 million of Common Stock (416,667 shares assuming an initial public offering
price of $12.00 per share, which is the midpoint of the estimated initial
public offering price range set forth on the front cover of this Prospectus)
at the same price per share to be paid by the investors in the Initial Public
Offering. The Company expects that the Concurrent Purchasers will include
certain of the Company's officers and directors, their relatives and their
business associates. The consummation of the Concurrent Offering and the
Initial Public Offering are contingent upon each other. In the event the
Concurrent Offering is not consummated by the closing date of the Initial
Public Offering, the Concurrent Offering will be terminated and all payments
made by the Concurrent Purchasers in connection with the Concurrent Offering
will be promptly returned. If the Concurrent Offering is not consummated for
the proposed amount, the shares of Common Stock not sold to the Concurrent
Purchasers will not be offered to purchasers in the Initial Public Offering.
All proceeds of the Concurrent Offering will be paid directly to the Company
and will be segregated in a separate non-interest bearing bank account
established by the Company pending the consummation of the Concurrent
Offering. Bear, Stearns & Co. Inc. and Volpe Brown Whelan & Company are acting
as the Placement Agents in connection with the Concurrent Offering. The
Placement Agents will receive a Placement Agent fee of $ per share of Common
Stock sold in the Concurrent Offering and will be indemnified by the Company
against certain liabilities, including liabilities under the Securities Act.
See "Underwriting."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,100,000 shares of
Common Stock offered in the Offerings by the Company are estimated to be
approximately $33.5 million (approximately $38.0 million if the Underwriters'
over-allotment option is exercised in full), based on an assumed initial
public offering price of $12.00 per share (the midpoint of the estimated
initial public offering price range set forth on the front cover of this
Prospectus) and after deducting the estimated underwriting discounts and
commissions, Placement Agent fees and other estimated offering expenses.
The Company will use the net proceeds of the Offerings for advertising,
brand name promotions and for other general corporate purposes, including
investment in the development and functionality of theglobe.com Web site,
enhancements of the Company's network infrastructure and working capital. The
Company may also use a portion of the proceeds for strategic alliances and
acquisitions. Although the Company reviews potential strategic alliances and
acquisitions from time to time, it has not had more than preliminary
discussions with respect to any such alliances or acquisitions. The Company
has not yet determined the amount of net proceeds to be used specifically for
each of the foregoing purposes. Accordingly, management will have significant
flexibility in applying the net proceeds of the Offerings. Pending any such
use, as described above, the Company intends to invest the net proceeds in
interest-bearing instruments. See "Risk Factors--Broad Discretion in Use of
Proceeds."
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock.
The Company currently intends to retain its future earnings, if any, to fund
the development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. The declaration and
payment of dividends by the Company are subject to the discretion of the Board
of Directors. Any future determination to pay dividends will depend on the
Company's results of operations, financial condition, capital requirements,
contractual restrictions and other factors deemed relevant by the Board of
Directors.
25
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of June 30, 1998, (ii) the pro forma capitalization as of such date, after
giving effect to the conversion of all outstanding shares of Preferred Stock
into Common Stock and (iii) the pro forma capitalization of the Company as of
June 30, 1998 as adjusted to reflect the 3,100,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$12.00 per share. The capitalization information set forth in the table below
is qualified and should be read in conjunction with the Financial Statements
and Notes related thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Obligations under capital leases, excluding
current installments.......................... $ 629 $ 629 $ 629
Stockholders' equity:
Preferred Stock, 3,000,000 shares authorized:
Series A through E, $.001 par value;
2,900,001 shares authorized; 1,449,995.5
shares issued and outstanding (aggregate
liquidation value of $21,886,110); none
issued and outstanding, pro forma and pro
forma as adjusted........................... 1 (21) --
Common Stock, $.001 par value; 22,000,000
shares authorized, actual, 100,000,000
shares authorized pro forma and pro forma as
adjusted; 1,196,979 shares issued and
outstanding, actual; 6,670,714 shares
outstanding, pro forma; 9,770,714 shares
issued and outstanding, pro forma as
adjusted(1)(2).............................. 1 7 10
Additional paid-in capital................... 21,875 21,870 55,363
Net unrealized loss on available-for-sale se-
curities.................................... (29) (29) (29)
Deferred compensation........................ (53) (53) (53)
Accumulated deficit.......................... (10,224) (10,224) (10,224)
-------- -------- --------
Total stockholders' equity................... 11,571 11,571 45,067
-------- -------- --------
Total capitalization....................... $ 12,200 $ 12,000 $ 45,696
======== ======== ========
</TABLE>
- --------
(1) Based on the number of shares of Common Stock outstanding as of June 30,
1998, and adjusted to include 5,473,735 shares of Common Stock that will
be issued upon the automatic conversion of all of the Company's
outstanding shares of Preferred Stock upon consummation of the Offerings.
Authorized pro forma and pro forma as adjusted give effect to Fourth
Amended and Restated Certificate of Incorporation of the Company to
become effective prior to consummation of the Offerings. Each share of
the Company's Series A, B and C Preferred Stock, totaling 1,449,970
shares, by its terms, is automatically convertible into one share of
Common Stock. Each of the Company's 25.5 shares of Series D Preferred
Stock is automatically convertible into approximately 157,795 shares of
Common Stock, totaling 4,023,765 shares in the aggregate. Based upon the
Series D Preferred Stock's original conversion terms, the shares of
Series D Preferred Stock are to be converted into 51% of the Company's
fully diluted shares on the date of conversion, excluding 700,000 options
from the Company's 1998 Stock Option Plan and the Series E Warrants. See
Note 5 to the Company's Financial Statements.
(2) Excludes 2,023,009 shares of Common Stock issuable upon the exercise of
outstanding Warrants at an exercise price of approximately $2.91 per
share following the consummation of the Offerings. See "Description of
Capital Stock--Warrants." If the Underwriters' over-allotment option is
exercised in full, an additional 402,500 shares of Common Stock would be
offered by the Company and 10,193,839 shares of Common Stock would be
outstanding after the Offerings. See "Underwriting." Excludes (i) 822,650
and 693,771 shares of Common Stock issuable upon the exercise of stock
options that would be outstanding after the Offerings under the Company's
1998 Stock Option Plan and 1995 Stock Option Plan, respectively, at a
weighted average exercise price of $11.81 per share (assuming an initial
public offering price of $12.00 per share) and $0.72 per share,
respectively, and (ii) 377,350 and 4,625 shares of Common Stock reserved
for future issuance under the Company's 1998 Stock Option Plan and the
1995 Stock Option Plan, respectively. See "Capitalization," "Management--
Executive Compensation," "Description of Capital Stock" and the Financial
Statements and Notes related thereto appearing elsewhere in this
Prospectus.
26
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1998,
after giving effect to the conversion of all outstanding shares of Preferred
Stock into 5,473,735 shares of Common Stock, was approximately $11,570,624 or
$1.73 per share of Common Stock. Pro forma net tangible book value per share
is determined by dividing the pro forma tangible net worth of the Company (pro
forma total assets less pro forma total liabilities) by the number of shares
of Common Stock. After giving effect to the sale of 3,100,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $12.00 per
share and the application of the estimated net proceeds from the Offerings,
pro forma net tangible book value of the Company as of June 30, 1998 would
have been $45,066,624 or $4.61 per share. This represents an immediate
increase in pro forma net tangible book value of $2.88 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$7.39 per share to new investors. The following table illustrates this
dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $12.00
Pro forma net tangible book value per share as of June 30,
1998........................................................ $1.73
Increase per share attributable to new investors............. 2.88
-----
Pro forma net tangible book value per share after the
Offerings..................................................... 4.61
------
Dilution per share to new investors............................ $ 7.39(1)
------
</TABLE>
- --------
(1) The foregoing computations assume no exercise of the Underwriters' over-
allotment option, stock options or the Warrants. The Warrants entitle the
holders thereof to purchase an aggregate of 2,023,009 shares of Common
Stock at an exercise price of approximately $2.91 per share. If the
foregoing Warrants had been exercised at June 30, 1998, pro forma net
tangible book value after the Offerings would have been $50,948,977 in the
aggregate or $4.32 per share, representing an immediate dilution to new
investors of $7.68 per share and an immediate increase in net tangible
book value of $2.59 per share attributable to the Offerings.
The following table summarizes, as of June 30, 1998, the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid by the existing stockholders and by new investors
purchasing shares in the Offerings (after giving effect to the conversion of
the outstanding shares of Preferred Stock into shares of Common Stock and
before deduction of estimated underwriting discounts and commissions and other
estimated expenses of the Offerings):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
--------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1)........ 6,670,714 68% $21,900,057 37% $ 3.28
Investors in the
Concurrent Offering.... 416,667(2) 4% 5,000,004 8% $12.00
Investors in the Initial
Public Offering........ 2,683,333 28% 32,199,996 55% $12.00
--------- --- ----------- ---
Total................. 9,770,714(3) 100% 59,100,057 100% $ 6.05
========= === =========== ===
</TABLE>
- --------
(1) Assumes all of the Company's outstanding Preferred Stock is converted into
Common Stock. Excludes 2,023,009 shares of Common Stock that may be issued
upon the exercise of the Warrants at approximately $2.91 per share.
(2) Represents an estimate of the number of shares to be purchased.
(3) Excludes 822,650 and 693,771 shares of Common Stock reserved for issuance
under options that will be outstanding after the Offerings pursuant to the
Company's 1998 Stock Option Plan and the Company's 1995 Stock Option Plan,
respectively, at a weighted average exercise price of $11.81 per share
(assuming an initial public offering price of $12.00 per share) and $0.72
per share, respectively. See "Management--Executive Compensation,"
"Description of Capital Stock--Warrants" and Notes 5 and 6 to the
Financial Statements appearing elsewhere in this Prospectus. To the extent
stock options are exercised, there will be further dilution to new
investors.
27
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data should be read in
conjunction with the Financial Statements and Notes related thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The consolidated statement
of operations data for the period from May 1, 1995 (inception) to December 31,
1995 and each of the years in the two-year period ended December 31, 1997, and
the consolidated balance sheet data at December 31, 1996 and 1997, are derived
from the consolidated financial statements of the Company which have been
audited by KPMG Peat Marwick LLP, independent accountants, and are included
elsewhere in this Prospectus. The balance sheet data at December 31, 1995 are
derived from audited financial statements of the Company not included herein.
The statement of operations data for each of the six-month periods ended June
30, 1997 and 1998, and the balance sheet data at June 30, 1998, are derived
from unaudited interim financial statements of the Company included elsewhere
in this Prospectus. The unaudited financial statements have been prepared on
substantially the same basis as the audited financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such periods. Historical results are not necessarily indicative
of the results to be expected in the future, and results of interim periods
are not necessarily indicative of results for the entire year.
<TABLE>
<CAPTION>
MAY 1, 1995
(INCEPTION) YEAR ENDED SIX MONTHS ENDED
THROUGH DECEMBER 31, JUNE 30
DECEMBER 31, -------------------- --------------------
1995 1996 1997 1997 1998
------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 27 $ 229 $ 770 $ 208 $ 1,173
Cost of revenues........ 13 116 423 106 503
--------- --------- --------- --------- ---------
Gross profit............ 14 113 347 102 670
Operating expenses:
Sales and marketing.... 1 276 1,248 224 4,493
Product development.... 60 120 154 63 251
General and
administrative........ 19 489 2,828 594 2,396
--------- --------- --------- --------- ---------
Total operating
expenses............... 80 885 4,230 881 7,140
--------- --------- --------- --------- ---------
Loss from operations.... (66) (772) (3,883) (779) (6,470)
Interest income
(expense), net......... -- 22 335 12 673
--------- --------- --------- --------- ---------
Loss before provision
for income taxes....... (66) (750) (3,548) (767) (5,797)
--------- --------- --------- --------- ---------
Provision for income
taxes.................. -- -- 36 -- 27
--------- --------- --------- --------- ---------
Net loss................ $ (66) $ (750) $ (3,584) $ (767) $ (5,824)
========= ========= ========= ========= =========
Basic and diluted net
loss per share(1)...... $ (0.06) $ (0.67) $ (3.13) $ (0.67) $ (5.01)
========= ========= ========= ========= =========
Weighted average shares
outstanding used in
basic and diluted per
share calculation(1)... 1,125,000 1,125,000 1,146,773 1,140,960 1,161,389
========= ========= ========= ========= =========
Pro forma basic and
diluted net loss per
share(2)............... $ (0.91) $ (0.95)
========= =========
Weighted average shares
used in computing pro
forma basic and diluted
net loss per share
calculation(2)......... 3,920,095 6,115,148
========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997 1998
---- ---- ------- --------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term
investments....................................... $587 $757 $18,874 $13,155
Working capital.................................... 575 648 17,117 10,452
Total assets....................................... 647 973 19,462 15,603
Capital lease obligations, excluding current
installments...................................... -- -- 99 629
Total stockholders' equity......................... $632 $795 $17,352 $11,571
</TABLE>
- --------
(1) Weighted average shares do not include any common stock equivalents
because such inclusion would have been anti-dilutive. See the Financial
Statements and Notes related thereto appearing elsewhere in this
Prospectus for the determination of shares used in computing pro forma
basic and diluted loss per share.
(2) Pro forma gives effect to the conversion of all outstanding shares of the
Company's Preferred Stock into Common Stock upon the closing of the
Offerings as if such conversion had occurred on January 1, 1997, or the
date of original issuance, if later.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements, trend analysis and other information contained in this
Prospectus relative to markets for the Company's products and trends in
revenues, gross margin and anticipated expense levels, as well as other
statements including words such as "believe," "anticipate," "expect,"
"estimate," "plan" and "intend" and other similar expressions, constitute
forward-looking statements. Those forward-looking statements are subject to
business and economic risks, and the Company's actual results of operations
may differ materially from those contained in the forward-looking statements.
For a more detailed discussion of these business and economic risks, see "Risk
Factors." The following discussion of the financial condition and results of
operations of the Company should also be read in conjunction with the
Financial Statements and Notes related thereto included elsewhere in this
Prospectus.
OVERVIEW
theglobe.com is one of the world's leading online communities with over 1.9
million members in the United States and abroad. In August 1998, over 6.5
million unique users visited the site. theglobe.com is a destination on the
Internet where users are able to personalize their online experience by
publishing their own content and interacting with others having similar
interests. theglobe.com facilitates this interaction by providing various free
services, including home page building, discussion forums, chat, e-mail and a
marketplace where members can purchase a variety of products and services.
Additionally, theglobe.com provides its users news, weather, movie and music
reviews, multi-player gaming, horoscopes and personals. By satisfying its
users' personal and practical needs, theglobe.com seeks to become their online
home. The Company's primary revenue source is the sale of advertising, with
additional revenues generated through e-commerce arrangements, and the sale of
membership subscriptions for enhanced services.
The Company was incorporated in May 1995. For the period from inception
through December 1995, the Company had minimal sales and its operating
activities related primarily to the development of the necessary computer
infrastructure and initial planning and development of theglobe.com. Operating
expenses in 1995 were minimal. During 1996, the Company continued the
foregoing activities and also focused on recruiting personnel, raising capital
and developing programs to attract and retain members. In 1997, the Company
moved its headquarters to New York City, expanded its membership base from
less than 250,000 to almost 1 million, improved and upgraded its services,
expanded its production staff, built an internal sales department and began
active promotion of theglobe.com to increase market awareness. From the end of
1997 through June 30, 1998, revenues and operating expenses have increased as
the Company has placed a greater emphasis on building its advertising revenues
and memberships by expanding its sales force and promoting theglobe.com brand.
To date, the Company's revenues have been derived principally from the sale
of advertisements and, to a lesser extent, from subscription revenues. E-
commerce revenues have not been significant to date, but are expected to
increase as the Company's existing e-commerce arrangements grow and new
arrangements are entered into. Advertising revenues constituted 89% of total
revenues for the six months ended June 30, 1998 and 77% of total revenues for
the year ended December 31, 1997. The Company sells a variety of advertising
packages to clients, including banner advertisements, event sponsorship, and
targeted and direct response advertisements. Currently, the Company's
advertising revenues are derived principally from short-term advertising
arrangements, averaging one to two months, in which the Company guarantees a
minimum number of impressions for a fixed fee. Advertising revenues are
recognized ratably in the period in which the advertisement is displayed,
provided that no significant Company obligations remain and collection of the
resulting receivable is probable. Payments received from advertisers prior to
displaying their advertisements on the site are recorded as deferred revenues
and are recognized as revenue ratably when the advertisement is displayed. To
the extent minimum guaranteed impression levels are not met, the Company
defers recognition of the corresponding revenues until guaranteed levels are
achieved.
29
<PAGE>
In addition to advertising revenues, the Company derives other revenues
primarily from its membership subscriptions. The Company's membership programs
offer premium services for a monthly fee, providing additional services such
as incremental storage space and the ability to host limited commercial
activity. Although non-advertising revenues may continue to grow through the
development of new membership programs and the planned enhancements of
theglobe.com's e-commerce merchandising solution, globeStores, in the fourth
quarter of 1998, the Company expects to derive its revenue principally from
the sale of advertising space on its Web site for the foreseeable future. The
Company's recent arrangements with its premier e-commerce partners generally
provide the Company with a fee for renting space in theglobe.com Marketplace,
and/or a share of any sales resulting from direct links from the Company's Web
site. Revenues from these programs will be recognized in the month that the
service is provided. Revenues from the Company's share of the proceeds from
its e-commerce partners' sales will be recognized by the Company upon
notification from its partners of sales attributable to the Company's site. To
date, revenues from e-commerce arrangements have not been material.
The Company incurred net losses of $65,706, $750,180 and $3.6 million for
the period from May 1, 1995 (date of inception) to December 31, 1995, and the
years ended December 31, 1996 and 1997, respectively, and $5.8 million for the
six months ended June 30, 1998. At June 30, 1998, the Company had an
accumulated deficit of $10.2 million. The net losses and accumulated deficit
resulted from the Company's lack of substantial revenues and the significant
operation, infrastructure and other costs incurred in the development and
marketing of the Company's services. As a result of its expansion plans and
its expectation that its operating expenses will increase significantly in the
next several years, especially in the areas of sales and marketing and brand
promotion, the Company expects to incur additional losses from operations for
the foreseeable future. To the extent that increases in its operating expenses
precede or are not subsequently followed by commensurate increases in
revenues, or that the Company is unable to adjust operating expense levels
accordingly, the Company's business, results of operations and financial
condition would be materially and adversely affected. There can be no
assurance that the Company will ever achieve or sustain profitability or that
the Company's operating losses will not increase in the future.
The Company has recorded deferred compensation of approximately $25,000 and
$83,100 for the years ended December 31, 1996 and 1997, respectively, in
connection with the grant of certain stock options to employees, representing
the difference between the deemed value of the Company's Common Stock for
accounting purposes and the exercise price of such options at the date of
grant. Such amount is presented as a reduction of stockholders' equity and
amortized over the vesting period of the applicable options, generally three
to five years. Amortization of deferred stock compensation is allocated to the
general and administrative expense line identified on the statement of
operations. As a result, the Company currently expects to amortize the
following amounts of deferred compensation annually: 1998--$46,200; 1999--
$26,300; 2000--$1,800; 2001--$1,200; and 2002--$500. Amortization of deferred
compensation was $23,100 and $28,100 for the six months ended June 30, 1998
and the year ended 1997, respectively.
The Company expects to record a charge to earnings estimated to be
$2,047,500 (assuming an initial public offering price of $12.00 per share) in
the third quarter of 1998 in connection with the transfer during the third
quarter of 1998 of Warrants to acquire 225,000 shares of Common Stock from
Dancing Bear Investments (its largest stockholder) to Todd V. Krizelman,
Stephan J. Paternot and Edward A. Cespedes. The actual amount of such charge
will be determined by the difference between the initial public offering price
and the exercise price per Warrant (approximately $2.91 per share assuming an
initial public offering price of $12.00 per share).
Also, during July 1998, pursuant to the terms of an employment agreement
with an officer of the Company, the Company granted stock options to purchase
112,500 shares of Common Stock, 87,500 of which have an exercise price per
share equal to 85% of the initial public offering price. As a result, the
Company will record deferred compensation expense estimated to be $157,500
(assuming an initial public offering price of $12.00 per share), representing
the difference between the deemed value of the Company's Common Stock, the
initial public offering price and the exercise price of 87,500 options at the
date of grant. Such amount shall be presented as a reduction of stockholders'
equity and amortized over the vesting period of the applicable options. The
87,500
30
<PAGE>
options shall vest with respect to one-third of the shares subject thereto on
each of the first three anniversaries of the date of grant. The remaining
options will be granted at the initial public offering price which is equal to
the fair market value per share of the Company's Common Stock on the date of
grant.
RESULTS OF OPERATIONS
The following table sets forth the results of operations (as a percentage of
total revenues) for the periods indicated by each item reflected in the
Company's statement of operations. Given its limited operating history, the
Company believes that an analysis of its cost and expense categories as a
percentage of revenue is not meaningful.
<TABLE>
<CAPTION>
MAY 1, 1995
(INCEPTION) YEAR ENDED SIX MONTHS ENDED
TO DECEMBER 31, JUNE 30,
DECEMBER 31, --------------- -------------------
1995 1996 1997 1997 1998
------------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Revenues................. 100% 100% 100% 100% 100%
Cost of revenues......... 48% 51% 55% 51% 43%
---- ------ ------ -------- --------
Gross profit........... 52% 49% 45% 49% 57%
Operating expenses:
Sales and marketing.... 5% 121% 162% 108% 383%
Product development.... 224% 52% 20% 30% 21%
General and administra-
tive.................. 68% 213% 367% 285% 204%
---- ------ ------ -------- --------
Total operating ex-
penses.............. 297% 386% 549% 423% 608%
---- ------ ------ -------- --------
Loss from operations..... (245%) (337%) (504%) (374%) (551%)
Interest income (ex-
pense), net............. (0%) 10% 43% 5% 57%
---- ------ ------ -------- --------
Loss before provision for
income taxes............ (245%) (327%) (461%) (369%) (494%)
Provision for income tax-
es...................... 0% 0% 4% 0% 2%
---- ------ ------ -------- --------
Net loss................. (245%) (327%) (465%) (369%) (496%)
==== ====== ====== ======== ========
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND 1998
Revenues. Revenues increased from $208,241 for the six months ended June 30,
1997 to $1.2 million for the six months ended June 30, 1998, an increase of
463%. The period to period growth in revenues resulted from an increase in (i)
the number of advertisers as well as the average contract duration and value,
(ii) the Company's Web site traffic and (iii) to a lesser extent, its
subscription memberships.
Advertising Revenues. Advertising revenues were $144,166 or 69% of total
revenues and $1.0 million or 89% of total revenues for the six months ended
June 30, 1997 and 1998, respectively. Commencing in April 1996, the Company
engaged an Internet advertising service provider to sell the Company's Web
site advertising inventory in exchange for a service fee. The Company
recognized revenues net of such service fees. Commencing May 1, 1997, the
Company canceled this arrangement and created its own internal sales
department in order to properly represent theglobe.com brand on a consistent
basis as well as to reduce overall sales costs. Accordingly, the
advertisements sold by the Internet advertising service provider accounted for
approximately 28% of total revenues for the six months ended June 30, 1997.
The Company did not record any similar expense in the six months ended June
30, 1998. In addition, the Company recorded $37,500 and $39,906 of barter
advertising revenues, representing 18% and 3% of total revenues, for the six
months ended June 30, 1997 and 1998, respectively, which primarily related to
an advertising contract with a major Internet search engine provider that was
cancelled in January 1998. The Company anticipates that advertising revenues
will continue to account for a substantial share of total revenues for the
foreseeable future and that barter revenue will continue to comprise an
insignificant portion of the Company's total revenues in the future.
Subscription Revenues. The Company's subscription membership revenues were
$64,075 or 31% of total revenues and $129,792 or 11% of total revenues for the
six months ended June 30, 1997 and 1998, respectively. At June 30, 1998, the
Company had deferred revenues of $132,353, attributable to prepaid
subscription memberships which are amortized ratably over the remaining
membership term, typically ranging from one to 12 months.
31
<PAGE>
Cost of Revenues. Cost of revenues consists primarily of Internet connection
charges, Web site equipment leasing costs, depreciation, barter advertising
expenses, salaries of operations personnel and other related maintenance and
support costs. Gross margins were 49% and 57% for the six months ended June
30, 1997 and 1998, respectively. The increase in gross margin was primarily
due to a greater increase in revenues relative to the increase in cost of
revenues. In addition, the Company recorded $37,500 and $39,906 of barter
advertising expenses during the six months ended June 30, 1997 and 1998,
respectively, included in cost of revenues, which is equivalent to the barter
advertising revenues recorded in the same period. The June 30, 1997 and 1998
gross margins exclusive of the barter transactions were 60% and 59%,
respectively. Therefore, excluding barter, gross margins have remained fairly
consistent from period to period.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries of sales and marketing personnel, commissions, advertising, public
relations, sales force and other marketing related expenses. Sales and
marketing expenses increased from $224,170 or 108% of total revenues for the
six months ended June 30, 1997 to $4.5 million or 383% of total revenues for
the six months ended June 30, 1998. The period to period increase in sales and
marketing expenses was primarily attributable to expansion of the Company's
online and print advertising, public relations and other promotional
expenditures, as well as increased sales and marketing personnel and related
expenses required to implement the Company's marketing strategy in the first
half of 1998. Sales and marketing expenses also increased as a result of the
Company's decision to shift its advertising to an internal sales department in
the second quarter of 1997. Sales and marketing expenses as a percentage of
total revenues have increased as a result of the continued development and
implementation of theglobe.com's branding and marketing campaign. The Company
expects sales and marketing expenses will continue to increase in absolute
dollars for the foreseeable future as the Company continues its branding
strategy, expands its direct sales force, hires additional marketing personnel
and increases expenditures for marketing and promotion.
Product Development Expenses. Product development expenses include personnel
costs associated with the development, testing and upgrades to the Company's
Web site and systems as well as personnel costs related to its editorial
content and community management and support. Product development expenses
increased from $62,500 or 30% of total revenues for the six months ended June
30, 1997 to $250,869 or 21% of total revenues for the six months ended June
30, 1998. The absolute dollar increase in product development expenses was
primarily attributable to increased staffing levels required to support
theglobe.com and related back-office systems and to enhance the content and
features within the Company's Web site. The Company believes that timely
deployment of new and enhanced features and technology are critical to
attaining its strategic objectives and remaining competitive. Accordingly, the
Company intends to continue recruiting and hiring experienced product
development personnel and to make additional investments in product
development. The Company expenses product development costs as incurred. As
such, the Company expects that product development expenditures will increase
in absolute dollars in future periods.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for general corporate
functions, including finance, accounting, facilities and legal expenses, and
fees for professional services. General and administrative expenses increased
from $594,358 or 285% of total revenues for the six months ended June 30, 1997
to $2.4 million or 204% of total revenues for the six months ended June 30,
1998, an increase of $1.8 million, or 303%. The absolute dollar increase in
general and administrative expenses was primarily due to increased salaries
and related expenses associated with management's employment contracts, hiring
of additional personnel, and increases in professional fees and travel. The
increased salaries also reflect the highly competitive nature of hiring in the
new media industry. The Company expects that it will incur additional general
and administrative expenses as the Company hires additional personnel and
incurs additional costs related to the growth of the business and its
operation as a public company, including directors' and officers' liability
insurance, investor relations programs and professional service fees.
Accordingly, the Company anticipates that general and administrative expenses
will continue to increase in absolute dollars.
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<PAGE>
Interest Income (Expense), Net. Interest income (expense), net includes
income from the Company's cash and investments and expenses related to the
Company's capital lease obligations. Interest income (expense), net increased
from $11,384 for the six months ended June 30, 1997 to $672,637 for the six
months ended on June 30, 1998, an increase of $661,253. The increase in
interest income was primarily due to a higher average cash, cash equivalent
and investment balance as a result of capital received from the issuance of
shares of the Company's Preferred Stock in the third quarter of 1997.
Income Taxes. Income taxes of $26,500 for the six months ended June 30, 1998
are based solely on state and local taxes on business and investment capital.
The Company's effective tax rate differs from the statutory federal income tax
rate, primarily as a result of the uncertainty regarding the Company's ability
to utilize its net operating loss carryforwards. Due to the uncertainty
surrounding the timing or realization of the benefits of its net operating
loss carryforwards in future tax returns, the Company has placed a valuation
allowance against its otherwise recognizable deferred tax assets. As of June
30, 1998 and December 31, 1997, the Company had approximately $9.9 million and
$4.4 million of federal net operating loss carryforwards for tax reporting
purposes available to offset future taxable income. The Company's federal net
operating loss carryforwards expire beginning 2000 through 2012. The Tax
Reform Act of 1986 imposes substantial restrictions on the utilization of net
operating losses and tax credits in the event of an "ownership change" of a
corporation. Due to the change in the Company's ownership interests in the
third quarter of 1997, as defined in the Internal Revenue Code of 1986, as
amended (the "Code"), future utilization of the Company's net operating loss
carryforwards will be subject to certain limitations or annual restrictions.
See Note 4 to the Notes to Financial Statements appearing elsewhere in this
Prospectus.
COMPARISON OF THE PERIOD FROM MAY 1, 1995 (INCEPTION) TO DECEMBER 31, 1995 AND
YEARS ENDED DECEMBER 31, 1996 AND 1997
Revenues. Revenues were $26,815, $229,363, and $770,293 for the period from
May 1, 1995 (inception) to December 31, 1995, and for the years ended December
31, 1996 and 1997, respectively. The period to period growth resulted from an
increase in (i) the number of advertisers as well as the average contract
duration and value, (ii) the Company's Web site traffic and (iii) to a lesser
extent, its subscription memberships.
Advertising Revenues. Advertising revenues were $26,815 or 100% of total
revenues, $216,814 or 95% of total revenues, and $592,409 or 77% of total
revenues for the period from May 1, 1995 (inception) to December 31, 1995, and
for the years ended December 31, 1996 and 1997, respectively. Commencing in
April 1996, the Company engaged an Internet advertising service provider to
sell the Company's Web site advertising inventory in exchange for a service
fee. During 1996, the advertisements sold by the Internet advertising service
provider accounted for approximately 71% of total revenues. Commencing May 1,
1997, the Company canceled this arrangement and created its own internal sales
department in order to represent theglobe.com brand on a consistent basis as
well as to reduce overall sales costs. During 1997, revenues from this service
provider were only 8% of total revenues. During 1997, the Company recorded
$166,500 of barter advertising revenues, representing 22% of total revenues,
which primarily related to an advertising contract with a major Internet
search engine provider.
Subscription Revenues. The Company's subscription membership revenues were
$12,549 or 5% of total revenues and $177,884 or 23% of total revenues for the
years ended December 31, 1996 and 1997, respectively. At December 31, 1996 and
1997, the Company had deferred revenues of $32,144 and $113,290, respectively,
attributable to prepaid subscription memberships. The Company did not have
subscription revenues in its year of inception.
Cost of Revenues. Cost of revenues were $12,779 or 48% of total revenues,
$116,780 or 51% of total revenues, $423,706 or 55% of total revenues for the
period from May 1, 1995 (inception) to December 31, 1995, and for the years
ended December 31, 1996 and 1997, respectively. Gross margins were 52%, 49%
and 45% in 1995, 1996 and 1997, respectively. The general decline in gross
margins as a percentage of total revenues was attributable to the growth of
the networking infrastructure resulting in an increase in Internet connection,
support
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<PAGE>
and maintenance charges, equipment costs as well as operations personnel
costs. In 1995, the Company's first year of operation, cost of revenues only
represented Internet connection and support and maintenance charges. In 1997,
gross margins also decreased due to the inclusion of $166,500 of barter
advertising expenses in cost of revenues, which was equivalent to the barter
advertising revenues recorded in the same period. The 1997 gross margin
exclusive of the barter transactions was 57%. The Company's 1997 gross margin
was positively impacted by its decision to shift its advertising to an
internal sales department during May 1997 and the increase in the Company's
subscription members.
Sales and Marketing Expenses. Sales and marketing expenses were $1,248 or 5%
of total revenues, $275,947 or 121% of total revenues, and $1.2 million or
162% of total revenues for the period from May 1, 1995 (inception) to December
31, 1995, and for the years ended December 31, 1996 and 1997, respectively. In
the first year of operation, the Company did not dedicate meaningful funds to
sales and marketing. The period to period increase in sales and marketing
expenses from 1996 to 1997 was primarily attributable to expansion of the
Company's online and print advertising, public relations and other promotional
expenditures as well as increased sales and marketing personnel and related
expenses required to implement the Company's marketing strategy. Sales and
marketing expenses also increased as a result of the Company's decision to
shift its advertising to an internal sales department in the second quarter of
1997.
Product Development Expenses. Product development expenses were $60,000 or
224% of total revenues, $120,000 or 52% of total revenues, and $153,667 or 20%
of total revenues for the period from May 1, 1995 (inception) to December 31,
1995, and for the years ended December 31, 1996 and 1997, respectively. The
increases in absolute dollars in product development expenses were primarily
attributable to increased staffing levels required to support theglobe.com and
its related back-office systems. Product development expenses as a percentage
of total revenues have decreased because of the growth in total revenues.
General and Administrative Expenses. General and administrative expenses
were $18,380 or 68% of total revenues, $489,073 or 213% of total revenues, and
$2.8 million or 367% of total revenues for the period from May 1, 1995
(inception) to December 31, 1995, and for the years ended December 31, 1996
and 1997, respectively. The period to period increase in general and
administrative expenses was primarily due to increases in the number of
general and administrative personnel, professional services, travel and
facility related expenses to support the growth of the Company's operations.
The increased salaries reflect the highly competitive nature of hiring in the
new media industry. General and administrative expenses as a percentage of
total revenues decreased in 1996 because of the growth in total revenues.
General and administrative expenses as a percentage of total revenues and in
absolute dollars increased in 1997 primarily related to expenses associated
with management's employment contracts and accrued bonuses granted during the
second half of 1997 combined with the additional costs required to support the
rapid growth of the Company's operations.
Interest Income (Expense), Net. Interest income (expense), net was $(114),
$22,257 and $334,720, for the period from May 1, 1995 (inception) to December
31, 1995, and for the years ended December 31, 1996 and 1997, respectively.
The increase in interest income for the year ended December 31, 1997 was
primarily due to a higher average cash, cash equivalent and investment balance
as a result of the proceeds received from the issuance of shares of the
Company's Preferred Stock in the third quarter of 1997.
Income Taxes. Income taxes of $36,100 for the year ended December 31, 1997
were based solely on state and local taxes on business and investment capital.
The Company paid less than $1,000 in income taxes in 1995 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has primarily financed its operations
through (i) the private placement of its Preferred Stock through which the
Company raised $20 million and $280,000 in the third and second quarters of
1997, respectively, and $910,000 in 1996, (ii) the private placement of
Preferred Stock and Common Stock, through which the Company raised $647,000
and $4,700, respectively, in 1995 and (iii) capital equipment lease
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<PAGE>
financing which, from December 1997 through June 1998, raised approximately
$963,000. As of June 30, 1998, the Company had approximately $3.0 million in
cash and cash equivalents and $10.2 million in marketable securities.
Net cash used in operating activities was $330,223 and $5.4 million for the
six months ended June 30, 1997 and 1998, respectively, and $58,510, $601,602,
and $1.9 million for the period from May 1, 1995 (inception) to December 31,
1995, and for the years ended December 31, 1996 and 1997, respectively. The
Company had significant negative cash flows from operating activities in each
fiscal and quarterly period to date. Net cash used in operating activities
resulted primarily from the Company's net operating losses, adjusted for
certain non-cash items, and a higher level of accounts receivable due to the
time lag between revenue recognition and the receipt of payments from
advertisers, which were partially offset by increases in accounts payable,
accrued expenses, deferred revenues and the timing of payments associated with
the Company's 1997 accrued bonuses in the first quarter of 1998. For the six
months ended June 30, 1998, the increase in net cash used in operating
activities resulted primarily from the Company's net operating loss of $5.8
million and the payment of 1997's bonuses of $1.1 million during the first six
months of 1998.
Net cash provided (used) in investing activities was $(229,696) and $2.6
million for the six months ended June 30, 1997 and 1998, respectively, and
$(51,101), $(138,309), and $(13.2) million for the period from May 1, 1995
(inception) to December 31, 1995, and for the years ended December 31, 1996
and 1997, respectively. Net cash provided (used) in investing activities was
primarily related to purchase and sales of short-term investments with the
proceeds from the Company's issuance of shares of the Company's Preferred
Stock in the third quarter of 1997, totaling $20 million, and the purchase of
property and equipment in connection with the Company's build out of its
infrastructure. During December 1997 and the first six months of 1998, the
Company acquired additional equipment under capital leases of $126,000 and
$836,648, respectively.
Net cash provided by (used in) financing activities was $258,205 and
$(69,233) for the six months ended June 30, 1997 and 1998, respectively, and
$696,685, $909,955, and $20.2 million for the period from May 1, 1995
(inception) to December 31, 1995, and for the years ended December 31, 1996
and 1997, respectively. Net cash provided by financing activities during 1995
consisted primarily of $45,500 in convertible notes payable and $646,505 in
proceeds from the issuance of the Company's Common Stock. Net cash provided by
financing activities in 1996 and in 1997 consisted primarily of net proceeds
from the issuance of the Company's Preferred Stock. Net cash used in financing
activities of $(77,405) consisted primarily of payments under its capital
lease obligations.
As of June 30, 1998, the Company's principal commitments consisted of
obligations outstanding under capital and operating leases. The Company spent
approximately $557,253 on capital expenditures since inception, excluding
capital lease arrangements. The Company estimates that its capital
expenditures for the second half of 1998 and 1999 will be approximately $2
million and $7 million, respectively. The Company currently expects that its
principal capital expenditures during that time will relate to improvements to
technical infrastructure and a planned move of the Company headquarters at the
end of 1998.
The Company's capital requirements depend on numerous factors, including
market acceptance of the Company's services, the amount of resources the
Company devotes to investments in its Web site, the resources the Company
devotes to marketing and selling its services and its brand promotions and
other factors. The Company has experienced a substantial increase in its
capital expenditures and operating lease arrangements since its inception
consistent with the growth in the Company's operations and staffing, and
anticipates that this will continue for the foreseeable future. Additionally,
the Company will continue to evaluate possible investments in businesses,
products and technologies, and plans to expand its sales and marketing
programs and conduct more aggressive brand promotions.
The Company believes that the net proceeds from the Offerings, together with
its current cash and cash equivalents, will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at
least 12 months. If cash generated from operations is insufficient to satisfy
the Company's liquidity requirements, the Company may seek to sell additional
equity or debt securities or to obtain a credit facility. The
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<PAGE>
sale of additional equity or convertible debt securities could result in
additional dilution to the Company's stockholders. The incurrence of
indebtedness would result in increased fixed obligations of the Company and
could result in operating covenants that would restrict the Company's
operations. There can be no assurance that financing will be available in
amounts or on terms acceptable to the Company, if at all. See "Risk Factors--
Additional Financing Requirements; Ability to Incur Debt; Expected Negative
Operating Cash Flow for the Foreseeable Future."
QUARTERLY RESULTS OF OPERATIONS DATA
The following table sets forth certain unaudited quarterly statement of
operations data for each of the six quarters ended June 30, 1998 as well as
such data expressed as a percentage of the Company's total revenues for the
periods indicated. In the opinion of management, this information has been
prepared substantially on the same basis as the audited financial statements
appearing elsewhere in this Prospectus, and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the unaudited quarterly results of
operations data.
The quarterly data should be read in conjunction with the Financial
Statements and Notes related thereto appearing elsewhere in this Prospectus.
The operating results for any quarter are not necessarily indicative of the
operating results for any future period. In particular, because of the
Company's limited operating history, the Company has limited meaningful
financial data upon which to base revenues and planned operating expenses.
Additionally, the Company believes that it may experience seasonality in its
business, with use of the Internet and theglobe.com being somewhat lower
during the summer vacation period and year-end holiday periods. Additionally,
seasonality may affect significantly the Company's advertising revenue during
the first and third calendar quarters. See "Risk Factors--Potential
Fluctuations in Operating Results; Quarterly Fluctuations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1997 1997 1997 1997 1998 1998
--------- -------- ------------- ------------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 87 $ 121 $ 207 $ 355 $ 394 $ 780
Cost of revenues........ 25 81 133 185 213 291
----- ----- ------- ------- ------- -------
Gross profit........... 62 40 74 170 181 489
Operating expenses:
Sales and marketing.... 64 160 404 620 1,411 3,083
Product development.... 30 32 37 54 85 165
General and administra-
tive.................. 303 291 1,511 722 1,098 1,299
----- ----- ------- ------- ------- -------
Total operating ex-
penses................ 397 483 1,952 1,396 2,594 4,547
----- ----- ------- ------- ------- -------
Loss from operations... (335) (443) (1,878) (1,226) (2,413) (4,058)
Interest income, net... 3 8 113 210 456 217
----- ----- ------- ------- ------- -------
Loss before provision
for income taxes...... (332) (435) (1,765) (1,016) (1,957) (3,841)
Provision for income
taxes.................. -- -- 18 18 16 10
----- ----- ------- ------- ------- -------
Net loss................ $(332) $(435) $(1,783) $(1,034) $(1,973) $(3,851)
===== ===== ======= ======= ======= =======
PERCENTAGE OF REVENUES:
Revenues................ 100% 100% 100% 100% 100% 100%
Cost of revenues........ 29% 67% 64% 52% 54% 37%
----- ----- ------- ------- ------- -------
Gross profit........... 71% 33% 36% 48% 46% 63%
Operating expenses:
Sales and marketing.... 74% 132% 196% 175% 358% 395%
Product development.... 34% 27% 18% 15% 22% 21%
General and administra-
tive.................. 348% 240% 731% 203% 279% 167%
----- ----- ------- ------- ------- -------
Total operating ex-
penses................. 456% 399% 945% 393% 659% 583%
----- ----- ------- ------- ------- -------
Loss from operations.... (385%) (366%) (909%) (345%) (613%) (520%)
Interest income, net.... 4% 7% 55% 59% 116% 28%
----- ----- ------- ------- ------- -------
Loss before provision
for income taxes....... (381%) (359%) (854%) (286%) (497%) (492%)
Provision for income
taxes.................. 0% 0% 9% 5% 4% 1%
----- ----- ------- ------- ------- -------
Net loss................ (381%) (359%) (863%) (291%) (501%) (493%)
===== ===== ======= ======= ======= =======
</TABLE>
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<PAGE>
IMPACT OF THE YEAR 2000
The Year 2000 issue is the potential for system and processing failures of
date-related data and the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
State of Readiness. The Company may be affected by Year 2000 issues related
to non-compliant IT systems or non-IT systems operated by the Company or by
third parties. The Company has substantially completed an assessment of its
internal and external (third-party) IT systems and non-IT systems. At this
point in its assessment, the Company is not currently aware of any Year 2000
problems relating to systems operated by the Company or by third parties that
would have a material effect on the Company's business, results of operations
or financial condition, without taking into account the Company's efforts to
avoid such problems, although there can be no assurance thereof.
The Company's IT systems consist of software developed either in-house or
purchased from third parties, and hardware purchased from vendors. At this
point, the Company's assessment of its in-house software has identified only
approximately 2,000 lines of code out of several hundred thousand in its
proprietary, in-house software which are not Year 2000 compliant. Those
portions of code which are not compliant are used solely for internal
statistical analysis. The Company does not anticipate any difficulty in
modifying this code to become Year 2000 compliant by December 31, 1998. The
Company has contacted its principal vendors of hardware and software. All of
those contacted vendors have notified the Company that the hardware and
software that they have supplied to the Company is Year 2000 compliant.
The Company has also substantially completed an assessment of its non-IT
systems which the Company has identified as containing embedded chip systems
for Year 2000 issues. At this point in its assessment, the Company is not
currently aware of any Year 2000 problems relating to these systems which
would have a material effect on the Company's business, results of operations,
or financial condition, without taking into account the Company's efforts to
avoid such problems.
The Company's IT systems and other business resources rely on IT systems and
non-IT systems provided by service providers and therefore may be vulnerable
to those service providers' failure to remediate their own Year 2000 issues.
Such service providers include those for the Company's network and e-mail
services and landlords for the Company's leased office spaces. The Company has
contacted these principal service providers and has been notified that the IT
and non-IT systems which they provide to the Company are Year 2000 compliant.
Cost. Based on its assessment to date, the Company does not anticipate that
costs associated with remediating the Company's non-compliant IT systems or
non-IT systems will be material.
Risks. To the extent that the Company's assessment is finalized without
identifying any additional material non-compliant IT systems operated by the
Company or by third parties, the most reasonably likely worst case Year 2000
scenario is a systemic failure beyond the control of the Company, such as a
prolonged telecommunications or electrical failure. Such a failure could
prevent the Company from operating its business, prevent users from accessing
the Company's Web site, or change the behavior of advertising customers or
persons accessing the Company's Web site. The Company believes that the
primary business risks, in the event of such failure, would include but not be
limited to, lost advertising revenues, increased operating costs, loss of
customers or persons accessing the Company's Web site, or other business
interruptions of a material nature, as well as claims of mismanagement,
misrepresentation, or breach of contract.
Contingency Plan. As discussed above, the Company is engaged in an ongoing
Year 2000 assessment. Following the completion of the assessment, the Company
plans to conduct a full-scale Year 2000 simulation of its IT systems. The
results of this simulation and the Company's assessment will be taken into
account in determining the nature and extent of any contingency plans.
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<PAGE>
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 1995, 1996 and 1997 and the
first six months of 1998, inflation has not had a significant effect on the
Company's results of operations since inception.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" as of January 1,
1998. SFAS No. 130 requires the Company to report in its financial statements,
in addition to its net income (loss), comprehensive income (loss), which
includes all changes in equity during a period from non-owner sources
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. For the six months ended June 30, 1998 and the year ended
December 31, 1997, comprehensive net loss was approximately $11,600 lower and
$41,200 higher, respectively, than the net loss reported in the Company's
statements of operations for the applicable periods, due to unrealized gains
or losses on securities classified as available-for-sale.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosure About Segments of an Enterprise and Related Information."
SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company has determined that it does not
have any separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standard for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. The statement is not expected to affect the Company as the Company
currently does not have any derivative instruments or hedging activities.
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<PAGE>
BUSINESS
OVERVIEW
theglobe.com is one of the world's leading online communities with over 1.9
million members in the United States and abroad. In August 1998, over 6.5
million unique users visited the site. theglobe.com is a destination on the
Internet where users are able to personalize their online experience by
publishing their own content and interacting with others having similar
interests. theglobe.com facilitates this interaction by providing various free
services, including home page building, discussion forums, chat, e-mail and a
marketplace where members can purchase a variety of products and services.
Additionally, theglobe.com provides its users news, weather, movie and music
reviews, multi-player gaming, horoscopes and personals. By satisfying its
users' personal and practical needs, theglobe.com seeks to become their online
home. The Company's primary revenue source is the sale of advertising, with
additional revenues generated through e-commerce arrangements and the sale of
membership subscriptions for enhanced services.
Since its founding in May 1995, theglobe.com has experienced strong growth.
According to Media Metrix, theglobe.com was ranked as the fourth fastest-
growing Web site in terms of audience reach for the first half of 1998. Over
6.5 million unique users visited the site in August 1998, according to ABC
Interactive. Additionally, the site has added approximately 100,000 new
members every month since October 1997. Approximately 25% to 35% of
theglobe.com's monthly traffic originates from abroad, reflecting the site's
international appeal.
INDUSTRY BACKGROUND
The rapid adoption of the Internet as a means to gather information,
communicate, interact and be entertained, combined with the vast proliferation
of Web sites, has made the Internet an important new mass medium. IDC
estimates that the number of Web users exceeded 68 million in 1997, and will
grow to over 319 million by 2002. The Internet enables advertisers to target
advertising campaigns utilizing sophisticated databases of information on the
users of various sites and to directly generate revenues from these users
through online transactions. As a result, the Internet has become a compelling
means to advertise and market products and services.
With the volume of sites and vast abundance of information available on the
Internet, users are increasingly seeking an online home where they can
interact with others with similar interests and quickly find information,
products and services related to a particular interest or need. Community
sites were developed as a solution to the challenges posed by the Internet's
growth and complexity. They offer a single location where users can build
their personal Web sites and place them among the sites of others having
similar interests. In addition, community sites generally offer services
including access to e-mail accounts, chat rooms, news, and entertainment
services, among other features. By satisfying the needs of its users,
communities seek to establish a close relationship with their audience. As a
result, the Company believes that users tend to be loyal to and spend more
time online at community sites.
Advertising. Jupiter Communications estimates that spending on Internet
advertising in the United States will grow from $940 million in 1997 to $7.7
billion in 2002. The Internet has become a compelling advertising vehicle that
provides advertisers with targeting tools not available from traditional
advertising media. The interactive nature of the Internet and the development
of "click-through" advertising banners and other feedback tools enable
advertisers to measure impression levels, establish a dialogue with users and
receive "real-time" direct feedback from their target markets. Such feedback
provides advertisers with an effective means to measure the attractiveness of
their offerings among targeted audiences and make modifications to their
advertising campaigns on short notice. Community sites are generally able to
provide advertisers significantly more information regarding consumers than
other Web sites because they collect detailed demographic data and facilitate
the development of user-created affinity groups. The ability to target
advertisements to broad audiences, specific regional populations, affinity
groups or individuals makes community Web site advertising a highly versatile
and effective tool for delivering customized and cost-effective messages.
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<PAGE>
One indicator of the Internet's popularity as an advertising medium is the
growing number and diversity of Internet advertisers. Most early Internet
advertisers were technology and Internet-related companies. Today, a growing
number of Internet advertisers consist of traditional, consumer product and
service companies. The diverse audience of users accessing community sites has
made such sites especially attractive to consumer product and service
companies advertising on the Internet. The Company believes that this trend
should continue, and that a wide variety of companies outside the technology
and Internet industries, such as financial services, consumer goods,
automotive and pharmaceutical companies, are or will be increasingly using the
Internet, and community sites in particular, to advertise.
E-commerce and Direct Marketing. The Internet has become a significant
marketplace for buying and selling goods and services. Jupiter Communications
estimates that the amount of goods or services purchased in online consumer
transactions will grow from approximately $2.6 billion in 1997 to
approximately $37.5 billion in 2002. Improvements in security, interface
design and transaction-processing technologies have facilitated an increase in
online consumer transactions. Early adopters of such improvements include
online merchants offering broad product catalogs (such as books, music CDs and
toys), those seeking distribution efficiencies (such as PCs, flowers and
groceries) and those offering products and services with negotiable pricing
(such as automobiles and mortgages). The Company believes that as the volume
of online transactions increases, traditional retailers will offer a wide
variety of products and services online. The Company believes that online
communities provide businesses an attractive environment for selling products
and services by providing direct access to users with like interests.
The Internet allows marketers to collect meaningful demographic information
and feedback from consumers, and to rapidly respond to this information with
new messages. This offers a significant new opportunity for businesses to
increase the effectiveness of their direct marketing campaigns. In traditional
media, a significant portion of all advertising budgets are spent on direct
marketing because of its effectiveness. However, the effectiveness of direct
marketing campaigns is dependent upon the quality of consumer data used to
develop and place consumer advertisements. In addition to providing detailed
demographic data, community Web site participants indicate their areas of
personal interest by self-selecting themselves into affinity groups. This
added level of information provides direct marketers an invaluable tool to
target potential customers more accurately. Accordingly, advertisers are able
to improve their direct marketing campaigns which may translate into higher
sales.
THEGLOBE.COM SOLUTION
The Company was founded by Todd V. Krizelman and Stephan J. Paternot to
capitalize on the growing demand for online destinations that allow users to
develop their own identities and establish relationships with other Internet
users. theglobe.com community is organized in an intuitive hierarchy modeled
after the real world. There are six "Themes of Interest": Arts and
Entertainment, Business and Finance, Lifestyles, Romance, Special Interests
and Geographical Interests. Themes of Interest are subdivided into 24
"Cities," which are further divided into 75 "Districts." Within each District
members have the ability to create or join "Interest Groups," theglobe.com's
smallest form of community. There are currently 325 Interest Groups. Interest
Groups, once proposed by any member, are posted for petition. Those groups
that garner enough votes then go "live" on the site. Members are not limited
as to the number of communities they can join and are able to leave an
Interest Group at any time. Because of this, the communities are dynamic and
evolve as member interests change. "Community Leaders" are elected to manage
communities and are able to highlight member content, communicate directly to
constituents and organize events.
Within Interest Groups, members can access a collection of services provided
by theglobe.com to generate content, including chat, open forums and e-mail.
Member created content within Interest Groups satisfy users' desires for topic
specific information, conversation and debate. Members vote and generate
content for communities, thereby facilitating production of desirable content
on theglobe.com. Viewing community content does not require membership,
allowing theglobe.com to leverage its member-created content to attract a
large audience of users. As these users become familiar with theglobe.com, the
Company believes that it has a greater ability to convert them into members,
perpetuating the growth of the site.
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The unique community focus of theglobe.com offers the Company several
advantages that include:
Member Loyalty. Because theglobe.com provides a home for its members,
members develop loyalty to the site and to the communities in which they
participate. The Company believes that this translates into more frequent
usage by members and longer stays at the site. According to Media Metrix,
theglobe.com was ranked as the fourth fastest-growing Web site in terms of
audience reach for the first half of 1998.
Member-Developed Content. The majority of content on theglobe.com is
developed by users on a voluntary basis for the benefit of all users of the
site. As a result, the Company avoids the majority of costs associated with
content development.
Targeted Advertising. theglobe.com structure provides a valuable platform
for advertisers by allowing them to target advertisements based on both
demographic information and affinity group affiliations. Advertisers are also
drawn to theglobe.com's volume of user traffic, frequency and average length
of use. theglobe.com's ability to reach users across a wide variety of
interest areas has made the site attractive to both technology companies as
well as traditional consumer product and service companies. Currently,
approximately 60% of theglobe.com's advertisers are branded consumer product
and service companies.
BUSINESS STRATEGY
theglobe.com's goal is to be the leading online community site. The Company
seeks to attain this goal through the following key strategies:
Improve User Experience. The Company will continue efforts to improve user
experience on theglobe.com by: (i) simplifying user interfaces and improving
the ease of use of services, (ii) improving customer support, (iii) developing
loyalty programs to reward members for increased usage, (iv) expanding the
suite of personal publishing/Web site building tools, (v) creating additional
opportunities for participating in existing affinity groups, as well as
expanding the number of affinity groups, (vi) personalizing the site to the
preferences of individual members and (vii) launching new services to enhance
the community.
Develop Brand Identity and Awareness. The Company intends to expand its
presence as a mass market site by building brand awareness. The Company plans
to continue to allocate a significant portion of its resources to develop its
brand in the same fashion as traditional consumer product and service
companies. The Company believes that establishing brand awareness among
consumers is instrumental in attracting new members to theglobe.com and also
has the effect of attracting media buyers who tend to favor well-known and
trusted companies. theglobe.com also intends to continue to market its
services in various media. In March 1998, theglobe.com launched advertising
campaigns in several forms of media, including television, print, billboards,
buses, telephone kiosks, online media, and other marketing and promotional
efforts designed to build its brand name in selected cities.
Increase New Membership Acquisition through Strategic
Alliances. theglobe.com continues to seek new ways to reach potential members
when they are first becoming acquainted with the Internet. The Company
believes that early contact with such users will enhance its ability to
instill customer loyalty. Accordingly, the Company has established a strategic
alliance with EarthLink Network, Inc. ("EarthLink"), one of the largest ISPs
in the United States, through which members gain Internet access and are
directed to theglobe.com as their home site upon startup. The Company has also
formed strategic alliances with companies including Advertising Age and Ziff
Davis University. These relationships are designed to drive additional traffic
to the site, create brand building opportunities and allow for the marketing
of products and services to theglobe.com's user base.
Expand Globally. The Company believes that significant opportunities exist
to capitalize on the growth of the Internet internationally and is pursuing
strategic relationships with international companies to exploit cross-
marketing, co-branding and promotional opportunities. Approximately 25% to 35%
of theglobe.com's traffic is
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generated by members outside of the United States who are able to communicate
and publish on the site in their respective languages. The Company has
received prominent press coverage in Europe, Asia and Australia, and has
established a relationship with MTV U.K. to feature theglobe.com's founders on
a weekly news show (to be launched initially in the United Kingdom in the fall
of 1998).
Further Develop E-commerce. The Company intends to increase its e-commerce
revenues by continuing to increase the number of e-commerce partners in
theglobe.com Marketplace (the "Marketplace"), and through globeStores, its e-
commerce merchandising solution aimed at the small to mid-sized office and
home office market. In addition, the Company is seeking to expand the number
of its premier commerce partners ("Premier Partners") that rent space on
theglobe.com. As of August 31, 1998, 43 companies, including Premier Partners,
participated in the Marketplace.
Enhance Membership Services. The Company currently offers additional
Internet services, such as increased storage space for building home pages,
through its Gold and Platinum membership programs. To attract a wider
subscriber base, the Company intends to develop new membership programs
offering premium content, shopping clubs and entertainment services.
PRODUCTS AND SERVICES
theglobe.com provides users with access to the following collection of
products and services to generate content and purchase merchandise online:
Free Services. theglobe.com provides a range of free services to its members
through which they are able to personalize their online experience. These
services include personal Web site hosting, discussion forums, chat and e-
mail. Additionally, theglobe.com provides news, weather, movie and music
reviews, multiplayer gaming, horoscopes and personals. Members are also
provided discounts on merchandise offered by certain retailers in the
Marketplace.
theglobe.com Marketplace. theglobe.com Marketplace provides users access to
products offered by leading retailers and service providers. The Company
allows retailers to locate in its Marketplace and collects a fee based on a
percentage of transactions. The Marketplace currently has 43 participants,
including BarnesandNoble.com, FAO Schwarz and Lens Express.
Premier Partners. The Company has relationships with Premier Partners who
pay an additional fixed monthly fee in order to receive prominent placement on
theglobe.com. Premier Partner agreements typically run for a period of six
months to three years and are renewable at the option of the partner. Examples
include:
Lowestfare.com. Lowestfare.com, a division of Global Discount Travel
Services, LLC, is a full service discount travel company, offering
discounted airline, car and hotel reservations, vacation packages and
cruises to the leisure and business consumer. Lowestfare.com has entered
into a three-year agreement with theglobe.com to be the exclusive provider
of travel-related services, as well as content, including weather, mapping,
destination information and voice response e-mail. Additionally,
theglobe.com will provide Lowestfare.com with advertising and Marketplace
exposure.
E! Online. E! Online, one of the premier Internet entertainment sites,
will be theglobe.com's Premier Partner in the Company's entertainment
category, providing among other things, movie reviews, celebrity news and
gossip. The Company has entered into a one-year relationship with E!
Online, whereby the Company will be paid a guaranteed fee in exchange for
giving E! Online preferred placement.
Republic Industries. Republic Industries owns the largest chain of new
vehicle dealerships in the United States and operates a chain of used car
megastores under the AutoNation USA brand name. AutoNation will be given
preferred placement in theglobe.com's auto category, pursuant to a three-
year agreement that Republic Industries has entered into with theglobe.com.
The Company also has such agreements with Cyberian Outpost, Inc. for
software and computer hardware, GetSmart for consumer finance, Classified
Warehouse for classified advertisements, RSL Communications for Internet
telephony services and VitaSave for herbs and vitamin products.
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globeStores. globeStores is the Company's e-commerce merchandising solution
aimed at the small to mid-sized office and home office market. The globeStore
tool set will allow merchants and users to build storefronts at theglobe.com
assisted by an easy-to-use online guide. The Company will offer globeStore
merchants and users various options ranging from a basic promotional
storefront to a more complete solution, including a catalog, shopping cart and
online transaction capabilities. The Company intends to charge globeStore
owners a monthly service fee based on the level of service utilized and a
transactional fee.
Member Subscriptions. The Company currently offers additional Internet
services through its Gold and Platinum membership packages. These packages
provide services such as additional storage space and the ability to host
limited commercial activity. Member subscriptions are available for a $4.95 or
$9.95 monthly fee, depending on the level of service.
CORPORATE ALLIANCES AND RELATIONSHIPS
theglobe.com has established a number of relationships designed to drive
additional traffic to its site, create brand building opportunities, and allow
for the marketing of products and services to theglobe.com user base. These
arrangements are with a variety of online and offline partners and provide a
cost effective way to deliver traffic to the site because they do not require
significant capital expenditures. Examples include:
EarthLink. theglobe.com seeks to reach new members as they first become
acquainted with the Internet. The Company believes that early contact with
such users will enhance the Company's ability to instill customer loyalty.
Consistent with this strategy, the Company has established an alliance,
currently in a trial phase, with EarthLink, one of the largest ISPs in the
United States. EarthLink has created a custom version of their "start-up
CD-ROM" which not only gives users Internet access but also automatically
directs them to theglobe.com as their home site upon start-up.
Additionally, EarthLink promotes theglobe.com within its site and pays the
production costs of co-branded theglobe.com/EarthLink start-up CD-ROMs.
EarthLink pays a commission to the Company for each member or user gaining
Internet access by utilizing the co-branded start-up CD-ROM. When the trial
phase is completed (expected in October 1998), the alliance will be
automatically renewed for one-year periods, unless terminated by either
party.
Advertising Age. theglobe.com hosts a full-service community for
Advertising Age, a leading trade publication for the advertising industry.
In exchange for providing the full range of membership services available
on theglobe.com to users of the Advertising Age Web site, the Company
receives free promotion on the Advertising Age Web site, as well as
discounts on advertising in Advertising Age magazine. This relationship
provides theglobe.com with significant exposure throughout the advertising
community, particularly among media buyers.
JobDirect, Inc. JobDirect, Inc. ("JobDirect") is an Internet resume
service that connects entry-level job seekers with employment
opportunities. In exchange for development of community features for its
Web site, JobDirect provides theglobe.com with a link from its site as well
as prominent promotion in its offline job events on college campuses.
JobDirect provides all of its members e-mail from theglobe.com and
distributes co-branded marketing material to college students, providing
theglobe.com with exposure to the college-age market segment.
In addition to the above relationships, the Company has a variety of other
arrangements designed primarily to drive traffic to its site, including
agreements with Ziff Davis University, Launch Magazine, Wall Street Sports
LLC, LINCS and WebSurfer.
ADVERTISING CUSTOMERS
With over 6.5 million unique users as of August 1998, according to ABC
Interactive, and over 1.9 million members in the United States and abroad,
theglobe.com has successfully attracted both mass market consumer product
companies as well as technology-related businesses advertising on the
Internet. Due to its advantages as a community Web site, the Company believes
that it is well positioned to capture a portion of the growing number of
consumer product and service companies seeking to advertise online. In the
last three months,
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approximately 110 customers advertised on theglobe.com. During that period,
approximately 70% were repeat customers and no one customer accounted for more
than 10% of revenues. Some of the Company's advertising clients include:
Lee Jeans Coca Cola J. Crew Ziff Davis
Procter & Gamble Visa Polygram BellSouth
Dunkin' Donuts Office Depot Levi's Microsoft
Sony 3Com USWest Intel
ADVERTISING SALES AND DESIGN
The Company seeks to distinguish itself from its competition through the
creation of unique advertising and sponsorship opportunities that are designed
to build brand loyalty for its corporate sponsors by seamlessly integrating
their advertising messages into theglobe.com's content. Through its close
relationship with the end user, the Company has the ability to deliver
advertising to specific targets within the site's themed content areas,
allowing advertisers to single out and effectively deliver their messages to
their respective target audiences. For example, a company can target an
advertisement solely to 35-40 year old Canadian men with music interests. The
Company believes that such sophisticated targeting is a critical element for
capturing worldwide advertising budgets for the Internet. Additionally, the
Company intends to expand the amount and type of demographic information it
collects from its members, which will allow it to offer more specific data to
its advertising clients.
While the Company's competition generally provides banner advertising as its
primary delivery system, the Company offers an assortment of advertising
options to its clients, allowing them to take advantage of theglobe.com's
unique relationship with its users and rapidly growing membership base. In
addition to direct response indicators like "click-throughs," theglobe.com
also specializes in providing innovative and aggressive selling services and a
number of "branding" and "beyond the banner" sponsorship packages for its
advertisers at higher premiums, such as:
. Banner Advertising . Sweepstakes
. Button Advertising . Content Development
. Contextual Links within Relevant . Affinity Packages for Advertising
Content Partners
. Pop Up and Log Out Interstitials . Opt-In Direct Marketing/Lead
. E-mail Sponsorship Programs Generation
. Celebrity Event Sponsorships . Pre- and Post-Campaign Market
Research
The Company has built an internal sales organization of 23 professionals,
focusing on both selling advertisements on the Web site and developing long-
term strategic relationships with clients. A significant portion of the
Company's sales personnel's income is commission based. All of the Company's
sales personnel sell advertising exclusively for theglobe.com. The Company
currently sells over 95% of its advertising inventory through its in-house
sales staff, allowing the Company to better control its pricing and inventory,
maintain brand consistency and capture maximum revenue. The Company has sales
offices in New York City and San Francisco, and intends to open additional
sales offices in selected markets around the world.
MARKETING AND PROMOTIONS
The Company has committed significant funds to advertising in traditional
offline media, totaling approximately $3.1 million in the first six months of
1998. The Company launched an $8 million advertising campaign in March 1998,
including television, print, billboards, buses, telephone kiosks, online
media, and other marketing and promotional efforts. These efforts are aimed at
generating significant additional traffic to theglobe.com, building and
defining a desirable online destination in the minds of present and potential
online consumers, and creating a strong and viable brand within the Internet
industry and advertising trades. The Company intends to continue to commit a
significant part of its budget to marketing theglobe.com brand. The Company
advertises on national cable channels like MTV, E! Entertainment Television,
Comedy Central, ESPN and the Sci-Fi Channel. The Company has also purchased
advertising on network television in several markets including New York, San
Francisco, Seattle, Boston, Denver and Atlanta.
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TECHNOLOGY
The Company's strategy is to apply existing technologies in novel ways to
deliver content and provide services to members of its online community. The
various features of theglobe.com's online environment are implemented using a
combination of commercially available and proprietary software components. The
Company favors licensing and integrating "best-of-breed" commercially
available technology from industry leaders such as Oracle, Sun Microsystems
and Microsoft whenever possible. The Company reserves internal development of
software for those components which are either unavailable on the market or
which have major strategic advantages when developed internally. The Company
believes that this component approach is more manageable, reliable and
scalable than single-source solutions. In addition, the emphasis on commercial
components speeds development time, which is an advantage when competing in a
rapidly evolving market.
Consistent with the Company's preference for off-the-shelf software
components, the hardware systems utilized by the Company also consist of
commercially available components. The Company believes that this architecture
provides the ability to increase scale more quickly and reliably, and at lower
cost, than more centralized systems. Although the existing infrastructure
currently exceeds the Company's present demand, the Company has aggressive
plans for additional upgrades in anticipation of increased demand.
The Company's distributed server architecture allows it to roll out upgrades
incrementally on an as-needed basis. In addition to being scalable, the Web-
serving architecture is also entirely redundant. The Company's Internet
servers are connected to the Internet through multiple dedicated 45 Mb T3
connections obtained through two separate backbone providers, AppliedTheory
and UUNET. This approach to connectivity protects the Company by allowing it
to continue operations in the event of a failure in either backbone. See "Risk
Factors--Internet Industry Characterized by Rapid Technological Change."
In order to efficiently manage the system, the Company has developed highly
automated methods of monitoring the system performance of each component. In
the event of a failure in any subsystem, the failed subsystem is immediately
taken out of service and requests are distributed among the remaining
operational systems. The Company has also developed a suite of tools to
perform routine management tasks such as log processing and content updates in
an automated, remote-controlled fashion. The Company believes that its
investment in automation lessens the need for the additional personnel that
would otherwise be required to support the system as it grows. See "Risk
Factors--Internet Industry Is Characterized by Rapid Technological Change" and
"--Dependence on Key Personnel."
COMPETITION
The market for members, users and Internet advertising is new and rapidly
evolving, and competition for members, users and advertisers is intense and is
expected to increase significantly. Barriers to entry are relatively
insubstantial and the Company may face competitive pressures from many
additional companies both in the United States and abroad. The Company
believes that the principal competitive factors for companies seeking to
create communities on the Internet are critical mass, functionality of the Web
site, brand recognition, member affinity and loyalty, broad demographic focus
and open access for visitors. Other companies that are primarily focused on
creating Internet communities are Tripod and GeoCities and, in the future,
Internet communities may be developed or acquired by companies currently
operating Web directories, search engines, shareware archives, content sites,
OSPs, ISPs and other entities, certain of which may have more resources than
the Company. In addition, the Company could face competition in the future
from traditional media companies, a number of which, including Disney, CBS and
NBC, have recently made significant acquisitions or investments in Internet
companies. Furthermore, the Company competes for users and advertisers with
other content providers and with thousands of Web sites operated by
individuals, the government and educational institutions. Such providers and
sites include AOL, Angelfire, CNET, CNN/Time Warner, Excite, Hotmail,
Infoseek, Lycos, Microsoft, Netscape, Switchboard, Xoom and Yahoo!. The
Company also faces competitive pressure from traditional media such as
newspapers, magazines, radio and television. The Company believes that the
principal competitive factors in attracting advertisers include the amount of
traffic on its Web site, brand recognition, customer service, the
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demographics of the Company's members and users, the Company's ability to
offer targeted audiences and the overall cost-effectiveness of the advertising
medium offered by the Company. The Company believes that the number of
Internet companies relying on Internet-based advertising revenue, as well as
the number of advertisers on the Internet and the number of users, will
increase substantially in the future. Accordingly, the Company will likely
face increased competition, resulting in increased pricing pressures on its
advertising rates, which could have a material adverse effect on the Company.
See "Risk Factors--Intense Competition."
Additionally, the e-commerce market is new and rapidly evolving and
competition among e-commerce merchants is expected to increase significantly.
The Company will rely primarily on e-commerce partners to generate e-commerce
revenues. The Company's ability to generate revenues from any of its present
or future e-commerce partners may be adversely affected by competition between
any such partner and other Internet retailers.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards substantial elements of its Web site and underlying
technology as proprietary and attempts to protect them by relying on
trademark, service mark, copyright and trade secret laws and restrictions on
disclosure and transferring title and other methods. The Company currently has
no patents or patents pending and does not anticipate that patents will become
a significant part of the Company's intellectual property in the foreseeable
future. The Company also generally enters into confidentiality agreements with
its employees and consultants and in connection with its license agreements
with third parties and generally seeks to control access to and distribution
of its technology, documentation and other proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use the Company's proprietary information without authorization or
to develop similar technology independently. The Company pursues the
registration of its trademarks in the United States and internationally. The
Company has registered a United States trademark for theglobe. The Company has
filed United States trademark applications for theglobe.com and theglobe.com
logo. Additionally, the Company has submitted trademark applications for
theglobe.com and theglobe.com logo in Australia, Brazil, Canada, China, the
European Union (covering Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Italy, Ireland, Luxembourg, the Netherlands, Portugal, Spain, Sweden
and the United Kingdom), Hong Kong, Israel, Japan, New Zealand, Norway,
Russia, Singapore, South Africa, Switzerland and Taiwan. Effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which the Company's services are distributed or made
available through the Internet, and policing unauthorized use of the Company's
proprietary information is difficult. See "Risk Factors--Reliance on
Intellectual Property and Proprietary Rights."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is currently subject to certain federal and state laws and
regulations that are applicable to certain activities on the Internet.
Legislative and regulatory proposals under consideration by federal, state,
local and foreign governmental organizations concern various aspects of the
Internet, including, but not limited to, online content, user privacy,
taxation, access charges, liability for third-party activities and
jurisdiction. Such government regulation may place the Company's activities
under increased regulation, increase the Company's cost of doing business,
decrease the growth in Internet use and thereby decrease the demand for the
Company's services or otherwise have a material adverse effect on the
Company's business, results of operations and financial condition. See "Risk
Factors--Government Regulation and Legal Uncertainties Associated with the
Internet."
Online Content. Online content restrictions cover many areas, including but
not limited to, indecent or obscene content and gambling. Several federal and
state statutes prohibit the transmission of certain types of indecent,
obscene, or offensive information and content, including sexually explicit
information and content, over the Internet to certain persons. The
constitutionality and the enforceability of some of these statues is not clear
at this time. For example, in 1997 the Supreme Court of the United States held
that selected parts of the federal Communications Decency Act of 1996 (the
"CDA") governing "indecent" and "patently offensive" content were
unconstitutional. Many other provisions of the CDA, including those relating
to "obscenity," however, remain in effect. Prior to the Supreme Court's
decision, a federal district court in New York held that certain provisions of
the New York penal law modeled on the CDA violated the Constitution. A
companion provision
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of that law, however, was subsequently upheld. Since the Supreme Court's
decision, a federal district court in New Mexico held that a recently adopted
provision of the New Mexico penal law purporting to make it unlawful to
disseminate over the Internet information that is "harmful to minors" also
violated the Constitution. The Senate version of the appropriations bill for
the Departments of Commerce, Justice, and State, as passed on August 31, 1998,
contains several Internet-related provisions. One of the provisions of the
bill is generally referred to as "CDA II," and, if enacted, would require that
Web sites engaged in the business of the commercial distribution of material
that is deemed to be harmful to minors restrict access to such material by
persons under 17 years of age. Another provision would, if enacted, require
public schools and libraries that receive federal funding of Internet access
to install software that would filter out material that is inappropriate for
minors. The House version of the bill, passed on August 6, 1998, contains
neither of these provisions. However, a similar bill requiring Web sites to
restrict access by persons under 17 years of age to material that is harmful
to minors is pending before the House Commerce Committee. The Company cannot
predict the final terms of any such legislation or the effect that such
legislation could have on the Company.
The U.S. Department of Justice and some state Attorneys General have
recently intensified their efforts in taking action against businesses that
operate Internet gambling activities, and pending legislation seeks to ban
Internet gambling. On July 23, 1998 the Senate passed the "Internet Gambling
Prohibition Act," which, if enacted, would prohibit placing, receiving or
otherwise making a bet or wager via the Internet in any state, and would also
prohibit engaging in the business of betting or wagering through the Internet
in any state. The bill also would direct the Secretary of State to negotiate
with foreign countries to conclude international agreements that would enable
the United States to enforce specified provisions of the act outside the
United States. A similar bill has been introduced in the House of
Representatives. Currently, online gambling advertisers account for under ten
percent of the Company's advertising revenues.
Certain states, including New York and California, have enacted laws or
adopted regulations that expressly or as a matter of judicial interpretation
apply various consumer fraud and false advertising requirements to parties who
conduct business over the Internet. The constitutionality and the
enforceability of some of these statues is not clear at this time. For
example, in 1997, a federal district court held that a Georgia criminal
statute violated the Constitution when it prohibited Internet transmissions
that falsely identify the sender or use trade names or logos that would
falsely state or imply that the sender was legally authorized to use them.
Internet Privacy. The United States government currently has limited
authority over the collection and dissemination of personal data collected
online. The Federal Trade Commission Act (the "Act") prohibits unfair and
deceptive practices in and affecting commerce. The Act authorizes the Federal
Trade Commission (the "FTC") to seek injunctive and other equitable relief,
including redress, for violations of the Act, and provides a basis for
government enforcement of certain fair information practices. For instance,
failure to comply with a stated privacy policy may constitute a deceptive
practice in certain circumstances and the FTC would have authority to pursue
the remedies available under the Act for such violations. Furthermore, in
certain circumstances, information practices may be inherently deceptive or
unfair, regardless of whether the entity has publicly adopted any privacy
policies. The FTC has issued an opinion letter addressing the possible
unfairness inherent in collecting certain personal identifying information
from children online and transferring it to third parties without obtaining
prior parental consent. However, as a general matter, the FTC lacks authority
to require companies to adopt privacy policies.
Certain industry groups have proposed, or are in the process of proposing,
various voluntary standards regarding the treatment of data collected over the
Internet. In order to establish and bolster user and member confidence in its
privacy policies, the Company may incur expenses in obtaining the endorsement
of such industry groups or in altering its current policies to comply with
such standards. There can be no assurance that the adoption of such voluntary
standards will preclude any legislative or administrative body from taking
governmental action regarding Internet privacy.
In June 1998, the FTC released a report analyzing the effectiveness of self-
regulation as a means of protecting consumer privacy on the Internet. The
report concluded that industry self-regulation had not provided adequate
protection for Internet users. The report listed four core information
practices that the FTC believes
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must be part of any privacy protection effort: notice, choice, access and
security. In order to protect the privacy of children, the FTC recommended
legislation that would require Web sites that obtain information from children
to provide actual notice to parents and to obtain parental consent. On July
21, 1998, Commissioner Pitofsky stated before a hearing of the House of
Representatives Subcommittee on Telecommunications, Trade, and Consumer
Protection that, unless the computer industry could demonstrate that it had
developed and implemented broad-based and effective self-regulatory programs
by the end of 1998, the FTC would seek additional legislative standards and
agency authority regarding Internet privacy. At the same hearing, the FTC
proposed model legislation that would force companies to comply with the four
core information practices and offer a safe harbor for industries that choose
to establish their own means for providing consumer privacy protections, as
long as those means are subject to governmental approval. There can be no
assurance that these efforts will not adversely affect the Company's ability
to collect demographic and personal information from members, which could have
an adverse affect on its ability to attract advertisers. This, in turn, could
have a material adverse effect on the Company's business, results of
operations and financial condition.
Moreover, the FTC has begun investigations into the privacy practices of
companies that collect information on the Internet. For example, on August 13,
1998, the FTC announced that it had entered into a proposed consent order with
one of the Company's competitors. In its complaint, the FTC alleged that such
competitor engaged in three deceptive practices. First, the FTC alleged that
the company falsely represented that the personal identifying information it
collects through the membership application form is used only to provide
members the specific offers and products or services they request. Second, the
FTC alleged that the competitor falsely represented that the "optional
information" it collects through the application form is not disclosed to
third parties without the member's permission. Third, the FTC alleged that the
competitor had falsely represented that it collected and maintained the
information provided by children who joined certain neighborhoods on its site,
rather than the undisclosed third parties who actually collected and
maintained the information.
Without admitting that these allegations are correct, the competitor has
tentatively agreed, among other things, to post a clear and prominent privacy
statement on its home page and each location where information is collected,
disclosing the information collected, the purpose to which the information
would be used, the persons to whom the information would be released, and the
methods by which subscribers could access and remove the information. The
competitor also agreed to obtain express parental consent before collecting
information from children 12 and under. Finally, the competitor agreed to
post, for five years, a clear and prominent hyperlink within its privacy
statement directing visitors to the FTC's site to view educational material on
privacy.
The Company is undertaking a review of its practices in light of the
foregoing recent FTC activity. However, the Company cannot predict the exact
form of the regulations that the FTC will adopt. Accordingly, there can be no
assurance that the Company's current practices would comply with the
regulatory scheme that is ultimately adopted or that the Company will not have
to make significant changes to comply with such laws. The Company includes
statements about user privacy in its user agreement entered into with new
members. The current user agreement states that its members should not have an
expectation of privacy in their accounts and that the Company may be forced to
disclose member e-mail to the government or third parties under certain
circumstances, or that third parties may unlawfully intercept private
communications. Additionally, the current user agreement states that, from
time to time, the Company may make its database of user information (including
e-mail addresses) available to other parties for promotions of and
solicitations for their goods or services that may be of interest to members
of theglobe.com community. In the current user agreement, each member
expressly consents to allow the use and disclosure of personally identifiable
information and each member is informed that he or she has the ability to
remove their personal information from the database of information made
available to third parties.
Regardless of the user agreement, the Company could be required under
several privacy statutes and regulations, including the Electronic
Communications Privacy Act of 1974, as amended, to disclose information about
users in a variety of contexts including, but not limited to, pursuant to an
administrative subpoena or court order. The Senate version of the Departments
of Commerce, Justice, and State appropriations bill, adopted on August 31,
1998, would, if enacted, grant the FBI administrative subpoena authority to
quickly access the records of an Internet service provider regarding a
potential sexual predator using the Internet to improperly contact children.
The House version of the bill, passed on August 6, 1998, does not contain a
similar provision.
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At the international level, the European Union (the "EU") has adopted a
directive (the "Directive") that provides for EU member countries to impose
restrictions on the collection and use of personal data, effective October
1998. The Directive could, among other things, affect United States companies
that collect information over the Internet from individuals in EU member
countries, and may impose restrictions that are more stringent than current
Internet privacy standards in the United States. There can be no assurance
that this Directive will not be interpreted or applied in a manner that would
adversely affect the Company's business, results of operations and financial
condition.
Any new legislation or regulation enacted by federal, state or foreign
governments regulating online privacy or the application or interpretation of
existing laws and regulations could affect the way in which the Company is
allowed to conduct its business, especially those aspects that contemplate the
collection or use of members' personal information.
Internet Taxation. A number of proposals have been made at the federal,
state and local level, and by certain foreign governments, that would impose
additional taxes on the sale of goods and services over the Internet, and
certain states have taken measures to tax Internet-related activities.
Currently, Congress is considering legislation that would place a temporary
moratorium on any new taxation of Internet commerce. On June 23, 1998, the
House of Representatives passed H.R. 4105, the "Internet Tax Freedom Act,"
which includes a three-year moratorium on state and local taxes on Internet
access, bit taxes or multiple or discriminatory taxes on electronic commerce.
Certain existing state laws, however, would be expressly excepted from this
moratorium if any such state law were reaffirmed within a one-year period. The
bill would also create a commission to study several Internet taxation issues
and to present proposed legislation to the President and Congress. H.R. 4105,
if enacted in its current form, would also prohibit the FCC and the states
from regulating the prices of Internet access and online services. See "Access
Charges" below. The Senate is also considering legislation on Internet
taxation. Any legislation that is eventually passed by both houses of Congress
may contain provision different from those in H.R. 4105. In addition to the
version passed by the House of Representatives, the Senate Commerce Committee
approved a version of S. 442 on November 4, 1997 that would, among other
things, impose a six-year moratorium, and the Senate Finance Committee
approved a version of S. 442 on July 28, 1998 that would, among other things,
impose a two-year moratorium.
There can be no assurance that any such legislation will be adopted by
Congress or that new taxes will not be imposed upon e-commerce after any
moratorium adopted by Congress expires or that current attempts at taxing or
regulating commerce over the Internet would not substantially impair the
growth of Internet commerce and as a result adversely affect the Company's
opportunity to derive financial benefit from such activities.
The Clinton Administration has stated that the United States will advocate
in the World Trade Organization and other appropriate international
organizations that the Internet be declared a tariff-free environment whenever
it is used to deliver products and services. In addition, the Clinton
Administration has stated that no new taxes should be imposed on Internet
commerce, but rather that taxation should be consistent with established
principles of international taxation, should avoid inconsistent national tax
jurisdictions and double taxation and should be simple to administer and easy
to understand. However, there can be no assurance that foreign countries will
not seek to tax Internet transactions.
Access Charges. Several telecommunications carriers are supporting
regulation of the Internet by the FCC in the same manner that the FCC
regulates other telecommunications services. These carriers have alleged that
the growing popularity and use of the Internet has burdened the existing
telecommunications infrastructure, resulting in interruptions in phone
service. Local telephone carriers such as Pacific Bell, a subsidiary of SBC
Communications Inc., have petitioned the FCC to regulate ISPs in a manner
similar to long-distance telephone carriers and to impose access fees on ISPs.
In May 1997, however, the FCC granted information service providers an
exemption from interstate access charges and, in August 1998, the Eighth
Circuit Court of Appeals upheld the FCC's exemption. If the FCC were to
withdraw the exemption or if the Supreme Court were to find that the exemption
is improper, the costs of communicating on or through the Internet could
increase
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substantially, potentially slowing the growth in Internet use, which could, in
turn, decrease demand for the Company's services or increase the Company's
cost of doing business.
Liability for Information Retrieved from or Transmitted over the
Internet. Materials may be downloaded and publicly distributed over the
Internet by the Internet services operated or facilitated by the Company or by
the Internet access providers with which the Company has relationships. These
third-party activities could result in potential claims against the Company
for defamation, negligence, copyright or trademark infringement or other
claims based on the nature and content of such materials. The CDA provides
that no provider or user of an interactive computer service shall be treated
as the publisher or speaker of any information provided by another information
content provider. See "Risk Factors--Liability for Information Retrieved from
or Transmitted over the Internet; Liability for Products Sold over the
Internet."
Future legislation or regulations or court decisions may hold the Company
liable for listings accessible through its Web site, for content and materials
posted by members on their respective personal Web pages, for hyperlinks from
or to the personal Web pages of members, or through content and materials
posted in the Company's chat rooms or bulletin boards. Such liability might
arise from claims alleging that, by directly or indirectly providing hyperlink
text links to Web sites operated by third parties or by providing hosting
services for members' sites, the Company is liable for copyright or trademark
infringement or other wrongful actions by such third parties through such Web
sites. If any third-party material on the Company's Web site contains
informational errors, the Company may be sued for losses incurred in reliance
on such information. While the Company attempts to reduce its exposure to such
potential liability through, among other things, provisions in member
agreements, user policies and disclaimers, the enforceability and
effectiveness of such measures are uncertain.
On August 4, 1998, the House passed H.R. 2281, the "Digital Millennium
Copyright Act," whose Title II contains the "Internet Copyright Infringement
Liability Clarification Act" (on September 17, 1998, the Senate passed an
amended version of H.R. 2281). This legislation would, if enacted, provide
that, under certain circumstances, a "service provider" would not be liable
for any monetary relief, and would be subject to limited injunctive relief,
for claims of direct infringement, based on copyright materials transmitted by
users over its digital communications network, temporarily stored on its
system by its system caching procedures, stored on systems or networks under
its control or connected to its systems or networks by hyperlinks and other
information location tools. This legislation also provides that, under certain
circumstances, a service provider shall not be liable for any claim based on
the service provider's good faith removal of or disabling access to such
infringing material.
The Company's e-mail service is provided by a third party. See "Risk
Factors--Dependence on Third-Party Relationships." Such relationship exposes
the Company to potential derivative risk, such as claims resulting from
unsolicited e-mail ("spamming"), lost or misdirected messages, illegal or
fraudulent use of e-mail or interruptions or delays in e-mail service.
Potential liability for information carried on or disseminated through the
Company's systems could lead the Company to implement measures to reduce its
exposure to such liability, which may require the expenditure of substantial
resources and limit the attractiveness of the Company's services to members
and users. While the Company attempts to reduce its exposure to such potential
liability through, among other things, provisions in member agreements, user
policies and disclaimers, the enforceability and effectiveness of such
measures are uncertain.
The Company also enters into agreements with commerce partners and sponsors
under which the Company is entitled to receive a share of any revenue from the
purchase of goods and services through direct links from the Company's Web
site. Such arrangements may expose the Company to additional legal risks and
uncertainties, including potential liabilities to consumers of such products
and services by virtue of the Company's involvement in providing access to
such products or services, even if the Company does not itself provide such
products or services. While the Company's agreements with these parties often
provide that the Company will be indemnified against such liabilities, there
can be no assurance that such indemnification, if available, will be
enforceable or adequate. Although the Company carries general liability
insurance, the Company's insurance may not cover all potential claims to which
it is exposed or may not be adequate to indemnify the Company for all
liability that
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may be imposed. Any imposition of liability that is not covered by insurance
or is in excess of insurance coverage could have a material adverse effect on
the Company's business, results of operations and financial condition.
The increased attention on liability issues relating to information
retrieved or transmitted over the Internet and legislative and administrative
proposals in this area could decrease the growth of Internet use, thereby
decreasing the demand for the Company's services. Even to the extent that
claims relating to such issues do not result in liability to the Company, the
Company could incur significant costs in investigating and defending against
such claims.
Domain Names. Domain names are the user's Internet "addresses." Domain names
have been the subject of significant trademark litigation in the United
States. The Company has registered the domain name "theglobe.com." There can
be no assurance that third parties will not bring claims for infringement
against the Company for the use of this trademark. Moreover, because domain
names derive value from the individual's ability to remember such names, there
can be no assurance that the Company's domain names will not lose their value
if, for example, users begin to rely on mechanisms other than domain names to
access online resources.
The current system for registering, allocating and managing domain names has
been the subject of litigation and of proposed regulatory reform. There can be
no assurance that the Company's domain names will not lose their value, or
that the Company will not have to obtain entirely new domain names in addition
to or in lieu of its current domain names, if such litigation or reform
efforts result in a restructuring in the current system.
Jurisdiction. Due to the global reach of the Internet, it is possible that,
although transmissions by the Company over the Internet originate primarily in
the State of New York, the governments of other states and foreign countries
might attempt to regulate Internet activity and the Company's transmissions or
take action against the Company for violations of their laws. There can be no
assurance that violations of such laws will not be alleged or charged by state
or foreign governments and that such laws will not be modified, or new laws
enacted, in the future. Any of the foregoing could have a material adverse
effect on the Company's business, results of operations and financial
condition.
EMPLOYEES
As of August 31, 1998, the Company had 93 full-time employees, including 23
in sales and marketing, 54 in production and 16 in finance and administration.
The Company's future success will depend, in part, on its ability to continue
to attract, retain and motivate highly qualified technical and management
personnel, for whom competition is intense. From time to time, the Company
also employs independent contractors to support its research and development,
marketing, sales and support and administrative organizations. The Company's
employees are not represented by any collective bargaining unit, and the
Company has never experienced a work stoppage. The Company believes that its
relations with its employees are good.
FACILITIES
The Company's headquarters are currently located in a leased facility in New
York City, consisting of approximately 12,000 square feet of office space, a
majority of which is under a five-year lease with four years remaining. The
Company has recently entered into a three-year lease for approximately 2,800
square feet of commercial space in New York City for its data facilities. The
Company intends to relocate its headquarters in the first half of 1999 to a
larger facility and is currently evaluating a number of locations in the
greater New York City area. Additionally, the Company has recently entered
into two six-month leases for a total of 3,943 square feet of office space in
New York City. The Company also leases approximately 1,200 square feet of
office space in San Francisco for its West Coast sales office.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to the Company's
knowledge, threatened against the Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions of the
Company's executive officers and directors. Executive officers are appointed
by, and serve at the discretion of, the Board of Directors. All directors hold
office until the annual meeting of stockholders of the Company following their
election or until their successors are duly elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael S. Egan......... 58 Chairman
Todd V. Krizelman....... 24 Co-Chief Executive Officer, Co-President and Director
Stephan J. Paternot..... 24 Co-Chief Executive Officer, Co-President, Secretary and
Director
Dean S. Daniels......... 41 Vice President and Chief Operating Officer
Edward A. Cespedes...... 32 Vice President of Corporate Development and Director
Francis T. Joyce........ 45 Vice President, Chief Financial Officer and Treasurer
Rosalie V. Arthur....... 39 Director
Henry C. Duques......... 55 Director
Robert M. Halperin...... 70 Director
David H. Horowitz....... 69 Director
H. Wayne Huizenga....... 60 Director
</TABLE>
MICHAEL S. EGAN. Mr. Egan has served as Chairman of theglobe.com since
August 1997. As such, Mr. Egan serves as Chairman of the Board of Directors
and as an executive officer of the Company with primary responsibility for
day-to-day strategic planning and financing arrangements. Mr. Egan has been
the controlling investor of Dancing Bear Investments, a privately held
investment company, since 1996, which holds a controlling interest in the
Company. From 1986 to 1996, he was the majority owner and Chairman of Alamo
Rent-A-Car, Inc. ("Alamo"), now a subsidiary of Republic Industries. Mr. Egan
began his career with Alamo in 1976 and held various management and ownership
positions during this period until he bought a controlling interest in 1986.
Mr. Egan is also Chairman and Chief Executive Officer of Certified Vacations,
a wholesale tour operator. Mr. Egan is a director of Florida Panthers
Holdings, Inc. Mr. Egan began in the car rental business with Olins Rent-A-
Car, where he held various positions, including President. Prior to acquiring
Alamo, Mr. Egan held various administrative positions at Yale University and
administrative and teaching positions at the University of Massachusetts at
Amherst. Mr. Egan is a graduate of Cornell University, where he received a
Bachelor's degree in Hotel Administration.
TODD V. KRIZELMAN. Mr. Krizelman co-founded the Company in the fall of 1994.
He is Co-Chief Executive Officer and Co-President of the Company and has
served in various capacities with the Company since its founding. Mr.
Krizelman graduated from Cornell University in 1996, where he received a
Bachelor's degree in Biology.
STEPHAN J. PATERNOT. Mr. Paternot co-founded the Company in the fall of
1994. He is Co-Chief Executive Officer, Co-President and Secretary of the
Company and has served in various capacities with the Company since its
founding. Mr. Paternot graduated from Cornell University in 1996, where he
received Bachelor's degrees in Business and Computer Science.
DEAN S. DANIELS. Mr. Daniels was appointed Vice President and Chief
Operating Officer of the Company in August 1998. From February 1997 until
joining the Company, Mr. Daniels served as Vice President and General Manager
of CBS New Media, a subsidiary managing all of CBS Television Network's
activity on the Internet. From March 1996 to February 1997, Mr. Daniels was
the Director of Interactive Services at CBS News. From 1994 to 1996, Mr.
Daniels served as Director of Affiliate News Services at CBS NEWSPATH. From
1992 to 1994, Mr. Daniels was Director of News of WCBS-TV, a CBS owned
television station in New York. Prior
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to that time, Mr. Daniels held various positions at WCBS-TV, including
executive producer, and was the recipient of four Emmy Awards.
EDWARD A. CESPEDES. Mr. Cespedes was appointed Vice President of Corporate
Development in July 1998 and has served as a director of the Company since
August 1997. As Vice President for Corporate Development, Mr. Cespedes has
primary responsibility for corporate development opportunities including
mergers and acquisitions. Mr. Cespedes is also a Managing Director of Dancing
Bear Investments. Mr. Cespedes joined Dancing Bear Investments at its
inception in 1996, where his responsibilities include venture capital
investments, mergers and acquisitions and finance. Prior to joining Dancing
Bear Investments, Mr. Cespedes served as Director of Corporate Finance for
Alamo in 1996, where he was responsible for general corporate finance in the
United States and in Europe. From 1988 to 1996, Mr. Cespedes worked in the
Investment Banking Division of J.P. Morgan & Company, where he most recently
focused on mergers and acquisitions. Mr. Cespedes received a Bachelor's degree
in International Relations from Columbia University.
FRANCIS T. JOYCE. Mr. Joyce was appointed Vice President, Chief Financial
Officer and Treasurer of the Company in July 1998. From 1997 until joining the
Company, Mr. Joyce served as Chief Financial Officer of the Reed Travel Group,
a division of Reed Elsevier Plc, which is an international publisher of travel
information. From 1994 to 1997, Mr. Joyce was the Chief Financial Officer at
Alexander Consulting Group, a division of Alexander & Alexander Services,
Inc., an international professional services firm, which included a human
resources consulting firm, an insurance brokerage unit and an executive
planning life insurance unit. From 1988 to 1994, Mr. Joyce worked as a Senior
Vice President and controller at Bates Worldwide, a division of Saatchi &
Saatchi Co., an advertising firm. Mr. Joyce received a Bachelor of Science in
Accounting from the University of Scranton and a Master of Business
Administration from Fordham University. He is a Certified Public Accountant.
ROSALIE V. ARTHUR. Ms. Arthur has served as a director of the Company since
August 1997. Ms. Arthur is a Senior Managing Director and Vice President of
Mergers and Acquisitions of Dancing Bear Investments. She currently serves on
the Board of Directors of Dancing Bear Investments and several of its
affiliated companies. She also served on the Board of Directors of Alamo and
affiliated entities and Nantucket Nectars. Prior to joining Dancing Bear
Investments, she served as Chief of Staff and Financial Counselor to the
Chairman of Alamo from 1986 to 1996, when the Company was sold. Ms. Arthur was
the Manager of Financial Reporting at Sensormatic Electronics Corporation from
1984 to 1986 and worked in the audit department of KPMG Peat Marwick from 1980
to 1984. Ms. Arthur received her Bachelor of Science in Accounting from the
University of South Florida. She is a Certified Public Accountant.
HENRY C. DUQUES. Mr. Duques is Chairman and Chief Executive Officer of First
Data Corporation, a position he has held since April 1989. From September 1987
to 1989, he served as President and Chief Executive Officer of the Data Based
Services Group of American Express Travel Related Services Company, Inc., the
predecessor to First Data Corporation. He was Group President of Financial
Services and a member of the board of directors of Automatic Data Processing,
Inc. from 1984 to 1987. Mr. Duques is currently a director of Unisys
Corporation. Mr. Duques holds a Bachelor of Business Administration in
Accounting and an MBA in Accounting and Finance from George Washington
University.
ROBERT M. HALPERIN. Mr. Halperin has served as a director of the Company
since 1995. Mr. Halperin has acted as an advisor to Greylock Management, a
venture capital firm, for the past five years. He is a member of the board of
directors of Avid Technology, Inc. In addition, Mr. Halperin serves on the
Board of Directors of the Associates of Harvard Business School, the Harvard
Business School Publishing Co. and Stanford Health Services and also is a Life
Trustee of the University of Chicago. He is the former Vice Chairman of
Raychem Corporation's Board of Directors and also served as its President and
Chief Operating Officer. Mr. Halperin joined Raychem Corporation in 1957. Mr.
Halperin received a Master of Business Administration degree from Harvard
Business School, and he earned a Bachelor's degree in liberal arts from the
University of Chicago and a Bachelor's degree in Mechanical Engineering from
Cornell University.
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DAVID H. HOROWITZ. Mr. Horowitz has served as a Director of the Company
since December 1995. Mr. Horowitz has acted as an investor and consultant in
the media and communications industries for at least the past five years, and
as a consultant to the American Society of Composers, Authors and Publishers,
and a Lecturer at the Columbia University School of Law. From 1973 to 1984,
Mr. Horowitz was an officer and director of Warner Communications, Inc., and
until 1985 he was President and CEO of MTV Networks, Inc. Mr. Horowitz is a
graduate of Columbia University, where he received a Bachelor's degree, and is
a graduate of Columbia Law School.
H. WAYNE HUIZENGA. Mr. Huizenga has served as a director of the Company
since July 1998. Mr. Huizenga has served as the Chairman of the Board of
Republic Industries since August 1995, as its Co-Chief Executive Officer since
October 1996 and as its Chief Executive Officer from August 1995 until October
1996. Mr. Huizenga also serves as the Chairman of the Board and Chief
Executive Officer of Republic Services, Inc., as the Chairman of the Board of
Florida Panthers Holdings, Inc., as the Chairman of the Board of Extended Stay
America, Inc. and a director of NationsRent, Inc. From September 1994 until
October 1995, Mr. Huizenga served as the Vice Chairman of Viacom Inc.
("Viacom"), and as the Chairman of the Board of Blockbuster Entertainment
Group ("Blockbuster"), a division of Viacom. From April 1987 through September
1994, Mr. Huizenga served as the Chairman of the Board and Chief Executive
Officer of Blockbuster. In September 1994, Blockbuster merged into Viacom. In
1971, Mr. Huizenga co-founded Waste Management, Inc. and served in various
capacities, including President, Chief Operating Officer and a director from
its inception until 1984. Mr. Huizenga also owns or controls the Miami
Dolphins and Florida Marlins professional sports franchises, as well as Pro
Player Stadium, in South Florida.
KEY EMPLOYEES
The following table sets forth the names and positions of the Company's key
employees.
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
Vance Huntley.................................. Director of Technology
Esther Loewy................................... Director of Communications
Will Margiloff................................. Director of Advertising Sales
Richard Mass................................... General Counsel
David Tonkin................................... Director of Human Resources
</TABLE>
VANCE HUNTLEY. Vance Huntley joined theglobe.com in August 1995 as Director
of Technology. Between 1991 and 1994 Mr. Huntley held software development
positions with Delta-Epsilon Software and the Cornell Institute of Social
Economic Research. In 1994 Mr. Huntley developed a Transmission Electron
Microscopy simulation for the Cornell Materials Science Center while
completing his BS in the Applied & Engineering Physics program at Cornell
University. In 1990, Mr. Huntley wrote simulation software at the Lawrence
Livermore National Laboratory Supercomputing Center.
ESTHER LOEWY. Ms. Loewy joined theglobe.com in May 1997 as Director of
Communications. As such, Ms. Loewy is responsible for managing the in-house
communications department for the Company as well as the direction of
theglobe.com's media and public relations. Before joining theglobe.com, Ms.
Loewy was a consultant for the @Cafe in New York and other media companies
from 1995 to 1997. From 1992 to 1995 Ms. Loewy was a Senior Account Executive
at Charles Levine Communication.
WILL MARGILOFF. Mr. Margiloff joined theglobe.com in March 1998 as Director
of Advertising Sales. Mr. Margiloff is responsible for the management and
direction of theglobe.com's sales force in New York and San Francisco, as well
as the expansion of the Company's advertising efforts both domestically and
internationally. Before joining theglobe.com, from 1997 to 1998 Mr. Margiloff
was the Vice President of East Coast Sales for 24/7 Media. From 1995 to 1998
Mr. Margiloff held the senior sales management position at software site
Jumbo!
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RICHARD W. MASS. Mr. Mass was appointed General Counsel of the Company in
September 1998. From 1994 until joining the Company, Mr. Mass served as a
senior attorney supporting AT&T's Internet services and was also the chief
counsel for Downtown Digital, AT&T's digital production facility that
developed interactive television programming and Web sites. From 1992 to 1994,
Mr. Mass was an attorney at Gray Cary Ware & Freidenrich in Palo Alto,
California. From 1991 to 1992, Mr. Mass was a Visiting Assistant Professor of
Law at the University of Miami and from 1987 to 1990 Mr. Mass was an attorney
at Proskauer, Rose, Goetz & Mendelsohn in New York. Mr. Mass received a
Bachelor of Arts in Economics from Williams College and received a law degree
from Stanford Law School.
DAVID TONKIN. Mr. Tonkin joined theglobe.com in May 1998 as Director of
Human Resources. Mr. Tonkin is responsible for managing the recruiting, hiring
and human resource administration of all employees at theglobe.com. Before
joining theglobe.com, from 1995 to 1998 Mr. Tonkin worked as a Senior Resource
Manager for Knowledge Transfer International, responsible for recruiting,
developing and managing consulting staffing services. Prior to that time, from
1994 to 1995, Mr. Tonkin worked as Human Resource Manager for NightRider (Alco
Management Service). From 1993 to 1994 Mr. Tonkin worked as Operations Manager
for Premier Shoe Company.
BOARD COMMITTEES
The Audit Committee of the Board of Directors reviews and monitors the
corporate financial reporting and the internal and external audits of the
Company, including, among other things, the Company's control functions, the
results and scope of the annual audit and other services provided by the
Company's independent accountants, and the Company's compliance with legal
matters that have a significant impact on the Company's financial condition.
The Audit Committee will consult with the Company's management and the
Company's independent accountants prior to the presentation of financial
statements to stockholders and, as appropriate, initiates inquiries into
aspects of the Company's financial affairs. In addition, the Audit Committee
has the responsibility to consider and recommend the appointment of, and to
review fee arrangements with, the Company's independent accountants. The
current members of the Audit Committee are Messrs. Halperin and Horowitz and
Ms. Arthur.
The Compensation Committee of the Board of Directors reviews and makes
recommendations to the Board regarding the Company's compensation policies and
all forms of compensation to be provided to executive officers and directors
of the Company, including, among other things, annual salaries and bonuses and
stock option and other incentive compensation arrangements of the Company. In
addition, the Compensation Committee reviews bonus and stock compensation
arrangements for all other employees of the Company. The current members of
the Compensation Committee are Messrs. Egan, Halperin and Horowitz and Ms.
Arthur. Prior to July 15, 1998, the Compensation Committee consisted of
Messrs. Egan, Halperin, Krizelman and Paternot. Stock option grants will be
approved, at the election of the Compensation Committee, by either the entire
Board or a subcommittee of the Compensation Committee consisting of Messrs.
Horowitz and Halperin.
The Nominating Committee of the Board of Directors makes recommendations to
the Board of Directors regarding nominees for the Board of Directors. The
current members of the Nominating Committee are Messrs. Egan, Krizelman and
Paternot and Ms. Arthur.
EXECUTIVE OFFICERS
Executive officers of the Company are appointed by the Board of Directors
and serve at the discretion of the Board of Directors.
DIRECTORS' COMPENSATION
Directors who are also employees of the Company receive no compensation for
serving on the Board of Directors. With respect to Directors who are not
employees of the Company ("Non-Employee Directors"), the Company intends to
reimburse such directors for all travel and other expenses incurred in
connection with
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attending such Board of Directors and committee meetings. Non-Employee
Directors are also eligible to receive automatic stock option grants under the
1998 Plan. The 1998 Plan provides that each eligible Non-Employee Director as
of July 13, 1998 will receive an initial grant of options to acquire 25,000
shares of Common Stock, and each Director who becomes an eligible Non-Employee
Director after such date will receive an initial grant of options to acquire
12,500 shares of Common Stock. In addition, each eligible Non-Employee
Director will receive an annual grant of options to acquire 3,750 shares of
Common Stock on the first business day following each of the Company's annual
meeting of shareholders that occurs while the 1998 Plan is in effect. All such
stock options will be granted with per share exercise prices equal to the fair
market value of the Common Stock as of the date of grant.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to the Company's Co-
Chief Executive Officers (collectively, the "Named Executives") during the
year ended December 31, 1997:
SUMMARY COMPENSATION TABLE(/1/)
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------
NUMBER OF
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)(2)
- --------------------------- ---------- --------- ------------ -------------------
<S> <C> <C> <C> <C>
Todd V. Krizelman,....... $76,000 $18,750 144,976 $500,000
Co-Chief Executive
Officer and
Co-President
Stephan J. Paternot,..... $76,000 $18,750 144,976 $500,000
Co-Chief Executive
Officer,
Co-President and
Secretary
</TABLE>
- --------
(1) The Company did not have any other executive officers during this period.
(2) Reflects a one-time payment of $500,000 associated with the Company's sale
of Preferred Stock and Warrants to Dancing Bear Investments in August
1997.
1997 YEAR END OPTION VALUES(/1/)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FISCAL
AT FISCAL YEAR-END (#) YEAR-END ($)(2)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Todd V. Krizelman........... 25,000 144,976 $69,000 $301,550
Stephan J. Paternot......... 25,000 144,976 $69,000 $301,550
</TABLE>
- --------
(1) The Named Executives did not exercise any options in 1997.
(2) Based on a per share fair market value of Common Stock equal to $2.78, as
of December 31, 1997.
56
<PAGE>
OPTIONS GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE ---------------------
NAME GRANTED (#) 1997 ($/SH) EXPIRATION DATE 5% 10%
- ---- ----------- ------------- ----------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Todd V. Krizelman....... 144,976 37% $0.70 May 2007 $ 172,348 $ 438,705
Stephan J. Paternot..... 144,976 37% $0.70 May 2007 $ 172,348 $ 438,705
</TABLE>
- --------
(1) These amounts represent certain assumed rates of appreciation only and are
displayed in connection with Securities and Exchange Commission ("SEC")
disclosure rules. Actual gains, if any, on stock option exercises are
dependent on future performance of the Common Stock.
EMPLOYMENT AGREEMENTS
On August 13, 1997, the Company entered into employment agreements (each a
"Chief Executive Employment Agreement") with Todd V. Krizelman and Stephan J.
Paternot. Pursuant to the terms of each Chief Executive Employment Agreement,
each individual will be employed as an Executive (as defined in each Chief
Executive Employment Agreement) of the Company. Each Chief Executive
Employment Agreement provides for an annual base salary of $125,000 with
eligibility to receive annual increases amounting to no less than 15% of the
Executive's then-base salary. Pursuant to the Chief Executive Employment
Agreements, each of the Executives also received a one-time payment of
$500,000 associated with the sale of Preferred Stock and Warrants to Dancing
Bear Investments, and each is entitled to an annual cash bonus, which will be
assessed at the Board's discretion and upon the achievement of target
performance objectives set forth in the Company's budget. Each Executive is
also entitled to participate in the stock option plans of the Company as well
as all health, welfare, and other benefit plans provided by the Company to its
most senior executives.
Each of the Chief Executive Employment Agreements is for a term expiring on
August 13, 2002, subject to earlier termination as provided in each Chief
Executive Employment Agreement. Each of the Chief Executive Employment
Agreements provides that, in the event of termination by the Company without
Cause (as defined in each Chief Executive Employment Agreement), the Executive
will be entitled to receive from the Company: (i) any accrued and unpaid base
salary, (ii) reimbursement for any reasonable and necessary monies advanced or
expenses incurred in connection with the Executive's employment, (iii) a pro-
rata portion of the annual bonus for the year of termination and (iv) for one
year following such termination or the remainder of the term of the Chief
Executive Employment Agreement, whichever is less, continued salary payments
and employee benefits. In addition, termination without Cause automatically
triggers the vesting of all stock options held by the Executive.
In the event of a Change in Control (as defined in each Chief Executive
Employment Agreement) or a dissolution of the Company, each Executive may
elect to terminate his employment by delivering a notice within 60 days to the
Company and receive (i) any accrued and unpaid base salary as of the
termination date and (ii) an amount reimbursing the Executive for expenses
incurred on behalf of the Company prior to the termination date.
Each Chief Executive Employment Agreement contains a covenant not to compete
with the Company for a period of five years from the date of each Chief
Executive Employment Agreement or, in the case of termination without Cause or
after a Change in Control, the earlier of a period of one year immediately
following termination of employment or five years from the consummation of the
Offerings.
The Company has entered into an Employment Agreement with Dean S. Daniels
(the "Daniels Employment Agreement"). Pursuant to the terms of the Daniels
Employment Agreement, Mr. Daniels will be employed as Chief Operating Officer
of the Company effective August 31, 1998. The Daniels Employment Agreement
provides for an annual base salary of not less than $250,000 per year and an
annual cash bonus of $50,000. Mr.
57
<PAGE>
Daniels will be granted stock options to purchase 112,500 shares of Common
Stock. The options will be granted at the initial public offering price which
is equal to the fair market value per share of Common Stock as of the date of
grant. Of such options, 87,500 will vest with respect to one-third of the
shares subject thereto on each of the first three anniversaries of the date of
grant, and 25,000 will vest with respect to one-seventh of such shares on each
of the first seven anniversaries of the date of grant. The Daniels Employment
Agreement also provides for the accelerated vesting of an aggregate of 25,000
of such options upon the Company's attainment of certain financial targets in
the 1998 and 1999 fiscal years of the Company.
The Daniels Employment Agreement is for a term expiring on August 31, 2001,
subject to earlier termination as provided in the Daniels Employment
Agreement. The Daniels Employment Agreement provides that, in the event of
termination by the Company without Cause (as defined in the Daniels Employment
Agreement), Mr. Daniels will be entitled to receive from the Company (i) any
accrued and unpaid base salary (as of the termination date) and salary
continuation during a non-competition period following termination which will
be one year, (ii) reimbursement for any and all reasonable monies advanced or
expenses incurred in connection with his employment, and (iii) the annual
bonus for the year of termination. In addition, termination without Cause
automatically triggers the vesting of all options held by Mr. Daniels that
have not yet vested.
The Daniels Employment Agreement contains a covenant not to compete with the
Company for a period of one year from the date of the Daniels Employment
Agreement's termination.
On July 13, 1998, the Company entered into an Employment Agreement with
Francis T. Joyce (the "Joyce Employment Agreement"). Pursuant to the terms of
the Joyce Employment Agreement, Mr. Joyce will be employed as Chief Financial
Officer of the Company. The Joyce Employment Agreement provides for an annual
base salary of not less than $200,000 per year with eligibility to receive
annual increases in base salary as determined by the Co-Chief Executive
Officers and Co-Presidents of the Company. Mr. Joyce will also receive an
annual cash bonus of $50,000. Mr. Joyce will be granted options to purchase
112,500 shares of Common Stock, 87,500 of which will have an exercise price
per share equal to 85% of the initial public offering price. As a result, the
Company will record a charge for deferred compensation expense of $157,500 in
the third quarter of 1998, representing the difference between the deemed
value of the Company's Common Stock, the initial public offering price
(assuming an initial public offering price of $12.00 per share) for accounting
purposes and the exercise price of such options at the date of grant. Such
amount will be presented as a reduction of stockholders' equity and amortized
over the vesting period of the applicable options. The remaining options will
be granted at the initial public offering price which is equal to the fair
market value per share of the Company's Common Stock on the date of grant. Of
such options, 87,500 will vest with respect to one-third of the shares subject
thereto on each of the first three anniversaries of the date of grant, and
25,000 will vest with respect to one-seventh of such shares on each of the
first seven anniversaries of the date of grant. The Joyce Employment Agreement
also provides for the accelerated vesting of an aggregate of 25,000 of such
options upon the Company's attainment of certain financial targets in the 1998
and 1999 fiscal years of the Company.
The Joyce Employment Agreement is for a term expiring on July 13, 2001,
subject to earlier termination as provided in the Joyce Employment Agreement.
The Joyce Employment Agreement provides that, in the event of termination by
the Company without Cause (as defined in the Joyce Employment Agreement), Mr.
Joyce will be entitled to receive from the Company (i) any accrued and unpaid
base salary (as of the termination date) and salary continuation during a non-
competition period following termination which will be six months (or one
year, if the Company elects to pay Mr. Joyce his salary during such period),
(ii) reimbursement for any and all monies advanced or expenses incurred in
connection with his employment, and (iii) a pro rata portion of the annual
bonus for the year of termination. In addition, termination without Cause
automatically triggers the vesting of all stock options held by Mr. Joyce that
have not yet vested.
1998 STOCK OPTION PLAN
The Company's 1998 Stock Option Plan (the "1998 Plan") was adopted by the
Board of Directors on July 15, 1998, and approved by the stockholders of the
Company as of July 15, 1998. The 1998 Plan provides for the
58
<PAGE>
grant of "incentive stock options" intended to qualify under Section 422 of
the Code and stock options which do not so qualify. The granting of incentive
stock options is subject to limitation as set forth in the 1998 Plan.
Directors, officers, employees and consultants of the Company and its
subsidiaries are eligible to receive grants under the 1998 Plan. The 1998 Plan
is designed to comply with the requirements for "performance-based
compensation" under Section 162(m) of the Code, and the conditions for
exemption from the short-swing profit recovery rules under Rule 16b-3 of the
Exchange Act.
The purpose of the 1998 Plan is to strengthen the Company by providing an
incentive to its directors, officers, employees and consultants and thereby
encouraging them to devote their abilities and industry to the success of the
Company's business enterprise. Options may be granted by the Board or
Committee (as defined below) in its discretion to directors, officers,
employees and consultants of the Company and its subsidiaries. In addition,
directors of the Company who are not also employees of the Company or any of
its subsidiaries are eligible to receive automatic formula option grants as
provided in the 1998 Plan. Such formula option grants include an initial grant
of options to acquire 25,000 shares to the eligible non-employee directors who
served on the Board as of July 15, 1998 (12,500 shares to eligible non-
employee directors who become directors for the first time after July 15,
1998) as well as annual grants of options to acquire 3,750 shares to eligible
non-employee directors on the day following each annual shareholders meeting
while the 1998 Plan is in effect. The terms and conditions of such options are
set forth in the 1998 Plan.
The 1998 Plan authorizes for issuance 1,200,000 shares of Common Stock,
subject to adjustment as provided in the 1998 Plan. As of July 15, 1998, the
Board of Directors approved for grant 100,000 options to each of Messrs.
Krizelman and Paternot and 25,000 options to Mr. Cespedes. One-quarter of Mr.
Cespedes' options are immediately vested. Additionally, the Company intends to
grant, subject to Board of Directors or Committee approval, 100,000 and 3,750
options to Mr. Egan and Mr. Cespedes, respectively, in connection with their
appointment as officers of the Company. Options will be granted by the Board
of Directors or a committee (the "Committee") of the Board of Directors
comprised of two or more "non-employee directors" within the meaning of Rule
16b-3, and unless otherwise determined by the Board of the Directors, "outside
directors" within the meaning of Section 162(m), which will administer the
1998 Plan. See "--Board Committees." No individual may be granted options with
respect to more than a total of 250,000 shares during any three consecutive
calendar year period under the 1998 Plan. Shares of Common Stock subject to
the 1998 Plan may either be authorized and unissued shares or previously
issued shares acquired or to be acquired by the Company and held in its
treasury. Subject to the terms of the 1998 Plan, the Committee has the right
to grant options to eligible participants and to determine the terms and
conditions of option agreements, including the vesting schedule and exercise
price of such options. The 1998 Plan provides that the term of any option may
not exceed ten years. In the event of a Change in Control (as defined in the
1998 Plan) all outstanding options will become immediately and fully vested.
If a participant's employment (or service as a director) is terminated
following a Change in Control, any options vested at such time will remain
outstanding until the earlier of the first anniversary of such termination and
the expiration of the option term.
In order to prevent dilution or enlargement of the rights of participants,
the 1998 Plan permits the Committee to make adjustments to the aggregate
number of shares subject to the 1998 Plan or any option, and to the purchase
price to be paid or the amount to be received in connection with the
realization of any option, upon the occurrence of certain events as described
in the 1998 Plan.
The Company intends, subject to final approval of the Board of Directors, to
issue shares of Common Stock to the Company's Community Leaders under the 1998
Plan. Immediately following the execution of the underwriting agreement, each
of the Company's Community Leaders, as of July 23, 1998, will be issued 11
fully vested shares of Common Stock (approximately 3,500 in the aggregate),
contingent upon the closing of the Offerings. As a result, the Company will
record a charge for compensation expense estimated at $42,000 in the fourth
quarter of 1998 (assuming an initial public offering price of $12.00 per
share) for the full value of the Company's Common Stock.
59
<PAGE>
1995 STOCK OPTION PLAN
The Company's 1995 Stock Option Plan, as amended (the "1995 Plan"), was
adopted by the Board of Directors on May 26, 1995. The 1995 Plan provides for
the grant of incentive stock options and non-qualified stock options.
Directors, employees and consultants of the Company and its affiliates are
eligible to receive grants under the 1995 Plan. The 1995 Plan authorizes for
issuance 791,000 shares of Common Stock, subject to adjustment as provided in
the 1995 Plan. The remaining options under the 1995 Plan may be granted by
Messrs. Krizelman and Paternot pursuant to the terms of the 1995 Plan. The
Company currently intends to grant 250 options to each of its employees
currently employed by the Company and who have served prior to January 1, 1998
and 100 options to each of its employees employed by the Company as of July
24, 1998 whose employment commenced after January 1, 1998.
401(K) SAVINGS PLAN
theglobe.com has established a savings and profit-sharing plan that
qualifies as a tax-deferred saving plan under Section 401(k) of the Code (the
"Savings Plan") for certain eligible employees of theglobe.com. Under the
Savings Plan, participants may contribute up to 15% of their eligible
compensation, up to $10,000, in any year on a pre-tax basis. Such employee
contributions are fully vested at all times. In addition, theglobe.com may, in
its discretion, make additional contributions on behalf of participants. All
amounts contributed under the Savings Plan are invested in one or more
investment accounts administered by the plan administrator.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On July 15, 1998, Michael S. Egan, Robert M. Halperin, David H. Horowitz and
Rosalie V. Arthur were appointed as members of the Compensation Committee.
Prior to such date, the Compensation Committee was comprised of Messrs. Egan,
Halperin, Krizelman and Paternot. Mr. Egan, effective as of July 22, 1998,
also serves as an executive officer of the Company in his role as Chairman.
Mr. Egan is also the controlling investor of Dancing Bear Investments, and Ms.
Arthur is a Senior Managing Director of Dancing Bear Investments. See "Certain
Relationships and Related Transactions--Arrangements with Entities Controlled
by Certain Directors and Officers." Although it is contemplated that Mr. Egan
will not receive a salary or bonus from the Company, the Company intends to
grant, subject to Board of Directors or Committee approval, stock options to
Mr. Egan for 100,000 shares of Common Stock under the 1998 Plan, as
consideration for his performance of services in his capacity as an executive
officer. In the past fiscal year, Mr. Egan has served as a director of
Certified Vacations, an entity with which the Company has recently begun e-
commerce arrangements.
KEY MAN INSURANCE
The Company does not have and currently does not intend to purchase key man
insurance.
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnification agreements with its directors
and officers. These agreements provide, in general, that the Company shall
indemnify and hold harmless such directors and officers to the fullest extent
permitted by law against any judgments, fines, amounts paid in settlement, and
expenses (including attorneys' fees and disbursements) incurred in connection
with, or in any way arising out of, any claim, action or proceeding (whether
civil or criminal) against, or affecting, such directors and officers
resulting from, relating to or in any way arising out of, the service of such
directors and officers as directors and officers of the Company.
60
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ARRANGEMENTS WITH ENTITIES CONTROLLED BY CERTAIN DIRECTORS AND OFFICERS
The Company has recently entered into an e-commerce contract with Republic
Industries, an entity affiliated with H. Wayne Huizenga, pursuant to which the
Company has granted a right of first negotiation with respect to the exclusive
right to engage in or conduct an automotive "clubsite" on theglobe.com through
AutoNation, a subsidiary of Republic Industries. Additionally, Republic has
agreed to purchase advertising from the Company for a three-year period at a
price which will be adjusted to match any more favorable advertising price
quoted to a third party by the Company, excluding certain short-term
advertising rates.
In addition, the Company has entered into an e-commerce arrangement with
InteleTravel, an entity controlled by Michael S. Egan, whereby the Company
developed a Web community for InteleTravel in order for its travel agents to
conduct business through theglobe.com Web site in exchange for access to
InteleTravel customers for distribution of the Company's products and
services.
The Company believes that the terms of the foregoing arrangements are on
comparable terms as if they were entered into with unaffiliated third parties.
As of the date hereof, revenues received by the Company from Republic and
InteleTravel have not been material.
STOCKHOLDERS' AGREEMENT
Messrs. Egan, Krizelman, Paternot and Cespedes, Ms. Arthur and Dancing Bear
Investments (an entity controlled by Mr. Egan) expect to enter into a
Stockholders' Agreement pursuant to which the Egan Group will agree to vote
for certain nominees of the Krizelman and Paternot Groups to the Board of
Directors and the Krizelman and Paternot Groups will agree to vote for the
Egan Group's nominees to the Board, who will represent a majority of the
Board. Additionally, pursuant to the terms of the Stockholders' Agreement,
Messrs. Krizelman, Paternot and Cespedes and Ms. Arthur have granted an
irrevocable proxy to Dancing Bear Investments with respect to any shares that
may be acquired or beneficially owned by them pursuant to the exercise of
outstanding Warrants transferred to each of them by Dancing Bear Investments.
Such shares will be voted by Dancing Bear Investments, which is controlled by
Mr. Egan, and will be subject to a right of first refusal in favor of Dancing
Bear Investments upon transfer. The Stockholders' Agreement will also provide
that if the Egan Group sells shares of Common Stock and Warrants representing
25% or more of the Company's outstanding Common Stock (including the Warrants)
in any private sale after the Offerings, the Krizelman and Paternot Groups,
Mr. Cespedes and Ms. Arthur will be required to sell up to the same percentage
of their shares as the Egan Group sells. If the Egan Group sells shares of
Common Stock or Warrants representing 25% or more of the Company's outstanding
Common Stock (including the Warrants) or the Krizelman and Paternot Groups
collectively sell shares or Warrants representing 7% or more of the shares and
Warrants of the Company in any private sale after the Offerings, each other
party to the Stockholders' Agreement, including entities controlled by them
and their permitted transferees, may, at their option, sell up to the same
percentage of their shares.
61
<PAGE>
TRANSACTIONS WITH DIRECTORS, OFFICERS AND 5% STOCKHOLDERS
Since the Company's inception, the Company has raised capital primarily
through the sale of shares of its Common Stock and Preferred Stock. The
following table summarizes the shares of Common Stock and Preferred Stock
purchased by executive officers, directors and 5% stockholders of the Company
and persons associated with them since the Company's inception.
<TABLE>
<CAPTION>
PREFERRED STOCK
EXECUTIVE OFFICERS, COMMON -----------------------------------------
DIRCTORS AND 5% STOCKHOLDERSE STOCK SERIES B SERIES C SERIES D(1) SERIES E(2)
- ----------------------------- ------ -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Dancing Bear Investments,
Inc.(3)...................... 25.5 5
Michael S. Egan(4)............ 25.5 5
Robert M. Halperin(5)......... 42,709 23,810 6,250
David H. Horowitz(6).......... 15,972 50,000 12,500
</TABLE>
- --------
(1) Convertible into 4,023,765 shares of Common Stock.
(2) Represents Warrants to purchase 5 shares of Series E Preferred Stock prior
to the Offerings and an aggregate of 2,023,009 shares of Common Stock
after the Offerings.
(3) Dancing Bear Investments paid $20 million for its initial investment in
the Series D Preferred Stock and the Warrants.
(4) Includes the shares that Mr. Egan is deemed to beneficially own as the
controlling investor of Dancing Bear Investments.
(5) Mr. Halperin paid $8,171.88 in 1998 in connection with the exercise of
options for his Common Stock. Mr. Halperin paid $25,000.50 and $25,000 for
his Series B and Series C Preferred Stock issued in December 1995 and
November 1996, respectively.
(6) Mr. Horowitz paid $3,111.06 in 1997 in connection with the exercise of
options for his Common Stock. Mr. Horowitz paid $52,000 and $50,000 for
his Series B and Series C Preferred Stock issued in December 1995 and
November 1996, respectively.
All of the directors and executive officers of the Company are also parties
to registration rights agreements with the Company which are described under
"Description of Capital Stock--Registration Rights." The Company also has
entered into indemnification agreements with its directors and officers. See
"Management--Indemnification Agreements."
In the Concurrent Offering, the Company will sell to the Concurrent
Purchasers shares of Common Stock having a value of up to approximately $5
million (416,667 shares assuming an initial public offering price of $12.00
per share) at the same price paid per share in the Initial Public Offering.
The Company expects that the Concurrent Purchasers will include certain of the
Company's officers and directors, their relatives and their business
associates. See "Principal Stockholders."
62
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of September 23, 1998 and as adjusted to
reflect the sale of 3,100,00 shares offered by the Company hereunder, certain
information with respect to the beneficial ownership of the Common Stock of
the Company by (i) each person known to the Company to own 5% or more of the
outstanding shares of Common Stock, (ii) each of the Company's directors,
(iii) each of the Company's executive officers, and (iv) all of the directors
and executive officers as a group.
The percentages of total shares of Common Stock set forth below assume that
only the indicated person or group has exercised options and warrants which
are exercisable within 60 days of September 23, 1998 and do not reflect the
percentage of Common Stock which would be calculated if all other holders of
currently exercisable options or Warrants had exercised their securities. See
footnote 1 below.
<TABLE>
<CAPTION>
SHARES OF COMMON PERCENTAGE OF TOTAL SHARES
NAME STOCK WHICH MAY BE OF COMMON STOCK
---- SHARES PURCHASED IN THE --------------------------------
BENEFICIALLY OWNED(1) CONCURRENT OFFERING(2) BEFORE OFFERINGS AFTER OFFERINGS
--------------------- ---------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Dancing Bear
Investments, Inc.(3)... 6,046,774 69.4% 51.2%
Michael S. Egan(4)...... 6,053,024 16,667(5) 69.4 51.4
Todd V. Krizelman(6).... 754,943 10.9 7.6
Stephan J. Paternot(7).. 807,488 11.7 8.1
Dean S. Daniels(8)...... 0 * *
Edward A. Cespedes(9)... 31,250 * *
Francis T. Joyce(10).... 0 * *
Rosalie V. Arthur(11)... 31,250 41,667 * *
Henry C. Duques(12)..... 6,250 * *
Robert M. Halperin(13).. 85,963 1.3 *
David H. Horowitz(14)... 105,556 1.6 1.1
H. Wayne Huizenga(15)... 6,250 250,000 *
All directors and
executive officers as a
group (11
persons)(16)........... 7,881,974 85.3% 66.3%
</TABLE>
- --------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock options or
Warrants held by that person that are currently exercisable or
exercisable within 60 days of September 23, 1998 are deemed outstanding.
Such shares, however, are not deemed outstanding for the purposes of
computing the percentage ownership of each other person.
(2) The Company is offering up to approximately $5 million of Common Stock in
the Concurrent Offering. The Concurrent Purchasers (which include officers
and directors of the Company, their relatives and their business
associates) have provided indications of interest to purchase shares of
Common Stock in the Concurrent Offering but may not be obligated to
purchase shares until after the registration statement of which this
Prospectus is a part becomes effective. These share numbers are based on
an initial public offering price of $12.00 per share (the mid-point of the
estimated initial public offering price range set forth on the front
cover).
(3) Includes: (a) 25.5 shares of Series D Preferred Stock, which will be
converted into an aggregate of 4,023,765 shares of Common Stock upon
consummation of the Offerings, (b) 1,773,009 shares of Common Stock
issuable following consummation of the Offerings upon exercise of
Warrants and (c) 250,000 shares of Common Stock issuable following
consummation of the Offerings, upon exercise of Warrants held by persons
other than Dancing Bear Investments but as to which Dancing Bear
Investments will have voting power upon exercise pursuant to a
Stockholders' Agreement. Dancing Bear Investments' mailing address is 333
East Las Olas Blvd., Ft. Lauderdale, FL 33301.
(4) Includes the following shares that Mr. Egan is deemed to beneficially own
as the controlling investor of Dancing Bear Investments: (a) 25.5 shares
of Series D Preferred Stock, which will be converted into an
63
<PAGE>
aggregate of 4,023,765 shares of Common Stock upon consummation of the
Offerings, (b) 1,773,009 shares of Common Stock issuable, following
consummation of the Offerings, upon exercise of Warrants, (c) 250,000
shares of Common Stock issuable following consummation of the Offerings
upon exercise of Warrants held by persons other than Mr. Egan but as to
which Mr. Egan will have voting power upon exercise pursuant to the
Stockholders' Agreement, and (d) 6,250 shares of Common Stock subject to
options that are currently exercisable. Excludes 100,000 shares of Common
Stock subject to options that will not be exercisable within 60 days of
September 23, 1998. Mr. Egan's mailing address is care of the Company.
(5) Represents 16,667 shares of Common Stock expected to be purchased by two
trusts for Mr. Egan's children as to which he disclaims beneficial
ownership.
(6) Includes (a) 22,455 shares of Series A Preferred Stock, which will be
converted into an equal number of shares of Common Stock upon
consummation of the Offerings, (b) 107,488 shares of Common Stock subject
to options that are currently exercisable and (c) 100,000 shares of
Common Stock issuable following consummation of the Offerings upon
exercise of Warrants. Excludes 172,488 shares of Common Stock subject to
options that will not be exercisable within 60 days of September 23,
1998. Mr. Krizelman's mailing address is care of the Company.
(7) Includes 107,488 shares of Common Stock subject to options that are
currently exercisable and 100,000 shares of Common Stock issuable
following consummation of the Offerings upon exercise of Warrants.
Excludes 172,488 shares of Common Stock subject to options that will not
be exercisable within 60 days of September 23, 1998. Mr. Paternot's
mailing address is care of the Company.
(8) Excludes 112,500 shares of Common Stock subject to options that will not
be exercisable within 60 days of September 23, 1998.
(9) Includes 6,250 shares of Common Stock subject to options that are
currently exercisable, and 25,000 shares of Common Stock issuable
following consummation of the Offerings upon exercise of Warrants.
Excludes 22,500 shares of Common Stock subject to options that will not
be exercisable within 60 days of September 23,
1998.
(10) Excludes 112,500 shares of Common Stock subject to options that will not
be exercisable within 60 days of September 23, 1998.
(11) Includes 6,250 shares of Common Stock subject to options that are
currently exercisable, and 25,000 shares of Common Stock issuable
following consummation of the Offerings upon exercise of Warrants.
Excludes 22,500 shares of Common Stock subject to options that will not
be exercisable within 60 days of September 23, 1998 and shares held by
Dancing Bear Investments (see footnote 3 above) for which Ms. Arthur
serves as an officer and a director, and as to which Ms. Arthur
disclaims beneficial ownership.
(12) Includes 6,250 shares of Common Stock subject to options that are
currently exercisable. Excludes 18,750 shares of Common Stock subject to
options that will not be exercisable within 60 days of September 23,
1998.
(13) Includes 23,810 shares of Series B Preferred Stock, and 1,250 shares of
Series C Preferred Stock, each convertible into an equal number of
shares of Common Stock, and 13,194 shares of Common Stock subject to
options that are currently exercisable. Excludes 47,848 shares of Common
Stock subject to options that are not currently exercisable. Excludes
90,180 shares of Common Stock owned by Mr. Halperin's children for which
he has a power of attorney but as to which he disclaims beneficial
ownership.
(14) Includes 50,000 shares of Series B Preferred Stock and 2,500 shares of
Series C Preferred Stock, each convertible into an equal number of
shares of Common Stock, and 27,084 shares of Common Stock subject to
options that are currently exercisable. Excludes 35,694 shares of Common
Stock subject to options that are not currently exercisable.
(15) Includes 6,250 shares of Common Stock subject to options that are
exercisable within 60 days of September 23, 1998. Excludes 22,500 shares
of Common Stock subject to options that are not exercisable within 60
days of September 23, 1998.
(16) See footnotes 3 through 15 above.
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DESCRIPTION OF CAPITAL STOCK
The Company's stockholders have approved the Fourth Amended and Restated
Certificate of Incorporation (the "Certificate") which will be filed with the
Delaware Secretary of State prior to consummation of the Offerings. Pursuant
to the Certificate, the Company's authorized capital stock will consist of 100
million shares of Common Stock and three million shares of Preferred Stock,
par value $.001 per share (the "Preferred Stock"). As of June 30, 1998, there
were 1,196,979 shares of Common Stock outstanding and 1,449,995.5 shares of
Preferred Stock outstanding (which may be convertible into shares of Common
Stock at any time).
The following descriptions of the Company's capital stock do not purport to
be complete and are subject to and qualified in their entirety by the
provisions of the Certificate and the Company's By-Laws, which are included as
exhibits to the Registration Statement of which this Prospectus is a part, and
by the provisions of applicable law. The By-laws have been approved by the
Company's Board of Directors in the form included as an exhibit to the
Registration Statement and will become effective prior to consummation of the
Offerings.
COMMON STOCK
Following the Offerings, 9,791,339 shares of Common Stock will be
outstanding (10,193,839 if the Underwriters' over-allotment option is
exercised in full). As of September 23, 1998, there were approximately 36
holders of the Company's Common Stock (after giving effect to the conversion
of Preferred Stock which will occur upon consummation of the Offerings). All
of the issued and outstanding shares of Common Stock are, and upon the
completion of the Offerings the shares of Common Stock offered hereby will be,
fully paid and non-assessable. Each holder of shares of Common Stock is
entitled to one vote per share on all matters to be voted on by stockholders
generally, including the election of directors. There are no cumulative voting
rights. The holders of Common Stock are entitled to dividends and other
distributions as may be declared from time to time by the Board of Directors
out of funds legally available therefor, if any. See "Dividend Policy." Upon
the liquidation, dissolution or winding up of the Company, the holders of
shares of Common Stock would be entitled to share ratably in the distribution
of all of the Company's assets remaining available for distribution after
satisfaction of all its liabilities and the payment of the liquidation
preference of any outstanding Preferred Stock as described below. The holders
of Common Stock have no preemptive or other subscription rights to purchase
shares of stock of the Company, nor are such holders entitled to the benefits
of any redemption or sinking fund provisions.
PREFERRED STOCK
As of June 30, 1998, the Company has 1,449,995.5 shares outstanding of
Preferred Stock, designated into Series A, Series B, Series C, Series D and
Series E. Shares of each series of Preferred Stock are convertible into Common
Stock, subject to anti-dilution adjustments, and will automatically convert
into Common Stock concurrently with the closing of the Offerings (subject to
anti-dilution adjustments). Additionally, the holders of shares of each series
of Preferred Stock may currently elect to convert each series to Common Stock
by a majority vote of the outstanding shares in that series. Further,
currently each share of Series A Preferred Stock shall automatically convert
to Common Stock upon the conversion into shares of Common Stock of all
outstanding shares of Series B Preferred Stock and Series C Preferred Stock.
If the Company issues additional shares of Common Stock for per share
consideration of less than $0.20, $1.05 and $4.00 for the Series A, Series B
and Series C Preferred Stock, respectively, anti-dilution adjustments will be
made. Assuming that the conditions to the automatic conversion are satisfied,
following the closing of the Offerings, no shares of Preferred Stock will
remain outstanding. The Board of Directors has the authority, without further
action by the stockholders, to issue the Preferred Stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. Preferred Stock could thus be issued
quickly with terms calculated to delay or prevent a change of control of the
Company or to serve as an entrenchment device for incumbent management. The
issuance of Preferred Stock may have the effect of decreasing the market price
of the Common Stock, and may adversely affect the voting and other rights of
the holders of Common Stock.
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WARRANTS
As of June 30, 1998, the Company has issued and outstanding Warrants to
purchase 5 shares of Series E Preferred Stock, each convertible into one
percent of the fully diluted Common Stock. Upon consummation of the Offerings,
the Series E Preferred Stock will be converted into Common Stock, and the
Warrants will be exercisable into 2,023,009 shares of Common Stock (subject to
certain anti-dilution adjustments) at an exercise price of approximately $2.91
per share. Prior to the consummation of the Offerings, a portion of the
Warrants held by Dancing Bear Investments will be transferred to certain
employees and directors of the Company. The Warrants may be exercised at any
time on or before August 13, 2004. After expiration of the exercise period,
the holder of the Warrants will have no future rights to exercise such
Warrants.
RIGHTS AGREEMENT
The Board of Directors currently expects to adopt a rights agreement (the
"Rights Agreement") to be effective simultaneously with or shortly after the
consummation of the Offerings. Pursuant to the Rights Agreement, the Board of
Directors will declare a dividend of one preferred stock purchase right (a
"Right") for each outstanding share of Common Stock. Each Right will entitle
the registered holder to purchase from the Company one one-thousandth of a
share of a new series of junior preferred stock, par value $.001 per share
(the "Junior Preferred Stock"), of the Company at a price to be determined by
the Board of Directors, per one one-thousandth of a share (the "Purchase
Price"), subject to adjustment. The description and terms of the Rights will
be set forth in a Rights Agreement between the Company and the designated
Rights Agent. The description set forth below is intended as a summary only
and is qualified in its entirety by reference to the form of the Rights
Agreement, a form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. See "Additional Information."
The Rights will be attached to all certificates representing outstanding
shares of Common Stock, and no separate Right Certificates (as defined below)
will be distributed. The Rights will separate from the shares of Common Stock
on the earlier to occur of (i) a public announcement that, without the prior
consent of the Board of Directors of the Company, a person or group (an
"Acquiring Person"), including any affiliates or associates of such person or
group (other than Dancing Bear Investments, Michael S. Egan, Todd V.
Krizelman, Stephan J. Paternot or any entities controlled by such persons)
acquired beneficial ownership of securities having 15% or more of the voting
power of all outstanding voting securities of the Company (as defined below)
and (ii) 10 business days (or such later date as the Board of Directors of the
Company may determine) following the commencement of, or announcement of an
intention (which is not subsequently withdrawn) to make, a tender offer or
exchange offer the consummation of which would result in any person or group
becoming an Acquiring Person (the earlier of such dates being called the
"Distribution Date"). The first date of public announcement that a person or
group has become an Acquiring Person is the "Stock Acquisition Date."
The Rights Agreement will provide that, until the Distribution Date, the
Rights will be transferred with and only with the shares of Common Stock.
Until the Distribution Date (or earlier redemption or expiration of the
Rights), new Common Stock certificates issued upon transfer or new issuance of
shares of Common Stock will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the surrender for transfer of any certificates for
shares of Common Stock outstanding, even without such notation, will also
constitute the transfer of the Rights associated with the shares of Common
Stock represented by such certificate. As soon as practicable following the
Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of the shares of Common
Stock as of the close of business on the Distribution Date (and to each
initial record holder of certain shares of Common Stock issued after the
Distribution Date), and such separate Right Certificates alone will evidence
the Rights.
The Rights will not be exercisable until the Distribution Date and will
expire at 5:00 P.M., New York, New York time, on the tenth anniversary of the
date of issuance, unless earlier redeemed by the Company as described below.
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In the event that any person becomes an Acquiring Person (except pursuant to
a Permitted Offer as defined below), each holder of a Right will have (subject
to the terms of the Rights Agreement) the right (the "Flip-In Right") to
receive upon exercise the number of shares of Common Stock, or, in the
discretion of the Board of Directors of the Company, the number of one-
thousandths of a share of Junior Preferred Stock (or, in certain
circumstances, other securities of the Company) having a value (immediately
prior to such triggering event) equal to two times the Purchase Price.
Notwithstanding the foregoing, following the occurrence of the event described
above, all Rights that are, or (under certain circumstances specified in the
Rights Agreement) were, beneficially owned by any Acquiring Person or any
affiliate or associate thereof will be null and void. A "Permitted Offer" is a
tender or exchange offer for all outstanding shares of Common Stock which is
at a price and on terms determined, prior to the purchase of shares under such
tender or exchange offer, by a majority of Disinterested Directors (as defined
below) to be adequate (taking into account all factors that such Disinterested
Directors deem relevant) and otherwise in the best interests of the Company
and its stockholders (other than the person or any affiliate or associate
thereof on whose behalf the offer is being made) taking into account all
factors that such Disinterested Directors may deem relevant. "Disinterested
Directors" are directors of the Company who are not officers of the Company
and who are not Acquiring Persons or affiliates or associates thereof, or
representatives of any of them.
In the event that, at any time following the Stock Acquisition Date, (i) the
Company is acquired in a merger or other business combination transaction in
which the holders of all of the outstanding shares of Common Stock immediately
prior to the consummation of the transaction are not the holders of all of the
surviving corporation's voting power, or (ii) more than 50% of the Company's
assets or earning power is sold or transferred, in either case with or to an
Interested Stockholder, or, if in such transaction all holders of shares of
Common Stock are not offered the same consideration, any other person, then
each holder of a Right (except Rights which previously have been voided as set
forth above) shall thereafter have the right (the "Flip-Over Right") to
receive, upon exercise, shares of common stock of the acquiring company having
a value equal to two times the Purchase Price. The holder of a Right will
continue to have the Flip-Over Right whether or not such holder exercises or
surrenders the Flip-In Right.
The Purchase Price payable, and the number of one-thousandths of a share of
Junior Preferred Stock or other securities issuable, upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, the shares of Junior Preferred Stock, (ii) upon the grant
to holders of the shares of Junior Preferred Stock of certain rights or
warrants to subscribe for or purchase shares of Junior Preferred Stock at a
price, or securities convertible into shares of Junior Preferred Stock with a
conversion price, less than the then current market price of the shares of
Junior Preferred Stock or (iii) upon the distribution to holders of the shares
of Junior Preferred Stock of evidences of indebtedness or assets (excluding
regular quarterly cash dividends) or of subscription rights or warrants (other
than those referred to above).
The Purchase Price payable, and the number of one-thousandths of a share of
Junior Preferred Stock or other securities issuable, upon exercise of the
Rights are also subject to adjustment in the event of a stock split of the
shares of Common Stock, or a stock dividend on the shares of Common Stock
payable in shares of Common Stock, or subdivisions, consolidations or
combinations of the shares of Common Stock occurring, in any such case, prior
to the Distribution Date.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional one-thousandths of a share of Junior
Preferred Stock will be issued and, in lieu thereof, an adjustment in cash
will be made based on the market price of the shares of Junior Preferred Stock
on the last trading day prior to the date of exercise.
At any time prior to the earlier to occur of (i) a person becoming an
Acquiring Person or (ii) the expiration of the Rights, the Company may redeem
the Rights in whole, but not in part, at a price of $.001 per Right (the
"Redemption Price"), which redemption shall be effective upon the action of
the Board of Directors of the Company. Additionally, the Company may redeem
the then outstanding Rights in whole, but not in part, at the
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Redemption Price (i) after the triggering of the Flip-In Right and before the
expiration of any period during which the Flip-In Right may be exercised in
connection with a merger or other business combination transaction or series
of transactions involving the Company in which all holders of shares of Common
Stock are not offered the same consideration, (ii) following an event giving
rise to, and the expiration of the exercise period for, the Flip-in Right if
and for as long as no person beneficially owns securities representing 15% or
more of the voting power of the Company's voting securities or (iii) if the
Acquiring Person reduces his ownership below 5% in transactions not involving
the Company. The redemption of Rights described in the preceding sentence
shall be effective only as of such time when the Flip-in Right is not
exercisable, and in any event, only after 10 business days' prior notice. Upon
the effective date of the redemption of the Rights, the right to exercise the
Rights will terminate and the only right of the holders of Rights will be to
receive the Redemption Price.
The shares of Junior Preferred Stock purchasable upon exercise of the Rights
will be non-redeemable and junior to any other series of preferred stock the
Company may issue (unless otherwise provided in the terms of such stock). Each
share of Junior Preferred Stock will have a preferential quarterly dividend in
an amount equal to 1,000 times the dividend declared on each share of Common
Stock, but in no event less than a dollar amount to be determined by the Board
of Directors. In the event of liquidation, the holders of Junior Preferred
Stock will receive a minimum preferred liquidation payment equal to the
greater of $1,000 or 1,000 times the payment made per each share of Common
Stock. Each share of Junior Preferred Stock will have 1,000 votes, voting
together with the shares of Common Stock. In the event of any merger,
consolidation or other transaction in which shares of Common Stock are
exchanged, each share of Junior Preferred Stock will be entitled to receive
1,000 times the amount and type of consideration received per share of Common
Stock. The rights of the Junior Preferred Stock as to dividends, liquidation
and voting, and in the event of mergers and consolidations, are protected by
customary anti-dilution provisions. Fractional shares of Junior Preferred
Stock will be issuable; however, the Company may elect to distribute
depositary receipts in lieu of such fractional shares. In lieu of fractional
shares other than fractions that are multiples of one two-hundredth of a
share, an adjustment in cash will be made based on the market price of the
Junior Preferred Stock on the last trading date prior to the date of exercise.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including, without limitation, the right to
vote or to receive dividends. While the distribution of the Rights will not be
taxable to stockholders of the Company, stockholders may, depending upon the
circumstances, recognize taxable income should the Rights become exercisable
or upon the occurrence of certain events thereafter.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group of persons that attempts to acquire
the Company on terms not approved by the Board of Directors. The Rights should
not interfere with any merger or other business combination approved by the
Board of Directors prior to the time that a person or group has acquired
beneficial ownership of 15% or more of the Common Stock since the Rights may
be redeemed by the Company at the Redemption Price until such time.
REGISTRATION RIGHTS
Pursuant to the terms of the Investor Rights Agreement, dated as of August
13, 1997 (the "Investor Rights Agreement"), among the Company and the holders
of the Series B, Series C, Series D and Series E Preferred Stock, at any time
following the Offerings, holders of 25% of all of the Common Stock converted
from Series B, Series C, Series D or Series E Preferred Stock, or issued as a
dividend or distribution for the above-mentioned Preferred Stock (the
"Registrable Securities"), or 50% of the Registrable Securities issued or
issuable in respect of the Series B and Series C Preferred Stock have the
right to require the Company to file a registration statement covering all or
part of their shares up to four times at the Company's expense. Holders of
4,890,740 shares of Common Stock (after giving effect to the conversion which
will occur upon consummation of the Offerings) have registration rights under
the Investor Rights Agreement. The Company will not be obligated to register
such shares if such holders propose to sell such securities at an aggregate
price to the public of less than $5 million. The Company may defer
registration for not more than 120 days if the Board of Directors determines
that it would be seriously detrimental to the Company and its stockholders to
register the Registrable Securities at such time. An underwriter participating
in the sale of the Registrable Securities may limit the number of shares of
Registrable Securities offered, and such number shall be allocated to the
holders of such securities on a pro
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rata basis. The Company is not required to effect more than one demand
registration on behalf of such holders in any 12 calendar month period. The
Company is not required in most cases to pay the registration expenses for any
such demand registration that is subsequently withdrawn by the requesting
Holders.
Holders of Registrable Securities have the right to include all or part of
their Registrable Securities in a registration statement filed by the Company
for purposes of a public offering (Piggyback Registration). The holders of a
majority of Registrable Securities have amended the Investor Rights Agreement
to waive any registration rights in connection with the Offerings. An
underwriter participating in such Offerings may limit the number of shares
offered, and such number shall be allocated first to the Company, then to such
holders on a pro rata basis, then to any stockholder on a pro rata basis. The
Company has the right to terminate or withdraw any such registration and shall
bear the expenses of any such withdrawn registration. The Company is not
obligated further after it has effected five such registrations for any such
holders.
Pursuant to the Investor Rights Agreement, holders of Registrable Securities
have agreed with the Company to be subject to lock-up periods of not more than
seven days prior to and 180 days following the date of this Prospectus and of
not more than seven days prior to and 90 days following the effective date of
any subsequent prospectus. All registration rights terminate three years after
the date of this Prospectus. Any right described in this section may be
amended and waived by written consent of the Company and the holders of a
majority of the Registrable Securities.
Pursuant to the terms of a Registration Rights Agreement by and among
Dancing Bear Investments, certain holders of Series A Preferred Stock, Messrs.
Krizelman and Paternot and the Company, the Company has granted registration
rights to such persons similar to the rights granted pursuant to the Investor
Rights Agreement. As a result, virtually all of the Company's outstanding
Common Stock or Preferred Stock has registration rights.
LIMITATION OF DIRECTOR LIABILITY
The Certificate limits the liability of directors of the Company to the
Company and its stockholders to the fullest extent permitted by Delaware law.
Specifically, directors of the Company will not be personally liable for money
damages for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the Delaware General Corporation Law ("DGCL"), which concerns unlawful
payments of dividends, stock purchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAWS PROVISIONS
Delaware Law. The Company is subject to the provisions of Section 203
("Section 203") of the DGCL. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or, in certain
cases, within three years prior, did own) 15% or more of the corporation's
voting stock. Under Section 203, a business combination between the Company
and an interested stockholder is prohibited unless it satisfies one of the
following conditions: (i) the Company's Board of Directors must have
previously approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder, or (ii) 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 Company outstanding at the time the transaction commenced
(excluding, for purposes of determining the number of shares outstanding,
shares owned by (a) persons who are directors and also officers and (b)
employee stock plans, in certain instances) or (iii) the business combination
is approved by the Board of Directors and authorized at an
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annual or special meeting of the stockholders by the affirmative vote of the
holders of at least 66 2/3% of the outstanding voting stock that is not owned
by the interested stockholder.
Special Meetings. The By-Laws provide that special meetings of stockholders
for any purpose or purposes can be called only upon the request of the
Chairman of the Board, the President, the Board of Directors, or the holders
of shares entitled to at least a majority of the votes at the meeting.
Amendment of Company By-Laws. In order to adopt, repeal, alter or amend the
provisions set forth therein, the By-Laws require either the affirmative vote
of the holders of at least a majority of the voting power of all of the issued
and outstanding shares of capital stock of the Corporation entitled to vote
thereon or by the Board of Directors.
Advance Notice Provisions for Stockholder Nominations and Proposals. The By-
Laws establish advance notice procedures for stockholders to make nominations
of candidates for election as directors, or bring other business before an
annual meeting of stockholders of the Company.
These procedures provide that only persons who are nominated by or at the
direction of the Board of Directors, or by a stockholder who has given timely
written notice to the Secretary of the Company prior to the meeting at which
directors are to be elected, will be eligible for election as directors of the
Company. Further, these procedures provide that at an annual meeting, only
such business may be conducted as has been specified in the notice of the
meeting given by, or at the direction of, the Board or by a stockholder who
has given timely written notice to the Secretary of the Company of such
stockholder's intention to bring such business before such meeting.
Under these procedures, notice of stockholder nominations to be made or
business to be conducted at an annual meeting must be received by the Company
not less than 60 days nor more than 90 days prior to the date of the meeting
(or, if less than 70 days' notice or prior public disclosure of the date of
the meeting is given or made to the stockholders, the 10th day following the
earlier of (i) the day such notice was mailed or (ii) the day such public
disclosure was made). Under these procedures, notice of a stockholder
nomination to be made at a special meeting at which directors are to be
elected must be received by the Company not later than the close of business
on the tenth day following the day on which such notice of the date of the
special meeting was mailed or public disclosure of the date of the special
meeting was made, whichever occurs first.
Under the By-Laws, a stockholder's notice nominating a person for election
as a director must contain certain information about the proposed nominee and
the nominating stockholder. If the Chairman determines that a nomination was
not made in accordance with the By-Laws, such nomination will be disregarded.
Similarly, a stockholder's notice proposing the conduct of business must
contain certain information about such business and about the proposing
stockholder. If the Chairman determines that business was not properly brought
before the meeting in accordance with the By-Laws, such business will not be
conducted.
By requiring advance notice of nominations by stockholders, the By-Laws
afford the Board an opportunity to consider the qualifications of the proposed
nominee and, to the extent deemed necessary or desirable by the Board, to
inform stockholders about such qualifications. By requiring advance notice of
other proposed business, the By-Laws also provide an orderly procedure for
conducting annual meetings of stockholders and, to the extent deemed necessary
or desirable by the Board, provides the Board with an opportunity to inform
stockholders, prior to such meetings, of any business proposed to be conducted
at such meetings, together with any recommendations as to the Board's position
regarding action to be taken with respect to such business, so that
stockholders can better decide whether to attend such a meeting or to grant a
proxy regarding the disposition of any such business.
Although the Certificate does not give the Board any power to approve or
disapprove stockholder nominations of the election of directors or proposals
for action, the foregoing provisions may have the effect of precluding a
contest for the election of directors or the consideration of stockholder
proposals if the proper
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procedures are not followed, and of discouraging or deterring a third party
from conducting a solicitation of proxies to elect its own slate of directors
or to approve its own proposal, without regard to whether consideration of
such nominees or proposals might be harmful or beneficial to the Company and
its stockholders.
WRITTEN CONSENT PROVISIONS
The By-Laws provide that any action required or permitted to be taken by the
holders of capital stock at any meeting of stockholders of the Company may be
taken without a meeting only by the holders of outstanding capital stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offerings, there has been no public market for the Common
Stock. No information is currently available and no prediction can be made as
to the timing or amount of future sales of shares, or the effect, if any, that
future sales of shares, or the availability of shares for future sale, will
have on the market price of the Common Stock prevailing from time to time.
Sales of substantial amounts of the Common Stock (including shares issuable
upon the exercise of stock options) in the public market after the lapse of
the restrictions described below, or the perception that such sales may occur,
could materially adversely affect the prevailing market prices for the Common
Stock and the ability of the Company to raise equity capital in the future.
See "Risk Factors--Shares Eligible for Future Sale; No Prior Trading Market;
Registration Rights."
Upon consummation of the Offerings, the Company will have 9,791,339
outstanding shares of Common Stock (10,193,839 if the Underwriters' over-
allotment option is exercised in full), and 822,650 and 693,771 shares of
Common Stock subject to options granted under the Company's 1998 Stock Option
Plan and 1995 Stock Option Plan, respectively. See "Management--Executive
Compensation." In addition, upon consummation of the Offerings, 2,023,009
shares of Common Stock will be issuable upon exercise of outstanding Warrants.
Of the outstanding shares, the 3,100,000 shares of Common Stock being sold in
the Offerings (3,502,500 if the Underwriters' over-allotment option is
exercised in full) will be immediately eligible for sale in the public market
without restriction or further registration under the Securities Act, unless
purchased by or issued to any "affiliate" of the Company, as that term is
defined in Rule 144, described below. All of the shares of Common Stock
outstanding prior to the Offerings are "restricted securities" as such term is
defined under Rule 144, in that such shares were issued in private
transactions not involving a public offering and may not be sold in the
absence of registration other than in accordance with Rule 144, 144(k) or 701
promulgated under the Securities Act or another exemption from registration.
In general, under Rule 144 as currently in effect, any affiliate of the
Company or any person (or persons whose shares are aggregated in accordance
with Rule 144) who has beneficially owned shares of Common Stock which are
treated as Restricted Securities for at least one year would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of 1% of the outstanding shares of Common Stock (approximately 97,913
shares based upon the number of shares outstanding after the Offerings) or the
reported average weekly trading volume in the Common Stock during the four
weeks preceding the date on which notice of such sale was filed under Rule
144. Sales under Rule 144 are also subject to certain manner of sale
restrictions and notice requirements and to the availability of current public
information concerning the Company. In addition, affiliates of the Company
must comply with the restrictions and requirements of Rule 144 (other than the
one-year holding period requirements) in order to sell shares of Common Stock
that are not Restricted Securities (such as Common Stock acquired by
affiliates in market transactions). Furthermore, if a period of at least two
years has elapsed from the date Restricted Securities were acquired from the
Company or an affiliate of the Company, a holder of such Restricted Securities
who is not an affiliate at the time of the sale and who has not been an
affiliate for at least three months prior to such sale would be entitled to
sell the shares immediately without regard to the volume, manner of sale,
notice and public information requirements of Rule 144.
Holders of virtually all of the Company's outstanding Common Stock and all
of the Company's outstanding preferred equity will have certain demand
registration rights with respect to the shares of Common Stock into which
their securities are convertible (subject to the 180-day lock-up arrangement
described below), under certain circumstances and subject to certain
conditions, to require the Company to register their shares of Common Stock
under the Securities Act, and certain rights to participate in any future
registration of securities by the Company. The Company is not required to
effect more than one demand registration on behalf of such holders in any
twelve calendar month period. Pursuant to the agreements pursuant to which the
registration rights were granted, holders of Registrable Securities have
agreed to be subject to lock-up periods of not more than seven days prior to
and 180 days following the date of this Prospectus and of not more than seven
days prior to and 90 days following the effective date of any subsequent
Prospectus. The Company intends to file a registration statement on Form S-8
for the shares held pursuant to its option plans that may make those shares
freely tradeable. Such registration statement will become effective
immediately upon filing and, shares covered by that
72
<PAGE>
registration statement will thereupon be eligible for sale in the public
markets, subject to the applicable lock-up agreements and Rule 144 limitations
applicable to affiliates. See "Description of Capital Stock--Registration
Rights."
The Company and its executive officers, directors and certain of its current
stockholders have agreed that, subject to certain exceptions, for a period of
180 days after the date of this Prospectus, without the prior written consent
of Bear, Stearns & Co. Inc., they will not, directly or indirectly, issue,
sell, offer or agree to sell, grant any option for the sale of, pledge, make
any short sale, establish an open "put equivalent position" within the meaning
of Rule 16a-1(h) under the Exchange Act or otherwise dispose of any shares of
Common Stock (or securities convertible into, exercisable for or exchangeable
for Common Stock) of the Company or of any of its subsidiaries. The foregoing
sentence shall not apply to (A) in the case of the Company, the shares of
Common Stock to be sold hereunder, (B) the issuance of any shares of Common
Stock upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof and referred to in this Prospectus,
(C) in the case of the Company 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 this Prospectus, (D) the pledge by certain
directors of the Company and Dancing Bear Investments or its affiliates of
shares of Common Stock to a financial institution in connection with a bona
fide financing transaction, (E) transfers of shares of Common Stock to
immediate family members or trusts for the benefit of such family members (a
"Family Transferee"); provided such transferee enters into a similar lock-up
agreement, (F) the transfer of all or part of any Warrants held by Dancing
Bear Investments on the date hereof to any employee of Dancing Bear
Investments, any employee of the Company, Michael S. Egan or a Family
Transferee of Michael S. Egan, provided that each transferee shall have
executed a similar lock-up agreement, or (G) shares of Common Stock issued in
connection with a merger, recapitalization or consolidation of the Company.
73
<PAGE>
UNDERWRITING
The underwriters of the Offerings named below (the "Underwriters"), for whom
Bear, Stearns & Co. Inc. and Volpe Brown Whelan & Company, LLC are acting as
representatives, have severally agreed with the Company, subject to the terms
and conditions of the Underwriting Agreement (the form of which has been filed
as an exhibit to the Registration Statement on Form S-1 of which this
Prospectus is a part), to purchase from the Company the aggregate number of
shares set forth opposite their respective names below at the initial public
offering price less the underwriting discounts and commissions set forth on
the cover page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc............................................
Volpe Brown Whelan & Company, LLC..................................
---
Total............................................................
===
</TABLE>
The nature of the respective obligations of the Underwriters is such that
all of the shares of Common Stock must be purchased if any are purchased.
Those obligations are subject, however, to various conditions, including the
approval of certain matters by counsel. The Company has agreed to indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act, and, where such indemnification is unavailable, to contribute
to payments that the Underwriters may be required to make in respect of such
liabilities.
The Company has been advised that the Underwriters propose to offer the
shares of Common Stock, initially at the initial public offering price set
forth on the cover page of this Prospectus and to certain selected dealers at
such price less a concession not to exceed $ per share; that the
Underwriters may allow, and such selected dealers may reallow, a concession to
certain other dealers not to exceed $ per share; and that after the
commencement of the Offerings, the public offering price and the concessions
may be changed.
The Company has granted the Underwriters an option to purchase in the
aggregate up to 402,500 additional shares of Common Stock solely to cover
over-allotments, if any. The option may be exercised in whole or in part at
any time within 30 days after the date of this Prospectus. To the extent the
option is exercised, the Underwriters will be severally committed, subject to
certain conditions, including the approval of certain matters by counsel, to
purchase the additional shares of Common Stock in proportion to their
respective purchase commitments as indicated in the preceding table.
The Underwriters have reserved for sale at the initial public offering price
up to 5% of the shares of Common Stock to be sold in the Initial Public
Offering for sale to employees of the Company and its affiliates, and to their
associates and related persons. The number of shares available for sale to the
general public will be reduced to the extent any reserved shares are
purchased. Any reserved shares not so purchased will be offered by the
Underwriters on the same basis as the other shares offered hereby. The
Underwriters do not expect sales of Common Stock to any accounts over which
they exercise discretionary authority to exceed 5% of the number of shares
being offered hereby.
The Company and its executive officers, directors and certain of its current
stockholders have agreed that, subject to certain exceptions, for a period of
180 days after the date of this Prospectus, without the prior written consent
of Bear, Stearns & Co. Inc., they will not, directly or indirectly, issue,
sell, offer or agree to sell, grant any option for the sale of, pledge, make
any short sale, establish an open "put equivalent position" within the meaning
of Rule 16a-1(h) under the Exchange Act or otherwise dispose of any shares of
Common Stock (or securities convertible into, exercisable for or exchangeable
for Common Stock) of the Company or of any of its subsidiaries.
Prior to the Offerings, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined
through negotiations among the Company and representatives of the
74
<PAGE>
Underwriters. Among the factors to be considered in making such determination
will be the Company's financial and operating history and condition, its
prospects and prospects for the industry in which it does business in general,
the management of the Company, prevailing equity market conditions and the
demand for securities considered comparable to those of the Company.
The consummation of the Concurrent Offering and the Initial Public Offering
are contingent upon one another. The price of the shares to be sold to the
Concurrent Purchasers in the Concurrent Offering is equal to the initial
public offering price. See "Concurrent Offering." In connection with the
Concurrent Offering, the Placement Agents will be paid a fee of $ per share
for each share sold in the Concurrent Offering in consideration for the
provision of certain advisory services and for acting as the Company's
Placement Agents. The Placement Agents will be indemnified by the Company
against certain liabilities, including liabilities under the Securities Act.
In order to facilitate the Offerings, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the Common Stock during and after the Offerings.
Specifically, the Underwriters may over-allot or otherwise create a short
position in the Common Stock for their own account by selling more shares than
have been sold to them by the Company. The Underwriters may elect to cover any
such short position by purchasing shares in the open market or by exercising
the over-allotment options granted to the Underwriters. In addition, such
persons may stabilize or maintain the price of the Common Stock by bidding for
or purchasing shares in the open market and may impose penalty bids, under
which selling concessions allowed to syndicate members or other broker-dealers
participating in the Offerings are reclaimed if shares previously distributed
in the Offerings are repurchased in connection with stabilization transactions
or otherwise. The effect of these transactions may be to stabilize or maintain
the market price of the Common Stock at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid may also
affect the price of the Common Stock to the extent that it discourages resales
thereof. No representation is made as to the magnitude or effect of any such
stabilization or other transactions. Such transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Fried, Frank, Harris, Shriver & Jacobson (a
partnership including professional corporations), New York, New York. Certain
legal matters in connection with the Offerings will be passed upon for the
Underwriters by Morrison & Foerster LLP, New York, New York.
EXPERTS
The financial statements for theglobe.com, inc. as of December 31, 1996 and
1997 and for the period from May 1, 1995 (inception) to December 31, 1995 and
the years ended December 31, 1996 and 1997 included in this Prospectus and
elsewhere in the Registration Statement have been so included in reliance on
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, upon the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement (which term
shall encompass any and all amendments thereto) on Form S-1 (the "Registration
Statement") under the Securities Act, with respect to the Common Stock offered
hereby. This Prospectus, which is part of the Registration Statement, does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain items of which are omitted in
accordance with the rules and regulations of the SEC. Statements made in this
Prospectus
75
<PAGE>
as to the contents of any contract, agreement or other document referred to
are not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
hereby made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. For further information with respect to the Company, reference
is hereby made to the Registration Statement and such exhibits and schedules
filed as a part thereof, which may be inspected, without charge, at the Public
Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at regional offices of the SEC located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Information relating to the operation of the Public Reference Section may be
obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a Web site
that contains reports, proxy and information statements regarding registrants
that file electronically with the SEC. The address of this Web site is
(http://www.sec.gov). Copies of all or any portion of the Registration
Statement may be obtained from the Public Reference Section of the SEC, upon
payment of the prescribed fees.
76
<PAGE>
THEGLOBE.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998 (unau-
dited)................................................................... F-3
Statements of Operations for the period from May 1, 1995 (inception) to
December 31, 1995 and for the years ended December 31, 1996 and 1997 and
for the six months ended June 30, 1997 (unaudited) and 1998 (unaudited).. F-4
Statements of Stockholders' Equity for the period from May 1, 1995 (incep-
tion) to December 31, 1995 and for the years ended December 31, 1996 and
1997 and for the six months ended June 30, 1998 (unaudited).............. F-5
Statements of Cash Flows for the period from May 1, 1995 (inception) to
December 31, 1995 and for the years ended December 31, 1996 and 1997 and
for the six months ended June 30, 1997 (unaudited) and 1998 (unaudited).. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
theglobe.com, inc.:
We have audited the accompanying balance sheets of theglobe.com, inc. as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity and cash flows for the period from May 1, 1995
(inception) to December 31, 1995 and for the years ended December 31, 1996 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of theglobe.com, inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash
flows for the period from May 1, 1995 (inception) to December 31, 1995 and for
the years ended December 31, 1996 and 1997 in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
April 16, 1998, except for note 9,
which is as of July 22, 1998
F-2
<PAGE>
THEGLOBE.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 757,118 $ 5,871,291 $ 2,997,391
Short-term investments................. -- 13,003,173 10,157,830
Accounts receivable, less allowance for
doubtful accounts of $12,000 and
$27,868 in 1997 and 1998,
respectively.......................... 66,128 254,209 624,191
Prepaids and other current assets...... 2,377 -- 75,847
---------- ----------- -----------
Total current assets................. 825,623 19,128,673 13,855,259
Property and equipment, net.............. 136,780 325,842 1,173,582
Other assets............................. 10,945 7,657 574,239
---------- ----------- -----------
Total assets......................... $ 973,348 $19,462,172 $15,603,080
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 130,478 $ 396,380 $ 2,029,901
Accrued expense........................ 15,234 325,454 834,959
Accrued bonuses........................ -- 1,148,999 150,000
Deferred revenue....................... 32,144 113,290 132,353
Current installments of obligations un-
der capital leases.................... -- 27,174 255,962
---------- ----------- -----------
Total current liabilities............ 177,856 2,011,297 3,403,175
Obligations under capital leases, exclud-
ing current installments................ -- 98,826 629,281
Stockholders' equity:
Preferred Stock, 3,000,000 shares
authorized:
Convertible preferred stock, Series A
through E, $0.001 par value; 2,900,001
shares authorized; 1,379,970,
1,449,995.5 and 1,449,995.5, shares
issued and outstanding at December 31,
1996 and 1997, and as of June 30,
1998, respectively; aggregate
liquidation preference of $1,606,110,
$21,886,110 and $21,886,110 at
December 31, 1996 and 1997, and as of
June 30, 1998, respectively........... 1,380 1,450 1,450
Common stock, $0.001 par value;
100,000,000 shares authorized;
1,125,000, 1,154,271 and 1,196,979
shares issued and outstanding at
December 31, 1996 and 1997, and as of
June 30, 1998, respectively........... 1,125 1,154 1,197
Additional paid-in capital............. 1,629,926 21,866,965 21,875,094
Net unrealized loss on securities...... -- (41,201) (29,647)
Deferred compensation.................. (21,053) (76,033) (52,914)
Accumulated deficit.................... (815,886) (4,400,286) (10,224,556)
---------- ----------- -----------
Total stockholders' equity........... 795,492 17,352,049 11,570,624
Commitments..............................
---------- ----------- -----------
Total liabilities and stockholders'
equity.............................. $ 973,348 $19,462,172 $15,603,080
========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
THEGLOBE.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1995 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ---------------------- ----------------------
1995 1996 1997 1997 1998
-------------- --------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 26,815 $ 229,363 $ 770,293 $ 208,241 $ 1,173,398
Cost of revenues........ 12,779 116,780 423,706 106,032 503,181
--------- --------- ----------- --------- -----------
Gross profit........ 14,036 112,583 346,587 102,209 670,217
Operating expenses:
Sales and marketing... 1,248 275,947 1,248,349 224,170 4,493,039
Product development... 60,000 120,000 153,667 62,500 250,869
General and
administrative....... 18,380 489,073 2,827,591 594,358 2,396,716
--------- --------- ----------- --------- -----------
Loss from
operations......... (65,592) (772,437) (3,883,020) (778,819) (6,470,407)
--------- --------- ----------- --------- -----------
Other income (expense):
Interest and dividend
income............... 980 25,966 334,720 11,384 703,097
Interest expense...... (1,094) (3,709) -- -- (30,460)
--------- --------- ----------- --------- -----------
Total interest
income (expense),
net................ (114) 22,257 334,720 11,384 672,637
--------- --------- ----------- --------- -----------
Loss before
provision for
income taxes....... (65,706) (750,180) (3,548,300) (767,435) (5,797,770)
--------- --------- ----------- --------- -----------
Provision for income
taxes.................. -- -- 36,100 -- 26,500
--------- --------- ----------- --------- -----------
Net loss............ $ (65,706) $(750,180) $(3,584,400) $(767,435) $(5,824,270)
========= ========= =========== ========= ===========
Basic and diluted net
loss per share......... $ (0.06) $ (0.67) $ (3.13) $ (0.67) $ (5.01)
========= ========= =========== ========= ===========
Weighted average basic
and diluted shares
outstanding............ 1,125,000 1,125,000 1,146,773 1,140,960 1,161,389
========= ========= =========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
THEGLOBE.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE NET
PREFERRED COMMON UNREALIZED
STOCK STOCK ADDITIONAL GAIN (LOSS) TOTAL
------------------ ----------------- PAID-IN ON SALE OF DEFERRED ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES COMPENSATION DEFICIT EQUITY
----------- ------ --------- ------- ----------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common shares
to founders.... -- $ -- 1,125,000 $ 1,125 $ 3,555 $ -- $ -- $ -- $ 4,680
Issuance of
Series A
convertible
preferred
stock.......... 356,490 356 -- -- 66,644 -- -- -- 67,000
Promissory notes
converted to
Series A
convertible
preferred
stock.......... 226,505 227 -- -- 46,011 -- -- -- 46,238
Issuance of
Series B
convertible
preferred
stock.......... 551,915 552 -- -- 578,953 -- -- -- 579,505
Net loss for the
period from May
1, 1995
(inception) to
December 31,
1995........... -- -- -- -- -- -- -- (65,706) (65,706)
----------- ------ --------- ------- ----------- -------- -------- ------------- ------------
Balance as of
December 31,
1995........... 1,134,910 1,135 1,125,000 1,125 695,163 -- -- (65,706) 631,717
Issuance of
Series B
convertible
preferred
stock.......... 23,810 24 -- -- 24,961 -- -- -- 24,985
Issuance of
Series C
convertible
preferred
stock.......... 221,250 221 -- -- 884,749 -- -- -- 884,970
Deferred
compensation... -- -- -- -- 25,053 -- (25,053) -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- 4,000 -- 4,000
Net loss........ -- -- -- -- -- -- -- (750,180) (750,180)
----------- ------ --------- ------- ----------- -------- -------- ------------- ------------
Balance at
December 31,
1996........... 1,379,970 1,380 1,125,000 1,125 1,629,926 -- (21,053) (815,886) 795,492
Issuance of
Series C
convertible
preferred
stock.......... 70,000 70 -- -- 279,930 -- -- -- 280,000
Exercise of
stock options.. -- -- 29,271 29 4,478 -- -- -- 4,507
Issuance of
Series D
convertible
preferred
stock, net of
expense of
$130,464....... 25.5 -- -- -- 19,869,536 -- -- -- 19,869,536
Net unrealized
loss on
securities..... -- -- -- -- -- (41,201) -- -- (41,201)
Deferred
compensation... -- -- -- -- 83,095 -- (83,095) -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- 28,115 -- 28,115
Net loss........ -- -- -- -- -- -- -- (3,584,400) (3,584,400)
----------- ------ --------- ------- ----------- -------- -------- ------------- ------------
Balance at
December 31,
1997........... 1,449,995.5 1,450 1,154,271 1,154 21,866,965 (41,201) (76,033) (4,400,286) 17,352,049
Amortization of
deferred
compensation... -- -- -- -- -- -- 23,119 -- 23,119
Exercise of
stock options
(unaudited).... -- -- 42,708 43 8,129 -- -- -- 8,172
Net loss for the
period
(unaudited) -- -- -- -- -- -- -- (5,824,270) (5,824,270)
Change in net
unrealized gain
(loss) on
securities
(unaudited).... -- -- -- -- -- 11,554 -- -- 11,554
----------- ------ --------- ------- ----------- -------- -------- ------------- ------------
Balance at June
30, 1998
(unaudited).... 1,449,995.5 $1,450 1,196,979 $ 1,197 $21,875,094 $(29,647) $(52,914) $ (10,224,556) $ 11,570,624
=========== ====== ========= ======= =========== ======== ======== ============= ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
THEGLOBE.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1995 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------------- ----------------------
1995 1996 1997 1997 1998
-------------- --------- ------------ --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(65,706) $(750,180) $ (3,584,400) $(767,435) $(5,824,270)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 10,530 47,595 60,210 37,499 238,411
Non-cash related
interest............. 738
Deferred compensation
earned............... -- 4,000 28,115 14,057 23,119
Changes in operating
assets and
liabilities:
Accounts receivable,
net.................. (3,025) (63,103) (188,081) 23,212 (369,982)
Prepaids and other
current assets....... (16,440) (2,377) 2,377 2,377 (75,847)
Other assets.......... -- -- -- -- (568,226)
Accounts payable...... 9,794 120,684 265,902 57,706 1,633,521
Accrued expenses...... 5,599 9,635 310,220 192,532 509,505
Accrued bonuses....... -- -- 1,148,999 37,250 (998,999)
Deferred revenue...... -- 32,144 81,146 72,579 19,063
-------- --------- ------------ --------- -----------
Net cash used in
operating activities.. (58,510) (601,602) (1,875,512) (330,223) (5,413,705)
-------- --------- ------------ --------- -----------
Cash flows from
investing activities:
Purchase of
securities............ -- -- (13,044,374) -- (230,484)
Proceeds from sale of
securities............ -- -- -- -- 3,087,381
Purchases of property
and equipment......... (51,101) (138,309) (119,984) (229,696) (247,859)
-------- --------- ------------ --------- -----------
Net cash (used in)
provided by investing
activities........... (51,101) (138,309) (13,164,358) (229,696) 2,609,038
-------- --------- ------------ --------- -----------
Cash flows from
financing activities:
Payments under capital
lease obligations..... -- -- -- -- (77,405)
Proceeds from
convertible promissory
notes................. 45,500 -- -- -- --
Proceeds from exercise
of common stock
options............... -- -- 4,507 4,507 8,172
Proceeds from issuance
of common stock....... 4,680 -- -- -- --
Proceeds from issuance
of convertible
preferred Series A, B
and C stock........... 646,505 909,955 280,000 280,000 --
Proceeds from issuance
of convertible
preferred Series D
stock................. -- -- 20,000,000 -- --
Payment of financing
costs................. -- -- (130,464) (26,302) --
-------- --------- ------------ --------- -----------
Net cash provided by
(used in) financing
activities........... 696,685 909,955 20,154,043 258,205 (69,233)
-------- --------- ------------ --------- -----------
Net change in cash and
cash equivalents..... 587,074 170,044 5,114,173 (301,714) (2,873,900)
Cash and cash
equivalents at
beginning of period.... -- 587,074 757,118 757,118 5,871,291
-------- --------- ------------ --------- -----------
Cash and cash
equivalents at end of
period................. $587,074 $ 757,118 $ 5,871,291 $ 455,404 $ 2,997,391
======== ========= ============ ========= ===========
Supplemental disclosure
of cash flow
information:
Cash paid during the
period for:
Interest............... $ 1,094 $ 3,709 $ -- $ -- $ 30,460
======== ========= ============ ========= ===========
Income taxes........... $ -- -- -- -- 45,125
======== ========= ============ ========= ===========
Supplemental disclosure
of noncash
transactions:
Series A convertible
preferred stock issued
upon conversion of
promissory notes,
including accrued
interest of $738...... $ 46,238 $ -- $ -- $ -- $ --
======== ========= ============ ========= ===========
Equipment acquired
under capital leases.. $ -- $ -- $ 126,000 $ -- $ 836,648
======== ========= ============ ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
theglobe.com, inc. (the "Company") was incorporated on May 1, 1995
(inception) and commenced operations on that date. theglobe.com is an online
community with members and users in the United States and abroad.
theglobe.com's users are able to personalize their online experience by
publishing their own content and interacting with others having similar
interests. The Company's primary revenue source is the sale of advertising,
with additional revenues generated through e-commerce arrangements and the
sale of membership subscriptions for enhanced services.
The Company's business is characterized by rapid technological change, new
product development and evolving industry standards. Inherent in the Company's
business are various risks and uncertainties, including its limited operating
history, unproven business model and the limited history of commerce on the
Internet. The Company's success may depend in part upon the emergence of the
Internet as a communications medium, prospective product development efforts
and the acceptance of the Company's solutions by the marketplace.
During August 1997, Dancing Bear Investments, Inc. invested $20,000,000 in
the Company in exchange for a 51% ownership interest in the Company on a fully
diluted basis, plus warrants (the "Dancing Bear Investment") (See Note 5).
(b) Initial Public Offerings
In June 1998, the Board of Directors authorized the filing of a registration
statement with the Securities and Exchange Commission ("SEC") that would
permit the Company to sell shares of the Company's common stock in connection
with a proposed initial public offering ("IPO"). In addition to the IPO, the
Company will be offering shares in a concurrent offering (the "Concurrent
Offering") directly to certain investors at a price per share equal to the IPO
price per share (collectively referred to as the "Offerings"). The
consummation of the Concurrent Offering and the IPO are contingent upon each
other. In the event the Concurrent Offering is not consummated by the closing
date of the IPO, the Concurrent Offering will be terminated and all payments
received in connection with the Concurrent Offering will be promptly returned.
If the Concurrent Offering is not consummated for the proposed amount, the
shares of Common Stock not sold will not be offered to purchasers in the IPO.
The Company plans to offer 3,100,000 shares of Common Stock at an estimated
price of between $11 and $13 per share, of which 2,683,333 and 416,667 shares
of its Common Stock will be offered in its IPO and Concurrent Offering,
respectively, at an assumed offering price of $12 per share.
If the IPO is consummated under the terms presently anticipated, upon the
closing of the proposed Offerings all of the then outstanding shares of the
Company's Convertible Preferred Stock will automatically convert into shares
of common stock.
(c) Unaudited Interim Financial Information
The interim financial statements of the Company for the six months ended
June 30, 1997 and 1998, included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the SEC. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations relating to
interim financial statements.
In the opinion of management, the accompanying unaudited interim financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of
F-7
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
the Company at June 30, 1997 and 1998, and the results of its operations and
its cash flows for the six months ended June 30, 1997 and 1998.
(d) 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 the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(e) Cash and Cash Equivalents
The Company considers all highly liquid securities with original maturities
of three months or less to be cash equivalents. Cash equivalents at
December 31, 1996 and 1997 were approximately $752,000 and $3,997,000,
respectively, and $2,994,000 as of June 30, 1998, which consisted of
certificates of deposit.
(f) Short-term Investments
Short-term investments are classified as available-for-sale and are
available to support current operations or to take advantage of other
investment opportunities. The majority of these investments are corporate
bonds, which are stated at their estimated fair value based upon publicly
available market quotes. Unrealized gains and losses are computed on the basis
of specific identification and are included in stockholders equity. Realized
gains, realized losses and declines in value, judged to be other-than-
temporary, are included in income. The costs of securities sold are based on
the specific-identification method and interest earned is included in interest
income. As of December 31, 1997, the Company had gross unrealized losses of
$41,678 and gross unrealized gains of $477 from its short-term investments. As
of June 30, 1998 the Company had gross unrealized losses of $56,654 and gross
unrealized gains of $27,007.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related
assets, generally ranging from three to five years. Equipment under capital
leases is stated at the present value of minimum lease payments and is
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets.
(h) Other Assets
At June 30, 1998, other assets included $568,226 of security deposits held
in an escrow account as collateral for certain capital lease equipment.
(i) Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. To
date, no such impairment has been recorded.
F-8
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
(j) Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases for operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in results of operations in
the period that the tax change occurs. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
(k) Revenue Recognition
The Company's revenues are derived principally from the sale of banner
advertisements under short-term contracts. To date, the duration of the
Company's advertising commitments has generally averaged from one to two
months. Advertising revenues are recognized ratably in the period in which the
advertisement is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include the guarantee of a minimum number of
"impressions" or times that an advertisement appears in pages viewed by the
users of the Company's online properties.
The Company also derived revenues from its membership subscriptions which
are deferred and recognized ratably over the term of the subscription period,
which is generally up to one year. Subscription revenues accounted for 0%, 5%,
23%, 31% and 11% of revenues for the period from May 1, 1995 (inception) to
December 31, 1995, the years ended December 31, 1996 and 1997, and for the six
months ended June 30, 1997 and 1998, respectively.
The Company trades advertisements on its Web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenues and
expenses are recorded at the fair market value of services provided or
received, whichever is more determinable in the circumstances. Revenue from
barter transactions is recognized as income when advertisements are delivered
on the Company's Web properties. Barter expense is recognized when the
Company's advertisements are run on other companies' Web sites, which is
typically in the same period when the barter revenue is recognized. Barter
revenues and expenses were approximately $-0-, $-0-, and $166,500 for the
period from May 1, 1995 (inception) to December 31, 1995 and for the years
ended December 31, 1996 and 1997, respectively, and $37,500 and $39,906 for
the six months ended June 30, 1997 and 1998, respectively.
(l) Product Development
Product development expenses include personnel costs associated with the
development, testing and upgrades to the Company's Web site and systems as
well as personnel costs related to its editorial content and community
management and support. Product development costs and enhancements to existing
products are charged to operations as incurred. Software development costs are
required to be capitalized when a product's technological feasibility has been
established by completion of a working model of the product which capitalized
asset would be fully expensed by the time when a product is available for
general release to customers. To date, completion of a working model of the
Company's products and general release have substantially coincided. As a
result, the Company has not capitalized any software development costs since
such costs have not been significant.
F-9
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
(m) Advertising
Advertising costs are expensed as incurred. Advertising costs totaling
$1,248, $202,986 and $1,057,606 in 1995, 1996 and 1997, respectively, and
$183,413 and $4,000,047 for the six months ended June 30, 1997 and 1998,
respectively, are included in sales and marketing expenses in the Company's
statements of operations.
(n) Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in accordance
with Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date
of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of Accounting Principle Board ("APB") Opinion No. 25 and provide
pro forma net earnings disclosures for employee stock option grants if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
(o) Net Loss Per Common Share
The Company adopted SFAS No. 128, "Computation of Earnings Per Share,"
during the year ended December 31, 1997. In accordance with SFAS No. 128 and
the SEC Staff Accounting Bulletin No. 98, basic earnings per share are
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon the conversion of the
Convertible Preferred Stock (using the if-converted method) and shares
issuable upon the exercise of stock options and warrants (using the Treasury
Stock method); common equivalent shares are excluded from the calculation if
their effect is anti-dilutive. Pursuant to SEC Staff Accounting Bulletin No.
98, common stock and convertible preferred stock issued for nominal
consideration, prior to the anticipated effective date of an IPO, are required
to be included in the calculation of basic and diluted net loss per share, as
if they were outstanding for all periods presented. To date, the Company has
not had any issuances or grants for nominal consideration.
Diluted loss per share has not been presented separately, as the outstanding
stock options, warrants and contingent stock purchase warrants are anti-
dilutive for each of the periods presented.
Anti-dilutive potential common shares outstanding were 1,309,910 for the
period ended December 31, 1995, 1,722,019 and 7,436,672 for the years ended
December 31, 1996 and 1997, respectively, and 2,082,699 and 7,414,964 for the
six-month periods ended June 30, 1997 and 1998.
(p) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." This statement establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements.
Comprehensive income generally represents all changes in shareholders' equity
during the period except those resulting from investments by, or distributions
to, shareholders. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented. For
the six months ended June 30, 1998 and the year ended December 31, 1997,
comprehensive net loss was approximately $11,600 lower and approximately
$41,200 higher, respectively, than the net loss reported in the Company's
statements of operations for the applicable periods, due to unrealized gains
or losses on securities classified as available-for-sale.
F-10
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
and Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that a public enterprise reports information about operating
segments in annual financial statements, and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997 and requires statement of earlier periods
presented. The Company has determined that it does not have any separately
reporting business segments.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. This statement does not apply to the Company as the Company
currently does not have any derivative instruments or hedging activities.
(q) Stock Split
In May 1996, the Company authorized and implemented a ten-for-one common
stock split. In August 1997, the Company authorized and implemented an
additional ten-for-one preferred stock split. In September 1998, the Company
authorized a one-for-two reverse stock split of all common and preferred
stock. All share and per share information in the accompanying financial
statements has been retroactively restated to reflect the effect of the stock
splits and the reverse stock split.
(2) CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents, short-term investments
and trade accounts receivable. The Company maintains cash and cash equivalents
with various domestic financial institutions. The Company performs periodic
evaluations of the relative credit standing of these institutions. From time
to time, the Company's cash balances with any one financial institution may
exceed Federal Deposit Insurance Corporation insurance limits.
The Company's customers are concentrated in the United States. The Company
performs ongoing credit evaluations, generally does not require collateral and
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of customers, historical trends and other information; to
date, such losses have been within management's expectations.
For the period from May 1, 1995 (inception) to December 31, 1995, there were
no customers that accounted for over 10% of revenues generated by the Company,
or of accounts receivable at December 31, 1995.
For the year ended December 31, 1996, one customer accounted for
approximately 71% of total revenues generated by the Company and 90% of
accounts receivable at December 31, 1996.
For the year ended December 31, 1997, there was one customer that accounted
for 11% of revenues (excluding barter advertising revenues of $166,500)
generated by the Company. There were no customers that accounted for over 10%
of accounts receivable at December 31, 1997.
For the six months ended June 30, 1998, there were no customers that
accounted for over 10% of revenues generated by the Company, or of accounts
receivable at June 30, 1998.
F-11
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment, including assets
under capital leases of $-0-,
$126,000, and $962,648,
respectively......................... $181,557 $421,164 $1,500,187
Furniture and fixtures................ 7,853 14,230 19,714
-------- -------- ----------
189,410 435,394 1,519,901
Less accumulated depreciation and
amortization, including amounts
related to assets under capital
leases of $-0-, $-0- and $110,007,
respectively......................... 52,630 109,552 346,319
-------- -------- ----------
Total............................... $136,780 $325,842 $1,173,582
======== ======== ==========
</TABLE>
(4) INCOME TAXES
The Company did not incur any income taxes for the period from May 1, 1995
(inception) to December 31, 1995 and for the year ended December 31, 1996 as a
result of operating losses. Income taxes for the year ended December 31, 1997
are based solely on state and local taxes on business and investment capital.
The difference between the provision for income taxes computed at the
statutory rate and the reported amount of tax expense (benefit) attributable
to income before income taxes for the period from May 1, 1995 (inception) to
December 31, 1995 and for the year ended December 31, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- -----------
<S> <C> <C> <C>
Tax expense at statutory rates........... $(22,340) $(257,781) $(1,218,695)
Increase (reduction) in income taxes re-
sulting from:
Valuation allowance adjustment......... 25,938 302,644 1,710,346
State and local income taxes, net of
Federal income tax benefit............ (3,660) (45,131) (458,817)
Other, net............................. 62 268 3,266
-------- --------- -----------
$ -- $ -- $ 36,100
======== ========= ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1997 are presented below.
<TABLE>
<CAPTION>
1996 1997
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $ 326,982 $ 2,018,635
Allowance for doubtful accounts.................... -- 5,520
Deferred compensation.............................. 1,600 14,773
--------- -----------
Total gross deferred tax assets.................. 328,582 2,038,928
Less valuation allowance............................. (328,582) (2,038,928)
--------- -----------
Net deferred tax assets.......................... $ -- $ --
========= ===========
</TABLE>
F-12
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
The valuation allowance for deferred tax assets as of January 1, 1996 and
1997 was $328,582 and $2,038,928 respectively. The net change in the total
valuation allowance for the years ended December 31, 1996 and 1997 was
$302,644 and $1,710,346, respectively. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary
differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment.
At December 31, 1997, the Company had net operating loss carryforwards
available for federal and state income tax purposes of $4.4 million. These
carryforwards expire through 2012 for federal purposes and state purposes.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), the utilization of net operating loss carryforwards may be limited
under the change in stock ownership rules of the Code. As a result of
ownership changes which occurred in August 1997, the Company's operating tax
loss carryforwards and tax credit carryforwards are subject to these
limitations.
(5) CAPITALIZATION
Authorized Shares
During 1997, the Company amended and restated its certificate of
incorporation. As a result, the total number of shares which the Company is
authorized to issue is 25,000,000 shares: 22,000,000 of these shares are
Common Stock, each having a par value of $0.001; and 3,000,000 shares are
Preferred Stock, each having a par value of $0.001. In July 1998, the
Company's stockholders approved the Fourth Amended and Restated Certificate of
Incorporation, which will be filed with the Delaware Secretary of State prior
to consummation of the Offerings, to increase the number of authorized shares
from 25,000,000 to 103,000,000 shares.
Common Stock
During 1995, the Company issued a total of 1,125,000 shares of Common Stock
to its founders in exchange for $4,680 in cash. During 1997, the Company
issued an additional 29,271 shares of Common Stock in connection with the
exercise of certain stock options.
Convertible Preferred Stock
As of December 31, 1997 and June 30, 1998, the Company had five series of
Convertible Preferred Stock (collectively "Preferred Stock") authorized and of
which only four of the series were outstanding. The holders of the various
series of Preferred Stock generally have the same rights and privileges. Each
class of the Company's Preferred Stock is convertible into Common Stock, as
defined below, and has rights and preferences which are generally more senior
to the Company's Common Stock and are more fully described in the Company's
amended and restated certificate of incorporation.
In 1995, the Company completed a private placement of 582,995 shares of
Series A Preferred Stock for an aggregate price of approximately $113,000.
Such consideration consisted of $67,000 in cash and the conversion of
outstanding Notes (described below) in the aggregate amount of approximately
$46,000. In 1995, the Company issued Convertible Promissory Notes ("Notes") in
the aggregate principal amount of $45,500,
F-13
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
bearing interest at rates between 6.62% and 8% per annum. Under the terms and
conditions of the original Note agreements, the Notes were convertible into
preferred stock at conversion prices equal to $0.20 per share, the highest
price paid for shares of its Preferred Stock sold during such time period.
These Notes, including interest thereon, were converted into a total of
226,505 shares of Series A Preferred Stock in connection with the Company's
1995 private placement of Series A Preferred Stock, in accordance with the
original terms and conditions of such Notes.
During December 1995, the Company completed a private placement of 575,725
shares of Series B Preferred Stock at $1.05 per share in two issuances for an
aggregate price of approximately $604,000, $579,000 was paid in cash in 1995
and $25,000 in 1996.
In 1996, the Company completed a private placement of 221,250 shares of
Series C Preferred Stock at $4.00 per share for an aggregate price of
approximately $885,000, paid in cash.
In April 1997, the Company amended the Series C Preferred Stock agreement in
order to extend the above private placement of Series C Preferred Stock to
April 15, 1997. In connection with this private placement, the Company issued
an additional 70,000 shares of Series C Preferred Stock at $4.00 per share for
an aggregate price of $280,000 in 1997.
In August 1997, the Company authorized and issued 25.5 shares of Series D
Preferred Stock for an aggregate cash amount of $20,000,000 in connection with
the Dancing Bear Investment. These shares constituted 51% of the fully diluted
capital stock of the Company at the time of exercise, as defined. In addition
to the Series D Preferred Stock, Dancing Bear Investments, Inc. also received
warrants which provide the right to purchase up to 5 shares of Series E
Preferred Stock representing 10% of the fully diluted capital stock of the
Company at the time of exercise for an aggregate purchase price of $5,882,353,
if exercised in total. In connection with the Dancing Bear Investment, two
officers and shareholders of the Company received $500,000 each as signing
bonuses in connection with their employment agreements. Such amounts were
accrued for at that time and were subsequently paid in the first quarter of
1998.
The conversion rate of the Series A, B and C Preferred Stock, as defined in
the original private placement agreements shall be the quotient obtained by
dividing the applicable series' original issue price by the applicable series'
conversion price. The original issue price and conversion price shall be
$0.20, $1.05 and $4 per share for Series A, B and C, respectively, as
determined by negotiations among the parties. Each share of Series D and E
Preferred Stock shall be convertible into an amount of common representing 1%
of the fully diluted capital stock, as defined in the original private
placement agreement. Such conversion features were determined by negotiations
among the parties.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, as defined, on a pari passu basis, an amount equal
to $0.20, $1.05, $4, $784,314 and $1,176,471 per share for Series A, B, C, D
and E convertible Preferred Stock, respectively, shall be paid out of the
assets of the Company available for distribution before any such payments
shall be made on any shares of the Company's common shares or any other
capital stock of the Company other than the Preferred Stock, plus any declared
but unpaid dividends.
F-14
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
The following table summarizes the Convertible Preferred Stock authorized,
issued and outstanding and liquidation preferences:
<TABLE>
<CAPTION>
PREFERRED SHARES EQUIVALENT SHARES OF
ISSUED AND OUTSTANDING COMMON STOCK
-------------------------------------------- -----------------------------
DECEMBER 31,
SHARES JUNE 30, ------------------- JUNE 30,
AUTHORIZED 1996 1997 1998 1996 1997 1998
---------- --------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Series A................ 1,165,990 582,995 582,995 582,995 582,995 582,995 582,995
Series B................ 1,151,450 575,725 575,725 575,725 575,725 575,725 575,725
Series C................ 582,500 221,250 291,250 291,250 221,250 291,250 291,250
Series D................ 51 0 25.5 25.5 0 3,503,357 3,503,357
Series E................ 10 0 0 0 0 1,761,366 1,761,366
--------- --------- ----------- ----------- --------- --------- ---------
2,900,001 1,379,970 1,449,995.5 1,449,995.5 1,379,970 6,714,593 6,714,593
========= ========= =========== =========== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
LIQUIDATION PREFERENCE
-------------------------------
DECEMBER 31,
LIQUIDATION -------------------- JUNE 30,
PREFERENCE PER SHARE 1996 1997 1998
-------------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Series A................... $ 0.20 116,599 116,599 116,599
Series B................... $ 1.05 604,511 604,511 604,511
Series C................... $ 4.00 885,000 1,165,000 1,165,000
Series D................... $ 784,313.72 0 20,000,000 20,000,000
Series E................... $1,176,470.60 0 0 0
--------- ---------- ----------
1,606,110 21,886,110 21,886,110
========= ========== ==========
</TABLE>
All Preferred Shares shall be automatically converted into common shares in
the event the Company closes a firm commitment for an underwritten initial
public offering of its common stock for an aggregate amount of at least
$15,000,000. The Preferred Shares are subject to additional mandatory
conversion rights, as defined in the Company's amended and restated
certificate of incorporation.
Holders of Preferred Stock are entitled to receive dividends when and if
declared by the Board of Directors. No such dividends have yet been declared
by the Board of Directors.
(6) STOCK OPTION PLAN
1995 Stock Option Plan
During 1995, the Company established the 1995 Stock Option Plan, which was
amended (the "Amended Plan") by the Board of Directors in December 1996. Under
the Amended Plan, the Board of Directors may issue incentive stock options or
nonqualified stock options to purchase up to 666,000 common shares. Incentive
stock options may be granted only to officers who are employees of the
Company, directors of the Company and other employees of the Company who are
deemed to be "key employees." Incentive stock options must be granted at the
fair market value of the Company's Common Stock at the date the option is
issued.
Nonqualified stock options may be granted to officers, directors, other
employees, consultants and advisors of the Company. The option price for
nonqualified stock options shall be at least 85% of the fair market value of
the Company's Common Stock. The granted options under the amended plan shall
be for periods not to exceed ten years. Incentive options granted to
stockholders who own greater than 10% of the total combined voting power of
all classes of stock of the Company must be issued at 110% of the fair market
value of the stock on the date the options are granted.
F-15
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
In connection with the Dancing Bear Investments investment, the Company
reserved an additional 125,000 shares of its common stock for issuance upon
the exercise of options to be granted in the future under the Amended Plan.
The per share weighted-average fair value of stock options granted during
1995, 1996 and 1997 was $0.02, $0.16 and $0.32, respectively, on the date of
grant using the option-pricing method with the following weighted-average
assumptions: 1995--risk-free interest rate 6%, and an expected life of three
years; 1996--risk-free interest rate 6.18%, and an expected life of two years;
1997--risk-free interest rate 6.00%, and an expected life of three years. As
permitted under the provisions of SFAS No. 123, and based on the historical
lack of a public market for the Company's units, no factor for volatility has
been reflected in the option pricing calculation.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, compensation cost of $4,000 and $28,115 has been recognized for
its stock options granted below fair market value in 1996 and 1997,
respectively, in the accompanying financial statements.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
GRANTED EXERCISE PRICE
------- --------------
<S> <C> <C>
Outstanding at December 31, 1995..................... 175,000 $0.02
Granted.............................................. 167,049 $0.12
Exercised............................................ --
Canceled............................................. --
-------
Outstanding at December 31, 1996..................... 342,049 $0.06
Granted.............................................. 411,701 $0.74
Exercised............................................ (29,271) $0.16
Canceled............................................. (2,500) $0.82
-------
Outstanding at December 31, 1997..................... 721,979 $0.44
=======
Vested at December 31, 1997.......................... 397,983
=======
Options available at December 31, 1997............... 39,751
=======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.02-$0.105 281,889 1 $ 0.05 233,262 $ 0.04
$0.40-$0.70 354,840 1 0.65 164,721 0.66
$0.82 82,250 5 0.82 0 0
------- -------
721,979 397,983
======= =======
</TABLE>
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $0.02--$0.82 and 1 year,
respectively.
During the six month period ended June 30, 1998, the Company granted 55,750
options with a weighted average exercise price of $3.78 per share and a
weighted average contractual life of 5 years. The range of exercise prices
were as follows: 44,250 options at $2.78 per share; 1,500 options at $4.60 per
share; and 10,000 options at $8.10 per share. All options granted from July 1,
1998 through September 28, 1998 will be granted at the initial public offering
price, except as noted in note 9.
F-16
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
The Company applies APB No. 25 in accounting for its stock options granted
to employees and accordingly, no compensation expense has been recognized in
the financial statements (except for those options issued with exercise prices
less than fair market value at date of grant). Had the Company determined
compensation expense based on the fair value at the grant date for its stock
options issued to employees under SFAS No. 123, the Company's net loss would
have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- ----------
<S> <C> <C> <C>
Net loss--as reported....................... $65,706 $750,180 $3,584,400
======= ======== ==========
Net loss--pro forma......................... $66,873 $756,135 $3,621,373
======= ======== ==========
Basic net loss per common share--as report-
ed......................................... $ (0.06) $ (0.67) $ (3.13)
======= ======== ==========
Basic net loss per common share--pro forma.. $ (0.06) $ (0.67) $ (3.16)
======= ======== ==========
</TABLE>
(7) COMMITMENTS
(a) Office Leases
In May 1997, the Company terminated its office lease in Ithaca, NY. The
Company moved to New York City and entered into an operating lease agreement
related to its new office space during February 1997.
Rent expense for the operating leases was $-0-, $26,181 and $81,157 for the
period from May 1, 1995 (inception) to December 31, 1995 and for the years
ended December 31, 1996 and 1997, respectively.
Future minimum payments under the New York City office operating leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- --------
<S> <C>
1998................................................................ $120,200
1999................................................................ 121,787
2000................................................................ 86,517
2001................................................................ 87,000
2002................................................................ 7,250
--------
Total minimum lease payments........................................ $422,754
========
</TABLE>
(b) Equipment Leases
The Company's lease obligations are collateralized by certain assets at
December 31, 1997. Future minimum lease payments under noncancellable
operating leases (with initial or remaining lease terms in excess of one year)
and future minimum capital lease obligations as of December 31, 1997 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ -------- ---------
<S> <C> <C>
1998.................................................... $ 41,399 $41,014
1999.................................................... 41,399 23,551
2000.................................................... 41,399 12,860
2001.................................................... 35,189 9,058
2002.................................................... -- 7,567
-------- -------
Total minimum lease payments.......................... $159,386 $94,050
======== =======
Less amount representing interest (at rates ranging from
11% to 12.5%).......................................... 33,386
--------
Present value of minimum capital lease payments......... 126,000
--------
Less current installments of obligation under capital
leases................................................. 27,174
--------
Obligations under capital leases, excluding current in-
stallments............................................. $ 98,826
========
</TABLE>
F-17
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
In addition, the Company entered into five capital leases in 1998 with
future minimum payments totaling $1,062,884 starting in 1998 through 2003.
(c) Advertising Contracts
During October 1997, the Company entered into an exclusive one-year contract
with an advertising agency with a minimum monthly fee of $50,000.
(d) Employment Agreements
The Company maintains employment agreements expiring in 2002, with two
executive officers of the Company. The employment agreements provide for
minimum salary levels, incentive compensation and severance benefits, among
other items.
(8) RELATED PARTY TRANSACTIONS
Certain officers and directors of the Company also serve as officers and
directors of Dancing Bear Investments, Inc., an entity which will continue to
control the Company following completion of the Offerings.
The Company has recently entered into an e-commerce contract with Republic
Industries, Inc. ("Republic"), an entity affiliated with a Director of the
Company, pursuant to which the Company has granted a right of first
negotiation with respect to the exclusive right to engage in or conduct an
automotive "clubsite" on theglobe.com Web site through AutoNation, a
subsidiary of Republic. Additionally, Republic has agreed to purchase
advertising from the Company for a three-year period at a price which will be
adjusted to match any more favorable advertising price quoted to a third party
by the Company, excluding certain short-term advertising rates. In addition,
the Company has entered into an e-commerce arrangement with InteleTravel, an
entity controlled by the Chairman of the Company, whereby the Company
developed a Web community for InteleTravel in order for its travel agents to
conduct business through theglobe.com in exchange for access to InteleTravel
customers for distribution of the Company's products and services. The Company
believes that the terms of the foregoing arrangements are on comparable terms
as if they were entered into with unaffiliated third parties. As of June 30,
1998, the Company had not received any revenues from InteleTravel or Republic.
STOCKHOLDERS' AGREEMENT
The Chairman, the Co-Chief Executive Officers, a Vice President and a
Director of the Company and Dancing Bear Investments, Inc. (an entity
controlled by the Chairman) expect to enter into a Stockholders' Agreement
(the "Stockholders' Agreement") pursuant to which the Chairman and Dancing
Bear Investments, Inc. or certain entities controlled by the Chairman and
certain permitted transferees (the "Chairman Group") will agree to vote for
certain nominees of the Co-Chief Executive Officers or certain entities
controlled by the Co-Chief Executive Officers and certain permitted
transferees (the "Co-Chief Executive Officer Groups") to the Board of
Directors and the Co-Chief Executive Officer Groups will agree to vote for the
Chairman Group's nominees to the Board, who will represent a majority of the
Board. Additionally, pursuant to the terms of the Stockholders' Agreement, the
Co-Chief Executive Officers, a Vice President and a Director have granted an
irrevocable proxy to Dancing Bear Investments, Inc. with respect to any shares
that may be acquired by them pursuant to the exercise of outstanding Warrants
transferred to each of them by Dancing Bear Investments, Inc. Such shares will
be voted by Dancing Bear Investments, Inc., which is controlled by the
Chairman, and will be subject to a right of first refusal in favor of Dancing
Bear Investments, Inc. upon transfer. The Stockholders' Agreement will also
provide that if the Chairman Group sells shares of Common Stock and Warrants
representing 25% or more of the Company's outstanding Common Stock (including
the Warrants) in any private sale after the Offerings, the Co-Chief Executive
Officer Groups, a Vice President and a Director of the Company will be
required to sell up to the same percentage of their shares as the Chairman
Group sells. If either the Chairman Group sells shares of Common Stock or
Warrants representing 25% or more of the Company's
F-18
<PAGE>
THEGLOBE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
outstanding Common Stock (including the Warrants) or the Co-Chief Executive
Officer Groups sell shares or Warrants representing 7% or more of the shares
and Warrants of the Company in any private sale after the Offerings, each
other party to the Stockholders' Agreement, including entities controlled by
them and their permitted transferees, may, at their option, sell up to the
same percentage of their shares.
(9) SUBSEQUENT EVENTS (UNAUDITED)
In July 1998, the Company approved the Fourth Amended and Restated
Certificate of Incorporation, which will be filed with the Delaware Secretary
of State prior to consummation of the Offerings, to increase the number of
authorized shares from 25,000,000 shares to 103,000,000 shares.
The Company's 1998 Stock Option Plan (the "1998 Plan") was adopted by the
Board of Directors on July 15, 1998, and approved by the stockholders of the
Company as of July 15, 1998. The 1998 Plan provides for the grant of
"incentive stock options" intended to qualify under Section 422 of the Code
and stock options which do not so qualify. The granting of incentive stock
option is subject to limitation as set forth in the 1998 Plan. Directors,
officers, employees and consultants of the Company and its subsidiaries are
eligible to receive grants under the 1998 Plan.
The 1998 Plan authorizes the issuance of 1,200,000 shares of Common Stock,
subject to adjustment as provided in the 1998 Plan. On July 15, 1998 the Board
of Directors approved the grant of 100,000 options each to two executives at
the initial public offering price. During the period from June 30, 1998
through September 24, 1998, the Company granted 822,650 options under the 1998
Plan with a weighted average exercise price equal to the initial public
offering price.
The Company expects to record a charge of $2,047,500 (assuming an initial
public offering price of $12 per share) to earnings in the third quarter of
1998 in connection with the transfer during the third quarter of 1998 of
warrants to acquire 225,000 shares of Common Stock by Dancing Bear Investments
to certain officers of the Company, at an exercise price of approximately
$2.91 per share. The Company has accounted for such transaction as if it were
a compensatory plan adopted by the Company. Accordingly, such amount will be
recorded as non-cash compensation expense in the Company's statement of
operations for services provided by such officers to the Company with an
offsetting contribution to capital by a principal shareholder. The amount of
such charge will based on the difference between the initial public offering
price (currently assumed to be $12 per share) and the exercise price per
warrant of approximately $2.91 per share.
During July and August 1998, the Company entered into two employment
agreements expiring in 2001, with two officers of the Company. The employment
agreements provide for minimum salary levels, incentive compensation and
severance benefits, among other items. The Company granted 112,500 stock
options to each of the two executives. The exercise price for 87,500 of the
options granted to one officer will be 85% of the initial public offering
price and the remaining options granted to that officer and the 112,500
options granted to the other officer will be granted at the initial public
offering price which is equal to the fair market value per share of the
Company's Common Stock on the date of grant. The 87,500 options will vest over
a three year period. As a result, the Company will record deferred
compensation expense of $157,500 (assuming an initial public offering price of
$12 per share) in the third quarter relating to the 87,500 shares granted at
85% of the initial public offering price, representing the difference between
the deemed value of the Company's Common Stock, the initial public offering
price for accounting purposes, and the exercise price of such options at the
date of grant. Such amount will be presented as a reduction of stockholders'
equity and amortized over the three year vesting period of the applicable
options.
F-19
<PAGE>
[GLOBESTORES LOGO, SCREEN SHOTS OF WEB SITE PAGES]
theglobe.com
One virtual community at theglobe.com, embodied by personal homepage building
and hosting, chat rooms, free e-mail, discussion forums, special interest
groups, a marketplace, neighborhoods, horoscope forum and more.
[FOLD-OUT COVER]
In the first half of '98, Media Metrix ranked theglobe.com as the 4th fastest-
growing web site in terms of audience reach.
Fastest-growing web sites
4. theglob.com
theglobe.com [LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table shows the expenses, other than underwriting discounts
and commissions, to be incurred in connection with the sale and distribution
of securities being registered by the Company. Except for the SEC registration
fee, Nasdaq Listing Fee and the NASD Filing Fee, all amounts are estimated.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 14,750
Nasdaq Listing Fee............................................... 74,625
NASD Filing Fee.................................................. 5,500
Blue Sky Fees and Expenses....................................... 15,000
Legal Fees and Expenses.......................................... 790,025
Accounting Fees and Expenses..................................... 250,000
Printing Expenses................................................ 125,000
Miscellaneous Expenses........................................... 100
----------
Total.......................................................... $1,275,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement in connection with specified
actions, suits, proceedings whether civil, criminal, administrative, or
investigative (other than action by or in the right of the corporation--a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with
the defense or settlement of such action, and the statue requires court
approval before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. The statue provides
that it is not exclusive of other indemnification that may be granted by a
corporation's charter, by-laws, disinterested director vote, stockholder vote,
agreement, or otherwise.
Article VI of the By-Laws requires the Company to indemnify any person who
was or is a party or is threatened to be made a party to or is involved
(including, without limitation, as a witness) in any threatened, pending or
completed action, suit, arbitration, alternative dispute mechanism,
investigation, administrative hearing or any other proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) brought by reason of the fact that he or she is or was a
director or officer of the Company, or, while a director or officer of the
Company, is or was serving at the request of the Company as a director or
officer of another corporation, partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefits plan
against expenses (including attorneys' fees, judgments, fines, excise taxes
under the Employee Retirement Income Security Act of 1974, penalties and
amounts paid in settlement) incurred by him or her in connection with such
action, suit or proceeding if he or she acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for (i) any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional
II-1
<PAGE>
misconduct or a knowing violation of law, (iii) payment of unlawful dividends
or unlawful stock purchases or redemptions, or (iv) any transaction from which
the director derived an improper personal benefit.
Article VI of the Certificate provides that to the fullest extent that the
DGCL, as it now exists or may hereafter be amended, permits the limitation or
elimination of the liability of directors, a director of the Company shall not
be liable to the Company or its stockholders for monetary damages for breach
of fiduciary duty as a director. Any amendment to or repeal of, or adoption of
any provision of the Certificate inconsistent with, such Article VI shall not
adversely affect any right or protection of a director of the Company for or
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
The Company has entered into indemnification agreements with its directors
and officers substantially in the form attached to this registration statement
as Exhibit 10.4. These agreements provide, in general, that the Company will
indemnify such directors and officers for, and hold them harmless from and
against, any and all amounts paid in settlement or incurred by, or assessed
against, such directors and officers arising out of or in connection with the
service of such directors and officers as a director or officer of the Company
or its Affiliates (as defined therein) to the fullest extent permitted by
Delaware law.
The Company maintains directors' and officers' liability insurance which
provides for payment, on behalf of the directors and officers of the Company
and its subsidiaries, of certain losses of such persons (other than matters
uninsurable under law) arising from claims, including claims arising under the
Securities Act, for acts or omissions by such persons while acting as
directors or officers of the Company and/or its subsidiaries, as the case may
be.
The Underwriting Agreement (the form of which is filed as Exhibit 1.1
hereto) provides for indemnification by the Underwriters of the Company and
its officers and directors for certain liabilities arising under the
Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
All sales, unless otherwise noted, were made in reliance on Section 4(2) of
the Securities Act and/or Regulation D or Rule 701 promulgated under the
Securities Act and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant
information necessary to evaluate these investments, and who represented to
the Registrant that the shares were being acquired for investment.
<TABLE>
<CAPTION>
DATE OF TITLE OF NUMBER OF CONSIDERATION
PURCHASER ISSUANCE SECURITIES SHARES RECEIVED ($)
- --------- -------- ------------------ --------- -------------
<S> <C> <C> <C> <C>
Alce Partners, L.P.......... 12/22/95 Series B Preferred 95,240 100,002
Bergendahl, Anders.......... 9/7/95 Series A Preferred 79,815 15,750
12/22/95 Series B Preferred 47,620 50,001
11/13/96 Series C Preferred 1,500 30,000
Bergendahl, Mia............. 9/7/95 Series A Preferred 79,815 15,750
12/22/95 Series B Preferred 23,810 25,000.50
Cayuga Venture Fund......... 11/13/96 Series C Preferred 1,250 25,000
David Duffield Trust........ 12/22/95 Series B Preferred 95,240 100,002
11/13/96 Series C Preferred 12,500 250,000
3/15/97 Series C Preferred 12,500 250,000
de Selliers, Baudouin....... 11/13/96 Series C Preferred 2,500 50,000
Ganem, Bruce................ 11/13/96 Series C Preferred 750 15,000
3/15/97 Series C Preferred 750 15,000
GC&H Investments............ 12/22/95 Series B Preferred 23,810 25,000.50
Grey, Nicki................. 11/16/95 Series A Preferred 3,215 500
Grinstead, Simon............ 11/16/95 Series A Preferred 53,215 10,500
Halperin, Mark R. .......... 12/22/95 Series B Preferred 23,810 25,000.50
11/13/96 Series C Preferred 1,250 25,000
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
DATE OF TITLE OF NUMBER OF CONSIDERATION
PURCHASER ISSUANCE SECURITIES SHARES RECEIVED ($)
- --------- -------- ------------------ --------- -------------
<S> <C> <C> <C> <C>
Halperin Dow, Peggy
Anne................... 12/22/95 Series B Preferred 23,810 25,000.50
11/13/96 Series C Preferred 1,250 25,000
Halperin, Philip W...... 12/22/95 Series B Preferred 23,810 25,000.50
11/13/96 Series C Preferred 1,250 25,000
Halperin, Robert M...... 12/22/95 Series B Preferred 23,810 25,000.50
11/13/96 Series C Preferred 1,250 25,000
5/29/98 Common Stock 42,708 8,171.88
Hirsch, Jason........... 11/16/95 Series A Preferred 19,245 3,000
Horowitz, David H. ..... 12/22/95 Series B Preferred 50,000 52,500
11/13/96 Series C Preferred 2,500 50,000
6/19/97 Common Stock 15,972 3,111.06
Huret Family Trust...... 11/13/96 Series C Preferred 1,250 25,000
Karlsson, Bengt......... 11/13/96 Series C Preferred 5,000 100,000
Krizelman, Allen........ 9/7/95 Series A Preferred 75,845 15,000
Krizelman, Susan........ 11/16/95 Series A Preferred 6,415 1,000
Krizelman, Todd......... 5/26/95 Common Stock 525,000 2,184
11/16/95 Series A Preferred 22,455 3,500
Leavitt Investments,
L.P.................... 11/13/96 Series C Preferred 7,500 150,000
Maconie, Andrew......... 11/16/95 Series A Preferred 3,215 513.70
Miller, Dan............. 11/13/96 Series C Preferred 3,750 75,000
Muckstadt, Jack......... 11/13/96 Series C Preferred 750 15,000
3/15/97 Series C Preferred 750 15,000
Muller, Georges......... 1/22/96 Series B Preferred 23,810 25,000.50
Paternot, Jacques....... 9/7/95 Series A Preferred 16,425 3,000
12/22/95 Series B Preferred 6,665 6,998.25
Paternot, Madeleine..... 11/16/95 Series A Preferred 1,285 205.48
Paternot, Monica........ 11/16/95 Series A Preferred 1,930 308.22
Paternot, Stephan....... 5/26/95 Common Stock 600,000 2,496
Paternot, Thierry....... 11/16/95 Series A Preferred 3,215 513.70
12/22/95 Series B Preferred 19,050 20,002.50
Paternot, Yves.......... 9/7/95 Series A Preferred 88,690 17,000
12/22/95 Series B Preferred 23,810 25,000.50
S. Knight Pond Trust.... 9/7/95 Series A Preferred 128,215 26,500
12/22/95 Series B Preferred 71,430 75,001.50
Tuli, John.............. 1/1/97 Common Stock 13,299 1,396.34
</TABLE>
(1) In August 1997, the Company issued and sold to Dancing Bear Investments
(i) 25.5 shares of Series D Preferred Stock which will convert into 4,023,765
shares of Common Stock upon consummation of the Offerings and (ii) Warrants to
purchase 2,023,009 shares of Common Stock of the Company at the time of
exercise for an aggregate price of $5,882,353. The aggregate consideration for
such transaction was $20 million.
(2) Since inception, the Company has granted stock options to directors,
officers and employees of the Company under the Company's 1998 Stock Option
Plan and 1995 Stock Option Plan. As of September 1998, the Company has granted
822,650 and 693,771 shares of Common Stock to directors, officers and
employees of the Company under the Company's 1998 Stock Option Plan and 1995
Stock Option Plan, respectively, and the Company issued -0- and 92,604 shares
of Common Stock pursuant to the exercise of these options under the Company's
1998 Stock Option Plan and 1995 Stock Option Plan, respectively.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The following Exhibits are attached hereto and incorporated herein by
reference:
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
1.2 Form of Placement Agent Agreement
3.1 Form of Fourth Amended and Restated Certificate of Incorporation of
the Company**
3.2 Form of By-Laws of the Company**
4.1 Second Amended and Restated Investor Rights Agreement among the
Company and certain equity holders of the Company dated as of August
13, 1997**
4.2 Amendment No.1 to Second Amended and Restated Investor Rights
Agreement among the Company and certain equity holders of the Company
dated as of July 15, 1998**
4.3 Form of Registration Rights Agreement dated as of July 15, 1998**
4.4 Specimen certificate representing shares of Common Stock of the
Company*
4.5 Amended and Restated Warrant to Acquire Shares of Common Stock**
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson**
9.1 Form of Stockholders' Agreement by and among Dancing Bear Investments,
Inc., Michael Egan, Todd V. Krizelman, Stephan J. Paternot, Edward A.
Cespedes and Rosalie V. Arthur, dated as of , 1998*
10.1 Employment Agreement dated August 13, 1997, by and between the Company
and Todd V. Krizelman**
10.2 Employment Agreement dated August 13, 1997, by and between the Company
and Stephan J. Paternot**
10.3 Employment Agreement dated July 13, 1998, by and between the Company
and Francis T. Joyce**
10.4 Form of Indemnification Agreement between the Company and each of its
Directors and Executive Officers**
10.5 Lease Agreement dated January 14, 1997 between the Company and Fifth
Avenue West Associates L.P.**
10.6 1998 Stock Option Plan**
10.7 1995 Stock Option Plan**
10.8 Form of Rights Agreement, by and between the Company and American
Stock Transfer & Trust Company as Rights Agent**
10.9 D.A.R.T. Service Agreement dated April 15, 1997**+
10.10 Amendment dated as of May 1, 1998, to original D.A.R.T. Service
Agreement dated April 15, 1997**+
10.11 Employment Agreement dated August 31, 1998, by and between the Company
and Dean Daniels**
10.12 Agreement between the Company, Republic Industries, Inc., and Michael
S. Egan, dated August 12, 1998, regarding the conduct of automotive
clubsites on theglobe.com**+
10.13 Data Center Space Lease between Telehouse International Corporation of
America and the Company, dated August 24, 1998
10.14 Travel Services Alliance Agreement between the Company and
Lowestfare.com, dated as of September 15, 1998+
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
11.1 Computation of Loss Per Share
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
Exhibit 5.1)**
23.3 Consent of ABC Interactive
23.4 Consent of Jupiter Communications, LLC
23.5 Consent of International Data Corporation
24.1 Power of Attorney**
27.1 Financial Data Schedule
99.1 Valuation and Qualifying Accounts**
</TABLE>
- --------
*To be filed by amendment.
**Previously filed.
+Confidential treatment requested.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) to provide to the Underwriters at the closing specified in the
Underwriting Agreements, certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
(2) that insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the questions whether such indemnification by them is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(3) that for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933, shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(4) that for purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
filed 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>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF NEW YORK, STATE OF NEW YORK, ON THE 29TH DAY OF SEPTEMBER 1998.
theglobe.com, inc.
/s/ Todd Krizelman
By: _________________________________
TODD KRIZELMAN
Co-Chief Executive Officer and
Co-President
/s/ Stephan Paternot
By: _________________________________
STEPHAN PATERNOT
Co-Chief Executive Officer, Co-
President and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
Michael Egan* Chairman
- ------------------------------------- September 29,
MICHAEL EGAN 1998
/s/ Todd Krizelman Co-Chief Executive
- ------------------------------------- Officer, Co- September 29,
TODD KRIZELMAN President and 1998
Director
/s/ Stephan Paternot Co-Chief Executive
- ------------------------------------- Officer, Co- September 29,
STEPHAN PATERNOT President, 1998
Secretary and
Director
Vice President and
Francis T. Joyce* Chief Financial September 29,
- ------------------------------------- Officer (Principal 1998
FRANK JOYCE Accounting Officer)
Edward Cespedes* Director
- ------------------------------------- September 29,
EDWARD CESPEDES 1998
Rosalie Arthur* Director
- ------------------------------------- September 29,
ROSALIE ARTHUR 1998
Robert Halperin* Director
- ------------------------------------- September 29,
ROBERT HALPERIN 1998
David H. Horowitz* Director
- ------------------------------------- September 29,
DAVID H. HOROWITZ 1998
H. Wayne Huizenga* Director
- ------------------------------------- September 29,
H. WAYNE HUIZENGA 1998
*By Attorney-in-Fact
II-6
<PAGE>
EXHIBIT 1.1
[______] Shares of Common Stock
theglobe.com, inc.
FORM OF
UNDERWRITING AGREEMENT
----------------------
[Date]
BEAR, STEARNS & CO. INC.
VOLPE BROWN WHELAN & COMPANY, LLC
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Dear Sirs:
theglobe.com, inc., a corporation organized and existing under the laws of
the State of Delaware (the "Company"), proposes, subject to the terms and
conditions stated herein, to issue and sell to the several underwriters named in
Schedule I hereto (the "Underwriters") an aggregate of [__________] shares (the
"Firm Shares") of the Company's common stock, par value $0.001 per share (the
"Common Stock") and, for the sole purpose of covering over-allotments in
connection with the sale of the Firm Shares, at the option of the Underwriters,
up to an additional [_________] shares (the "Additional Shares") of Common
Stock. The issuance by the Company and the sale to the Underwriters of the Firm
Shares and the Additional Shares is hereinafter referred to as the "Underwritten
Offering."
The Company has also entered into an agreement (the "Placement Agency
Agreement"), providing for the sale by the Company (the "Concurrent Offering")
of up to a total of [_________] shares of the Common Stock (the "Concurrent
Shares" and collectively with the Firm Shares and any Additional Shares
purchased by the Underwriters, the "Shares") through arrangements with Bear,
Stearns & Co. Inc. ("Bear Stearns") and Volpe Brown Whelan & Company,
<PAGE>
LLC as placement agents (the "Placement Agents"). In connection with the
Concurrent Offering, the Company will also enter into a subscription agreement
(the "Subscription Agreement") with each purchaser of Concurrent Shares
(collectively, the "Purchasers"). The Company acknowledges and agrees with the
Underwriters that as between the Company on the one hand and the Underwriters
(other than the Placement Agents, in their capacity as Placement Agents) on the
other, that the Company is the sole beneficiary of the Concurrent Offering and
that none of the Underwriters (other than the Placement Agents, in their
capacity as Placement Agents) has provided any services to the Company as to the
structure or implementation of the Concurrent Offering. The shares of Common
Stock of the Company to be outstanding after giving effect to the sales
contemplated hereby and the Concurrent Offering are hereinafter collectively
referred to as the "Common Stock." The Underwritten Offering and the Concurrent
Offering are hereinafter collectively referred to as the "Offerings." The
consummation of the Concurrent Offering is contingent upon the consummation of
the Underwritten Offering.
1. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, and has filed amendments thereto, on
Form S-1 (No. 333-59751), for the registration of the Shares under the
Securities Act of 1933, as amended (the "Act"). Such registration statement,
including the prospectus, financial statements and schedules, exhibits and all
other documents filed as a part thereof, as amended at the time of effectiveness
of the registration statement, including any information deemed to be a part
thereof as of the time of effectiveness pursuant to paragraph (b) of Rule 430A
or Rule 434 of the Rules and Regulations of the Commission under the Act (the
"Regulations"), is herein called the "Registration Statement" and the
prospectus, in the form first filed with the Commission pursuant to Rule 424(b)
of the Regulations or filed as part of the Registration Statement at the time of
effectiveness if no Rule 424(b) or Rule 434 filing is required, is herein called
the "Prospectus". The term "preliminary prospectus" as used herein means a
preliminary prospectus as described in Rule 430 of the Regulations.
(b) At the time of the effectiveness of the Registration Statement or the
effectiveness of any post-effective amendment to the Registration Statement,
when the Prospectus is first filed with the Commission pursuant to Rule 424(b)
or Rule 434 of the Regulations, when any supplement to or amendment of the
Prospectus is filed with the Commission and at the Closing Date and an
Additional Closing Date, if any, (as hereinafter respectively defined), the
Registration Statement and the Prospectus and any amendments thereof and
supplements thereto complied or will comply in all material respects with the
applicable provisions of the Act and the Regulations and does not or will not
contain an untrue statement of a material fact and does not or will not omit to
state any material fact required to be stated
2
<PAGE>
therein or necessary in order to make the statements therein (i) in the case of
the Registration Statement, not misleading and (ii) in the case of the
Prospectus, in light of the circumstances under which they were made, not
misleading. When any related preliminary prospectus was first filed with the
Commission (whether filed as part of the registration statement for the
registration of the Shares or any amendment thereto or pursuant to Rule 424(a)
of the Regulations) and when any amendment thereof or supplement thereto was
first filed with the Commission, such preliminary prospectus and any amendments
thereof and supplements thereto complied in all material respects with the
applicable provisions of the Act and the Regulations and did not contain an
untrue statement of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein in light of the circumstances under which they were made not misleading.
The Prospectus and any preliminary prospectus delivered to the Underwriters for
use in connection with the Offerings was identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T. No representation and warranty is
made in this subsection (b), however, with respect to any information contained
in or omitted from the Registration Statement or the Prospectus or any related
preliminary prospectus or any amendment thereof or supplement thereto in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter through you as herein stated
expressly for use in connection with the preparation thereof. If Rule 434 is
used, the Company will comply with the requirements of Rule 434.
(c) KPMG Peat Marwick, LLP, who have certified the financial statements
and supporting schedules included in the Registration Statement, are independent
public accountants as required by the Act and the Regulations.
(d) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as set forth in the
Registration Statement and the Prospectus, there has been no change in the
capital stock of the Company or the long-term indebtedness of the Company, and
there has been no material adverse change in the business, prospects,
properties, operations, condition (financial or other), stockholders' equity or
results of operations of the Company (the effect of each such change or
development being referred to herein as a "Material Adverse Effect"), whether or
not arising from transactions in the ordinary course of business, and since the
date of the latest balance sheet presented in the Registration Statement and the
Prospectus, the Company has not incurred or undertaken any liabilities or
obligations, direct or contingent, which are material to the Company, except for
liabilities or obligations which are discussed in the Registration Statement and
the Prospectus.
3
<PAGE>
(e) This Agreement and the transactions contemplated herein have been duly
and validly authorized by the Company and this Agreement has been duly and
validly executed and delivered by the Company.
(f) The execution, delivery, and performance of this Agreement, the
Placement Agency Agreement and the Subscription Agreements and the consummation
of the transactions contemplated hereby do not and will not (i) conflict with or
result in a breach of any of the terms and provisions of, or constitute a
default (or an event which with notice or lapse of time, or both, would
constitute a default) under, require approval or consent under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company pursuant to, the terms of (A) any agreement, instrument,
contract, indenture, mortgage, lease, license, arrangement or understanding to
which the Company is a party, or to which any of its properties or assets are
subject, that is material to the Company (collectively, "Material Contracts")
or (B) any governmental franchise, license, permit heretofore issued to the
Company, or (ii) violate or conflict with any provision of the Second Amended
and Restated Certificate of Incorporation or Bylaws of the Company or any
judgment, decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over the Company
or any of its properties or assets. No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any court or
any public, governmental or regulatory agency or body having jurisdiction over
the Company is required for the execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated hereby, including
the issuance, sale and delivery of the Shares to be issued, sold and delivered
by the Company hereunder, except the registration under the Act of the Shares
and such consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the Shares
by the Underwriters.
(g) All of the outstanding shares of Common Stock are duly and validly
authorized and issued, fully paid and non-assessable and were not issued and are
not now in violation of or subject to any preemptive rights. The Shares, when
issued, delivered and sold to the Underwriters or the Purchasers in accordance
with this Agreement, the Placement Agency Agreement or the Subscription
Agreements, will be duly and validly issued and outstanding, fully paid and non-
assessable, and will not have been issued in violation of or be subject to any
preemptive or similar rights; and, except as described in or expressly
contemplated by the Prospectus, there are no outstanding rights (including,
without limitation, preemptive rights), warrants or options to acquire, or
instruments convertible into or exchangeable for, any shares of capital stock or
other equity interests in the Company, or any contract, commitment, agreement,
understanding or arrangement of any kind relating to the issuance of any capital
stock of the Company. The Company had, at [_________], 1998, an authorized and
outstanding capitalization as set forth
4
<PAGE>
in the Registration Statement and the Prospectus. The Common Stock, the Firm
Shares, the Additional Shares and the Concurrent Shares conform to the
descriptions thereof contained in the Registration Statement and the Prospectus.
(h) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware. The
Company is duly qualified and in good standing as a foreign corporation in each
jurisdiction in which the character or location of its properties (owned, leased
or licensed) or the nature or conduct of its business makes such qualification
necessary, except for those failures to be so qualified or in good standing
which, individually or in the aggregate, would not have or reasonably be
expected to have a Material Adverse Effect. The Company has all requisite power
and authority, and all material consents, approvals, authorizations, orders,
registrations, qualifications, licenses and permits of and from all public,
regulatory or governmental agencies and bodies, to own, lease and operate its
properties and conduct its business as now being conducted and as described in
the Registration Statement and the Prospectus, and no such consent, approval,
authorization, order, registration, qualification, license or permit contains a
materially burdensome restriction not adequately disclosed in the Registration
Statement and the Prospectus. There are no statutes, regulations, contracts or
other documents applicable to the Company that are required to be described in
the Registration Statement or Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(i) Except for WebGenesis, Inc. (the "Subsidiary"), a wholly-owned
subsidiary of the Company duly organized and validly existing as a corporation
in good standing under the laws of the State of Delaware, the Company does not
have any subsidiaries and does not own or control, directly or indirectly, any
interest in any other corporation, association or other business entity. The
Subsidiary, which was capitalized with $1000 in cash, presently conducts no
business operations and has no material assets.
(j) Except as described in the Prospectus, there is no litigation or
governmental proceeding to which the Company is a party or to which any property
of the Company is subject or which is pending or, to the knowledge of the
Company, contemplated, threatened against or otherwise affecting the Company
which, individually or in the aggregate, may reasonably be expected to have a
Material Adverse Effect or which is required to be disclosed in the Registration
Statement and the Prospectus.
(k) The Company has not taken and will not take, directly or indirectly,
any action designed to cause or result in, or which constitutes or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale of the Shares.
5
<PAGE>
(l) The financial statements, including the notes thereto, and
supporting schedules included in the Registration Statement and the Prospectus
present fairly the financial position of the Company as of the dates indicated
and the results of operations of the Company for the periods specified; except
as otherwise stated in the Registration Statement, said financial statements
have been prepared in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis; and the supporting schedules included in
the Registration Statement present fairly the information required to be stated
therein. The selected financial data and the summary financial data included in
the Prospectus present fairly the information shown therein and have been
compiled on a basis consistent with that of the financial statements included in
the Registration Statement. No other financial statements are required by Form
S-1 or otherwise to be included in the Registration Statement or the Prospectus
other than those included therein.
(m) Except as described in the Prospectus, no holder of securities of the
Company has any rights to the registration of such securities of the Company
because of the filing of the Registration Statement or otherwise in connection
with the sale of the Shares contemplated hereby.
(n) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940.
(o) Except as described in the Prospectus, the Company owns or
possesses or reasonably believes it can acquire on reasonable terms, patents,
licenses (but excluding any required regulatory licenses or approvals),
inventions (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), copyrights,
trademarks, service marks, trade names or other intellectual property,
registrations and applications to register any of the foregoing, or that it can
contract on reasonable terms with third parties who can acquire such
intellectual property which is material to the business now operated, or
proposed to be operated, by the Company (collectively, "Intellectual Property")
and the Company has not received any notice and is not 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 and which infringement or conflict (if the subject of any unfavorable
decision, ruling or finding) or invalidity or inadequacy, individually or in the
aggregate, would have or may reasonably be expected to have a Material Adverse
Effect.
(p) No relationship, direct or indirect, exists between or among the
Company, on the one hand, and the directors, officers, stockholders, customers
or suppliers of the Company, on the other hand, which is required by the Act to
be described in the Registration Statement and the Prospectus which is not so
described.
6
<PAGE>
(q) The Company is in compliance with all environmental, safety or
similar laws or regulations applicable to them or their business or property
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants and the
disposal of hazardous or toxic substances, wastes, pollutants and contaminants,
except those which, individually or in the aggregate, would not have or
reasonably be expected to have a Material Adverse Effect.
(r) To the knowledge of the Company, it is not in violation or breach
of, or in default under (nor has an event occurred that with notice, lapse of
time or both, would constitute a default under), any Material Contract, and each
Material Contract is in full force and effect, and is the legal, valid and
binding obligation of the Company, and (subject to (i) applicable bankruptcy,
insolvency, reorganization, fraudulent transfer, moratorium or similar laws
affecting the enforceability of creditors' rights generally and (ii) general
principles of equity, including without limitation, standards of materiality,
good faith, fair dealing and reasonableness and limits on the availability of
equitable remedies) is enforceable as to the Company in accordance with its
terms.
(s) The Company maintain systems of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain accountability for assets;
(iii) the access to the respective assets of the Company is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(t) There are no existing or, to the knowledge of the Company,
threatened labor disputes with the employees of the Company which are likely,
individually or in the aggregate, to have or may reasonably be expected to have
a Material Adverse Effect.
(u) Each employee benefit plan, within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), that
is maintained, administered or contributed to by the Company for employees or
former employees of the Company has been maintained in compliance with its terms
and the requirements of any applicable statutes, orders, rules and regulations,
including but not limited to ERISA and the Internal Revenue Code of 1986, as
amended ("Code"). No prohibited transaction, within the meaning of Section 406
of ERISA or Section 4975 of the Code has occurred with respect to any such plan
excluding transactions effected pursuant to a statutory or administrative
exemption. For each such plan which is subject to the funding rules of Section
412 of the Code or Section 302 of ERISA no "accumulated funding deficiency" as
defined in Section 412 of the Code has incurred, whether or not waived, and the
fair market value of the assets of each such plan (excluding for these
7
<PAGE>
purposes accrued but unpaid contributions) exceeded the present value of all
benefits accrued under such plan determined using reasonable actuarial
assumptions.
(v) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions therefor
(except in any case in which the failure to so file would not have or reasonably
be expected to have, individually or in the aggregate, a Material Adverse
Effect) and the Company has paid all material taxes required to be paid by it
and any other assessment, fine or penalty levied against it, to the extent that
any of the foregoing is due and payable, except for any such assessment, fine or
penalty that is currently being contested in good faith.
(w) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which the Company is engaged. The Company
does not have any reason to believe that it will not be able to renew its
existing insurance coverage from similar insurers as may be necessary to
continue in its business.
(x) Except as described in the Registration Statement and as shall be
described in the Prospectus, the Company has (i) good and marketable title to
all real and personal properties owned by it, free and clear of all liens,
security interests, pledges, charges, encumbrances and mortgages, and (ii)
valid, subsisting and enforceable leases for all real and personal properties
leased by it, in either case (i) or (ii) above, subject to such exceptions as,
individually or in the aggregate, would not have or reasonably be expected to
have a Material Adverse Effect. No real property owned, leased, licensed or
used by the Company lies in an area that is, or to the best knowledge of the
Company will be, subject to zoning, use or building code restrictions that would
prohibit, and no state of facts relating to the actions or inaction of another
person or entity or his, her or its ownership, leasing, licensing or use of such
real property in the business of the Company as presently conducted or as the
Prospectus indicates are contemplated to be conducted, subject to such
exceptions as, individually or in the aggregate, would not have or reasonably be
expected to have a Material Adverse Effect.
(y) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba within
the meaning of Section 517.075, Florida Statutes and the Company agrees to
comply with such Section if prior to the completion of the distribution of the
Shares it commences doing such business.
(z) The Concurrent Offering conforms, and will conform in all
material respects to the requirements of the Act and the Exchange Act, and the
rules and regulations of the Commission thereunder.
(aa) Each of the Subscription Agreements has been duly authorized,
executed and delivered by the Company and, when accepted by the Company, is a
valid and binding agreement of the Company, enforceable with its terms.
8
<PAGE>
2. Purchase, Sale and Delivery of the Shares.
------------------------------------------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters and the Underwriters,
severally and not jointly, agree to purchase from the Company, at a purchase
price per share of [$_______], the number of Firm Shares set forth opposite the
respective names of the Underwriters in Schedule I hereto plus any additional
number of Shares which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery of certificates for,
the [Firm] Shares shall be made at the office of Morrison & Foerster LLP, 1290
Avenue of the Americas, New York, New York 10104-0050, or at such other place as
shall be agreed upon by Bear Stearns and the Company, at 9:30 A.M. on the third
or fourth business day (as permitted under Rule 15c6-1 under the Exchange Act)
(unless postponed in accordance with the provisions of Section 9 hereof)
following the date of the effectiveness of the Registration Statement (or, if
the Company has elected to rely upon Rule 430A of the Regulations, the third or
fourth business day (as permitted under Rule 15c6-1 under the Exchange Act)
after the determination of the initial public offering price of the Shares), or
such other time not later than ten business days after such date as shall be
agreed upon by you and the Company (such time and date of payment and delivery
being herein called the "Closing Date"). Payment shall be made to the Company
by wire transfer in same day funds, against delivery to you for the respective
accounts of the Underwriters of the Shares to be purchased by them.
Certificates for the Shares shall be registered in such name or names and in
such authorized denominations as you may request in writing at least two full
business days prior to the Closing Date. The Company will permit you to examine
such certificates for delivery at least one full business day prior to the
Closing Date.
(c) In addition, the Company hereby grants to the Underwriters the option
to purchase up to [_______] Additional Shares at the same purchase price per
share to be paid by the Underwriters to the Company for the Firm Shares as set
forth in this Section 2, for the sole purpose of covering over-allotments in the
sale of Firm Shares by the Underwriters. This option may be exercised at any
time, in whole or in part and from time to time, on or before the thirtieth day
following the date of the Prospectus, by written notice by you to the Company.
Such notice shall set forth the aggregate number of Additional Shares as to
which the option is being exercised and the date and time, as reasonably
determined by you, when the Additional Shares are to be delivered (any such date
and time being herein sometimes referred to as an "Additional Closing Date");
provided, however, that an Additional Closing Date shall not be earlier than the
Closing Date or earlier than the second full business day after the date on
which the option shall have been exercised nor later than the eighth full
business day after the date on which the option shall
9
<PAGE>
have been exercised (unless such time and date are postponed in accordance with
the provisions of Section 9 hereof). Certificates for the Additional Shares
shall be registered in such name or names and in such authorized denominations
as you may request in writing at least two full business days prior to an
Additional Closing Date.
The number of Additional Shares to be sold to each Underwriter shall be the
number which bears the same ratio to the aggregate number of Additional Shares
being purchased as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto (or such number increased as set forth in
Section 9 hereof) bears to [insert the total number of Firm Shares being
purchased by the Company], subject, however, to such adjustments to eliminate
any fractional shares as you in your sole discretion shall make.
Payment for the Additional Shares shall be made by wire transfer in same
day funds upon delivery of the Additional Shares to you for the respective
accounts of the Underwriters.
3. Offering.
------------
(a) Upon your authorization of the release of the Firm Shares, the
Underwriters propose to offer the Firm Shares and the Additional Shares for sale
to the public upon the terms set forth in the Prospectus.
(b) The Company and the Underwriters hereby agree that up to five
percent (5%) of the [Firm] Shares to be purchased by the Underwriters (the
"Directed Shares") shall be reserved for sale by the Underwriters to eligible
employees of and certain persons designated by the Company ("the Directed Shares
Purchasers"), as part of the distribution of the Shares by the Underwriters
subject to the terms of this Agreement, the applicable rules, regulations and
interpretations of the National Association of Securities Dealers, Inc. and all
other applicable laws, rules and regulations, provided, however, that under no
-------- -------
circumstances will Bear Stearns or any other Underwriter be liable to the
Company or to any of the Directed Shares Purchasers for any action taken or
omitted in good faith in connection with transactions effected with regard to
the Directed Shares Purchasers. To the extent that such Directed Shares are not
orally confirmed for purchase by such persons by the end of the first day after
the date of this Agreement, such Directed Shares will be offered to the public
as part of the Underwritten Offering contemplated hereby.
4. Covenants of the Company. The Company covenants and agrees with the
------------------------
Underwriters that:
(a) If the Registration Statement has not yet been declared effective,
the Company will use its best efforts to cause the Registration Statement and
any amendments thereto to become effective as promptly as possible, and if Rule
430A is used or the filing of the Prospectus is otherwise required under Rule
424(b)
10
<PAGE>
or Rule 434, the Company will file the Prospectus (properly completed if Rule
430A has been used) pursuant to Rule 424(b) or Rule 434 within the prescribed
time period and will provide evidence satisfactory to you of such timely filing.
If the Company elects to rely on Rule 434, the Company will prepare and file a
term sheet that complies with the requirements of Rule 434.
The Company will notify you as promptly as possible (and, if requested by
you, will confirm such notice in writing) (i) when the Registration Statement
and any amendments thereto become effective, (ii) of any request by the
Commission for any amendment of or supplement to the Registration Statement or
the Prospectus or for any additional information, (iii) of the mailing or the
delivery to the Commission for filing of any amendment of or supplement to the
Registration Statement or the Prospectus, (iv) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration Statement or
any post-effective amendment thereto or of the initiation, or the threatening,
of any proceedings therefor, (v) of the receipt of any comments from the
Commission, and (vi) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for that
purpose. If the Commission shall propose or enter a stop order at any time, the
Company will make every reasonable effort to prevent the issuance of any such
stop order and, if issued, to obtain the lifting of such order as soon as
possible. The Company will not file any amendment to the Registration Statement
or any amendment of or supplement to the Prospectus (including the prospectus
required to be filed pursuant to Rule 424(b) or Rule 434) that differs from the
prospectus on file at the time of the effectiveness of the Registration
Statement before or after the effective date of the Registration Statement to
which you shall reasonably object in writing in a timely fashion based on the
circumstances after being timely furnished in advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares is required to
be delivered under the Act any event shall have occurred as a result of which
the Prospectus as then amended or supplemented would, in the judgment of the
Company include an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it shall be necessary at any time to amend or supplement the
Prospectus or Registration Statement to comply with the Act or the Regulations,
the Company will notify you promptly and prepare and file with the Commission an
appropriate amendment or supplement (in form and substance satisfactory to you)
which will correct such statement or omission and will use its best efforts to
have any amendment to the Registration Statement declared effective as soon as
possible.
(c) The Company will promptly deliver to you two signed copies of the
Registration Statement, including exhibits and all amendments thereto, and the
Company will promptly deliver to each of the Underwriters such number of
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copies of any preliminary prospectus, the Prospectus, the Registration
Statement, and all amendments of and supplements to such documents, if any, as
you may reasonably request.
(d) The Company will endeavor in good faith, in cooperation with you, at
or prior to the time of effectiveness of the Registration Statement, to qualify
the Shares for offering and sale under the securities laws relating to the
offering or sale of the Shares of such jurisdictions (domestic or foreign) as
you may designate and to maintain such qualification in effect for so long as
required for the distribution thereof; except that in no event shall the Company
be obligated in connection therewith to qualify as a foreign corporation or to
execute a general consent to service of process.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of its fiscal quarter in
which the first anniversary date of the effective date of the Registration
Statement occurs, an earning statement (in form complying with the provisions of
Rule 158 of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement.
(f) During the period of 180 days from the date of the Prospectus, the
Company will not, without your prior written consent, directly or indirectly,
issue, sell, offer or agree to sell, except pursuant to any stock option or
incentive plan described in the Prospectus, grant any option for the sale of,
pledge, make any short sale, establish an open "put equivalent position" within
the meaning of Rule 16a-1(h) under the Exchange Act or otherwise dispose of any
Common Stock (or any securities convertible into, exercisable for or
exchangeable for Common Stock), and the Company will obtain the undertaking of
each of its officers and directors as have been heretofore designated by you and
listed on Schedule II attached hereto not to engage in any of the aforementioned
transactions on their own behalf, other than the Company's sale of Shares
hereunder and the Company's issuance of Common Stock upon the exercise of
presently outstanding stock options. The Company agrees not to waive any
undertaking obtained pursuant to this paragraph.
(g) The Company will apply the proceeds from the sale of the Shares as set
forth under "Use of Proceeds" in the Prospectus.
(h) The Company will use its best efforts to cause the Shares to be
approved for quotation on the National Association of Securities Dealers
Automated Quotation National Market System ("Nasdaq").
(i) The Company will comply with Rule 463 of the Regulations.
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(j) The Company will use its best efforts to ensure that the Directed
Shares are restricted as required by the National Association of Securities
Dealers, Inc. or the National Association of Securities Dealers, Inc. rules from
sale, transfer, assignment, pledge or hypothecation for a period of three (3)
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 a period of time. Should the
Company release, or seek to release, from such restrictions any of the Directed
Shares, the Company agrees to reimburse the Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
(k) The Company agrees to not terminate the Concurrent Offering without
the prior written consent of Bear Stearns.
5. Payment of Expenses. Whether or not the transactions contemplated in
-------------------
the Placement Agency Agreement or in this Agreement are consummated, or the
Placement Agency Agreement or this Agreement is terminated, the Company hereby
agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
exhibits thereto), any preliminary prospectus, the Prospectus and any amendments
or supplements thereto (including, without limitation, fees and expenses of the
Company's accountants and counsel), the underwriting documents (including this
Agreement, the Agreement Among Underwriters [and the Selling Agreement]) and all
other documents related to the public offering of the Shares (including those
supplied to the Underwriters in quantities as hereinabove stated), (ii) the
issuance, transfer and delivery of the Shares to the Underwriters and to the
Placement Agents, including any transfer or other taxes payable thereon, (iii)
the qualification of the Shares under state or foreign securities or Blue Sky
laws, including the costs of printing and mailing a preliminary and final "Blue
Sky Survey" and the fees of counsel for the Underwriters and the Placement
Agents and such counsel's disbursements in relation thereto, (iv) quotation of
the Shares on Nasdaq, (v) filing fees of the Commission and the National
Association of Securities Dealers, Inc.; (vi) the cost of printing certificates
representing the Shares, (vii) the cost and charges of any transfer agent or
registrar, and (viii) cost and expenses (including the out-of-pocket expenses of
the Underwriters) associated with the Company's "road show" and any internet
broadcasts thereof (if any).
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
Underwriters to purchase and pay for the Firm Shares, the Additional Shares and
the Concurrent Shares, as provided herein, shall be subject to the accuracy of
the representations and warranties of the Company herein contained, as of the
date
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hereof and as of the Closing Date (for purposes of this Section 6 "Closing
Date" shall refer to the Closing Date for the Firm Shares and the Concurrent
Shares and all Additional Closing Dates, if different, for the Additional
Shares), to the absence from any certificates, opinions, written statements or
letters furnished to you or to Morrison & Foerster LLP ("Underwriters' Counsel")
pursuant to this Section 6 of any misstatement or omission, to the performance
by the Company of its obligations hereunder, and to the following additional
conditions:
(a) The Registration Statement shall have become effective not later than
if pricing pursuant to Rule 430A -- 5:30 P.M., New York time, on the date of
this Agreement, or at such later time and date as shall have been consented to
in writing by you; if the Company shall have elected to rely upon Rule 430A or
Rule 434 of the Regulations, the Prospectus shall have been filed with the
Commission in a timely fashion in accordance with Section 4(a) hereof; and, at
or prior to the Closing Date no stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereof shall have been
issued and no proceedings therefor shall have been initiated or threatened by
the Commission.
(b) At the Closing Date you shall have received the opinion of Fried,
Frank, Harris, Shriver & Jacobson, counsel for the Company, dated the Closing
Date addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) The Company is validly existing as a corporation in good standing
under the laws of the State of Delaware, with all requisite corporate power
and authority to own its properties and conduct its business as described
in the Prospectus.
(ii) The Company is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character or location of its
properties (owned, leased or licensed) or the nature or conduct of its
business makes such qualification necessary, except for those failures to
be so qualified or in good standing which will not in the aggregate have a
material adverse effect on the Company.
(iii) The Company has an authorized capital stock as set forth in the
Prospectus under the caption "Capitalization," and all of the issued shares
of capital stock of the Company (including the Shares being delivered on
the date hereof) have been duly authorized, validly issued and are fully
paid and non-assessable (assuming, with respect to the Shares to be sold by
the Company, that they are paid for in accordance with the terms of this
Agreement or the Subscription Agreements) and will not be issued in
violation of or subject to any preemptive rights under the Second Amended
and Restated Certificate of Incorporation of the Company; and the Common
Stock, the Firm Shares, the Additional Shares
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and the Concurrent Shares conform as to legal matters to the descriptions
thereof contained in the Prospectus.
(iv) The Shares have been approved for quotation on Nasdaq.
(v) The Company has the requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement.
(vi) The Company has taken all necessary corporate action to authorize
the execution, delivery and performance of its obligations under this
Agreement, the Placement Agency Agreement and the Subscription Agreements
and has dully executed and delivered this Agreement, the Placement Agency
Agreement and the Subscription Agreements.
(vii) To the knowledge of such counsel, there is no pending or
threatened action, suit or proceeding before any court or governmental
agency, authority or body or any arbitrator against the Company, of a
character required to be disclosed in the Registration Statement which is
not adequately disclosed in the Prospectus.
(viii) The execution and delivery by the Company of this Agreement, the
Placement Agency Agreement and the Subscription Agreements and the
performance by the Company of its obligations hereunder (i) do not require
under the federal laws of the United States of America or the laws of the
States of New York or Delaware any filing or registration by the Company
with, or approval or consent to the Company of, any governmental agency or
authority of the United States of America or the States of New York or
Delaware that has not been made or obtained, the failure of which to make
or obtain would not have a material adverse effect on the Company, (ii) do
not contravene any provision of the Second Amended and Restated Certificate
of Incorporation or the By-Laws of the Company, and (iii) do not violate
(A) any present law, or present regulation of any governmental agency or
authority, of the States of New York or Delaware or the United States of
America known by such counsel to be applicable to the Company or its
property or (B) any agreement or any court decree or order binding upon the
Company or its property (such opinion being limited (x) to those
agreements, decrees or orders, if any, that have been listed in an
officer's certificate as the only such agreements, decrees or orders
binding upon the Company, or that are otherwise known to such counsel and
(y) in that such counsel need express no opinion with respect to any
violation not readily ascertainable from the face of any such agreement or
court decree or order, or arising under or
15
<PAGE>
based upon any cross-default provision insofar as it relates to a default
under an agreement or court order or decree not so listed, or arising under
or based upon any covenant of a financial or numerical nature or requiring
computation); which violation would have a material adverse effect on the
Company.
(ix) The Registration Statement and the Prospectus, as of their
respective effective or issue dates (other than the financial statements,
notes or schedules included or omitted in the Registration Statement or the
Prospectus or other financial or accounting data included in or omitted
from the Registration Statement or Prospectus, as to which we express no
opinion) appeared on their face to be responsive as to form in all material
respects with the applicable requirements of the Act.
(x) The Registration Statement has been declared effective by the
Commission under the Act. To the best of our knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued
under the Act and no proceedings for such purpose have been instituted or
are pending or are contemplated or threatened by the Commission. Any
required filing of the Prospectus pursuant to Rule 424(b) under the
Securities Act has been made in the manner and within the timer period
required by such Rule 424(b).
(xi) In addition, such counsel shall state that in the course of the
preparation of the Registration Statement and the Prospectus such counsel
participated in conferences with certain of the officers and
representatives of, and the independent public accountants for, the
Company. Such counsel shall state that between the date of the
Registration Statement and the time of delivery of their opinion, they
participated in additional conferences with certain officers and
representatives of the Company at which the contents of the Registration
Statement and the Prospectus were discussed. Such counsel may state that
given the limitations inherent in the independent verification of factual
matters and the character of determinations involved in the registration
process, they are not passing upon and do not assume any responsibility for
the accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus. Such counsel shall state that
subject to the foregoing and on the basis of the information they gained in
the course of the performance of the services referred to above, including
information obtained from offices and representatives of the Company, no
facts have come to their attention that cause them to believe that the
Registration Statement, at the time the Registration Statement became
effective, contained any 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, as of its
date,
16
<PAGE>
contained any untrue statement of a materials fact or omitted 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.
Also, such counsel shall state that, subject to the foregoing, no facts
have come to their attention in the course of the proceedings described in
the second sentence of this paragraph that cause them to believe that the
Prospectus, as of the date and time of delivery of their opinion letter,
contains any untrue statement of a material fact or omits to state any
material necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. In each case,
however, such counsel shall not be required to express any view or belief
with respect to (i) financial statements, notes or schedules included or
omitted in the Registration Statement or the Prospectus or (ii) other
financial or accounting data included in the Registration Statement or the
Prospectus.
(xii) The Concurrent Offering conforms, in all material respects, to
the requirements of the Act and the Exchange Act.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States
and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon
an opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to
Underwriters' Counsel, familiar with the applicable laws; (B) as to matters
of fact, to the extent they deem proper, on certificates of officers of the
Company and certificates or other written statements of officers of
departments of various jurisdictions having custody of documents respecting
the corporate existence or good standing of the Company, provided that
copies of any such statements or certificates shall be delivered to
Underwriters' Counsel. The opinion of such counsel for the Company shall
state that the opinion of any such other counsel is in form satisfactory to
such counsel and, in their opinion, you and they are justified in relying
thereon.
(c) At the Closing Date you shall have received the opinion of Cooley
Godward LLP, special intellectual property counsel for the Company, dated the
Closing Date addressed to the Underwriters and in form and substance
satisfactory to the Underwriters' counsel.
(d) All proceedings taken in connection with the sale of the Firm Shares,
the Additional Shares and the Concurrent Shares as herein contemplated shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and the
Underwriters shall have received from said Underwriters' Counsel a favorable
opinion, dated as of the Closing Date with respect to the issuance and sale of
the Firm Shares, and
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<PAGE>
as of the Additional Closing Date with respect to the Additional Shares, the
Registration Statement and the Prospectus and such other related matters as you
may reasonably require, and the Company shall have furnished to Underwriters'
Counsel such documents as they request for the purpose of enabling them to pass
upon such matters.
(e) At the Closing Date you shall have received a certificate of either
Co-Chief Executive Officer and the Chief Financial Officer of the Company, dated
the Closing Date to the effect that (i) the condition set forth in subsection
(a) of this Section 6 has been satisfied, (ii) as of the date hereof and as of
the Closing Date the representations and warranties of the Company set forth in
Section 1 hereof are accurate in all material respects, (iii) as of the Closing
Date the obligations of the Company to be performed hereunder on or prior
thereto have been duly performed in all material respects and (iv) subsequent to
the respective dates as of which information is given in the Registration
Statement and the Prospectus, the Company has not sustained any material loss or
interference with its respective businesses or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by insurance, or
from any labor dispute or any legal or governmental proceeding, and there has
not been any material adverse change, or any development involving a material
adverse change, in the business prospects, properties, operations, condition
(financial or otherwise), or results of operations of the Company, except in
each case as described in or contemplated by the Prospectus.
(f) [DELETE SPECIFIC LANGUAGE OF KPMG OPINION CONTAINED IN THIS PARAGRAPH
ONCE SUCH OPINION HAS BEEN REVIEWED AND IS ACCEPTABLE TO THE UNDERWRITERS.] At
the time this Agreement is executed and at the Closing Date, you shall have
received a letter, from KPMG Peat Marwick, LLP, independent public accountants
for the Company, dated, respectively, as of the date of this Agreement and as of
the Closing Date addressed to the Underwriters and in form and substance
satisfactory to you, to the effect that: (i) they are independent certified
public accountants with respect to the Company within the meaning of the Act and
the Regulations and stating that the answer to Item 10 of the Registration
Statement is correct insofar as it relates to them; (ii) stating that, in their
opinion, the financial statements and schedules of the Company included in the
Registration Statement and the Prospectus and covered by their opinion therein
comply as to form in all material respects with the applicable accounting
requirements of the Act and the applicable published rules and regulations of
the Commission thereunder; (iii) on the basis of procedures consisting of a
reading of the latest available unaudited interim consolidated financial
statements of the Company, a reading of the minutes of meetings and consents of
the shareholders and boards of directors of the Company and the committees of
such boards subsequent to [___________], inquiries of officers and other
employees of the Company who have responsibility for financial and accounting
matters of the Company with respect to transactions and events subsequent to
[___________] and other specified procedures and inquiries to a date not more
than five days prior to the date of such letter, nothing has come to their
attention that would cause them to believe that: (A) the unaudited consolidated
financial statements and schedules of the Company presented in the
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Registration Statement and the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act and, if
applicable, the Exchange Act and the applicable published rules and regulations
of the Commission thereunder or that such unaudited consolidated financial
statements are not fairly presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited consolidated financial statements included in the Registration
Statement and the Prospectus; (B) with respect to the period subsequent to
[__________] there were, as of the date of the most recent available monthly
consolidated financial statements of the Company, if any, and as of a specified
date not more than five days prior to the date of such letter, any changes in
the capital stock or long-term indebtedness of the Company or any decrease in
the net current assets or stockholders' equity of the Company, in each case as
compared with the amounts shown in the most recent balance sheet presented in
the Registration Statement and the Prospectus, except for changes or decreases
which the Registration Statement and the Prospectus disclose have occurred or
may occur or which are set forth in such letter or (B) that during the period
from [date following the date of the most recent consolidated balance sheet of
the Company included in the Registration Statement and the Prospectus] to the
date of the most recent available monthly consolidated financial statements of
the Company, and to a specified date not more than five days prior to the date
of such letter, there was any decrease, as compared with the corresponding
period in the prior fiscal year, in total revenues, or total or per share net
income, except for decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur or which are set forth in such letter; and
(iv) stating that they have compared specific dollar amounts, numbers of shares,
percentages of revenues and earnings, and other financial information pertaining
to the Company set forth in the Registration Statement and the Prospectus, which
have been specified by you prior to the date of this Agreement, to the extent
that such amounts, numbers, percentages, and information may be derived from the
general accounting and financial records of the Company or from schedules
furnished by the Company, and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the application
of specified readings, inquiries, and other appropriate procedures specified by
you set forth in such letter, and found them to be in agreement.
(g) Prior to the Closing Date the Company shall have furnished to you such
further information, certificates and documents as you may reasonably request.
(h) You shall have received from each person who is a director or officer
of the Company or such shareholder as have been heretofore designated by you and
listed on Schedule II hereto an agreement to the effect that such person will
not, without your prior written consent, directly or indirectly, issue, sell,
offer or agree to sell, grant any option for the sale of, pledge, make any short
sale, establish an open "put equivalent position" within the meaning of Rule
16a-1(h) under the Exchange Act or otherwise dispose of any Common Stock (or any
securities convertible into, exercisable for or exchangeable for Common Stock)
for a period of 180 days after the date of the
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Prospectus. The Company agrees not to waive any undertaking obtained pursuant to
this paragraph.
(i) At the Closing Date, the Shares shall have been approved for
quotation on Nasdaq, subject to official notice of issuance.
(j) The Company shall have satisfied all of the conditions with respect
to the sale of the Concurrent Shares pursuant to the Placement Agency Agreement
and the Subscription Agreements and the Company shall have complied with all
obligations under the Placement Agency Agreement and the Subscription
Agreements.
(k) Prior to the Closing Date, and with respect to the Additional
Shares, prior to an Additional Closing Date, the Company shall have furnished to
you such further information, certificates and documents as you may reasonably
request.
If any of the conditions specified in this Section 6 shall not have been
fulfilled when and as required by this Agreement, or if any of the certificates,
opinions, written statements or letters furnished to you or to Underwriters'
Counsel pursuant to this Section 6 shall not be in all material respects
reasonably satisfactory in form and substance to you and to Underwriters'
Counsel, all obligations of the Underwriters hereunder may be cancelled by you
at, or at any time prior to, the Closing Date and the obligations of the
Underwriters to purchase the Additional Shares may be cancelled by you at, or at
any time prior to, an Additional Closing Date. Notice of such cancellation
shall be given to the Company in writing, or by telephone, telex or telegraph,
confirmed in writing.
7. Indemnification.
----------------
(a) 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 Act or Section 20(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), against any and all losses, liabilities, claims,
damages and expenses whatsoever as incurred (including but not limited to
reasonable attorneys' fees and any and all reasonable expenses whatsoever
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts paid
in settlement of any claim or litigation), joint or several, to which they or
any of them may become subject under the Act, the Exchange Act or otherwise,
insofar as such losses, liabilities, claims, damages or expenses (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the registration statement for
the registration of the Shares, as originally filed or any amendment thereof, or
any related preliminary prospectus or the Prospectus, or in any supplement
thereto or amendment thereof, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; provided, however,
-------- -------
that the Company will not be liable in any such case to the extent but
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only to the extent that any such loss, liability, claim, damage or expense
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any Underwriter through you expressly for use therein.
(b) Each Underwriter severally, and not jointly, agrees to indemnify and
hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), jointly or several, to which they or any of them
may become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the registration statement for the registration
of the Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein; provided,
however, that in no case shall any Underwriter be liable or responsible for any
amount in excess of the underwriting discount applicable to the Shares purchased
by such Underwriter hereunder. This indemnity will be in addition to any
liability which any Underwriter may otherwise have including under this
Agreement. The Company acknowledges that the statements set forth in the last
paragraph of the cover page of the Prospectus, the last paragraph set forth on
the inside front cover, and in the third paragraph, the last sentence of the
seventh paragraph and the eighth paragraph under the caption "Underwriting" in
the Prospectus constitute the only information furnished in writing by or on
behalf of any Underwriter expressly for use in the registration statement
relating to the Shares as originally filed or in any amendment thereof, any
related preliminary prospectus or the Prospectus or in any amendment thereof or
supplement thereto, as the case may be.
(c) In connection with the offer and sale of the Directed Shares, 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 the
Directed Shares Purchasers to pay for and accept delivery of the Directed Shares
which, by the end of the day following
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the date of this Agreement, were subject to a properly confirmed agreement to
purchase such Directed Shares.
(d) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7). In case any such action is
brought against any indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party. Notwithstanding the foregoing, the
indemnified party or parties shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by one of the indemnifying
parties in connection with the defense of such action, (ii) the indemnifying
parties shall not have employed counsel to have charge of the defense of such
action within a reasonable time after notice of commencement of the action, or
(iii) such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them which are different from or
additional to those available to one or all of the indemnifying parties (in
which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties), in any of
which events such fees and expenses shall be borne by the indemnifying parties.
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, which counsel shall be selected
by Bear Stearns. Anything in this subsection to the contrary notwithstanding,
an indemnifying party shall not be liable for any settlement of any claim or
action effected without its written consent; provided, however, that such
consent was not unreasonably withheld.
8. Contribution.
------------
(a) In order to provide for contribution in circumstances in which the
indemnification provided for in Section 7 hereof is for any reason held to be
unavailable from any indemnifying party or is insufficient to hold harmless a
party indemnified thereunder, the Company and the Underwriters shall contribute
to the aggregate losses, claims, damages, liabilities and expenses of the nature
contemplated by such indemnification provision (including any investigation,
legal and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or
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proceeding or any claims asserted, but after deducting in the case of losses,
claims, damages, liabilities and expenses suffered by the Company any
contribution received by the Company from persons, other than the Underwriters,
who may also be liable for contribution, including persons who control the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, officers of the Company who signed the Registration Statement and
directors of the Company) as incurred to which the Company and one or more of
the Underwriters may be subject, in such proportions as is appropriate to
reflect the relative benefits received by the Company and the Underwriters from
the offering of the Shares or, if such allocation is not permitted by applicable
law or indemnification is not available as a result of the indemnifying party
not having received notice as provided in Section 7 hereof, in such proportion
as is appropriate to reflect not only the relative benefits referred to above
but also the relative fault of the Company and the Underwriters in connection
with the statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Underwriters shall be
deemed to be in the same proportion as (x) the total proceeds from the Offerings
(net of underwriting discounts and commissions but before deducting expenses)
received by the Company and (y) the underwriting discounts and commissions
received by the Underwriters, respectively, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault of the Company and
of the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would not
be just and equitable if contribution pursuant to this Section 8 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. Notwithstanding the
provisions of this Section 8, (i) in no case shall any Underwriter be liable or
responsible for any amount in excess of the underwriting discount applicable to
the Shares purchased by such Underwriter hereunder, and (ii) no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Notwithstanding the provisions of this Section 8
and the preceding sentence, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. For purposes of this Section 8, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act shall have the same rights to contribution as such
Underwriter, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case
23
<PAGE>
to clauses (i) and (ii) of this Section 8. Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties, notify each party or parties from whom
contribution may be sought, but the omission to so notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have under this Section 8 or otherwise. No party
shall be liable for contribution with respect to any action or claim settled
without its consent; provided, however, that such consent was not unreasonably
-------- -------
withheld.
(b) The obligations of the Company under Sections 8 and 9 herein shall
be in addition to any liability which the Company may otherwise have, including
under the Placement Agency Agreement.
9. Default by an Underwriter.
-------------------------
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if the
Firm Shares or Additional Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, the Firm Shares or Additional Shares to which the default
relates shall be purchased by the non-defaulting Underwriters in proportion to
the respective proportions which the numbers of Firm Shares set forth opposite
their respective names in Schedule I hereto bear to the aggregate number of Firm
Shares set forth opposite the names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of the Firm
Shares or Additional Shares, as the case may be, you may in your discretion
arrange for yourself or for another party or parties (including any non-
defaulting Underwriter or Underwriters who so agree) to purchase such Firm
Shares or Additional Shares, as the case may be, to which such default relates
on the terms contained herein. In the event that within 5 calendar days after
such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
the Company to sell the Additional Shares shall thereupon terminate, without
liability on the part of the Company with respect thereto (except in each case
as provided in Section 5, 7(a) and 8 hereof) or the Underwriters, but nothing in
this Agreement shall relieve a defaulting Underwriter or Underwriters of its or
their liability, if any, to the other Underwriters and the Company for damages
occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to which the
default relates are to be purchased by the non-defaulting Underwriters, or are
to be purchased by another party or parties as aforesaid, you or the Company
shall have the right to postpone the Closing Date or an Additional Closing Date,
as the case may be for
24
<PAGE>
a period, not exceeding five business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus or
in any other documents and arrangements, and the Company agrees to file promptly
any amendment or supplement to the Registration Statement or the Prospectus
which, in the opinion of Underwriters' Counsel, may thereby be made necessary or
advisable. The term "Underwriter" as used in this Agreement shall include any
party substituted under this Section 9 with like effect as if it had originally
been a party to this Agreement with respect to such Firm Shares and Additional
Shares.
10. Survival of Representations and Agreements. All representations and
------------------------------------------
warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5,
the indemnity agreements contained in Section 7 and the contribution agreements
contained in Section 8, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any controlling person thereof, and shall survive
delivery of and payment for the Shares to and by the Underwriters. The
representations contained in Section 1 and the agreements contained in Sections
5, 7, 8 and 11(d) hereof shall survive the termination of this Agreement,
including termination pursuant to Section 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
----------------------------------------
(a) This Agreement shall become effective, upon the later of when (i)
you and the Company shall have received notification of the effectiveness of the
Registration Statement or (ii) the execution of this Agreement. If either the
price of the Underwritten Offering or the purchase price per Share has not been
agreed upon prior to 5:00 P.M., New York time, on the fifth full business day
after the Registration Statement shall have become effective, this Agreement
shall thereupon terminate without liability to the Company or the Underwriters
except as herein expressly provided. Until this Agreement becomes effective as
aforesaid, it may be terminated by the Company by notifying you or by you
notifying the Company. Notwithstanding the foregoing, the provisions of this
Section 11 and of Sections 1, 5, 7 and 8 hereof shall at all times be in full
force and effect.
(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date or the obligations of the Underwriters to purchase the
Additional Shares at any time prior to an Additional Closing Date, as the case
may be, if (A) any domestic or international event or act or occurrence has
materially disrupted, or in your opinion will in the immediate future materially
disrupt, the market for the Company's securities or securities in general; or
(B) if trading on the New York Stock Exchange or Nasdaq shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required by the New
York Stock Exchange or Nasdaq or by order of the Commission or any other
governmental authority having jurisdiction; or (C) if a banking moratorium has
25
<PAGE>
been declared by a state or federal authority or if any new restriction
materially adversely affecting the distribution of the Firm Shares, the
Additional Shares or the Concurrent Shares, as the case may be, shall have
become effective; or (D) (i) if the United States becomes engaged in hostilities
or there is an escalation of hostilities involving the United States or there is
a declaration of a national emergency or war by the United States or (ii) if
there shall have been such change in political, financial or economic conditions
if the effect of any such event in (i) or (ii) as in your judgment makes it
impracticable or inadvisable to proceed with the offering, sale and delivery of
the Firm Shares, the Additional Shares or the Concurrent Shares, as the case may
be, on the terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, telex, or telegraph, confirmed in writing.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof, the
Company will, subject to demand by you, reimburse the Underwriters for all out-
of-pocket expenses (including the fees and expenses of their counsel), incurred
by the Underwriters in connection herewith.
12. Notices. All communications hereunder, except as may be otherwise
-------
specifically provided herein, shall be in writing and , if sent to any
Underwriter, shall be mailed, delivered, or telexed or faxed and confirmed in
writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue, New
York, N.Y. 10167, Fax (212) 272-3092, Attention: [_____________], with a copy to
Allen Weingarten, Esq. c/o Morrison & Foerster LLP, 1290 Avenue of the Americas,
New York, New York 10104; if sent to the Company, shall be mailed, delivered, or
faxed and confirmed in writing to theglobe.com, inc., 31 West 21st Street, 4th
Floor, New York, New York 10010, Fax (212) 367-8588, Attention: Todd Krizelman
and Stephan Paternot, with a copy to Stuart Gelfond, Esq. c/o Fried Frank,
Harris, Shriver & Jacobson, 1 New York Plaza, New York, New York 10004.
13. Parties. This Agreement shall inure solely to the benefit of, and
-------
shall be binding upon, the Underwriters and the Company and the controlling
persons, directors, officers, employees and agents referred to in Section 7 and
8, and their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of Shares from any of the Underwriters.
26
<PAGE>
14. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
27
<PAGE>
If the foregoing correctly sets forth the understanding between you and the
Company, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
theglobe.com, inc.
By________________________
Accepted as of the date first above written.
BEAR, STEARNS & CO. INC.
VOLPE, BROWN, WHELAN & COMPANY, LLC
on behalf of themselves and the other
Underwriters named in Schedule I hereto.
Bear, Stearns & Co. Inc.
By ___________________________
28
<PAGE>
SCHEDULE I
Name of Underwriter Number of Firm Shares to be Purchased
- ----------------------------------- -------------------------------------
Bear, Stearns & Co. Inc.
Volpe, Brown, Whelan & Company, LLC
Total
29
<PAGE>
SCHEDULE II
Michael S. Egan
Todd V. Krizelman
Stephan J. Paternot
Dean S. Daniels
Edward A. Cespedes
Francis T. Joyce
Rosalie V. Arthur
Robert M. Halperin
David Horowitz
H. Wayne Huizenga
30
<PAGE>
EXHIBIT 1.2
PLACEMENT AGENCY AGREEMENT
_____________ ___, 1998
theglobe.com, inc.
31 West 21st Street
New York, NY 10010
Ladies and Gentlemen:
This placement agency agreement (the "Agreement") outlines the terms upon
which Bear, Stearns & Co. Inc. ("Bear Stearns") and Volpe Brown Whelan &
Company, LLC (collectively, the "Placement Agents") are engaged by theglobe.com,
inc., a Delaware corporation (the "Company"), to act as its financial advisors
and exclusive placement agents in connection with the offering by the Company
(the "Concurrent Offering") of up to an aggregate of _________ Shares (the
"Concurrent Shares") of Common Stock, par value $.001 per share (the "Common
Stock"), of the Company. The Concurrent Offering of the Concurrent Shares is
registered on Registration Statement No. 333-59751 (as such Registration
Statement may be amended from time to time, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Act"), filed by the Company with
the Securities and Exchange Commission (the "Commission"). The Company will
also enter into an underwriting agreement with the Placement Agents (as such
underwriting agreement may be amended from time to time with the Placement
Agents' consent, the "Underwriting Agreement"), as representatives of the
several Underwriters to be named in Schedule I thereto (collectively, the
"Underwriters"), relating to the offering of Common Stock by the Underwriters
(the "Initial Public Offering" and, together with the Concurrent Offering, the
"Offerings"), in the form filed as Exhibit 1.1 to the Registration Statement and
attached hereto as Annex A. The Initial Public Offering is also registered on
the Registration Statement. To the extent designated herein, portions of the
Underwriting Agreement shall be deemed to be incorporated by reference herein
and form a part hereof. Notwithstanding anything else herein to the contrary,
it is expressly understood and agreed that the closing of the Concurrent
Offering is conditioned on the occurrence of the Closing Date. All capitalized
terms not defined herein shall have the meanings ascribed to them in the
Underwriting Agreement.
<PAGE>
- ------------- --, 1998
Page Two
SERVICES
1. The Company hereby appoints the Placement Agents as the Company's
exclusive placement agents in connection with the Concurrent Offering and,
subject to the terms and conditions contained or incorporated by reference
herein, the Placement Agents hereby accept such appointment.
2. The Placement Agents agree to provide advisory services to the
Company as to the structure of the Concurrent Offering. Except as specifically
set forth herein, the Placement Agents do not assume any additional duties or
responsibilities with respect to the Concurrent Offering and no other duties
shall be implied from this Agreement. The Company acknowledges that purchasers
of the Concurrent Offering are not, and will not be treated as, "customers" of
the Placement Agents for purposes of the rules of the National Association of
Securities Dealers, Inc. (the "NASD") and that the Placement Agents shall have
no responsibility for the performance or non-performance of any purchaser in the
Concurrent Offering or for the performance or non-performance of the Company.
3. The Company hereby makes to the Placement Agents the
representations, warranties and covenants set forth in Sections 1 and 4 of the
Underwriting Agreement.
4. The Company agrees with the Placement Agents to provide the
Placement Agents with such copies of the Registration Statement, Prospectus, any
preliminary prospectus and such other documents and instruments as the Placement
Agents may reasonably request; and
5. [CONFORM TO ANY CHANGES TO BE MADE TO THE UNDERWRITING AGREEMENT.]
Whether or not the transactions contemplated in the Underwriting Agreement or in
this Agreement are consummated, or the Underwriting Agreement or this Agreement
is terminated, the Company hereby agrees to pay all costs and expenses incident
to the performance of the obligations of the Company hereunder, including those
in connection with (i) preparing, printing, duplicating, filing and distributing
the Registration Statement, as originally filed and all amendments thereof
(including all exhibits thereto), any preliminary prospectus, the Prospectus and
any amendments or supplements thereto (including, without limitation, fees and
expenses of the Company's accountants and counsel), the underwriting documents
(including the Underwriting Agreement, this Agreement, the Agreement Among
Underwriters [and the Selling Agreement]) and all other documents related to the
public offering of the Concurrent Shares (including those supplied to the
Underwriters and the Placement Agents in quantities as hereinabove stated), (ii)
the issuance, transfer and delivery of the
2
<PAGE>
- ------------- --, 1998
Page Three
Concurrent Shares to the Placement Agents, including any transfer or other taxes
payable thereon, (iii) the qualification of the Concurrent Shares under state or
foreign securities or Blue Sky laws, including the costs of printing and mailing
a preliminary and final "Blue Sky Survey" and the fees of counsel for the
Placement Agents and such counsel's disbursements in relation thereto, (iv)
quotation of the Concurrent Shares on the National Association of Securities
Dealers Automated Quotation system ("Nasdaq"), (v) filing fees of the Commission
and the NASD; (vi) the cost of printing certificates representing the Concurrent
Shares, (vii) the cost and charges of any transfer agent or registrar, and
(viii) all other costs and expenses incident to the performance of its
obligations hereunder and the Subscription Agreements which are not otherwise
provided for in this Section.
6. The obligations of the Placement Agents hereunder and the closing of
the sale of the Concurrent Shares in the Concurrent Offering (the "Concurrent
Time of Delivery") shall be subject to the satisfaction of the conditions set
forth in Section 6 of the Underwriting Agreement. Furthermore, (i) the
Concurrent Time of Delivery shall be conditioned upon the occurrence of the
Closing Date, (ii) the obligations of the Placement Agents hereunder shall be
conditioned upon resolution to the reasonable satisfaction of the Placement
Agents of all legal and regulatory issues related to the Concurrent Offering and
(iii) if the Concurrent Offering is not consummated for all the proposed shares,
the shares of Common Stock not sold to the Concurrent Purchasers will not be
offered to the purchasers of the Initial Public Offering. For purposes of this
Section 6, all references to "Placement Agents" and "Firm Shares" in the
introductory paragraph of Section 6 of the Underwriting Agreement shall be
deemed to refer to the Placement Agents and Concurrent Shares, respectively.
Also for purposes of this Section 6, (a) the opinions of (i) Fried, Frank,
Harris, Shriver & Jacobson, (ii) Cooley Godward LLP and (iii) Morrison &
Foerster LLP, (b) the letter or letters of KPMG Peat Marwick, LLP and (c) the
certificates of officers of the Company (provided for in Section 6(e) of the
Underwriting Agreement), shall each also be addressed and furnished to the
Placement Agents at the Concurrent Time of Delivery and all references in
Section 6 of the Underwriting Agreement to "as you may reasonably require," "as
you may reasonably request," "satisfactory to you," "reasonably satisfactory in
form and substance to you" or similar language shall be deemed to refer to a
determination by the Placement Agents.
PROCEEDS AND FEES
7. All proceeds of the Concurrent Offering will be paid directly to the
Company and will be segregated in a separate non-interest bearing account
established by the Company and pending the consummation of the Concurrent
Offering. As compensation for their services under this Agreement, the Placement
Agents will receive
3
<PAGE>
- ------------- --, 1998
Page Four
at the Concurrent Time of Delivery a fee (the "Placement Fee") from the
Company of ____ of the amount equal to Initial Public Offering Price less the
underwriting discount and commissions to be paid to the Placement Agents in the
Underwritten Offering, multiplied by the number of Shares sold in the Concurrent
Offering, by wire transfer in immediately available funds to a bank account or
accounts designated by the Placement Agents. Payment of such Placement Fee
shall be a condition of the Concurrent Time of Delivery. In the event the
Concurrent Offering is (i) terminated by the Placement Agents because of any
failure or refusal on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement or (ii) not consummated by the
closing date of the Initial Public Offering, the Concurrent Offering will be
terminated and all payments made by the Concurrent Purchasers in connection with
the Concurrent Offering will be promptly returned, and the Company agrees to
reimburse the Placement Agents for all out-of-pocket expenses (including the
fees and disbursements of counsel) reasonably incurred by them.
INDEMNIFICATION [CONFORM WITH ANY CHANGES TO BE MADE TO THE UNDERWRITING
AGREEMENT]
8. (a) The Company agrees to indemnify and hold harmless each of the
Placement Agents and each person, if any, who controls any of the Placement
Agents within the meaning of Section 15 of the Act or Section 20(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any
and all losses, liabilities, claims, damages and expenses whatsoever as incurred
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Concurrent Shares and the Shares, as
originally filed or any amendment thereof, or any related preliminary prospectus
or the Prospectus, or in any supplement thereto or amendment thereof, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that the Company will not be liable
-------- -------
in any such case to the extent but only to the extent that any such loss,
liability, claim, damage or expense arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged omission
made therein in reliance upon and in conformity with written information
furnished to the Company by or on
4
<PAGE>
- ------------- --, 1998
Page Five
behalf of any of the Placement Agents through you expressly for use therein.
This indemnity agreement will be in addition to any liability which the Company
may otherwise have including under this Agreement.
(b) Promptly after receipt by an indemnified party under subsection
(a) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify each party against whom indemnification is
to be sought in writing of the commencement thereof (but the failure so to
notify an indemnifying party shall not relieve it from any liability which it
may have under this Section 8). In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall have been authorized in
writing by one of the indemnifying parties in connection with the defense of
such action, (ii) the indemnifying parties shall not have employed counsel to
have charge of the defense of such action within a reasonable time after notice
of commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
indemnifying parties. Anything in this subsection to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement of
any claim or action effected without its written consent; provided, however,
that such consent was not unreasonably withheld.
CONTRIBUTION [CONFORM TO CHANGES IN UNDERWRITING AGREEMENT]
9. In order to provide for contribution in circumstances in which the
indemnification provided for in Section 8 hereof is for any reason held to be
unavailable from any indemnifying party or is insufficient to hold harmless a
party indemnified thereunder, the Company and the Placement Agents shall
contribute to the aggregate losses, claims, damages, liabilities and expenses of
the nature contemplated by such indemnification provision (including any
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claims
5
<PAGE>
- ------------- --, 1998
Page Six
asserted, but after deducting in the case of losses, claims, damages,
liabilities and expenses suffered by the Company any contribution received by
the Company from persons, other than the Placement Agents, who may also be
liable for contribution, including persons who control the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, officers
of the Company who signed the Registration Statement and directors of the
Company) as incurred to which the Company and one or more of the Placement
Agents may be subject, in such proportions as is appropriate to reflect the
relative benefits received by the Company and the Placement Agents from the
offering of the Concurrent Shares or, if such allocation is not permitted by
applicable law or indemnification is not available as a result of the
indemnifying party not having received notice as provided in Section 8 hereof,
in such proportion as is appropriate to reflect not only the relative benefits
referred to above but also the relative fault of the Company and the Placement
Agents in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Placement Agents shall be deemed to be in the same proportion as (x) the total
proceeds from the offering (net of underwriting discounts and commissions but
before deducting expenses) received by the Company and (y) the underwriting
discounts and commissions received by the Placement Agents, respectively, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault of the Company and of the Placement Agents shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Placement Agents and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Placement
Agents agree that it would not be just and equitable if contribution pursuant to
this Section 9 were determined by pro rata allocation (even if the Placement
Agents 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. Notwithstanding the provisions of this Section 9, (i) in no case shall
any Placement Agent be liable or responsible for any amount in excess of the
underwriting discount applicable to the Concurrent Shares purchased by such
Placement Agent hereunder, and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 9 and the
preceding sentence, no Placement Agent shall be required to contribute any
amount in excess of the amount by which the total price at which the Concurrent
6
<PAGE>
- ------------- --, 1998
Page Seven
Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages that such Placement Agent has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. For purposes of this Section 9, each person, if
any, who controls a Placement Agent within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act shall have the same rights to contribution
as such Placement Agent, and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, each officer of the Company who shall have signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to clauses (i) and (ii) of
this Section 9. Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such party
in respect of which a claim for contribution may be made against another party
or parties, notify each party or parties from whom contribution may be sought,
but the omission to so notify such party or parties shall not relieve the party
or parties from whom contribution may be sought from any obligation it or they
may have under this Section 9 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
rovided, however, that such consent was not unreasonably withheld.
- -------- -------
OTHER
10. The Company represents and warrants that no person or organization
other than the Placement Agents are, as a result of any action by the Company,
entitled to compensation for services as a finder, broker, placement agent or
investment banker in connection with the Concurrent Offering.
11. This Agreement shall be deemed to be effective as of the date
hereof and the term of this engagement shall be from the date hereof until the
earlier of (i) termination of the Concurrent Offering, and (ii) the completion
of the Offerings. Notwithstanding the foregoing, if at any time the Company
violates any of its covenants and agreements contained herein or if any of the
conditions set forth in Section 6 are not satisfied, the Placement Agents shall
have the right to terminate their obligations hereunder upon prior notice to the
Company. In the event of any termination of this Agreement or if for any reason
the Concurrent Offering is terminated, the Company shall be responsible for (i)
the reimbursement of all fees, disbursements, costs and expenses, as provided in
Section 5, and (ii) its obligations arising under Sections 8 and 9.
12. The Company agrees that the Placement Agents shall have the right
to advertise their participation in the Concurrent Offering in "tombstone" or
other
7
<PAGE>
- ------------- --, 1998
Page Eight
appropriate financial advertisements in newspapers, magazines, trade periodicals
or other publications.
13. The invalidity or unenforceability of any provision of this
Agreement shall in no way offset the validity or enforceability of any other
provision. This Agreement shall be governed by and construed and enforced in
accordance with the laws of the state of New York. The terms and provisions of
this Agreement are solely for the benefit of the Company and the Placement
Agents and the other indemnified parties and their respective successors,
assigns, heirs and personal representatives, and no other person shall acquire
or have any right by virtue of this letter.
14. All statements, requests, notices and agreements hereunder shall be
in writing, and if to the Placement Agents shall be delivered or sent by mail,
telex or facsimile transmission to: in the case of the Placement Agents to Bear,
Stearns & Co. Inc., 245 Park Avenue, 18th Floor, New York New York 10167; and in
the case of the Company to the address of the Company set forth in the
Registration Statement, Attention: Secretary. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
15. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
* * *
Please confirm that the terms described herein are in accordance with
your understanding by signing and returning to us the enclosed duplicate of this
letter.
Very truly yours,
BEAR, STEARNS & CO. INC.
By:______________________________
Title:___________________________
VOLPE BROWN WHELAN & COMPANY, LLC
By:______________________________
Title:___________________________
8
<PAGE>
- ------------- --, 1998
Page Nine
AGREED AND CONFIRMED:
theglobe.com, inc.
By:______________________________
Title:_____________________________
9
<PAGE>
ANNEX A
[Attach form of Underwriting Agreement]
<PAGE>
EXHIBIT 10.13
DATA CENTER SPACE LEASE
BETWEEN
TELEHOUSE INTERNATIONAL CORPORATION OF AMERICA
(LANDLORD)
AND
THEGLOBE.COM
(TENANT)
SITE E/THIRD FLOOR
TELEHOUSE CENTER
7 TELEPORT DRIVE
STATEN ISLAND, NY
Dated: August 24, 1998
<PAGE>
TABLE OF CONTENTS
DATA CENTER SPACE LEASE
EXECUTION COPY
ARTICLE I - FUNDAMENTAL LEASE PROVISIONS
1.1 Fundamental Lease Provisions 1
1.2 Effect of Reference to a Fundamental Lease Provision 3
1.3 Definitions 3
1.4 Other Interpretive Provisions 5
ARTICLE II - PREMISES AND LEASE TERM
2.1 Premises; Rentable Area Calculation 5
2.1.1 Demise of Premises 5
2.1.2 Determination of Rentable Area of the Premises 5
2.1.3 Appurtenant Facilities 6
2.2 Lease Term; Commencement Date 6
2.3 Preparation of Premises 6
2.4 Failure to Deliver Possession 7
ARTICLE III - LIMITATIONS ON LANDLORD'S WORK.OWNERSHIP OF IMPROVEMENTS
3.1 Tenant Improvements 7
3.2 Ownership of Improvements 7
ARTICLE IV- RENTS
4.1 Rents 8
4.2 Payment of Rents 8
4.3 Payment of Base Rent 8
4.4 Rent for a Partial Month 8
4.5 [Intentionally Omitted.] 8
4.6 Interest 8
4.7 Payments Included in Rents 8
4.8 Government Rent Restrictions 8
4.9 Partial Pavment 9
ARTICLE V - TAX AND OPERATING EXPENSE ADJUSTMENTS
5.1 Tax and Operating Expense Definitions 9
5.1.1 Lease Year 9
5.1.2 [Intentionally omitted.] 9
5.1.3 Taxes 9
5.1.4 [Intentionally omitted.] 10
5.1.5 Building Operating Expenses 10
5.1.6 Building Operating Expenses- Exclusions 12
5.1.7 Building Operating Expenses Adjustment 13
5.2 Payment of Taxes and Building Operating Expenses 13
5.2.1 Payment of Tenant's Share of Taxes 13
5.2.1.1 Tax Payment and Tax Statement 13
5.2.1.2 Adjustments of Tax Payment 14
5.2.1.3 Miscellaneous Tax Matters 14
<PAGE>
EXECUTION COPY
5.2.2 Payment of Tenant's Share of Building Operating Expenses 15
5.2.2.1 Operating Expense Statement 15
5.2.2.2 Miscellaneous Building Operating Expense Matters 15
5.2.3 Tenant's Objection to Tax Statement or Operating Expense Statement 15
5.2.4 Arbitration 15
ARTICLE VI - SERVICES AND UTILITIES
6.1 Electricity 17
6.1.1 Direct Supply 17
6.1.2 Additional Electrical Equipment 17
6.1.3 Landlord's Consent to Electrical Alterations 18
6.1.4 [Intentionally Omitted] 18
6.1.5 Provision of Emergency Power 18
6.2 Water 19
6.2.1 Provision of Water 19
6.2.2 Failure of Water Supply 19
6.3 Elevators and Cleaning 19
6.4 Heating and Air Conditioning 19
6.4.1 Heating 19
6.4.2 Air Conditioning 20
6.4.3 Miscellaneous HVAC Provisions 20
6.4.4 Effect on HVAC of Changes in Premises 20
6.5 Service Interruption 20
6.6 Additional Tenant Use 21
6.7 Exculpation of Landlord for Utilities 21
6.8 Access 21
6.9 Communication Facilities 21
ARTICLE VII - INSURANCE
7.1 Property Insurance 22
7.2 Liability Insurance 22
7.3 Use of Premises 22
7.4 Waiver of Subrogation 22
7.4.1 Waiver Included in Policy 22
7.4.2 Landlord's Waiver 23
7.4.3 Tenants' Waiver 23
7.4.4 Limitation on Waiver 23
7.5 Policy Requirements 23
7.6 Premium Increase 24
ARTICLE VIII - ALTERATIONS
8.1 Conditions 25
8.1.1 Alterations by Tenant 25
8.1.2 Alterations by Landlord 25
8.2 Performance 25
8.3 Liens and Violations 26
8.3.1 Discharge of Liens and Violations 26
8.3.2 Tenant's Right to Contest Liens 27
8.4 Labor Conditions 27
8.5 Port Authority's Fee 27
8.6 Improvement Fee 27
<PAGE>
EXECUTION COPY
ARTICLE IX - LANDLORD'S AND TENANT'S PROPERTY
9.1 Tenant's Property 28
9.2 Fixtures 28
9.3 [Intentionally omitted] 28
9.4 Abandonment 28
9.5 Taxes on Tenant's Property and Non-Standard Tenant Improvements 29
9.5.1 Taxes on Tenant's Property 29
9.5.2 [Intentionally omitted] 29
ARTICLE X - REPAiRS AND MAINTENANCE
10.1 Landlord's Obligations 29
10.2 Tenant's Obligations 29
10.3 Exculpation of Landlord for Repairs 30
10.4 Notice 30
ARTICLE XI - USE AND COMPLIANCE WITH LAW
11.1 Use 30
11.2 Licenses and Permits 30
11.3 Prohibited Uses 31
11.4 Compliance by Tenant 31
11.5 Service Contracts 32
11.6 Floor Load 32
11.7 Right of Repossession 32
11.8 Rules and Regulations 33
11.9 Labor Harmony 33
11.10 Landlord's and Port Authoritv's Consent 33
ARTICLE XII - RIGHTS OF LANDLORD
12.1 Conduits in Premises 33
12.2 Entry by Landlord 33
12.3 [Intentionally omitted] 34
12.4 Exhibiting the Premises 34
12.5 [Intentionally omitted] 34
12.6 Building Name and Address 34
12.7 [Intentionally omitted] 34
12.8 Security 34
12.9 Other Rights 34
ARTICLE XIII - DAMAGE OR DESTRUCTION
13.1 Restoration 34
13.2 Rent Abatement 35
13.3 [Intentionally omitted] 35
13.4 Election to Terminate 35
13.4.1 Landlord's Election to Terminate 35
13.4.2 Tenant's Election to Terminate 35
13.5 Business Interruption 35
13.6 Tenant's Property 36
13.7 Waiver 36
ARTICLE XIV - EMINENT DOMAiN
14.1 Complete Taking 36
14.2 Partial Taking 36
<PAGE>
EXECUTION COPY
14.3 Award 36
14.4 Temporary Taking 37
ARTICLE XV - SURRENDER OF PREMISES
15.1 Surrender 37
15.2 Acceptance of Surrender 37
15.3 No Merger 38
15.4 No Holding Over 38
ARTICLE XVI - EXCULPATION AND INDEMNIFICATION
16.1 Exculpation 38
16.2 Indemnity 38
16.3 Transfers of Landlord's Interest 40
16.4 Recourse Limited to Building 40
16.5 Responsibility for Infrastructure 41
ARTICLE XVII - SUBORDINATION AND ATTORNMENT
17.1 Subordination 41
17.2 Election to Subordinate 42
17.3 Notice and Cure of Landlord's Default 42
17.4 Attornment 42
17.5 Requirements of Superior Lessor or Mortgagee 43
17.6 Compliance With Ground Lease 43
17.6.1 Approval of Lease and Sublease By Port Authority 43
17.6.2 Compliance With Ground Lease 43
ARTICLE XVIII - QUIET ENJOYMENT
18.1 Quiet Enjoyment 44
ARTICLE XIX - ASSIGNMENTS AND SUBLEASES
1 9.1 [Intentionally omitted] 44
19.2 Prohibition 44
19.3 Corporate and Partnership Transactions 45
19.4 Notice to Landlord 45
19.5 [Intentionally omitted] 45
19.6 [Intentionally omitted] 45
19.7 [Intentionally omitted] 45
19.8 Consent by Landlord 45
19.9 Miscellaneous 45
19.9.1 General Terms 45
19.9.2 Tenant Remains Liable 45
19.9.3 Landlord's Consent Required 47
19.9.4 Identification of Landlord 47
19.9.5 General Sublease Provisions 47
19.9.6 Modification 47
19.10 [Intentionally omitted] 48
1 9.1 1 Additional Charges 48
19.12 Acceptance of Rent 48
19.13 Standards of Landlord's Consent 48
ARTICLE XX - ESTOPPEL CERTIFICATES
20.1 Estoppel Certificates 49
<PAGE>
EXECUTION COPY
ARTICLE XXI - [INTENTIONALLY OMITTEDl
ARTICLE XXII - BROKER
22.1 Broker 50
ARTICLE XXIII - CONDITIONAL LIMITATIONS
23.1 Conditional Limitations 50
23.1.1 [Intentionally omitted] 50
23.1.2 Failure to Pay Rent 50
23.1.3 [Intentionally omitted] 50
23.1.4 Failure to Perform Under This Lease 50
23.1.5 [Intentionally omitted] 51
23.1.6 Admission of Inability to Pay Debts 51
23.1.7 Voluntary Proceeding 51
23.1.8 General Assignment 51
23.1.9 Involuntary Proceeding 51
23.1.10 Appointment of Trustee 51
23.1.11 Tenant's Acquiescence 51
23.1.12 [Intentionally omitted] 51
23.1.13 Waste 51
23.1.14 Hypothecation or Assignment 51
23.1.15 Service of Notice 51
23.1.16 Rent Delays 52
23.1.17 Legal Process 52
23.2 Termination 52
23.3 Remedies and Damages 52
23.3.1 Surrender and Re-Entry 52
23.3.2 Tenant's Waiver of Notice and Redemption 53
23.3.3 Damages 53
23.3.4 Rents from Reletting 54
23.3.5 Monies Received 54
23.3.6 Equitabie Remedies 54
23.4 Waiver of Trial by Jury; Tenant Not to Counterclaim 54
23.5 No Holdover by Tenant 54
23.6 Landlord's Right to Cure Defaults 54
23.7 Effects of Waivers of Default; No Other Waiver 54
23.8 Election to Terminate 55
23.9 Remedies Not Exclusive 55
23.10 Payment of Landlord's Expenses 55
ARTICLE XXIV- MISCELLANEOUS
24.1 No Recording of Lease 55
24.2 Entire Agreement 55
24.3 Amendments 56
24.4 Successors 56
24.5 Force Majeure 56
24.6 Post-Termination Obligations 56
24.7 Construction on Adjacent Premises 56
24.8 No Representations by Landlord 57
24.9 Landlord's Consent 57
24.10 Interpretation 57
<PAGE>
EXECUTION COPY
24.10.1 Governing Law 57
24.10.2 Invalidity 57
24.10.3 Captions 57
24.10.4 Presumptions 57
24.10.5 Independent Covenants 57
24.10.6 Numberand Gender 57
24.10.7 Exhibits 57
24.11 Joint and Several Liability 57
24.12 Submission of Lease 58
24.13 Notices From One Pany to the Other 58
24.14 Partnership Tenant 58
24.15 Pon Authority's Immunity 58
24.16 No Discrimination 58
ATTACHMENTS
EXHIBIT A Floor Plans A-1
EXHIBIT B Special Site Fitout B-1
EXHIBIT C TELEHOUSE Tenant Cleaning Specifications C-1
EXHIBIT D Rules and Regulations D-1
EXHIBIT E Excessive Electricity E-1
EXHIBIT F Appurtenant Facilities F-1
EXHIBIT Z Consent Agreement Z-1
<PAGE>
EXECUTION COPY
THE TELEPORT
DATA CENTER SPACE LEASE
ARTICLE I
FUNDAMENTAL LEASE PROVISIONS
----------------------------
SECTION 1 FUNDAMENTAL LEASE PROVISIONS
----------------------------
DATE: August 12, 1998
LANDLORD: TELEHOUSE International Corporation Of America,
a Delaware corporation.
ADDRESS OF THE
LANDLORD: 7 Teleport Drive
Staten Island, New York 10311-1011
Attention: Finance Department
Telephone: (718) 355-2500
Fax: (718) 355-2517
TENANT: theglobe.com
TENANT'S IDENTITY: Tenant is a corporation incorporated in the State of
Delaware
ADDRESS OF TENANT: 31 West 21st Street
New York, NY 10010
Attention: Vance Huntley
Telephone: (212) 886-0820
Fax: (212) 367-8588
email: [email protected]
PREMISES: Space consisting of a portion of the third floor in the
Building, which space is more particularly indicated by
shading on the floor plan annexed hereto as Exhibit "A".
BUILDING: The data center and office building and underlying land
known as TELEHOUSE CENTER and located at 7 Teleport Drive
in the Teleport, in the Borough of Staten Island, County
of Richmond, City and State of New York, and all rights
and interests appurtenant thereto.
-1-
<PAGE>
BASE RENT: $201,538.00 per annum
INITIAL TENANT'S
SHARE OF BUILDING
OPERATING EXPENSE: $14.50 per square foot of Rentable Area per annum
TENANTS SHARE: 3.57 percent
BASE PERIOD: The term of the lease commencing on September 1, 1998
through August 31, 2001.
LEASE TERM: The term of this Lease which shall include the Lease
Term and any extension or renewals thereof. A period
of 3 years (unless terminated earlier pursuant to any
of the provisions of this Lease or pursuant to law),
commencing as set forth in Section 2.2, plus a stub
period of a partial month as necessary in order for
the Lease Term to end on the last day of the month.
RECAPTURE
PERCENTAGE: The Recapture Percentage shall be one hundred percent
(100%) unless a different percentage is specified as
follows: fifty percent (50%).
FIXED COMMENCEMENT
DATE*: September 1, 1998
*Do Not Fill In This Date If An Outside Commencement Date Is Specified Below.
OUTSIDE COMMENCEMENT
DATE**: The Outside Commencement Date is________ days after
the date of this Lease.
**Do Not Fill In This Date If A Scheduled Commencement Date Is Specified Above.
RENT COMMENCEMENT
DATE: Payment of Base Rent and Additional Rent commences on
September 1, 1998.
RENTABLE AREA: 5,411.21 square feet. The useable area is 2,895
square feet.
TENANT'S BUSINESS: Communication related services.
TENANT'S BROKER: None
ADDRESS OF TENANT'S
BROKER:
1.2 Effect of Reference to a Fundamental Lease Provision. Each
----------------------------------------------------
reference in this Lease to any of the Fundamental Lease Provisions contained in
Section 1.1 shall be
-2-
<PAGE>
EXECUTION COPY
construed to incorporate all of the terms provided under each such Fundamental
Lease Provision.
SECTION 1.3 DEFINITIONS. Whenever used in this Lease, the following terms
-----------
shall have the indicated meanings:
Additional Rent: As defined in Section 4.1.
---------------
Alterations: As defined in Section 8.1.
-----------
Appurtenant Facilities: As defined in Exhibit E.
----------------------
Base Rent: As defined in Section 4.1.
---------
Building: As defined in Section 1.1
--------
Building Operating Expenses: As defined in Section 5.1.5.
---------------------------
Business Hours: As defined in Section 6.3.
--------------
Conditional Limitation: As defined in Section 23.1.
----------------------
Commencement Date: As defined in Section 2.2.
-----------------
Critical Power: As defined in Section 6.1.5.
--------------
Date of the Taking: As defined in Section 14.1.
------------------
Deficiency: As defined in Section 23.3.3.
----------
Eminent Domain: As defined in Section 14.1.
--------------
Essential Power: As defined in Section 6.1.5.
---------------
Expiration Date: As defined in Section 2.2.
---------------
Force Majeure: As defined in Section 24.5.
-------------
Fundamental Lease Provisions: Those terms and provisions set forth in
----------------------------
Section 1.1.
Ground Lease: That certain Agreement dated as of August 9, 1988 by and
------------
between the Port Authority as landlord and Landlord as tenant.
Improvements: As defined in Section 3.2.
------------
Improvement Fee: As defined in Section 8.5.
---------------
Infrastructure: Roadways, walkways, landscaping, driveways and other areas
--------------
located within the Teleport and used in common by tenants and subtenants of
the Teleport.
Base Rent: As defined in Section 1.1.
---------
Interest Rate: As defined in Section 4.6.
-------------
Initial Tenant's Share of Building Operating Expenses: As defined in
------------------------------------------------------
Section 1.1.
Labor Conditions: As defined in Section 8.4.
----------------
Landlord: The party named as "Landlord" in Section 1.1 until a sale,
--------
transfer or lease by it and thereafter the Person or Persons who shall, at
any given time, be liable for the obligations of Landlord under the
provisions of this Lease, as more fully described in Section 16.3.
Laws: The terms "law", "laws", "provisions of law," and words of similar
----
import shall mean present and future laws, statutes, ordinances, building
and fire codes, rules, regulations, requirements, judgments, rulings,
decrees, executive, judicial and other orders and directives of any or all
of the federal, state, county and city governments and all agencies,
authorities, bureaus, commissions, courts, departments, subdivisions, or
offices thereof, and of any other governmental, public or quasi-public
authorities (including the board of fire underwriters or other insurance
body) having jurisdiction over the Building, and the direction of any
public officer pursuant to law, whether now or hereafter in force.
References to specific statutes include successor statutes of similar
purpose and import.
Lease Term: As defined in Section 1.1.
----------
Lease Year: As defined in Section 5.1.1.
----------
Memorandum of Lease Commencement: As defined in Section 2.2.
--------------------------------
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<PAGE>
EXECUTION COPY
Mortgage: The term "mortgage" shall include a mortgage or a deed of trust,
--------
and the term "holder of a mortgage" or "mortgagee" or words of similar
import shall include a mortgagee of a mortgage or a beneficiary of a deed
of trust.
Operating Expense Payment: As defined in Section 5.2.2.
-------------------------
Operating Expense Statement: As defined in Section 5.2.2.
---------------------------
Partial Lease Year: As defined in Section 5.1.1.
------------------
Partnership Tenant: As defined in Section 24.14.
------------------
Permitted Use: Data processing and data, video and voice communications in
-------------
connection with Tenant's Business, office space and incidental and usual
activities compatible therewith, and for no other purpose whatsoever.
Person: A natural person, firm, association, corporation, partnership,
------
joint venture, trust or other entity, as the case may be.
Port Authority: The Port Authority of New York and New Jersey, a body
--------------
corporate and politic created by compact between the States of New York and
New Jersey with the consent of the Congress of the United States of
America.
Premises: As defined in Section 1.1.
--------
Recapture Percentage: As defined in Section 1.1.
--------------------
Rents: As defined in Section 4.1.
-----
Rent Commencement Date: As defined in Section 1.1.
----------------------
Rentable Area: As defined in Section 1.1.
-------------
Repossession Date: As defined in Section 11.7.
-----------------
Rules and Regulations: As defined in Section 11.8.
---------------------
Substantially Complete or Substantial Completion: As defined in Section
------------------------------------------------
2.3.2.
Substantial Completion Date: The date on which the Premises are
----------------------------
Substantially Complete as defined in Section 2.3.2.
Successor Landlord: As defined in Section 17.4.
------------------
Superior Interest Holder: As defined in Section 17.1.
------------------------
Superior Lease: As defined in Section 17.1.
--------------
Superior Lessor: As defined in Section 17.1.
---------------
Superior Mortgage: As defined in Section 17.1.
-----------------
Superior Mortgagee: As defined in Section 17.1.
------------------
Taxes: As defined in Section 5.1.3.
-----
Tax Payment: As defined in Section 5.2.1.1.
-----------
Tax Statement: As defined in Section 5.2.1.1.
-------------
Telehouse Complex: The Building together with any other data centers and
-----------------
office buildings owned or operated by Landlord and the underlying land
located adjacent to the Building in the Teleport.
Teleport: The telecommunications facility and related office park
--------
developed by the Port Authority within a portion of the Staten Island
Industrial Park in the Borough of Staten Island, County of Richmond, City
and State of New York, of which the Telehouse Complex is a part.
Tenant Improvements: As defined in the Work Letter.
-------------------
Tenant's Broker: As defined in Section 1.1.
---------------
Tenant's Business: As defined in Section 1.1.
-----------------
Tenant Expenses: As defined in Section 19.11.
---------------
Tenant's Property: As defined in Section 9.2.
-----------------
Tenant's Share: As defined in Section 1.1.
--------------
Tenant's Work: As defined in the Work Letter.
-------------
UPS System: As defined in Section 6.1.6.
----------
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EXECUTION COPY
Useable Area: The floor area of space in the Building in which Tenant
------------
Improvements have been or will be constructed.
Work Letter: Exhibit B attached hereto.
-----------
SECTION 1.4 OTHER INTERPRETIVE PROVISIONS. References to "Articles" and
------------------------------
"Sections" shall be to Articles and Sections respectively, of this Lease
unless otherwise specifically provided. Any of the terms defined in Sections
1.1 and 1.3 may, unless the content otherwise requires, be used in the
singular or the plural depending on the reference. References to agreements
and other contractual instruments shall be deemed to include all subsequent
amendments and other modifications thereto, but only to the extent such
amendments and other modifications are not prohibited by the terms of this
Lease. The term "including" shall mean "including, but not limited to",
except where the context requires otherwise. Where either Landlord or Tenant
is obligated to perform some duty, such obligation shall be at the sole cost
and expense of the party so obligated, unless otherwise provided herein.
Whenever it is provided in this Lease that a party's consent or approval shall
not unreasonably be withheld, such consent or approval shall also not
unreasonably be conditioned or delayed.
ARTICLE II
PREMISES AND LEASE TERM
SECTION 2.1 PREMISES; RENTABLE AREA CALCULATION.
------------------------------------
2.1.1 DEMISE OF PREMISES. Landlord hereby leases to Tenant and Tenant
------------------
hereby hires from Landlord the Premises, pursuant to the provisions of this
Lease, together with the nonexclusive right, together with all other lessees
and occupants of the Building, to use common areas of the Building (including
the Appurtenant Facilities pursuant to Section 2.1.3 hereof) and the
Infrastructure, subject to the provisions of this Lease and Landlord's Rules
and Regulations (annexed hereto as Exhibit D) and the rules and regulations of
the Port Authority (Ground Lease, Exhibit R).
2.1.2 DETERMINATION OF RENTABLE AREA OF THE PREMISES. If the Rentable
----------------------------------------------
Area of the Premises is reduced in size pursuant to Section 11.7 or as a
result of a partial taking in Eminent Domain, all amounts, sums and/or
percentages based upon the Rentable Area of the Premises (including amounts,
sums and/or percentages based upon the useable area of the Premises),
including without limitation, amounts, sums and/or percentages set forth in
Sections 1.1 and 4.5 and in any Rider hereto, shall be adjusted by multiplying
said amounts, sums and/or percentages by a fraction, the numerator of which
shall be the number of square feet of Rentable Area (or useable area depending
on the manner in which the percentage is calculated) contained in the
Premises, as so determined, and the denominator of which shall be the number
of square feet of Rentable Area set forth in Section 1.1 (or in the number of
square feet of useable area contained in the Premises on the date of this
Lease). Landlord and Tenant shall execute an addendum in a form reasonably
acceptable to both landlord and Tenant documentary any such change in Rentable
Area. The failure of either party to execute such addendum shall not affect
the validity or enforceability of this Lease. The number of square feet of
Rentable Area contained in the Premises, as set forth in this Lease, shall for
all purposes of this Lease conclusively be
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<PAGE>
EXECUTION COPY
deemed to be the Rentable Area of the Premises as of the date of this Lease,
and Landlord and Tenant shall be responsible for performance of all
obligations based upon or calculated from the Rentable Area of the Premises,
as so determined, notwithstanding any subsequent remeasurement of the Premises
as they exist on the date of this Lease.
2.1.3 APPURTENANT FACILITIES. In addition to the Premises, Tenant shall
----------------------
have the right in common with all other lessees and occupants of the Building
to use the Appurtenant Facilities located in the Building as described in
Exhibit F annexed hereto, subject to payment by Tenant as Additional Rent of
Landlord's standard charge for such use.
SECTION 2.2 Lease Term; Commencement Date. The "Lease Term" (a) shall
------------------------------
commence on the date (the "Commencement Date") that is (x) the earlier to
occur of: (i) the Fixed Commencement Date, if any such date is specified in
Section 1.1, or (ii) the date on which Tenant, or anyone claiming under or
through Tenant, first occupies the Premises, with Landlord's consent and with
the Port Authority's certification of occupancy, for the conduct of Tenant's
Business, provided, however, that the installation and /or testing of
equipment installed by or on behalf of Tenant within the Premises shall not
constitute the conduct of Tenant's business for purposes of this Article, but
(a) in no case prior to the date on which the Port Authority consents to this
Lease pursuant to Section 17.6.1 if Landlord and Tenant elect, as set forth in
Section 17.6.1, to condition commencement on such consent; and (b) shall end
at noon on the last day of the Lease Term (the "Expiration Date") unless
sooner terminated as hereinafter provided or pursuant to applicable law.
After the Commencement Date, upon Tenant's or Landlord's request, Landlord
and Tenant shall execute a Memorandum of Lease Commencement (the "Memorandum
of Lease Commencement") which shall specify the calendar dates of the
Commencement Date and the Expiration Date of the Lease Term. The failure by
Landlord or Tenant to execute a Memorandum of Lease Commencement when
requested by the other party shall not affect the occurrence of the
Commencement Date or Expiration Date.
SECTION 2.3 PREPARATION OF PREMISES. Landlord has provided the site with
------------------------
Landlord's standard site buildout including:
. raised floor, drop ceiling, site paining
. lighting, carpeting of support area
. critical power, essential power and non-essential power feeder installation
. demising walls and interior glass partitions, water protection measures
. halon and pre-action sprinkler fire protection installation and testing
. computer room and support office air conditioning, support office heating
. connection to centralized building monitoring and security system
. site preparation coordination
. governmental approvals and scheduling
. 75 Kva Computer Power Center
In addition, Landlord has performed certain other site fitout work according
to the requirements of the Special Site Fitout Work annexed hereto as
Exhibit "B".
-----------
SECTION 2.4 FAILURE TO DELIVER POSSESSION. Except to the extent specifically
------------------------------
provided for in this Article and 17.6.1, Tenant waives any right to rescind
this Lease under Section 223-a of the New York Real Property Law and further
waives the right to recover any damages that may
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result from Landlord's failure to deliver possession of the Premises on the
Commencement Date. If Landlord shall be unable to give possession of the
Premises on the Commencement Date, and provided Tenant is not solely
responsible for such inability to give possession, Tenant's obligation to pay
Base Rent and Tenant's Share of Taxes and Building Operating Expenses,
including Initial Tenant's Share of Building Operating Expenses, and all other
additional rent shall not commence until possession of the Premises is given
or the Premises are available for occupancy by Tenant, and no such failure to
give possession on such date shall in any way affect the validity of this
Lease or the obligations of Tenant hereunder or give rise to any claim for
damages by Tenant or claim for rescission of this Lease, nor shall the same be
construed to extend the Lease Term. The Rent Commencement Date, if any is
specified in Section 1.1, shall be adjourned by the number of days between the
Commencement Date and the date on which possession is delivered to Tenant. If
permission is given to Tenant to enter into possession of the Premises or to
occupy space in the Building other than the Premises prior to the Commencement
Date, such occupancy shall be deemed to be under all the provisions of this
Lease provided, however, the Tenant shall not be obligated to pay base rent or
any other rents until the Commencement Date. Notwithstanding anything to the
contrary contained herein, Tenant shall have the right to cancel and terminate
this Lease by notice to Landlord if possession of the Premises is not
delivered to Tenant in accordance with the terms, covenants and conditions of
this Lease on or before the date which is forty-five (45) days from the date
upon which triplicate originals of this Lease executed by Tenant are delivered
to Landlord.
ARTICLE III
LIMITATIONS ON LANDLORD'S WORK; OWNERSHIP OF IMPROVEMENTS
SECTION 3.1 Tenant Improvements. Landlord has completed preparation of the
--------------------
Premises in accordance with the provisions of Article III of this Lease and
Exhibit "B", Special Site Fitout, and Landlord shall not be further obligated
to prepare, alter or improve the Premises.
SECTION 3.2 OWNERSHIP OF IMPROVEMENTS. All installations, alterations,
--------------------------
additions, substitutions, replacements, betterments or improvements, including
Tenant Improvements ("Improvements") upon the Premises, made by either party,
including pipes, ducts, conduits, wiring, panelling, non-mobile partitions and
railings, shall become the property of Landlord and shall remain upon and be
surrendered with the Premises as a part thereof; provided, however, that
-------- -------
Landlord may elect to have Tenant remove any Improvements, such election to be
exercised at the time of consent for such Improvements is given by Landlord.
Notwithstanding the foregoing, improvements (i) which are standard and
customary installations for data processing and communications occupancy may
be left in place by Tenant at the expiration or sooner termination of the term
of this Lease, (ii) movable office furniture and equipment and mobile
partitions, which have been heretofore installed or which are hereafter
installed by Tenant at its expense, shall at all times remain Tenant's
Property and may be removed at any time, subject to the provisions of Section
9.2 and (iii) which have been completed as of the above date of this lease in
accordance with provisions of Section 3.1 and Exhibit "B" need not be removed
by Tenant because Landlord did not elect to require such removal at the time
Landlord consented to the improvements.
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ARTICLE IV
RENTS
SECTION 4.1 Rents. Commencing on the Rent Commencement Date and thereafter
------
during the Lease Term, Tenant shall pay to Landlord the following rents for
the Premises (collectively, the "Rents"): (a) a base rent per annum (the
"Base Rent") in an amount equal to the Base Rent and (b) additional charges
("Additional Rent") consisting of all other sums of money payable by Tenant
under the provisions of this Lease.
SECTION 4.2 PAYMENT OF RENTS. Tenant shall pay the Rents when due, without
-----------------
notice or demand, and without any abatement, deduction or setoff, except for
abatements expressly provided for elsewhere in this Lease. Tenant shall pay
the Rents to Landlord, or as Landlord may otherwise designate, in lawful money
of the United States, at the Address of Landlord or at such other place as
Landlord may designate.
SECTION 4.3 PAYMENT OF BASE RENT. Tenant shall pay the annual Base Rent in
---------------------
equal monthly installments in advance on the first day of each calendar month
included in the Lease Term, except that no Base Rent shall be payable for the
portion of the Lease Term occurring prior to the Rent Commencement Date
specified in Section 1.1 and as may be extended pursuant to Section 2.4. The
first installment of Base Rent shall be paid on the Rent Commencement Date.
SECTION 4.4 RENT FOR A PARTIAL MONTH. The Base Rent for any portion of a
-------------------------
calendar month included in the month in which the Rent Commencement Date
occurs or at the at the end of the Lease Term, shall be prorated in the ratio
that the number of days in such portion bears to the number of days in such
month. Tenant shall receive a credit against the monthly installment of Base
Rent next coming due for any overpayment made in the first installment of Base
Rent.
SECTION 4.5 [INTENTIONALLY OMITTED]
----------------------
SECTION 4.6 INTEREST. Interest shall accrue on any payment due hereunder at
--------
a rate (the "Interest Rate") equal to the lesser of (i) two (2) percentage
points above the then current prime rate or reference rate charged by
Citibank, N.A. or its successor, from time to time or (ii) the maximum rate of
interest chargeable under applicable law. Interest shall accrue on any such
payment from and after the tenth (10th) day following the due date thereof.
SECTION 4.7 PAYMENTS INCLUDED IN RENTS. All payments to be made hereunder by
---------------------------
Tenant to Landlord, including Base Rent, shall be included in the term "Rents"
whenever used in this Lease. All such payments, other than Base Rent, shall
be deemed to be Additional Rent hereunder, whether or not designated as such
and, unless another time shall be herein expressly provided for the payment
thereof, shall be due and payable within thirty (30) days after demand and
Landlord shall have the same remedies for failure to pay the Additional Rent
as for non-payment of Base Rent.
SECTION 4.8 Government Rent Restrictions. If the amount of the Rents payable
-----------------------------
under this Lease exceeds that allowed by the terms of any valid government
restriction which limits the amount of rent or other charges that a commercial
lessor may charge or collect, the amount of
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Rents payable under this Lease shall be the maximum permitted by such
government restriction for the period of time during which such restriction
remains in effect. However, all increases in Rents provided for in this Lease
shall, to the extent permitted by law, be calculated upon the amount of the
Rents that would have been payable in the absence of the government
restriction, and, effective as of the expiration of the government
restriction, the Rents payable hereunder shall be increased to the amount that
would have prevailed had the government restriction never been in effect.
Moreover, to the fullest extent permitted by law, on the first due date for an
installment of Base Rent following expiration of the government restriction,
Tenant shall pay to Landlord, as Additional Rent, an amount equal to the
difference between the amount of Rents which Tenant would have paid if the
government restriction had not been in force and the amount of Rents actually
paid by Tenant during the period in which the government restriction remained
in effect.
SECTION 4.9 PARTIAL PAYMENT. If Tenant pays a lesser amount than the correct
----------------
amount of Rents due, such payment shall be deemed to be a payment on account.
No endorsement or statement on any check or any letter accompanying any check
or payment may be deemed to be an accord and satisfaction, but Landlord may
accept such check or payment without prejudice to Landlord's right to recover
the balance, treat such partial payment as a default or pursue any other
available remedy.
ARTICLE V
TAX AND OPERATING EXPENSE ADJUSTMENTS
SECTION 5.1 Tax and Operating Expense Definitions.
--------------------------------------
5.1.1 "Lease Year" means a period of twelve (12) consecutive full
------------
calendar months, the first full Lease Year to commence on the July 1
immediately following the Commencement Date (or on the Commencement Date if
the Commencement Date is July 1), with each succeeding Lease Year commencing
on the anniversary date of such first Lease Year. Any portion of the Lease
Term which is less than a full Lease Year, that is, from the Commencement Date
(if other than July 1) through the following June 30 and from the last July 1
falling within the Lease Term to the end of the Lease Term (if the Lease Term
does not end on June 30), shall be deemed a "Partial Lease Year". Any
reference in this Lease to a Lease Year shall, unless the context clearly
indicates otherwise, be deemed to be a reference to a Partial Lease Year if
the period in question involves a Partial Lease Year.
5.1.2 [INTENTIONALLY OMITTED.]
5.1.3 Taxes includes the aggregate amount of all real estate taxes,
-----
general or specific assessments and other governmental impositions, duties,
charges and levies of every kind, character and nature whatsoever,
extraordinary as well as ordinary, foreseen and unforeseen (including payments
in lieu of taxes imposed on Landlord because the Teleport is owned by a public
authority), and each and every installment thereof, which shall during the
Lease Term, be levied, assessed, imposed, become due and payable, or liens
upon, or arise in connection with the use, occupancy or possession of, the
Telehouse Complex, the Building or the Premises
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(including any expenses incurred by Landlord (including attorneys' reasonable
fees and disbursements, payments to appraisers and fees to experts and other
witnesses) in contesting any of the foregoing or contesting the assessed
valuation of the Telehouse Complex), and shall include (i) assessments made
with respect to any "air" and "development" rights affecting the Telehouse
Complex, and (ii) any fee, tax or charge imposed by any governmental authority
for any vaults, vault space or other properties within the boundaries of the
land underlying the Telehouse Complex, but excluding, however, all penalties
and interest thereon and also excluding any water charges, sewer rental,
utility taxes and any other costs included in the term "Building Operating
Expenses". Nothing in the preceding sentence shall be construed to include as
Taxes any inheritance, estate, succession, transfer, gift, gain, franchise,
corporation, income or profit tax or capital levy that is imposed upon
Landlord. However, if at any time during the Lease Term the methods of
taxation prevailing on the date hereof shall be altered so that in lieu of or
as a substitute for the whole or any part of the Taxes now levied, assessed or
imposed on real estate or upon Landlord with respect to the Telehouse Complex,
the Building, or the Premises, there shall be levied, assessed or imposed any
other tax, fee, charge, imposition or assessment, however denominated
including, (a) a tax on the rents received from such real estate, or (b) a
license fee measured by the rents receivable by Landlord from the Telehouse
Complex or the Building or the Premises, or (c) a tax or license fee imposed
upon Landlord which is otherwise measured by or based in whole or in part upon
the Telehouse Complex, the Building or the Premises, or (d) a payment in lieu
of taxes, then the same, computed as if the amount of such tax or fee so
payable were that due if the Telehouse Complex, the Building or the Premises
were the only property of Landlord subject thereto, shall be included in
Taxes. Provided, that the Taxes imposed on the Telehouse Complex shall
--------
be equitably allocated among all of the buildings (including the Building)
within the Telehouse Complex.
5.1.4 [Intentionally Omitted.]
5.1.5 BUILDING OPERATING EXPENSES means the aggregate of all costs,
---------------------------
expenses and disbursements of every kind and nature paid or incurred by or on
behalf of Landlord or its agent or any contractor employed by Landlord with
respect to the operation, repair, cleaning, maintenance, management and
security of the Building and the Telehouse Complex, provided that Building
Operating Expenses incurred in connection with the operation, repair,
cleaning, maintenance, management and security of the Telehouse Complex shall
be allocated among all of the buildings (including the Building) located
within the Telehouse Complex on an equitable basis as determined by Landlord
in its reasonable discretion according to generally acceptable accounting
principles. Without in any way limiting the generality of the foregoing,
Building Operating Expenses shall include the following:
(i) salaries, wages, bonuses, fringe benefits and the cost of any pension
or retirement plan or of any life or disability or other benefits with respect
to the employees of Landlord engaged in the operation, repair, cleaning,
maintenance, management and security of the Building at or below the grade of
director of operations; provided, that if any such employees of Landlord
--------
provide services for more than one building of Landlord, then a prorated
portion of their wages,benefits and taxes shall be included in Building
Operating Expenses, based on the portion of their working time devoted to the
Building;
(ii) social security, unemployment and other payroll taxes;
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(iii) electricity for use in common areas; gas, steam or other fuel;
operation of elevators and security systems; heating, cooling, air
conditioning and ventilating in common areas; hot and cold water, sewer and
other utilities; utility taxes, water rates and charges and sewer rental;
(iv) cleaning (including windows), painting, trash removal, security and
other services and replacement of tubes, bulbs, lamps and ballasts required
for building standard lighting;
(v) the cost of all appropriate insurance, required to be carried by
Tenant under the Lease, including Workers Compensation, property, casualty,
rental or business interruption, liability and fidelity insurance and
insurance consultants;
(vi) repairs and maintenance of the Telehouse Complex and the Building
and its systems, not including capital expenditures;
(vii) landscaping;
(viii) building and cleaning goods and supplies;
(ix) the cost of, or rental charges (including interest charges paid by
Landlord) for, machinery, equipment, tools, maintenance facilities or systems
used in the operation, repair, cleaning, maintenance,management and security
of the Building, and any sales and other taxes thereon;
(x) uniforms and dry cleaning;
(xi) management fees, or if no management fee is being charged, an amount
not in excess of the amount which would be paid for managing a similar data
center;
(xii) service agreements on equipment and service contracts and charges
of independent contractors;
(xiii) telephone, telegraph, fax (or other telecommunication) costs
incurred by Landlord in the management and operation of the Building and
stationery;
(xiv) legal, accounting and professional fees and disbursements (other
than with respect to Landlord's leasing of space in the Building);
(xv) costs of capital improvements and replacements which are made after
completion of the Building or Telehouse Complex which are intended to reduce
Operating Costs, and actually do so by an amount greater than the cost
thereof, or which are required by law, amortized over the shortest useful life
permitted by the Internal Revenue Code of 1986 for such improvements and
replacements, including interest charges paid by Landlord or, in the absence
of actual interest, imputed interest at the Interest Rate;
(xvi) licenses, permits and inspections;
(xvii) depreciation on personal property, tools and moveable equipment
used in the operation repair,cleaning, maintenance, management or security of
the Building or the Telehouse
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Complex or provided by Landlord for the use or benefit of lessees or
occupants, including window coverings and carpeting in public corridors;
(xviii) costs of contesting the validity or applicability of any law if a
successful contest would reduce Building Operating Expenses;
(xix) those taxes, duties, charges, levies and assessments which are
expensed as a part of the Building's or the Telehouse Complex's operation,
repair, cleaning, maintenance, management and security, but which are not
included within Taxes (as defined below), such as sales, use and utility
taxes;
(xx) all expenses and costs incurred by Landlord (other than for capital
improvements, which are covered by clause (xv) of this Section) as a result of
or in order to comply with applicable laws, including laws pertaining to
energy or natural resource conservation or environmental protection (such as
the costs of securing alternative sources of utilities, energy or other
products or services and the costs of making the Building, the Premises or the
Telehouse Complex compatible with the use of such alternative sources);
(xxi) all charges, taxes, surcharges, assessments or penalties imposed
by any government agency or public utility as a means of conserving or
controlling the consumption of water, gas, electricity, energy sources or
other natural resources;
(xxii) all charges imposed by the Port Authority with respect to the
operation, repair, cleaning, maintenance, management and security of the
Teleport or the Infrastructure for which Landlord is obligated to pay under
the Ground Lease;
(xxiii) rent (excluding annual basic ground rent, basic operating
expense rental and additional operating expense rental) payable to the Port
Authority under the Ground Lease; and
(xxiv) any and all other costs and expenses of any kind or nature paid
in connection with the operation, repair, cleaning, maintenance, management
and security of the Building, or the Premises.
5.1.6 BUILDING OPERATING EXPENSES-EXCLUSIONS. The term Building
--------------------------------------
Operating Expenses excludes:
(i) expenses relating to leasing space in the Building and the Telehouse
Complex (including tenant improvements, leasing commissions and advertising
expenses);
(ii) legal charges incurred for collection of accounts, or negotiation of
leases, or relating to disputes between Landlord and other lessees and
occupants of the Building or the Telehouse Complex;
(iii) the cost of electricity and other utilities and services furnished
directly to the Premises or to space leased to other lessees and occupants to
the extent that such lessees and occupants pay for such utilities and services
directly or reimburse Landlord for such costs other than as provided in this
Article V;
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(iv) the cost of repairs or replacements incurred by reason of fire or
other casualty or Eminent Domain to the extent to which Landlord has actually
received compensation therefor through proceeds of insurance, or would have
received proceeds if Landlord carried required insurance or condemnation
awards;
(v) taxes;
(vi) depreciation (other than on personal property, tools and moveable
equipment as described in Clause (xvii) of Section 5.1.5 above), and interest
and principal on mortgages encumbering the Building, the TELEHOUSE Complex,
or Landlord's interest under the Ground Lease;
(vii) telephone, telegraph, fax or other telecommunication costs incurred
by lessees and occupants of the Telehouse Complex or the Building;
(viii) costs and expenses otherwise includable in Building Operating
Expenses, to the extent that Landlord is reimbursed from other sources for
such costs and expenses;
(ix) salaries, wages, bonuses, fringe benefits and the cost of any
pension or retirement plan or of any life or disability or other benefits with
respect to the employees of Landlord above the grade of director of
operations;
(x) annual basic ground rent payable to the Port Authority under the
Ground Lease and payments under any mortgage encumbering the Building and/or
the estate created by the Ground Lease; and
(xi) costs of performing work or furnishing services for tenants other
than this Tenant at the Landlord's expense.
It is the intention of the parties that Tenant shall not be required to make
duplicate payments of any Building Operating Expense item, if such payment was
made in relation to the item pursuant to any other provision of this Lease;
nor shall Tenant be required to pay any item as an Building Operating Expense
to the extent Landlord is reimbursed for such item, whether by another tenant,
through insurance proceeds or otherwise.
5.1.7 BUILDING OPERATING EXPENSES ADJUSTMENT. If during all or part of
---------------------------------------
any Lease Year the Rentable Area of the Building is not fully occupied by
tenants, the Building Operating Expenses for such Lease Year shall be adjusted
to reflect the Building Operating Expenses which would have been payable had
the Building been fully occupied throughout such Lease Year.
SECTION 5.2 PAYMENT OF TAXES AND BUILDING OPERATING EXPENSES. Landlord shall
-------------------------------------------------
pay all Taxes and Building Operating Expenses and Tenant shall reimburse
Landlord for Tenant's Share thereof, in accordance with this Section 5.2.
5.2.1 PAYMENT OF TENANT'S SHARE OF TAXES.
-----------------------------------
5.2.1.1 TAX PAYMENT AND TAX STATEMENT. Tenant shall pay to Landlord as
------------------------------
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Additional Rent, an amount equal to Tenant's Share of Taxes for any Lease Year
or Partial Lease Year in the manner set forth in this Section 5.2.1. At any
time during or after a Lease Year, Landlord may render to Tenant a statement
(the "Tax Statement") showing (a) the Taxes for the Lease Year and (b)
Tenant's Share of any such Taxes (the "Tax Payment"). Tenant shall pay to
Landlord, in (2) equal installments, in advance, on June 1 and December 1 of
each year, the Tax Payment shown on the Tax Statement. If the taxing authority
changes the number or amount of installments of Taxes or the dates on which
Taxes are required to be paid, then the amounts or the due dates of the
installments of the Tax Payment shall be correspondingly revised so that the
Tax Payment (or the installments thereof) will be due not more than thirty
(30) days prior to the date the corresponding payment is due to such
authority. If any additional Taxes are imposed during any Lease Year or if
any Tax Statement contains an error, Landlord may at any time deliver revised
Tax Statements to Tenant, and the provisions of this Section 5.2.1.1 regarding
the timing of the Tax Payment shall apply to such revised Tax Statements.
Landlord's failure to render a Tax Statement during any Lease Year or failure
to make a demand under this Section 5.2.1 shall not prejudice Landlord's right
to render a Tax Statement with respect to such Lease Year during any
subsequent Lease Year or with respect to any subsequent Lease Year, and shall
not affect Tenant's obligation to pay the Tax Payment for such Lease Year or
act as a waiver of any kind. Whenever so requested, but not more than once a
year, Landlord shall furnish Tenant with a reproduced copy of the tax bill for
the Taxes for the current or next succeeding Lease Year, if theretofore issued
by the taxing authority.
5.2.1.2 ADJUSTMENTS OF TAX PAYMENT. The Tax Payment shall be prorated
--------------------------
for any Partial Lease Year in which the Lease Term shall commence or end. If
a Tax Statement is furnished to Tenant after the commencement of the Lease
Year in respect of which such Tax Statement is rendered, Tenant shall, within
thirty (30) days after receipt, pay to Landlord the amount shown thereon. If,
after Tenant shall have made a Tax Payment and regardless of whether this
Lease shall have terminated, Landlord shall receive a refund of any portion of
the Taxes on which such payment shall have been based, Landlord shall have the
option either to pay to Tenant Tenant's Share of the net refund after
deduction of all expenses (including, but not limited to, attorneys' and
appraisers' fees and disbursements and witnesses' fees) incurred by Landlord
in connection with obtaining the refund or to credit such sum against
subsequent Tax Payments; provided, however, that Tenant's Share of such refund
-------- -------
shall be limited to the amount, if any, which Tenant had theretofore paid to
Landlord in respect of Taxes for such Lease Year.
5.2.1.3 MISCELLANEOUS TAX MATTERS. Tenant shall receive Tenant's Share
--------------------------
of any discount that Landlord may receive by virtue of any early payment of
Taxes or on account of any exemption or abatement of Taxes, and Taxes shall be
calculated by taking such discounts into account. Subject to the second
sentence of Section 5.1.7, Taxes shall be computed initially on the assessed
valuation in effect at the time the Tax Statement is issued to Tenant,
regardless of any then pending proceeding for reduction of such assessed
valuation. Only Landlord shall be eligible to institute tax reduction or
other proceedings to reduce the assessed valuation of the Telehouse Complex or
the Building or contest any item comprising Taxes. Notwithstanding the
foregoing, Tenant shall have the right to participate in, at Tenant's sole
cost and expense, or maintain, at Tenant's sole cost and expense, appropriate
proceedings to seek reduction of any Tax imposed on Tenant's property under
the provisions of the New York State Tax Law imposing a tax on
telecommunications equipment or other Tenant's property. Tenant's liability
for any Tax Payment due under this Section 5.2.1 shall survive the expiration
or earlier termination of this Lease, and shall be payable within thirty (30)
days after demand therefor following such expiration
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or termination. In no event shall any adjustment of any Tax Payment hereunder
result in a decrease in Base Rent.
5.2.2 PAYMENT OF TENANT'S SHARE OF BUILDING OPERATING EXPENSES.
---------------------------------------------------------
5.2.2.1 OPERATING EXPENSE STATEMENT. Tenant shall pay to Landlord as
----------------------------
Additional Rent an amount equal to Tenant's Share of Building Operating
Expenses for any Lease Year or Partial Lease Year in the manner set forth in
this Section 5.2.2. Promptly after the commencement of each Lease Year,
Landlord shall submit to Tenant a statement (the "Operating Expense
Statement") setting forth Landlord's estimate of Building Operating Expenses
for such Lease Year and indicating Tenant's Share of the estimated Building
Operating Expenses. For the first Lease Year, Tenant's Share of estimated
Building Operating Expenses is set forth in Section 1.1 as the Initial
Tenant's Share of Building Operating Expenses (the "Operating Expense
Payment"). Landlord's failure to render an Operating Expense Statement during
any Lease Year or failure to make a demand under this Section 5.2.2 shall not
prejudice Landlord's right to render an Operating Expense Statement with
respect to such Lease Year during any subsequent Lease Year or with respect to
any subsequent Lease Year, and shall not affect Tenant's obligation to pay
Tenant's Share of such Building Operating Expenses for such Lease Year or act
as a waiver of any kind. Within thirty (30) days of receipt of an Operating
Expense Statement, Tenant shall pay to Landlord a sum equal to one-twelfth
(1/12th) of such estimated Building Operating Expenses multiplied by the
number of months (including any partial months) to and including the then
current month which have elapsed since the commencement of such Lease Year,
less the aggregate of any payments made on account of Building Operating
Expenses made since the commencement of such Lease Year pursuant to this
Section 5.2.2; and, thereafter, commencing with the first day of the month
following the furnishing to Tenant of an Operating Expense Statement and
continuing monthly on the first day of every month thereafter until rendition
of the next succeeding Operating Expense Statement, Tenant shall pay an amount
equal to one-twelfth (1/12th) of Tenant's Share of such estimated Building
Operating Expenses.
5.2.2.2 MISCELLANEOUS BUILDING OPERATING EXPENSE MATTERS. Tenant's
-------------------------------------------------
liability for Tenant's Share of Building Operating Expenses due under this
Section 5.2.2 shall survive the expiration or earlier termination of this
Lease, and shall be payable within thirty (30) days after demand therefore
following such expiration or termination. In no event shall the Base Rent
ever be reduced by the operation of any provision of this Section 5.2.2.
5.2.3 TENANT'S OBJECTION TO TAX STATEMENT OR OPERATING EXPENSE
--------------------------------------------------------
STATEMENT. Any Tax Statement or Operating Expense Statement shall be
----------
conclusively binding upon Tenant unless (a) Tenant shall send Landlord a
notice within one hundred and eighty (180) days of receipt thereof stating
that Tenant objects to Landlord's determination therein of (i) the Tax Payment
or (ii) the Operating Expense Payment, and specifying the reasons for such
objection and further stating that Tenant desires to make the examination
permitted by this Section 5.2.3, and (b) within sixty (60) days after the
examination in clause (a) above, Tenant shall give Landlord a notice that it
still disputes Landlord's determination of such Tax Payment or Operating
Expense Payment, as the case may be, specifying with reference to the
particular books and records of Landlord, the particular respects in which
such Tax Statement or Operating Expense Statement is claimed to be inaccurate
and that it requests that such dispute be determined by arbitration pursuant
to Section 5.2.4. of this Lease.
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From and after the date of Tenant's notice under clause (a) above until
the expiration of the time period within which Tenant may send its notice
under clause (b) above, Landlord shall afford Tenant or its representatives
the right on as many occasions as shall be reasonably necessary to examine
(and make extracts from and copies of Landlord's books, records and all other
data relating to the operation, repair, cleaning, maintenance, management and
security of the Building. Each time Tenant desires to make any such
examination, it shall give reasonable advance notice to Landlord of the date
on which it will conduct such examination. Tenant shall conduct such
examination at the business office of Landlord during the normal business
hours of such office. Tenant shall maintain all information obtained in the
course of such examination in strict confidence.
No dispute by Tenant shall excuse or abate Tenant's obligation to make
the payments required by this Section 5.2 pending resolution of Tenant's
objection. Any dispute by Tenant shall be determined by arbitration pursuant
to Section 5.2.4.
If the Tax Payment for such Tax Year or the Operating Expense Payment for
such Lease Year, as determined by such arbitration (or settlement), is more or
less than the amount thereof indicated in the Tax Statement or the Operating
Expense Statement, as the case may be, Tenant shall pay to Landlord any
difference in Landlord's favor, and Tenant shall receive a credit against the
next installments of Additional Rent in respect of Taxes or Operating
Expenses, as the case may be (or, following the expiration of the Term, a
refund), for any difference in Tenant's favor; provided, that if any Rents are
-------- ----
due and owing to Landlord under this Lease, Landlord may apply such credit
against any such Rents due and owing.
5.2.4 Arbitration. Any dispute under Section 5.2.3 shall be determined
-----------
by arbitration conducted in New York, New York in accordance with the rules of
the American Arbitration Association (or its successor) by a panel of three
(3) arbitrators. Each arbitrator shall be an independent certified public
accountant who is an employee or member of an accounting firm national in
scope. Tenant shall designate an arbitrator meeting the foregoing
requirements in its written notice requesting arbitration made pursuant to
Section 5.2.3. Landlord shall, by written notice to Tenant, designate a
second arbitrator meeting the foregoing requirements within thirty (30) days
after receipt of Tenant's notice. Within thirty (30) days after Landlord's
notice to Tenant, the two arbitrators so designated shall select the third
arbitrator, and if they do not do so, the third arbitrator shall be selected
by the American Arbitration Association. Landlord and Tenant shall execute
all documents and do all other things necessary to submit the dispute to
arbitration pursuant to this Section 5.2.4. A judgment or order may be
entered in any court of competent jurisdiction based upon an arbitration award
made in an arbitration pursuant to this Section 5.2.4. The costs and expenses
of arbitrations shall be shared equally between Landlord and Tenant, but each
party shall be responsible for its own costs and expenses and the fees and
expenses of its own witnesses and counsel and the arbitrator designated by it.
The arbitrators shall have the right to consult experts in the matter under
arbitration; provided, that such consultations shall be made only after ten
-------- ----
(10) days' prior notice to Landlord and Tenant and only in their presence,
with full right on their part to cross-examine such experts. The
arbitrators' decision and award shall be in writing and counterpart copies
thereof shall be delivered to Landlord and Tenant. In rendering their
decision and award, the arbitrators shall have no power to vary, modify or
amend any provision of this Lease.
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ARTICLE VI
SERVICES AND UTILITIES
----------------------
SECTION 6.1 ELECTRICITY.
------------
6.1.1 DIRECT SUPPLY. Electrical power shall be furnished directly to
--------------
the Premises by the Port Authority for so long as the Port Authority provides
electrical power to the Building, and Tenant shall obtain electrical power
directly from the Port Authority. The costs of such service (which shall be
at least one hundred fifteen percent (115%) of the cost to the Port Authority
of the same quantity of electrical power) shall be paid by Tenant directly to
the Port Authority on such terms and conditions as the Port Authority may
establish. Notwithstanding the foregoing, if Tenant's consumption of
electrical power exceeds the standard of forty (40) Volt-Amps per square foot
of Useable Area, Tenant shall pay as Additional Rent an amount calculated
according to the Excessive Electricity Schedule annexed hereto as Exhibit "F".
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6.1.2 ADDITIONAL ELECTRICAL EQUIPMENT. If Tenant from time to time
--------------------------------
shall require additional electrical power for use in the Premises in excess of
the quantity being previously supplied to the Premises, Tenant may obtain such
additional electrical power from the Port Authority so long as Tenant's use of
electrical power will not exceed the capacity of existing feeders to the
Building or the risers, conduits, transformers, cables, switches, meters,
switchboards or wiring installations and Tenant's use of electrical power will
not, in Landlord's reasonable judgment, overload such installations or
interfere with the use thereof by other lessees and occupants of the Building.
If, in Landlord's reasonable judgment, such excess requirements cannot be
furnished unless additional risers, conduits, feeders, transformers, cables,
switches, meters, switchboards or installations are installed in the Premises
or the Building, Landlord, upon written request of Tenant, will, to the extent
that such excess requirements can in Landlord's reasonable opinion be
practically and safely met without undue interference with the use and
occupancy of other lessees and occupants, proceed with reasonable diligence to
install such additional risers, conduits, feeders, transformers, cables,
switches, meters, switchboards or installations provided the same and the use
thereof (i) shall be permitted by the Port Authority, (ii) shall not cause
permanent damage to the Building or the Premises or create a dangerous
condition or entail unreasonable Alterations or unreasonably interfere with,
or disturb other lessees or occupants of the Building or increase the premiums
for any insurance on the Building, and (iii) shall comply with applicable
laws; but no risers, conduits, feeders, transformers, cables, switches,
meters, switchboards or installations may be installed without Tenant's first
submitting plans and obtaining the prior written consent of Landlord (which
shall not be unreasonably withheld) and the Port Authority. Tenant shall pay
all costs and expenses incurred by Landlord in connection with such
installation of additional risers, etc., within thirty (30) days after receipt
of an invoice and documentation substantiating all charges. All meters and
all panel boards, feeders, risers, wiring, transformers, switches,
switchboards and other conductors or equipment required for the Premises to
receive electrical power directly from the Port Authority and/or public
utility shall be installed by Landlord at Tenant's expense, the amount of
which shall be equal to the direct, out-of-pocket costs and expenses actually
incurred by Landlord, plus the Landlord's Improvement Fee as described in
Section 8.6. Notwithstanding the above, Landlord agrees that the installation
of a second CPC/PDU, as necessary to accommodate up to 105 cabinets will be
acceptable.
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6.1.3 LANDLORD'S CONSENT TO ELECTRICAL ALTERATIONS. In order that
--------------------------------------------
Landlord may at all times have all necessary information that it requires to
maintain and protect its equipment, Tenant agrees that Tenant will not make
any alteration of or addition to, the electrical equipment or wiring in the
Premises without the prior written consent in each instance of Landlord (which
shall not be unreasonably withheld) and, if required, of the Port Authority.
6.1.4 [INTENTIONALLY OMITTED]
-----------------------
6.1.5 PROVISION OF EMERGENCY POWER. Except as provided in this Section
----------------------------
6.1.5, Landlord shall not be liable in any way to Tenant for any failure,
inadequacy or defect in the supply or character of electrical power furnished
to the Premises caused by any applicable law or any act or omission of the
Port Authority or for any other reason not attributable to the gross
negligence or willful misconduct of Landlord. However, in the event of an
interruption in the electrical power furnished by the Port Authority, Landlord
shall furnish emergency electrical power to the Premises as follows:
(i) Landlord shall provide to the Premises an emergency power system
consisting of (a) four diesel generators located in the Building equipped with
a 48-hour capacity fuel tank, and (b) an uninterruptable power source ("UPS
----
System") with batteries which operate to provide electrical power from the
-------
time of the interruption in the Port Authority's service until the generators
are operating, but not exceeding fifteen (15) minutes.
(ii) Landlord shall operate the emergency power system to provide two
categories of electrical power to the Premises. The first category, referred
to as "Essential Power", is electrical power in quantity at least equal to
one-half (1/2) of the quantity of electrical power normally consumed by Tenant
during the time of year in which the interruption occurs in Tenant's operation
of its lighting and air-conditioning equipment for office space. The second
category, referred to as "Critical Power", is electrical power in quantity at
least equal to the quantity of electrical power normally consumed by Tenant
during the time of year in which the interruption occurs in Tenant's operation
of its computers in the Premises.
Provided, that Landlord shall use its best efforts to furnish both Essential
--------
Power and Critical Power to the Premises at all times during any interruption
of the Port Authority's service, but Landlord shall not be liable to Tenant
for any loss, liability, damage or expense which Tenant may sustain or incur
if (i) all or part of the emergency power system fails to operate or (ii) the
electrical power supplied to the Premises by Landlord's emergency power system
is interrupted due to an event of Force Majeure or otherwise or (iii) the
quantity or character of electrical power supplied by Landlord's emergency
power system changes or is no longer available or suitable for Tenant's
requirements, except for actual damage suffered by Tenant and resulting from
Landlord's willful misconduct or gross negligence, and then only after actual
notice thereof to Landlord and Landlord's failure to cure within a reasonable
time. Notwithstanding anything to the contrary contained in this Section
6.1.5, in no event shall Landlord be liable to Tenant or any third Person for
consequential damages. Provided, further, that Landlord will maintain in good
working order and condition all equipment and conductors required to furnish
the Premises with normal and emergency electrical power; will not interrupt or
diminish electrical power supplied to the Premises unless required due to an
emergency, and will use its best efforts to notify Tenant not less than five
(5) business days in advance of an anticipated or planned interruption or
diminution of power
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furnished to the Premises. In the event that the supply of electrical power to
the Premises is interrupted by any cause except Tenant's acts or omissions,
and such interruption results in the shut down of Tenant's computer and/or
communications equipment in the Premises and prevents Tenant from engaging in
its business for a period in excess of one hour in any calendar day, then the
Base Rent and Tenant's Share of Building Operating Expenses shall be abated
for such calendar day.
SECTION 6.2 WATER.
-----
6.2.1 PROVISION OF WATER. Landlord shall provide hot and cold water for
------------------
ordinary lavatory and drinking purposes only in the common areas.
Additionally, Landlord shall provide chilled water to the Premises as
necessary for the cooling of the computer and/or communications equipment
therein and for conditioning air for office space cooling.
6.2.2 FAILURE OF WATER SUPPLY. Except as provided in this Section
-----------------------
6.2.2, Landlord shall not be liable to Tenant for any loss, liability, damage
or expense which Tenant may sustain or incur by reason of any failure,
inadequacy or defect in the supply or character of water furnished to the
Premises or the common areas except for actual damage suffered by Tenant by
reason of any such failure, inadequacy or defect caused by the gross
negligence or willful misconduct of Landlord, and then only after actual
notice thereof to Landlord and Landlord's failure to cure within a reasonable
time, and in no event shall Landlord be liable to Tenant or any third Person
for consequential damages. In the event that the supply of chilled water for
cooling the computer and/or communications equipment in the Premises is
interrupted by any cause except Tenant's acts or omissions, and such
interruption results in the shut down of Tenant's computer and/or
communications equipment in the Premises and prevents Tenant from engaging in
its business for a period in excess of one hour in any calendar day, then the
Base Rent and Tenant's Share of Building Operating Expenses shall be abated
for such calendar day.
SECTION 6.3 ELEVATORS AND CLEANING. Landlord shall (i) provide necessary
----------------------
passenger elevator service on a 24-hour basis each day and shall provide
freight elevator service and loading dock service on business days from 8:00
o'clock a.m. to 6:00 o'clock p.m. and on Saturdays from 8:00 o'clock a.m. to
1:00 o'clock p.m. (collectively, "Business Hours") and (ii) provide office and
window cleaning services, and remove Tenant's ordinary office refuse and
rubbish, all pursuant to the Cleaning Specifications provided in Exhibit "C"
-----------
annexed hereto. Landlord shall not be required to provide janitorial services
for portions of the Premises used for computer operations or for storage. The
terms "Business Days" and "Saturdays" as used in this Section 6.3 and in
Section 6.4 shall not include Sundays or Federal or New York State legal
holidays. Landlord shall have the right to make reasonable changes in the
operation of the elevators or the loading dock in the Building and shall have
the right to discontinue, temporarily or permanently, the use of any one or
more cars in any of the banks of elevators provided reasonable elevator
service is furnished to the Premises as above provided.
SECTION 6.4 HEATING AND AIR CONDITIONING.
----------------------------
6.4.1 HEATING. Landlord shall, through the heating equipment of the
-------
Building, furnish the common areas of the Building with heat sufficient in
Landlord's reasonable judgment for comfortable occupancy of the common areas
between October 1st and May 14th. Tenant shall be responsible for providing
heating to the Premises.
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6.4.2 AIR CONDITIONING. Landlord shall, through the air conditioning
----------------
equipment of the Building, furnish the common areas of the Building with air
conditioning sufficient in Landlord's reasonable judgment for comfortable
occupancy of the common areas between May 15th and September 30th. Tenant
shall be responsible for providing air conditioning to the Premises.
6.4.3 MISCELLANEOUS HVAC PROVISIONS. Any heating, ventilating or air
-----------------------------
conditioning equipment required by Tenant for the proper operation of Tenant's
computer or for the comfortable occupancy by Tenant of the Premises and any
utilities required for the operation of such equipment shall be furnished,
installed, maintained and obtained by Tenant, at Tenant's sole cost, in
accordance with the applicable provisions of this Lease and Exhibit "B".
Landlord shall not be required to provide any heat, ventilating or air
conditioning to the Premises other than conditioned fresh air as required by
applicable law. Landlord and Tenant shall at all times cooperate fully with
each other, and Tenant shall abide by all the Rules and Regulations which
Landlord may reasonably prescribe or which the Port Authority may prescribe
for the proper functioning of the Building's heating, ventilating and air
conditioning system. Landlord upon reasonable notice (except in emergency)
shall have free and unrestricted access to any and all heating, ventilating
and air conditioning facilities in the Premises.
6.4.4 EFFECT ON HVAC OF CHANGES IN PREMISES. Tenant understands that
-------------------------------------
(i) any occupancy of the Premises, in whole or in part, for any purpose other
than the Permitted Use or (ii) any rearrangement of partitioning which
interferes with normal operation of the Building's heating, ventilating and
air conditioning system, may require changes or alterations in said system or
in the ducts through which the system operates, and Tenant accordingly agrees
that any changes or alterations so occasioned shall be made only with the
prior written consent of Landlord which Landlord will not unreasonably
withhold (and the consent of the Port Authority), and shall be done by Tenant
at Tenant's expense, and otherwise subject to the provisions of Article VIII,
to the extent applicable.
SECTION 6.5 SERVICE INTERRUPTION. Landlord reserves the right to interrupt,
--------------------
curtail, stop or suspend service or operation of the heating, air
conditioning, elevator, plumbing, mechanical and electrical systems when
Landlord is required to do so because Landlord has been mandated by law to
adhere to a recognized energy, water or other resource conservation program
promulgated by any governmental or quasi-governmental agency, bureau, board,
commission, department, office or other division thereof. Landlord may take
such action as it deems appropriate to comply with any such program, including
making Alterations to the Building or Premises, provided such actions do not
adversely affect Tenant's use and occupancy of Premises. Landlord agrees,
however, that it will use its best efforts to minimize interference with
Tenant's use of the Premises in effecting such and that Landlord diligently
will prosecute same to completion. Landlord agrees that it will not apply the
restrictions of such program to Tenant on a discriminatory basis. Subject to
the provisions of Section 6.1.5, Landlord reserves the right without liability
to Tenant to interrupt, curtail, stop or suspend service or operation of the
heating, air conditioning, elevator, plumbing, mechanical and electrical
systems, when necessary by reason of accident, or emergency, or for repairs or
Alterations desirable or necessary in the reasonable judgment of Landlord to
be made, until said repairs or Alterations shall have been completed.
Landlord agrees, however, that it will use its best efforts to minimize
interference with Tenant's use of the Premises in effecting such and that
Landlord diligently will prosecute same to completion.
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SECTION 6.6 ADDITIONAL TENANT USE. At the Commencement Date, and from time
---------------------
to time thereafter, Landlord may impose a reasonable charge at no profit, as
Additional Rent, and establish reasonable Rules and Regulations for: (a) the
use by Tenant of the heating, air conditioning, or ventilation systems serving
the common areas, or of the loading dock or freight elevator at any time other
than during Business Hours; or (b) the use by Tenant of chilled water in
amounts exceeding the amounts Landlord has undertaken to provide in Section
6.2.1 of this Article VI. All requests for additional services must be
submitted in writing to the Building's superintendent (or such other person
designated by Landlord), by a person authorized by Tenant to make such
requests, before 3:00 o'clock p.m. on weekdays for weekday service and before
3:00 o'clock p.m. the day preceding holidays and weekends for holiday or
weekend service. In the event of emergency, after-hours service may be
obtained by calling the Building's superintendent (or such other person
designated by Landlord) in sufficient time to enable him to provide the
service requested, and Tenant shall follow up with a written confirmation.
Landlord may also impose a reasonable charge, as Additional Rent, for the use
of any additional or unusual cleaning services required because of any non-
building standard improvements in the Premises or for the removal of any
refuse and rubbish from the Premises, other than discarded material placed in
wastepaper baskets and left for emptying as an incident to Landlord's normal
cleaning of the Premises. Landlord may charge Tenant an additional charge for
cleaning if Tenant has glass partitions or an unusual amount of glass surfaces
in the interior of the Premises. Any charges imposed under the provisions of
this Section shall not exceed charges imposed for the provision of such
services in similar, first-class data centers.
SECTION 6.7 EXCULPATION OF LANDLORD FOR UTILITIES.
-------------------------------------
Except as provided in Section 6.1.5 and Section 6.2.2, Landlord shall not be
liable for any failure to furnish any services or utilities when such failure
is caused by events of Force Majeure, accidents, breakage, necessary repairs,
including any governmental energy, water or other resource conservation
program and including any interruption in service by the Port Authority, and
Tenant shall not be entitled to any damages nor shall such failure abate or
suspend Tenant's obligation to pay the Rents or constitute or be construed as
a constructive or other eviction of Tenant.
SECTION 6.8 ACCESS. Tenant agrees to allow Landlord, its cleaning contractor
------
and their employees, to have access to the Premises after 5:30 o'clock p.m.
and before 8:00 o'clock a.m. and to have the right to use, without charge
therefor, all light and electrical power in the Premises reasonably required
to clean the Premises.
SECTION 6.9 COMMUNICATION FACILITIES. During the Lease Term, until Landlord
------------------------
gives Tenant written notice to the contrary, Teleport Communications Group, a
partnership, shall, under the terms of the Ground Lease, be the exclusive
provider of communications services and facilities at the Teleport, including,
without limitation, all antennas, conduit, and cabling and including any such
items located in, on, or around any buildings and structures at the Teleport,
and Tenant shall not, and shall not permit any other Person to, install,
contract for, or use, or cause to be installed, contracted for, or used, any
such items, services, or facilities at the Teleport not provided by Teleport
Communications Group without the prior written approval of Teleport
Communications Group, which may be withheld or subject to such conditions as
Teleport Communications Group in its sole discretion may determine, provided,
--------
however, that Teleport Communications Group may consent to internal building
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wiring and internal terminal equipment
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furnished by Tenant, but only if Teleport Communications Group is reasonably
satisfied after testing and inspection that such wiring and equipment is
technologically compatible with its telecommunications equipment and
configurations at the Teleport. Notwithstanding the above, Tenant will have
access to fiber based services of both the Teleport Communications Group and
Bell Atlantic.
ARTICLE VII
INSURANCE
---------
SECTION 7.1 PROPERTY INSURANCE. During the Lease Term, Landlord shall
------------------
maintain All Risk property insurance, covering the Building and insuring the
Building in the amount of its full replacement value, with loss of rents
coverage. The amount of any deductible shall be determined by Landlord but
shall not exceed that which is commercially reasonable for a first-class data
center.
SECTION 7.2 LIABILITY INSURANCE. During the Lease Term, Landlord shall
-------------------
maintain public liability insurance covering the Building and insuring against
all hazards and risks customarily insured against by Persons operating data
communications buildings. During the Lease Term, Tenant shall maintain
comprehensive general liability insurance, written on an occurrence basis with
blanket contractual liability coverage, broad form property damage and such
other coverage as Landlord may reasonably require, with respect to the
Premises, their use and occupancy by Tenant and the conduct or operation of
business therein, with combined single-limit coverage of not less than Five
Million Dollars ($5,000,000). Landlord may, from time to time, but not more
frequently than once every three (3) years, increase the policy amount to be
maintained by Tenant under this Section 7.2 as Landlord reasonably deems
necessary in order to maintain adequate liability coverage, provided, that the
policy amount does not exceed the policy amount required for other tenants
within the Building.
SECTION 7.3 USE OF PREMISES. Tenant shall not do, or permit anything to be
---------------
done, in or about the Premises which might, solely by reason of the particular
nature of Tenant's use of the Premises: (a) increase any insurance rate with
respect to the Building over the rate which would otherwise then be in effect,
or (b) result in insurance companies of good standing refusing to insure the
Building in amounts satisfactory to Landlord, or (c) result in the
cancellation of any policy covering or relating to the Building.
SECTION 7.4 WAIVER OF SUBROGATION.
---------------------
7.4.1 WAIVER INCLUDED IN POLICY. Landlord and Tenant shall each secure
-------------------------
an appropriate clause in, or an endorsement upon, each property insurance
policy required by this Article VII, pursuant to which the insurance company
waives subrogation or permits the insured, prior to any loss, to agree with a
third party to waive any claim it might have against said third party without
invalidating the coverage under the insurance policy. On Tenant's policies,
the waiver of subrogation or permission for waiver of any claim shall extend
to Landlord and its agents and employees and against other lessees in the
Building, provided, that such other lessees agree to a waiver of their
--------
respective rights of subrogation against Tenant. On Landlord's policies, the
waiver
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of subrogation or permission for waiver of any claim shall extend to Tenant
and its agents and employees. If such waiver be unobtainable, the parties
shall include in their property insurance policies (i) an express agreement
that such policy shall not be invalidated if the insured waives or has waived
before the casualty the right of recovery against any party responsible for a
covered casualty or (ii) any other form of permission for the release of such
responsible party. If such waiver, agreement or permission shall not be, or
shall cease to be, obtainable without additional charge or at all, the insured
party shall so notify the other party promptly after notice thereof. If the
other party shall agree in writing to pay the insurer's additional charge
therefor, such waiver, agreement or permission shall (if obtainable) be
included in the policy. In the event either party's insurer shall refuse to
permit such waiver, agreement or permission even with an additional charge,
then the other party shall have the right to designate another insurer with a
Best's Insurance Guide rating of A-XI or better who would be prepared to
permit such waiver, and the first party shall use such other insurer.
7.4.2 LANDLORD'S WAIVER. As long as Landlord's casualty insurance
-----------------
policies include the waiver of subrogation or agreement or permission to
release liability referred to in Section 7.4.1, Landlord hereby waives, for
itself and those claiming through or under it, any right of recovery against
Tenant, any other permitted occupant of the Premises, and of their partners,
employees, agents or contractors, for any loss occasioned by fire or other
insured casualty, whether or not arising from the negligence of Tenant or its
employees, agents or contractors. If at any time any of Landlord's property
insurance policies shall not include such or similar provisions, the waiver
set forth in the foregoing sentence shall, upon notice given by Landlord to
Tenant, be of no further force or effect (or, if the insurer shall not grant
such waiver for all of the required parties, such waiver shall be of no force
or effect only with respect to the required parties not included in such
waiver). To the extent that Landlord is at any time a self-insurer with
respect to loss, damage or destruction by fire or other casualty, Landlord
agrees to waive any claim or right of recovery which Landlord might have
against Tenant for any loss occasioned by fire or other casualty, whether or
not arising from Tenant's negligence.
7.4.3 TENANTS' WAIVER. As long as Tenant's property insurance policies
---------------
include the waiver of subrogation or agreement or permission to release
liability referred to in Section 7.4.1 and provided that Landlord provides the
waiver referred to in Section 7.4.2, Tenant hereby waives (and agrees to use
reasonable efforts to cause all other occupants of the Premises to execute and
deliver to Landlord instruments waiving), for itself and those claiming
through or under it, any right of recovery against Landlord, the other
additional insureds and any of their partners, employees, agents or
contractors, and against other lessees of the Telehouse Complex to the extent
that the policies of such other lessees permit a similar waiver for the
benefit of Tenant and such other lessee actually gives such a waiver, for any
loss occasioned by fire or other insured peril, whether or not arising from
the negligence of Landlord or its employees, agents or contractors. If at any
time any of Tenant's property insurance policies shall not include such or
similar provisions, the waiver set forth in the foregoing sentence shall, upon
notice given by Tenant to Landlord, be of no further force or effect (or, if
the insurer shall not grant such waiver for all of the required parties, such
waiver shall be of no force or effect only with respect to the required
parties not included in such waiver). To the extent that Tenant is at any
time a self-insurer with respect to loss, damage or destruction by fire or
other peril, Tenant agrees to waive any claim or right of recovery which
Tenant might have against Landlord for any loss occasioned by fire or other
peril, whether or not arising from Landlord's negligence provided that
Landlord provides the waiver referred to in Section 7.4.2.
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7.4.4 LIMITATION ON WAIVER. Except to the extent expressly provided in
--------------------
this Section 7.4, nothing contained in this Lease shall relieve either party
of any liability to the other or to its insurance carriers which such party
may have under law or the terms of this Lease in connection with any damage to
the Building by fire or other peril.
SECTION 7.5 POLICY REQUIREMENTS. Landlord and its agents and employees, the
-------------------
City of New York, the New York City Public Development Corporation, the Port
Authority and any other Superior Lessor or any Superior Mortgagee whose name
and address shall have been furnished to Tenant shall be designated as
additional insureds on any insurance policy required by this Article VII.
Tenant shall deliver to Landlord certificates of insurance for the insurance
coverage required by this Article VII, in form reasonably satisfactory to
Landlord, issued by the insurance company or its authorized agent, within
thirty (30) days of the Commencement Date. Tenant shall procure and pay for
renewals of such insurance from time to time before the expiration thereof,
and Tenant shall deliver to Landlord such renewal certificate(s). At
Landlord's request, Tenant shall deliver certificates of insurance to
additional insured parties. All policies shall be issued by companies of
recognized responsibility, reasonably acceptable to Landlord, and licensed to
do business in the State of New York. All policies shall provide that they
cannot be cancelled or modified unless Landlord, the Port Authority and any
other Superior Lessor or any Superior Mortgagee named as an additional insured
are given at least thirty (30) days' prior written notice of such cancellation
or modification. All insurance policies involving liability shall contain a
provision that in any action or proceeding under or in connection with such
policy, the insurance carrier shall not without obtaining express advance
consent from the General Counsel of the Port Authority raise any defense
involving in any way the immunity of the Port Authority, its Commissioners,
officers, agents or employees, the governmental nature of the Port Authority,
the provisions of any statutes respecting suits against the Port Authority, or
the jurisdiction of the tribunal over the person of the Port Authority.
Tenant shall not carry separate or additional insurance, concurrent in form or
contributing in the event of any loss or damage with any insurance required to
be obtained by Tenant under this Lease. Tenant may carry any insurance
coverage required of it hereunder pursuant to blanket policies of insurance so
long as the coverage afforded Landlord and the other additional insureds
thereunder shall not be less than the coverage which would be provided by
direct policies.
SECTION 7.6 PREMIUM INCREASE. If, by reason of any default by Tenant under
----------------
this Lease after notice and beyond any applicable grace period, or by reason
of any Tenant's Work installed in the Premises except for any work performed
by Landlord pursuant to the terms hereof, including without limitation, the
work referred to in Section 2.3 of this Lease, the premiums on Landlord's
insurance on the Building (including without limitation rent insurance) are
higher than they otherwise would be, Tenant shall correct such default, and
Tenant shall reimburse Landlord, within thirty (30) days after demand, as
Additional Rent, for that part of the premiums attributable to the default by
Tenant or the Tenant's Work. If, due to the particular manner of Tenant's use
of the Premises, any such insurance shall be cancelled by the insurance
carrier, then Tenant shall cease such use or occupancy and shall indemnify,
defend and hold Landlord harmless against any loss which would have been
covered by such insurance. A schedule or statement of rates for the Building,
issued by the insurance companies insuring the Building, or by a fire
insurance rating organization or other similar body making rates for insurance
for the Building, shall be conclusive evidence of the facts therein stated and
of the several items and charges in the insurance rate then applicable to the
Building.
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ARTICLE VIII
ALTERATIONS
-----------
SECTION 8.1 CONDITIONS.
----------
SECTION 8.1.1 ALTERATIONS BY TENANT. With Landlord's prior approval, which
---------------------
will not be unreasonably withheld, and the prior approval of the Port
Authority, if such approval is required pursuant to the Ground Lease, Tenant
may from time to time, at its expense, make such alterations, improvements,
additions and replacements (including installation of fixtures, cables, wires)
and decorations (collectively, "Alterations") in and to the Premises as Tenant
may desire, provided that: (a) the Alterations do not affect the outside
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appearance of the Building and are not visible from the outside of the
Building; (b) the Alterations are non-structural and do not impair the
strength or structural integrity of the Building; (c) the Alterations are to
the interior of the Premises and do not affect any part of the Building
outside of the Premises; (d) the Alterations do not adversely affect the
proper functioning of the mechanical, electrical, sanitary and other service
systems of the Building, or unreasonably increase the usage of such systems by
Tenant; (e) before proceeding with any Alteration (other than decorations),
Tenant shall submit to Landlord, for Landlord's reasonable approval, plans and
specifications for the work to be done, and Tenant shall not proceed with such
work until it obtains Landlord's approval, which shall not be unreasonably
withheld; (f) Tenant shall pay to Landlord upon demand the reasonable direct,
out-of-pocket costs and expenses actually incurred by Landlord in reviewing
Tenant's plans and specifications and inspecting the Alterations to determine
whether they are being performed in accordance with the approved plans and
specifications and in compliance with law, including the fees of any architect
or engineer employed by Landlord for such purpose; and (g) Tenant shall comply
with the rules and regulations of Landlord and the Port Authority (including
applicable provisions of the Ground Lease) then in force with respect to the
making of Alterations. Tenant hereby agrees that the review and approval by
Landlord of Tenant's plans and specifications for Alterations are solely for
Landlord's benefit. Landlord shall have no duty toward Tenant, nor shall
Landlord be deemed to have made any representation or warranty to Tenant with
respect to the safety, adequacy, correctness, efficiency or compliance with
law of the plans and specifications, the Alterations or their design, or any
other matter regarding the Alterations. Landlord shall, at no cost or expense
to Landlord, cooperate reasonably with Tenant and its contractors and
subcontractors in obtaining all permits, approvals, certificates and bonds
required under this Article VIII.
SECTION 8.1.2 ALTERATIONS BY LANDLORD. Landlord reserves the right, at any
-----------------------
time, to make such Alterations, in or to the Building, the Telehouse Complex
and the respective systems and equipment of each, as well as in or to street
entrances, doors, halls, passages, elevators, escalators and stairways, and
other public parts of the Building, as Landlord shall deem necessary or
desirable. However, Landlord shall not exercise its rights under this Section
8.1.2 in a manner that would materially interfere with Tenant's use or access
to the Premises, reduce Tenant's usable square footage, materially alter the
configuration of the Premises, or in any manner effect the Tenant's ability to
continue their permitted use of the Premises.
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SECTION 8.2 PERFORMANCE. Landlord or Tenant shall obtain all necessary
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governmental permits and certificates for the construction of the Alterations
which either of them undertakes and for the use and occupancy of the
Alterations upon completion. Tenant shall retain a reputable contractor,
selected from Landlord's list of acceptable contractors and independently
approved by Landlord (which approval shall not be unreasonably withheld) and
by the Port Authority for specific Alterations, to perform the Alterations in
compliance with the permits and certificates and applicable law. Alterations
shall be diligently performed in a good and workmanlike manner, using new
materials and equipment at least equal in quality and class to the better of:
(a) the original installations of the Building, or (b) the prevailing building
standards established by Landlord. Any Alterations by Tenant in the
mechanical, electrical, sanitary, heating, ventilating, air-conditioning or
other systems of the Building shall be performed only by contractors
designated by Landlord. Alterations shall be performed in a manner that
causes the least interference with the use of the Building by lessees and
occupants and in a manner that does not interfere unreasonably with, delay or,
in the case of Tenant's Alterations, impose additional expense on Landlord in
the maintenance, repair or operation of the Building; and if any additional
expense is incurred by Landlord as a result of any Alterations by Tenant,
Tenant shall reimburse Landlord for such additional expense, within thirty
(30) days after demand, as Additional Rent. Throughout the performance of
Alterations by Tenant, Tenant shall carry, or cause its contractors to carry,
workers' compensation insurance as required by law and general liability
insurance, with completed operations endorsements, for any occurrence in or
about the Building, in such coverage limits as Landlord may reasonably
require, with insurers meeting the requirements of Section 7.5. Landlord and
the Persons specified in Section 7.5 shall be designated as additional
insureds on such insurance policies. Tenant shall furnish Landlord with
evidence reasonably satisfactory to Landlord that such insurance is in effect
before the commencement of Alterations and, on request of Landlord during
construction, Tenant shall provide evidence reasonably satisfactory to
Landlord that the insurance remains in effect. Upon completion of any
Alterations, Landlord or Tenant shall obtain certificates of final approval of
such Alterations required by any governmental authority and, in the case of
Alterations performed by Tenant, shall furnish Landlord with copies thereof,
together with the "as-built" plans and specifications therefor as approved in
accordance with law and the Rules and Regulations for the Building and the
Teleport. If any of Tenant's Alterations involve the removal of fixtures,
equipment or other property in the Premises which are not Tenant's Property,
the removed fixtures, equipment or other property shall be promptly replaced
at Tenant's expense with new fixtures, equipment or other property of like
utility and at least equal value, unless Landlord otherwise directs Tenant in
writing.
SECTION 8.3 LIENS AND VIOLATIONS.
--------------------
8.3.1 DISCHARGE OF LIENS AND VIOLATIONS. Tenant shall promptly procure
---------------------------------
the cancellation or discharge of all notices of violation arising from or
otherwise connected with Alterations, or any other work, done for Tenant, or
any person claiming through or under Tenant, which shall be Authority or the
Building Department of the City of New York or any other public authority.
Tenant shall not utilize materials in Alterations that are subject to security
interests or liens. Tenant shall defend, indemnify and hold Landlord harmless
from and against all liens and encumbrances or claims of liens or encumbrances
filed in connection with Alterations, or any other work, labor, services or
materials done for or supplied to Tenant, including security interests in any
materials, fixtures or articles installed in the Premises; and against all
costs, expenses and liabilities incurred in connection with any such lien or
encumbrance, or claim of lien or
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encumbrance, its removal or any related action or proceeding. Subject to
Tenant's right to contest as set forth below, Tenant shall satisfy or
discharge of record each lien or encumbrance within twenty (20) days after it
is filed. If Tenant fails to do so, Landlord shall have the right to satisfy
or discharge such lien or encumbrance by payment to the claimant on whose
behalf it was filed or by payment into court or to the County Clerk pursuant
to the New York Lien Law. Tenant shall reimburse Landlord within thirty (30)
days after demand for the costs and expenses so incurred by Landlord, as
Additional Rent, and without regard for any defense or offset that Tenant may
have had against the claimant.
8.3.2 TENANT'S RIGHT TO CONTEST LIENS. Notwithstanding anything to the
-------------------------------
contrary contained in this Section 8.3, Tenant shall have the right to contest
in good faith and with diligence the correctness or the validity of any lien,
encumbrance or claim therefor if Tenant discharges the lien of record, whether
by deposit of funds into the appropriate court or with the County Clerk or by
procuring and recording a lien release bond issued by a corporation authorized
to issue surety bonds in the State of New York in an amount equal to one and
one-half (1.5) times the amount of the claim of lien, encumbrance or claim
therefor. The bond shall meet the requirements of New York law and shall
provide for payment of any sum that the claimant may recover on the claim,
together with costs of suit if it recovers in the action. Nothing in this
Lease contained shall be construed as a consent on the part of Landlord to
subject Landlord's estate in the Premises to any lien or liability under the
Lien Law of the State of New York.
SECTION 8.4 LABOR CONDITIONS. In the performance of Alterations, Tenant
----------------
shall not permit any Labor Condition to arise or continue at the Building or
the Teleport which interferes with the progress of other construction work at
the Building or the Teleport. The determinations of the Port Authority or
Landlord as to whether any Labor Condition interferes with the progress of
other construction work at the Teleport or the Building shall be conclusive on
Tenant so long as such determinations are not arbitrary or capricious and,
upon notice from the Port Authority or Landlord, Tenant shall, or shall cause
its contractor to, rectify any Labor Condition specified in the notice as soon
as is reasonably possible, unless failure to rectify such Labor Condition
immediately will result in an emergency situation, in which event Tenant
shall, or shall cause its contractor to, rectify such Labor Condition
immediately. In the event of failure by Tenant or its contractor to comply
with the requirements of this Section (whether or not such failure is due to
Tenant's fault), the Port Authority or Landlord by notice shall have the right
to suspend the Port Authority's or Landlord's permission to Tenant to proceed
with any portion of the Alterations being performed, and Tenant shall
thereupon immediately cease the same. Unless failure to immediately suspend
construction will result in an emergency condition, the Port Authority has
agreed to give, and Landlord will give, reasonable advance notice before
directing a cessation of construction. When the Labor Condition shall be so
settled that such interference no longer exists, the Port Authority has agreed
to, or Landlord, by notice to Tenant, shall, reinstate the permission to
Tenant to perform the Alterations on all the same terms and conditions as
before the suspension. "Labor Condition" shall mean and include strikes,
boycotts, picketing, work-stoppages, slowdowns, complaints, disputes,
controversies or any other type of labor trouble, regardless of the employer
of the Person involved or their employment status, if any.
SECTION 8.5 PORT AUTHORITY'S FEE. If the Port Authority shall charge any fee
--------------------
in connection with any Alteration to the Premises, Tenant shall pay the fee.
SECTION 8.6 IMPROVEMENT FEE. Tenant shall pay to Landlord as Additional Rent
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in
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connection with any Alterations except for those performed by Landlord in
connection with Tenant's initial occupancy of the Premises, Landlord's fee
(the "Improvement Fee"), which shall not exceed (i) fifteen percent (15%) of
the total cost of such Alteration if Landlord performs the Alteration on
Tenant's behalf, and (ii) if Tenant performs the Alteration, all of Landlord's
reasonable actual costs and expenses in connection with such Alteration. There
shall be excluded from such computation the cost of furniture, furnishings,
draperies, office, computer and communication equipment, painting, cabinetry,
items of special decoration and telephone installation. Prior to making any
Alteration, Tenant shall submit to Landlord a statement of Tenant's
contractor, estimating the total cost of such Alteration. The Improvement Fee
shall be calculated on the basis of such estimate and paid in equal monthly
installments during the course of the performance of the Alteration, together
with the monthly installments of Base Rent. Upon completion of the Alteration,
Tenant shall submit to Landlord a statement of Tenant's contractor, certifying
the total cost of such Alteration. The Improvement Fee shall be adjusted, if
necessary, based on the certification. Within thirty (30) days after
completion of the Alteration, Tenant shall pay to Landlord any remaining
balance of the Improvement Fee. If the Improvement Fee, as adjusted, is less
than the amount theretofore paid to Landlord, Landlord, within thirty (30)
days after receipt of the certification, shall refund to Tenant the amount of
such overpayment.
ARTICLE IX
LANDLORD'S AND TENANT'S PROPERTY
--------------------------------
SECTION 9.1 TENANT'S PROPERTY. All computer, communications and office
-----------------
equipment, whether or not attached to or built into the Premises, which are
installed in the Premises by or for the account of Tenant, without expense to
Landlord, and which can be removed without substantial damage to the Premises
or the Building, and all furniture, furnishings and other articles of movable
personal property owned by Tenant and located in the Premises shall remain the
property of Tenant ("Tenant's Property") and may be removed by Tenant at any
time during the Lease Term. Prior to the expiration of the Lease Term, or
immediately upon any earlier termination of this Lease, Tenant shall remove
from the Premises all of Tenant's Property (except such items thereof as
Landlord has expressly permitted to remain, which shall become the property of
Landlord). Tenant shall repair any damage to the Premises or to the Building
resulting from the installation or removal of Tenant's Property. Equipment or
other property for which Landlord shall have granted an allowance or credit to
Tenant, or any item installed for Tenant's account, but in replacement of an
item that was not Tenant's Property, shall not be deemed Tenant's Property and
shall become the property of Landlord.
SECTION 9.2 FIXTURES. All fixtures, equipment (other than equipment referred
--------
to in Section 9.1), improvements and appurtenances attached to or built into
the Premises at the Commencement Date or during the Lease Term, including
Alterations, shall become and remain a part of the Premises and the property
of Landlord, regardless of whether they were installed by Tenant or at
Tenant's expense, and shall not be removed by Tenant.
SECTION 9.3 [INTENTIONALLY OMITTED.]
SECTION 9.4 ABANDONMENT. If Tenant does not remove items of Tenant's
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Property from
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the Premises after the expiration or earlier termination of the Lease Term,
Landlord may consider such items to have been abandoned. In that event
Landlord may retain such items as its property or dispose of them, at Tenant's
expense, in such manner as Landlord shall determine.
SECTION 9.5 TAXES ON TENANT'S PROPERTY AND NON-STANDARD TENANT IMPROVEMENTS.
---------------------------------------------------------------
9.5.1 TAXES ON TENANT'S PROPERTY. Tenant shall pay all taxes levied or
---------------------------
assessed upon Tenant's Property. If the assessed value of the Building is
increased by the inclusion of a value placed upon Tenant's Property, Tenant
shall pay to Landlord, within thirty (30) days after demand, as Additional
Rent, the taxes (including payments in lieu of taxes) levied against Landlord
on account of the included value of Tenant's Property. Landlord shall
uniformly apply this Section 9.5.1 or a similar provision to all tenants of
the Building and if Landlord does not uniformly apply such a provision,
Landlord shall not include in Building Operating Expenses any taxes that
should have been charged directly to other tenants of the Building under the
terms of such a provision.
9.5.2 [INTENTIONALLY OMITTED.]
ARTICLE X
REPAIRS AND MAINTENANCE
-----------------------
SECTION 10.1 Landlord's Obligations. Landlord, at its expense, shall keep
----------------------
and maintain the Building's exterior walls, glass, structural components, roof
and foundation and the public portions of the Building and the Building
systems and facilities serving the Premises, including, without limitation,
the mechanical, electrical, sanitary, ventilating, air conditioning and other
systems, in proper working order, condition and repair. Landlord's obligation
to perform such repairs in the Premises, or with respect to Building systems
and facilities serving the Premises, shall arise promptly after Tenant has
notified Landlord or Landlord has actual knowledge of the need for such
repairs in the Premises.
SECTION 10.2 TENANT'S OBLIGATIONS. Except for Landlord's obligations as set
--------------------
forth specifically in Sections 10.1 and 13.1, Tenant shall take good care of
the Premises and Tenant's Property. Tenant shall promptly replace all
scratched, damaged or broken doors and interior glass in the Premises with
doors and glass that match as nearly as practicable the damaged item unless
such damage or breakage is caused by the acts or omissions of Landlord.
Tenant shall be responsible for all repairs, maintenance and replacement of
wall and floor coverings and electrical fixtures and equipment in the Premises
(excluding the portions of the HVAC system located outside of the Premises and
excluding the sprinkler system and life safety system). Additionally, Tenant
shall be responsible for all maintenance and repairs, interior and exterior,
structural and non-structural, ordinary and extraordinary, of the Premises,
the Building and the Building's facilities and systems, made necessary, in
whole or in part, by: (a) the performance or existence of Tenant's Work or
Alterations (excluding any Work or Alterations performed by Landlord under the
Lease); b) the installation or use of Tenant's Property in the Premises; (c)
the moving of Tenant's Property into or out of the Building; (d) an act or
omission of Tenant or its officers, partners,
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employees, agents, representatives, contractors, sublessees or invitees; or
(e) the particular nature of Tenant's use or occupancy of the Premises. Tenant
shall promptly make all repairs in or to the Premises for which Tenant is
responsible, and such repair work shall be subject to the provisions of
Article VIII regarding Alterations, to the extent applicable. Tenant shall
also be responsible for any repairs and maintenance of the Infrastructure
required as a result of the acts or omissions of Tenant, its officers,
partners, employees, agents, representatives, contractors, sublessees or
invitees. Landlord shall perform or cause to be performed, at Tenant's
expense, any other repairs of the Building and its facilities and systems or
the Infrastructure for which Tenant is responsible. Tenant shall reimburse
Landlord on demand, as Additional Rent, for the costs of such repairs, plus
fifteen percent (15%) of such costs as an allowance for Landlord's overhead
and indirect costs.
SECTION 10.3 EXCULPATION OF LANDLORD FOR REPAIRS. Except as otherwise
-----------------------------------
expressly provided in this Lease, Landlord will not be liable to Tenant and
Tenant's obligations under this Lease shall not be reduced or abated, by
reason of any inconvenience, annoyance, interruption or injury to business
arising from Landlord making any maintenance, repairs or Alterations in or to
any portion of the Building or the Premises or in or to the fixtures,
equipment or appurtenances of the Building or the Premises, which Landlord is
required or permitted to make by this Lease, or which are required by law, or
which Landlord deems appropriate, excepting any direct (but not consequential)
damages to the extent caused by the gross negligence or willful misconduct of
Landlord or its employees. Landlord shall have the right to erect scaffolding
and barricades in the Building for purposes of such repairs, provided that
such structures do not unreasonably impair access to or use of the Premises.
Tenant waives any rights it may have under any provisions of law regarding the
duties of a lessor to repair leased premises or the rights of lessees to make
repairs if the lessor fails to do so. In the event that Landlord fails for a
period of thirty (30) days after receipt of written notice from Tenant to
perform maintenance or repairs in the Premises that Landlord is required to
perform by the terms of this Lease, and such maintenance or repairs will not
affect the utility and other systems in the Building nor interfere in any way
with the occupancy and quiet enjoyment of other tenants and occupants of the
Building, then Tenant may make such repairs to the Premises and Landlord shall
pay the reasonable cost of such repairs within thirty (30) days after receipt
of Tenant's itemized invoices for such work.
SECTION 10.4 NOTICE. Tenant will notify Landlord and Landlord will notify
------
Tenant of: (a) any occurrence in or about the Premises for which Landlord
will be liable; (b) any fire or other casualty in the Premises; (c) any damage
to or defect in the Premises, for the repair of which Landlord will be
responsible; and (d) any damage to or defect in any part of the Building's
sanitary heating, ventilating, air-conditioning or other systems located in or
passing through the Premises.
ARTICLE XI
USE AND COMPLIANCE WITH LAW
---------------------------
SECTION 11.1 USE. Tenant shall use and occupy the Premises for the Permitted
---
Use and for no other purpose.
SECTION 11.2 LICENSES AND PERMITS. Tenant shall procure and at all times
--------------------
comply with
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the terms and conditions of any governmental license or permit required for
the lawful conduct of the Permitted Use in the Premises, and Landlord shall
procure and at all times comply with the terms and conditions of any
governmental license or permit required for the lawful occupancy of the
Building, excluding licenses and permits relating to work done by or on behalf
of Tenant. at no cost to the Tenant. Landlord and Tenant shall, at no cost or
expense to Landlord, cooperate with each other in obtaining any governmental
license or permit required under this Section 11.2. Anything contained herein
to the contrary notwithstanding, to the best knowledge of Landlord, the
Permitted Use of the Premises is permissible under all applicable laws,
statutes, rules and regulations affecting the Premises and Landlord maintains
all necessary governmental licenses and permits and certificates of occupancy
for the Permitted use of the Premises.
SECTION 11.3 PROHIBITED USES. Tenant shall not at any time use or occupy or
---------------
allow any Person to use or occupy the Premises or the Infrastructure or do or
permit anything to be done or kept in or about the Premises or the Building or
the Infrastructure that solely by reason of the particular nature of Tenant's
use of the Premises or Infrastructure: (a) violates any certificate of
occupancy in force for the Building or the Infrastructure; (b) causes or is
likely to cause damage to the Building or the Infrastructure or any equipment,
facilities or other systems therein; (c) constitutes a violation of law; (d)
violates a requirement or condition of the standard fire insurance policy
issued for office or data processing buildings in the City of New York or, in
the non-arbitrary and non-capricious judgment of Landlord or the Port
Authority, constitutes an extra-hazardous condition; (e) impairs the
character, reputation, image or appearance of the Building as a first-class
data center; (f) impairs the proper and economic maintenance, operation and
repair of the Building, the Infrastructure or their respective equipment,
facilities or systems; (g) constitutes a nuisance, annoyance or inconvenience
to other lessees or occupants of the Building or the Infrastructure or any
portion of the Telehouse Complex or interferes with or disrupts the use or
occupancy of any area of the Building, the Infrastructure or any portion of
the Telehouse Complex (other than the Premises) by other lessees or occupants
of the Building or the Telehouse Complex or the Teleport; (h) interferes with
the computer or telecommunications operations of any lessee or occupant of the
Telehouse Complex or with the transmission or reception of microwave,
television, radio or other communications signals by antennae located
anywhere within the Teleport (including the Building); (i) constitutes an
unlawful, immoral or objectionable occurrence or condition; or (j) results in
repeated demonstrations, bomb threats or other events which require evacuation
of the Building or any other portion of the Telehouse Complex or otherwise
disrupts the use, occupancy or quiet enjoyment of the Building or any other
portion of the Telehouse Complex by other lessees and occupants. Tenant shall
not use or allow another Person to use any part of the Premises for a
restaurant or bar; the preparation, consumption, storage, manufacture or sale
of food, beverages, liquor, tobacco, drugs or hazardous substances; the
maintenance or operation of vending machines or devices for dispensing or sale
of food, beverages, liquor, tobacco, tobacco products or merchandise of any
kind or any equipment or device for furnishing services to the public,
including pay telephones; the business of photocopying, multilith or offset
printing (but Tenant may use part of the Premises for photocopying in
connection with its own business); a typing or stenography business; a school
or classroom; cooking, lodging or sleeping; or for immoral purposes. No
noise, vibration or odor shall be permitted to escape from the Premises.
SECTION 11.4 COMPLIANCE BY TENANT. Tenant and Landlord shall promptly
--------------------
forward to each other any notice received of the violation of any law
involving the Premises. Tenant shall comply with all laws and all Superior
Leases that impose any obligation arising from or related to:
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(a) the particular manner of Tenant's use of the Premises; (b) the conduct of
Tenant's business or operation of its equipment therein; (c) any cause or
condition created by or at the instance of Tenant; or (d) breach of any of
Tenant's obligations hereunder; and Tenant shall pay all the costs, expenses,
fines, penalties and damages which may be imposed upon Landlord by reason of
or arising out of Tenant's failure to comply with (i) the requirement for
delivery of the notice provided in the first sentence of this Section 11.4 or
(ii) any law or any Superior Lease that imposes any obligation arising from or
related to: (w) the peculiar nature of Tenant's use of the Premises; (x) the
conduct of Tenant's business or operation of its equipment therein; (y) any
cause or condition created by or at the instance of Tenant; or (z) breach of
any of the Premises by Tenant pursuant to this Section 11.4 shall be subject
to the provisions of Article VIII. Anything contained in this Lease to the
contrary notwithstanding, to the best knowledge of Landlord, at the time
possession of the Premises is delivered, the Premises shall comply fully with
(i) all laws regarding life safety, including, without limitation, New York
Local Laws Nos. 5, 16, and 58 and any similar or successor laws thereto, and
(ii) all laws regrading the removal and disposal of asbestos, including,
without limitation, New York City Local Law 76 and any similar or successor
laws thereto and (iii) American Disabilities Act.
SECTION 11.5 SERVICE CONTRACTS. Tenant shall neither contract for, nor
-----------------
employ any labor in connection with, the maintenance or cleaning of, or
providing of any other services to, the Premises or the Building (but
excluding Tenant's Property) without the prior consent of Landlord, which
consent shall not be unreasonably withheld or delayed, and the prior consent
of the Port Authority.
SECTION 11.6 FLOOR LOAD. Tenant shall not place a load upon any floor of the
----------
Premises which exceeds either the load per square foot which such floor was
designed to carry 100 pounds per square foot, or that which is allowed by law.
Landlord reserves the right to prescribe the weight and position of all safes,
business machines and mechanical equipment. Business machines and mechanical
equipment used by Tenant that cause vibrations or noise that may be
transmitted to the Building structure or to any leased space to such a degree
as to be reasonably objectionable to Landlord or to any lessees or occupants
of the Building shall be placed and maintained by Tenant, at its expense, in
settings of cork, rubber or spring-type vibration eliminators sufficient to
eliminate such vibrations or noise.
SECTION 11.7 RIGHT OF REPOSSESSION. If in order to comply with any law now
---------------------
or hereafter enacted, it becomes necessary for Landlord to recover possession
of all or any portion of the Premises, Landlord shall have the right to
repossess the Premises, or such portion thereof, at any time upon one hundred
eighty (180) days' (or any lesser time required by law) notice to Tenant, and
when said space shall have been repossessed, in lieu of any and all claims for
damages, Tenant shall be entitled to a reduction in the Base Rent equal to the
percentage that the Rentable Area of the repossessed space bears to the total
Rentable Area of the Premises, and a reduction in Tenant's Share of Taxes and
Building Operating Expenses by an amount equal to the percentage that the
Rentable Area of the repossessed space bears to the total Rentable Area of the
Building. However, if the space taken is of such an amount or size as to make
the remaining space unusable to Tenant, in Tenant's sole discretion, then
Landlord, upon thirty (30) days' notice from Tenant, shall use its best
efforts to furnish Tenant with comparable space, if available, elsewhere in
the Telehouse Complex and to place Tenant in such new space at Landlord's
expense, and this Lease and each and all of the terms, covenants and
conditions hereof shall thereupon remain in full force and effect and be
deemed applicable to such new space. For this
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purpose, comparable space shall include provision by Landlord of capability
similar to that resulting from Preparation of Premises, Section 2.3, and
Tenant Improvements, Section 3.1. If Landlord is unable to provide Tenant with
such substitute space, then this Lease shall cease and terminate on the date
(the "Repossession Date") designated in writing by Tenant to Landlord at least
thirty (30) days prior to such Repossession Date, which Repossession Date
shall not be later than ninety (90) days from the end of the thirty (30) day
notice period. No exercise by Landlord of any right reserved in this Section
11.7 shall entitle Tenant to damages for any injury or inconvenience
occasioned thereby.
SECTION 11.8 RULES AND REGULATIONS. Tenant shall observe and comply with the
---------------------
Rules and Regulations for the Teleport promulgated by the Port Authority in
the Ground Lease and the Rules and Regulations (the "Rules and Regulations")
for the Building set forth in Exhibit D hereto, and any amendments and
---------
additions thereto as Landlord may reasonably adopt or the Port Authority may
adopt from time to time for the management, safety, security, care,
cleanliness and good order of the Teleport, which Landlord should provide to
the Tenant, or of the Building. Landlord shall not be responsible or liable to
Tenant for violations of the Rules and Regulations by other lessees and
occupants of the Building. Landlord agrees that it shall not apply any Rule
or Regulation to Tenant on a discriminatory basis.
SECTION 11.9 LABOR HARMONY. Tenant shall not use (and upon notice from
-------------
Landlord shall cease using) contractors, labor, materials or equipment that,
in Landlord's reasonable judgment, would disturb labor harmony with the
workforce or trades engaged in performing other work or services in or about
the Building or the Telehouse Complex or which would violate any of the terms
of the Ground Lease.
SECTION 11.10 LANDLORD'S AND PORT AUTHORITY'S CONSENT. In the event Tenant's
---------------------------------------
compliance as required by this Lease necessitates actions by Tenant for which
this Lease requires Landlord's consent and the consent of the Port Authority,
Tenant shall obtain such consents before taking such actions. Landlord will
cooperate in obtaining the Port Authority's consent when necessary.
ARTICLE XII
RIGHTS OF LANDLORD
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SECTION 12.1 Conduits in Premises. Landlord reserves the right, and Tenant
--------------------
shall permit Landlord, to install, erect, use and maintain pipes, ducts and
conduits in and through the Premises when reasonably required; provided that
--------
(i) Landlord shall disguise, conceal or camouflage the pipes, ducts and
conduits, (ii) the same are erected along perimeter walls wherever possible
and are installed in a manner that does not materially detract from the
appearance of the Premises or interfere with Tenant's use and operation of the
Premises.
SECTION 12.2 ENTRY BY LANDLORD. Landlord and its agents shall have the right
-----------------
to enter or pass through the Premises at reasonable times: (a) to examine the
Premises and to show them to actual and prospective lenders, Superior Lessors,
Superior Mortgagees, purchasers, and lessees of the Building; (b) to make
repairs and Alternations in the Premises, the Building or Building
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facilities and equipment; and (c) to take such actions as Landlord deems
necessary or desirable in an emergency, including shutting down or turning off
Tenant's computer, air conditioning, cooling and other equipment. Any entry by
Landlord shall be made on reasonable advance oral notice, except in emergency
situations. In exercising its rights under this Section 12.2, Landlord shall
take reasonable measures to avoid unnecessary interference with Tenant's use
and occupancy of the Premises. Landlord shall have a pass key or card key to
the Premises and shall be allowed to bring materials and equipment into the
Premises as necessary in connection with repairs and Alterations. If work is
to be performed by Landlord in the Premises, Tenant shall afford Landlord
access and the work shall be done with due diligence. Landlord shall not
interfere with Tenant's business operations and shall not cause any
interruption thereto; but Tenant acknowledges that Landlord's work may be done
on business days during business hours and Tenant agrees to cooperate amicably
enabling Landlord to complete such work. Landlord shall repair any damage it
causes to the Premises and shall fully restore the Premises to the condition
existing prior to the commencement of Landlord's work.
SECTION 12.3 [INTENTIONALLY OMITTED.]
SECTION 12.4 EXHIBITING THE PREMISES. During the period of six (6) months
-----------------------
prior to the date of expiration of the Lease Term, Landlord and its agents may
exhibit the Premises to prospective tenants during normal business hours, on
reasonable advance oral notice to Tenant.
SECTION 12.5. [INTENTIONALLY OMITTED]
SECTION 12.6 BUILDING NAME AND ADDRESS. Landlord reserves the right at any
-------------------------
time, without prior notice to Tenant, to change the Building's or the
Telehouse Complex's respective name or address, and Landlord shall have no
liability to Tenant for any cost or inconvenience occasioned thereby.
Landlord shall provide Tenant notice within 5 days of change.
SECTION 12.7 [INTENTIONALLY OMITTED]
SECTION 12.8 SECURITY. Landlord shall supply reasonable security measures
--------
for the Building, consistent with such services supplied for other buildings
in the Teleport. By obligating itself to provide security measures, Landlord
does not warrant or represent the adequacy or sufficiency of such security to
protect persons and property in or about the Premises or the Building, and
Landlord's obligations under this Section 12.8 are expressly subject to the
exculpatory provisions of Article XVI of this Lease. In addition, Landlord
reserves the right to institute such security measures as may be required by
the Port Authority, from time to time.
SECTION 12.9 OTHER RIGHTS. The enumeration of rights of Landlord in this
------------
Article is not all-inclusive, and shall not be construed to preclude or limit
other rights reserved to Landlord by this Lease or by law.
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ARTICLE XIII
DAMAGE OR DESTRUCTION
---------------------
SECTION 13.1 RESTORATION. If the Building or the Premises is partially
-----------
damaged or totally destroyed by fire or other casualty, and if this Lease is
not terminated as provided in this Article XIII, Landlord shall repair the
damage and restore the Building or the Premises (except for Tenant's
Property), as the case may be, with reasonable dispatch after notice to
Landlord of the damage or destruction and the collection of substantially all
of the insurance proceeds receivable on account of the casualty; provided,
--------
that in no event shall Landlord be required to expend on such restoration
amounts in excess of the total insurance proceeds collected on account of the
casualty. Tenant shall not be obligated to repair damage to or destruction of
the Building or the Premises caused by such casualty.
SECTION 13.2 RENT ABATEMENT. If fire or other casualty damages or destroys
--------------
or renders the Premises untenantable, or deprives Tenant of reasonable access
to the Premises, the Base Rent shall be abated or reduced in the proportion
that the Rentable Area of the untenantable portion of the Premises bears to
the total Rentable Area of the Premises, for the period from the date of the
damage or destruction to the date that any damage to the Premises has been
substantially repaired except for Punch-List Items and Tenant has reasonable
access to the Premises and Tenant's Share of Taxes and Building Operating
Expenses shall be adjusted to the percentage that the Rentable Area of the
portion of the Premises that has not been rendered untenantable bears to the
then Rentable Area of the Building after the casualty; provided, however,
-------- -------
should Tenant reoccupy a portion of the Premises for the conduct of Tenant's
Business during the period the repair work is taking place and prior to the
date that the Premises are substantially repaired, the Base Rent and
Additional Rent allocable to such reoccupied portion, based upon the
proportion which the Rentable Area of the reoccupied portion of the Premises
bears to the total Rentable Area of the Premises, shall be payable by Tenant,
and Tenant's Share of Taxes and Building Operating Expenses shall be adjusted
based upon the proportion which the Rentable Area of the reoccupied portion of
the Premises bears to the then total Rentable Area of the Building, from the
date of such occupancy.
SECTION 13.3 [INTENTIONALLY OMITTED]
-----------------------
SECTION 13.4 ELECTION TO TERMINATE.
---------------------
13.4.1 LANDLORD'S ELECTION TO TERMINATE. If: (i) the Building or the
--------------------------------
Premises is totally destroyed by fire or other casualty; or (ii) the Building
is so damaged (whether or not the Premises are damaged or destroyed) that
Landlord elects not to restore the Building; or (iii) less than one (1) year
remains in the Lease Term at the time of the fire or other casualty and the
time necessary to rebuild or repair the Building or the Premises, in the
opinion of a reputable contractor, would exceed ninety (90) days; then, in any
of such cases, either party may terminate this Lease by giving the other party
notice to such effect within ninety (90) days after the date of the casualty.
This Lease shall terminate on the date specified in such party's notice.
13.4.2 TENANT'S ELECTION TO TERMINATE. If: (i) the Building is totally
------------------------------
destroyed by fire or other casualty; or (ii) the Building or the Premises is
damaged to such an extent that Tenant cannot reasonably expect to conduct its
business for a period exceeding ninety (90) days from
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the date of the casualty, Tenant may terminate this Lease by giving Landlord
notice within ninety (90) days after the date of the casualty, and this Lease
shall terminate as of the date of the casualty.
SECTION 13.5 BUSINESS INTERRUPTION. Except as set forth in Section 6.1.5 and
---------------------
Section 6.2.2 of the Lease, Tenant shall not be entitled to any compensation
or rent abatement solely on account of inconvenience, loss of business or
annoyance arising from any repair or restoration of any portion of the
Premises or of the Building pursuant to this Article XIII. Landlord shall
exert reasonable efforts to make such repair or restoration promptly and in
such manner as not to interfere unreasonably with Tenant's use and occupancy
of the Premises, but Landlord shall have no obligation to perform such work on
an overtime or premium-pay base.
SECTION 13.6 TENANT'S PROPERTY. Landlord shall not be obligated to repair
-----------------
any damage to or replace Tenant's Property.
SECTION 13.7 WAIVER. Tenant hereby waives the application of any law, now or
------
hereafter in force, to any case of damage to or destruction of the Building or
the Premises by fire or other casualty, or to a taking of all or part of the
Building or the Premises subject to the provisions of Article XIV below. This
Article XIII constitutes an express agreement governing the case of damage or
destruction of the Premises or the Building by fire or other casualty, and
Section 227 of the Real Property Law of the State of New York, which provides
for such contingency in the absence of an express agreement, shall not apply
in any such case.
ARTICLE XIV
EMINENT DOMAIN
--------------
SECTION 14.1 COMPLETE TAKING. If the whole of the Building or the Premises
---------------
is taken by condemnation, sale in lieu of condemnation, or in any other manner
for any public or quasi-public use or purpose ("Eminent Domain"), this Lease
and the term and estate hereby granted shall terminate as of the date of
vesting of title on such taking or the date that the condemning or purchasing
authority takes possession, whichever is earlier ("Date of the Taking"), and
the Rents shall be prorated and adjusted as of such date.
SECTION 14.2 PARTIAL TAKING. If only part of the Building is taken by
--------------
Eminent Domain, this Lease shall be unaffected by such taking, except that:
(a) if more than twenty-five percent (25%) of the Rentable Area of the
Building shall be taken, whether or not any portion of the Premises shall be
affected thereby, or if so much of the Building shall be taken that Landlord
in the exercise of its good faith business judgment determines that it would
be economically or operationally impractical to operate (including
impracticability of providing conditioned air or of operating the emergency
power system) the portion of the Building remaining after the taking, Landlord
may, at its option, terminate this Lease by giving Tenant sixty (60) days
prior notice to that effect within thirty (30) days after the Date of the
Taking, and (b) if twenty percent (20%) or more of the Premises shall be so
taken and the remaining area of the Premises shall not be reasonably adequate
for Tenant to continue operation of its business, Tenant may terminate this
Lease by giving Landlord sixty (60) days prior notice to that effect within
thirty (30) days after the Date of the
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Taking. This Lease shall terminate on the sixtieth (60th) day after the date
that such termination notice from Landlord or Tenant is given, and the Rents
shall be prorated and adjusted as of such termination date. Upon a partial
taking, where this Lease continues in force as to any part of the Premises,
the Base Rent shall be reduced by the percentage that the Rentable Area of the
portion of the Premises taken bears to the Rentable Area of the Premises prior
to the taking, and Tenant's Share of Taxes and Building Operating Expenses
shall be adjusted to the percentage that the Rentable Area of the portion of
the Premises left to Tenant bears to the Rentable Area of the Building after
the taking.
SECTION 14.3 AWARD. Landlord shall be entitled to receive the entire award or
-----
payment in connection with any taking of the Premises, without deduction for
any estate vested in Tenant by this Lease. Tenant hereby expressly assigns to
Landlord all of its right, title and interest in and to every such award or
payment. Tenant shall be entitled to claim and receive any award or payment
from the condemning authority expressly granted for the taking of Tenant's
Property, interruption of its business or moving expenses, but only if
Tenant's claim does not adversely affect or result in any reduction of
Landlord's or the Port Authority's award or interfere with Landlord's or the
Port Authority's prosecution of its claim for the taking. If Tenant
intervenes in a condemnation proceeding in which Landlord or the Port
Authority is a party, Landlord and Landlord's counsel or the Port Authority
and the Port Authority's counsel shall manage and control the proceeding for
the claimants.
SECTION 14.4 TEMPORARY TAKING. If all or any portion of the Premises is
----------------
taken by Eminent Domain for a limited period of time,not exceeding fourteen
(14) days this Lease shall remain in full force and effect and Tenant shall
continue to perform all of Tenant's obligations under this Lease, including,
without limitation, the payment of Rents. Tenant shall be entitled to receive
that portion of the award which is made for any such temporary taking of the
Premises attributable to any period within the Lease Term and for any damage
to Tenant's Property. Landlord shall be entitled to receive that portion of
the award which is made for any such temporary taking of the Premises
attributable to the period after the expiration of the Lease Term or which is
allocable to the Building, other than the Premises, or to the cost of
restoration of the Premises or which is made for any other purpose. If any
such temporary taking terminates prior to the expiration of the Lease Term,
Tenant shall restore the Premises as nearly as possible to their condition
prior to the taking, at Tenant's sole cost and expense; provided that Tenant
shall receive the portion of the award attributable to such restoration. If
all of the Premises is taken by Eminent Domain for a period of time longer
than ninety (90) consecutive days, then Tenant shall have the right to treat
such taking as a Total Taking and the provisions of Sections 14.1 and 14.3
shall apply. If less than all of the Premises is taken by Eminent Domain for
a period of time longer than ninety (90) consecutive days, then Tenant shall
have the right to treat such taking as a Partial Taking and the provisions of
Sections 14.2 and 14.3 shall apply.
ARTICLE XV
SURRENDER OF PREMISES
---------------------
SECTION 15.1 SURRENDER. On the last day of the Lease Term, or upon any
---------
earlier termination of this Lease, or upon any re-entry by Landlord upon the
Premises, Tenant shall quit
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and surrender the Premises to Landlord "broom-clean" and in good order,
condition and repair, ordinary wear and tear and also excepting any damage or
destruction caused by fire or other casualty which Tenant is not obligated by
this Lease to repair. As provided in Section 9.2, Tenant shall remove all of
Tenant's Property from the Premises.
SECTION 15.2 ACCEPTANCE OF SURRENDER. Prior to expiration of the Lease Term,
-----------------------
or earlier termination of this Lease in accordance with the terms hereof, no
act or thing done by Landlord or its agents (including accepting the keys to
the Premises) shall be deemed an acceptance of surrender of the Premises, and
no agreement to accept such surrender shall be valid unless in writing and
signed by Landlord.
SECTION 15.3 NO MERGER. The surrender of this Lease by Tenant or the
--------
termination of this Lease prior to expiration of the Lease Term shall not
constitute a merger, and at the option of Landlord shall operate as an
assignment to Landlord of any subleases of the Premises.
SECTION 15.4 NO HOLDING OVER. There shall be no holding over by Tenant after
---------------
expiration of the Lease Term, and the failure by Tenant to deliver possession
of the Premises to Landlord shall be an unlawful detainer.
ARTICLE XVI
EXCULPATION AND INDEMNIFICATION
-------------------------------
SECTION 16.1 Exculpation. Except to the extent provided for in this Lease,
-----------
neither Landlord, nor any partner, shareholder, director, officer, agent or
employee of Landlord nor the Port Authority nor the agents or employees of the
Port Authority shall be liable to Tenant or its partners, directors, officers,
contractors, agents,employees, invitees, sublessees or licensees, for any
loss,injury or damage to Tenant or to any other Person, or to its or their
property, irrespective of the cause of such injury, damage or loss, including
but not limited to, claims for damage resulting from: (i) any equipment or
appurtenances becoming out of repair; (ii) injury done or occasioned by
weather conditions; (iii) any defect in or failure of plumbing, heating or air
conditioning equipment, raised flooring, leak detection equipment, gas, water,
and steam pipes, stairs, porches, railings or walks; (iv) broken glass; (v)
the backing up of any sewer pipe or downspout; (vi) the bursting, leaking or
running of any water pipe, air conditioner, humidifier, chiller, tank, tub,
washstand, water closet, waste pipe, sprinkler, drain or any other pipe or
tank in, upon or about the Building or the Premises; (vii) the escape of steam
or hot water; (viii) water, snow or ice being upon or coming through the roof
or any skylight, trapdoor, stair, doorway, window, walk or any other place
upon or near the Building or the Premises or otherwise; (ix) the falling of
any fixture, plaster, tile or stucco; and (x) any act, omission or negligence
of other lessees, licensees or other occupants of the Building or of adjoining
or contiguous buildings or of owners of adjacent or contiguous property;
unless solely caused by or solely resulting from the gross negligence or
willful misconduct of Landlord or its employees in the operation or
maintenance of the Premises or the Building, without any contributing
negligence on the part of Tenant or any of its sublessees or licensees or its
or their employees, agents or contractors, or any other lessees or occupants
of the Building. Further, neither Landlord, nor any partner, shareholder,
director, officer, agent or employee of Landlord nor the Port Authority or the
Commissioners, officers, agents and employees of the Port Authority in its
capacity as Superior
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Lessor shall be liable: (a) for any such damage caused by other lessees or
Persons in or about the Building, or caused by operations in construction of
any private, public or quasi-public work; or (b) for consequential damages,
whether arising out of any loss of the use of the Premises or any equipment or
facilities therein by Tenant or any Person claiming through or under Tenant,
or arising from any other cause including the gross negligence or willful
misconduct of Landlord or its agents, contractors or employees.
SECTION 16.2 INDEMNITY.
---------
(A) To the extent not covered by insurance, Tenant shall defend,
indemnify and hold harmless Landlord, the Port Authority and the Commissioners
of the Port Authority, all Superior Lessors and Superior Mortgagees, and its
and their respective partners, directors, officers, agents and employees (in
the case of the Landlord only, to the extent not covered by insurance
maintained by Landlord) from and against any and all claims, demands,
liability, losses, damages, costs and expenses arising from or in connection
with: (a) the use or occupancy of the Premises or the conduct or management
of the Premises or of any business therein, or any work or act whatsoever
done, or any condition created (other than by Landlord or with respect to
which Landlord is obligated to remedy pursuant to the terms and provisions of
this Lease) in or about the Premises during the Lease Term or during the
period of time, if any, prior to the Commencement Date that Tenant may have
been given access to the Premises or during any holdover by Tenant after the
expiration or earlier termination of this Lease; (b) any act or omission of
Tenant or any of its subtenants or licensees or its or their partners,
directors, officers, members, agents, employees, representatives, contractors,
customers, guests, invitees and other Persons doing business with Tenant or
who are at the Premises with Tenant's consent (whether or not such acts or
omissions occur at the Premises or elsewhere in the Teleport); (c) any
accident, injury or damage whatever (unless caused solely by Landlord's
negligence) occurring in or about the Premises; and (d) any breach or default
by Tenant in the full and prompt payment and performance of Tenant's
obligations under this Lease or under any other lease of space in the
Telehouse Complex or any ancillary service agreement or other agreement
between Landlord and Tenant. If any claim, action or proceeding is brought
against any of the persons indemnified under this Section 16.2 (A) for a
matter covered by this indemnity, Tenant, upon notice from the indemnified
Person, shall defend such claim, action or proceeding by counsel reasonably
satisfactory to Landlord and the indemnified Person. In the conduct of such
defense, Tenant shall not, without obtaining express advance permission from
the General Counsel of the Port Authority, raise any defense involving in any
way the jurisdiction of the tribunal over the person of the Port Authority,
the immunity of the Port Authority, its Commissioners, officers, agents or
employees, the governmental nature of the Port Authority, or the provisions of
any statutes respecting suits against the Port Authority. Any party seeking
indemnification pursuant to this Section 16.2 (A) shall (i) give prompt
written notice to Tenant of the commencement by a third party of any action,
suit or proceeding or of any written threat from a third party of any claim,
action, suit or proceeding for which such party shall seek to be indemnified,
(ii) advise Tenant in writing upon request of the status of the same, (iii)
cooperate, at no expense to such party, with Tenant with respect to the
defense of the same, and (iv) not settle or compromise any such claim, action,
suit or proceeding without Tenant's prior written consent, which consent shall
not unreasonably be withheld. The Tenant's obligations under this Section
16.2 (A) shall not be diminished by any delay or failure to comply with the
foregoing clauses (i) through (iv), except to the extent that such failure or
delay results in any increased costs or material prejudice to Tenant solely as
a result of such failure or delay.
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(B) Landlord shall defend, indemnify and hold harmless Tenant and its
partners, directors, officers, agents and employees (to the extent not covered
by insurance maintained by Tenant) from and against any and all claims,
liability, losses, damages, costs and expenses arising from or in connection
with: (a) the use or occupancy of the Building (other than the Premises) or
the conduct or management of the Building (other than the Premises), or any
work or act whatsoever done, or any condition created (other than by Tenant or
with respect to which Tenant is obligated to remedy pursuant to the terms and
provisions of this Lease) in or about the Building (other than the Premises)
during the Lease Term or during the period of time, if any, prior to the
Commencement Date that Tenant may have been given access to the Premises or
during any holdover (with Landlord's express written consent) by Tenant after
the expiration or earlier termination of this Lease; (b) any act or omission
of Landlord or any of its partners, directors, officers, members, agents,
employees, representatives, and contractors, and other Persons doing business
with Landlord (excluding other tenants and occupants of the Building) (whether
or not such acts or omissions occur at the Building or elsewhere in the
Teleport); (c) any accident, injury or damage whatever (unless causes solely
by Tenant's negligence) occurring in or about the Building (other than the
Premises); and (d) any breach or default by Landlord in the full and prompt
payment and performance of Landlord's obligations under this Lease or any
ancillary service agreement or other agreement between Landlord and Tenant.
If any claim, action or proceeding is brought against any of the persons
indemnified under this Section 16.2 (B) for a matter covered by this
indemnity, Landlord, upon notice from the indemnified Person, shall defend
such claim, action or proceeding by counsel reasonably satisfactory to Tenant
and the indemnified Person. Any party seeking indemnification pursuant to
this Section 16.2 (B) shall (i) give prompt written notice to Landlord of the
commencement by a third party of any action, suit or proceeding or of any
written threat from a third party of any claim, action, suit or proceeding for
which such party shall seek to be indemnified, (ii) advise Landlord in writing
upon request of the status of the same, (iii) cooperate, at no expense to such
party, with Landlord with respect to the defense of the same, and (iv) not
settle or compromise any such claim, action, suit or proceeding without
Landlord's prior written consent, which consent shall not unreasonably be
withheld. Landlord's obligations under this Section 16.2 (B) shall not be
diminished by any delay or failure to comply with the foregoing clauses (i)
through (iv), except to the extent that such failure or delay results in any
increased costs or material prejudice to Landlord solely as a result of such
failure or delay.
SECTION 16.3 TRANSFERS OF LANDLORD'S INTEREST. The term "Landlord" shall
--------------------------------
mean only the owner at the time in question of the present Landlord's interest
in the Building. In the event of a sale or transfer of the Building (by
operation of law or otherwise) or a lease of all or substantially all of the
Building, or a sale or transfer (by operation of law or otherwise) of the
leasehold estate under any such lease, the grantor, transferor or lessor, as
the case may be, shall be and hereby is (to the extent of the interest or
portion of the Building or leasehold estate sold, transferred or leased)
automatically and entirely released and discharged, from and after the date of
such sale and other thus accrued obligations, transfer or leasing, of all
liability in respect of the performance of any of the terms of this Lease on
the part of Landlord thereafter to be performed; it being intended that
Landlord's obligations hereunder shall be binding on Landlord, its successors
and assigns only during and in respect of their respective successive periods
of ownership. In the event of such a sale, transfer or leasing, the covenants
of Landlord shall thereafter be binding upon the transferee of Landlord's
interest. If Landlord's interest in the Building shall be sold, assigned or
otherwise transferred to any Person, including any transfer upon the exercise
of any remedy provided in a Superior Lease or a Superior Mortgage or at law or
equity, that Person, and
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each Person thereafter succeeding to its interest in the Building, shall not
be: (a) liable for any act or omission of Landlord under this Lease occurring
prior to such sale, assignment or other transfer; (b) subject to any offset,
defense or counterclaim accruing prior to such sale, assignment, or other
transfer; (c) bound by any payment prior to such sale, assignment or other
transfer of Base Rent or Additional Rent for more than one month in advance;
and (d) liable for the return of the Security Deposit except to the extent
that the Security Deposit has been paid over to such Person.
SECTION 16.4 RECOURSE LIMITED TO BUILDING. No recourse shall be had on any
----------------------------
of Landlord's obligations hereunder or for any claim based thereon or
otherwise in respect thereof against any agent, incorporator, subscriber to
the capital stock, shareholder, officer, director, or employee, past, present
or future, of any corporation or any joint venturer of a joint venture which
shall be Landlord hereunder or included in the term "Landlord" or of any
successor of any such corporation, or against any principal, disclosed or
undisclosed, or any affiliate of any party which at the time the obligation
accrued shall have been Landlord or included in the term "Landlord", whether
directly or through Landlord or through any receiver, assignee, trustee in
bankruptcy or through any other Person, whether by virtue of any law or by
enforcement of any assessment or penalty or otherwise, except to the extent of
the interest of any of the foregoing in the Building or the proceeds of the
Building, all such liability, except as aforesaid, being expressly waived and
released by Tenant. Tenant shall look solely to Landlord's estate and
interest in the Building or the proceeds of the Building for the satisfaction
of any right of Tenant for the collection of a judgment or other judicial
process or arbitration award requiring the payment of money by Landlord, and
no other property or assets of Landlord, Landlord's agents, incorporators,
subscribers, shareholders, officers, directors, employees, partners,
principals (disclosed or undisclosed) or affiliates shall be subject to levy,
lien, execution, attachment, or other enforcement procedure for the
satisfaction of Tenant's rights and remedies under or with respect to this
Lease, the relationship of Landlord and Tenant, or Tenant's use and occupancy
of the Premises or any other liability of Landlord to Tenant.
SECTION 16.5 RESPONSIBILITY FOR INFRASTRUCTURE. The Infrastructure has been
---------------------------------
designed and constructed and will be repaired and maintained by the Port
Authority. Landlord shall have no responsibility regarding the
Infrastructure, and the Rents will not be reduced or abated, nor will Tenant's
other obligations hereunder be affected, by any defect or change in, or
closure of, or failure to complete, the Infrastructure; provided however, the
----------------
Base Rent and Tenant's Share of Taxes and Building Operating Expenses will be
abated on a daily basis for each day of twelve (12) hours or more that Tenant
is denied access to the Building by some defect in or repair or closure of the
Infrastructure; and provided further, that the provisions set forth in Section
----------------
6.1.5 and Section 6.2.2 shall apply.
ARTICLE XVII
SUBORDINATION AND ATTORNMENT
----------------------------
SECTION 17.1 Subordination. This Lease, and all rights of Tenant under it,
-------------
are subordinate to the Ground Lease and the rights of the Port Authority
thereunder and all present and future ground leases of all or any part of the
Building or any other part of the Telehouse
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Complex (except for leases of office or commercial space within the Building
or other portions of the Telehouse Complex); existing present and future
mortgages encumbering the Building, the Telehouse Complex or any of such
leases, including mortgages also covering other real property; all past and
future advances made under such mortgages, all renewals, modifications,
replacements and extensions of such leases and such mortgages and spreaders
and consolidations of such mortgages; unless the lessor under any such lease
or the mortgagee under any such mortgage elects that this Lease shall be
superior to his lease or mortgage pursuant to Section 17.2. This Section 17.1
shall be self-operative and no further instrument of subordination shall be
required. However, in confirmation of subordination, Tenant shall promptly
execute, acknowledge and deliver any instrument, reasonably satisfactory to
Tenant, that Landlord, the lessor under any such lease or the mortgagee under
any such mortgage or any of their respective successors in interest may
reasonably request to evidence such subordination. If Tenant fails to execute,
acknowledge or deliver any such instrument within fifteen (15) days after
request therefor, such failure shall constitute a material default under this
Lease. Tenant hereby irrevocably appoints Landlord as Tenant's attorney-in-
fact, with full power of substitution, coupled with an interest, to execute,
acknowledge and deliver any such instrument for and on behalf of Tenant in the
event of such a default by Tenant, but exercise by Landlord of its power of
attorney shall not cure the default. Any lease to which this Lease, at the
time referred to, is subordinate (including the Ground Lease) is herein called
a "Superior Lease" and the lessor of a Superior Lease or its successor in
interest, at the time referred to (including the Port Authority), is herein
called a "Superior Lessor"; and any mortgage to which this Lease, at the time
referred to, is subordinate is herein called a "Superior Mortgage" and the
holder of a Superior Mortgage is herein called a "Superior Mortgagee". Each
Superior Lessor or Superior Mortgagee is also herein called a "Superior
Interest Holder".
SECTION 17.2 ELECTION TO SUBORDINATE. By written notice to Tenant, any
-----------------------
Superior Lessor or Superior Mortgagee may elect to subordinate its Superior
Lease or Superior Mortgage to this Lease.
SECTION 17.3 NOTICE AND CURE OF LANDLORD'S DEFAULT. If any act or omission
-------------------------------------
of Landlord would give Tenant the right, immediately or after lapse of a
period of time, to cancel or terminate this Lease, or to claim a partial or
total eviction, Tenant shall not exercise such right until: (a) it has given
written notice of the act or omission to Landlord, to the Port Authority at
its address specified in Section 24.13 and to each Superior Mortgagee and
Superior Lessor whose name and address shall previously have been furnished to
Tenant, which notice shall specifically refer to this Section 17.3 and shall
describe Landlord's default with reasonable detail, specifying the section of
this Lease as to which Landlord is in default, and (b) a reasonable period for
remedying the act or omission shall have elapsed following the giving of such
notice and following the time during which the Port Authority and each such
Superior Mortgagee or Superior Lessor would be entitled under its Superior
Mortgage or Superior Lease to remedy the act or omission (which reasonable
period shall in no event be shorter than the period during which Landlord
would be entitled under this Lease, after similar notice, to effect such
remedy nor be shorter than thirty (30) days). If, within said reasonable
period, the Port Authority or such a Superior Mortgagee or Superior Lessor
gives Tenant notice of its intention to remedy the act or omission, and
thereafter diligently commences the required remedial action and pursues it to
completion, Tenant shall have no right to terminate this Lease on account of
the act or omission.
SECTION 17.4 ATTORNMENT. Any Superior Lessor or Superior Mortgagee who
----------
succeeds to
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the rights of Landlord under this Lease, whether through exercise of remedies
in a Superior Lease or Superior Mortgage or by operation of law, is in this
Section 17.4 called a "Successor Landlord". Subject to the terms of any non-
disturbance agreement between Tenant and the Superior Landlord, if such
Successor Landlord does not elect to treat this Lease as extinguished, upon
the Successor Landlord's request, Tenant shall attorn to and recognize the
Successor Landlord as Tenant's landlord under this Lease and shall promptly
execute and deliver any instrument that such Successor Landlord may reasonably
request to evidence the attornment. Tenant hereby irrevocably appoints
Landlord or the Successor Landlord as Tenant's attorney-in-fact, coupled with
an interest, to execute, acknowledge and deliver the instrument of attornment
on behalf of Tenant in the event Tenant fails to do so within twenty (20) days
after receipt. Upon attornment, this Lease shall continue in full force and
effect and as a direct lease between the Successor Landlord and Tenant, upon
all of the terms, conditions and covenants as are set forth in this Lease,
subject to the provisions of Section 16.3.
SECTION 17.5 Requirements of Superior Lessor or Mortgagee. If any Superior
Lessor or Superior Mortgagee requires any modifications of this Lease, Tenant
shall, at Landlord's request, promptly execute and deliver to Landlord
instruments effecting the modifications that the Superior Lessor or Superior
Mortgagee requires, provided that such modifications do not adversely affect
in a material respect any of Tenant's rights or Landlord's obligation, or
reduce limit or modify, in a manner materially adverse to Tenant, Landlord's
obligations under this Lease.
SECTION 17.6 COMPLIANCE WITH GROUND LEASE.
----------------------------
17.6.1 APPROVAL OF LEASE AND SUBLEASE BY PORT AUTHORITY.
------------------------------------------------
Notwithstanding the execution of this Lease by Landlord and Tenant, if the
Port Authority shall refuse to execute and deliver a consent agreement in the
form attached to the Ground Lease as "Exhibit Z", a copy of which is attached
hereto as Exhibit Z, then on the date of such refusal this Lease shall
terminate and all obligations of Landlord and Tenant arising thereafter shall
be discharged and released automatically. In addition, if the Port Authority
shall fail to execute and deliver a consent agreement in the form attached to
the Ground Lease as "Exhibit Z", a copy of which is attached hereto as Exhibit
Z within fourteen (14) days from the Fixed Commencement Date, then Tenant
shall have the right to terminate this lease and all obligations of Landlord
and Tenant arising thereafter shall thereafter be discharged and released.
Alternatively, if either Landlord or Tenant elects not to perform any of their
respective obligations hereunder until the Port Authority consents, then this
Lease shall not become effective until Landlord, Tenant and the Port Authority
shall each have executed a consent agreement in the form attached to the
Ground Lease as "Exhibit Z", a copy of which is attached hereto as Exhibit Z.
Additionally, no sublease of the Premises or assignment of this Lease shall be
effective until Tenant, its proposed subtenant or assignee and the Port
Authority shall each have executed a consent agreement in the form attached
hereto as Exhibit Z. Use or occupancy of the Premises by Tenant or any
subtenant or assignee pursuant to consent by the Port Authority shall not
entitle any such subtenant or assignee to any rights or privileges which the
Port Authority has or may hereafter accord to lessees of space at the
Teleport.
17.6.2 COMPLIANCE WITH GROUND LEASE. Tenant shall: (i) observe, be
----------------------------
bound by, and comply with all of the terms, provisions, covenants and
conditions of the Ground Lease affecting its operations under or in connection
with this Lease and its occupancy of the Premises; (ii) use the Premises for
the Permitted Use and for no other purpose whatsoever; and (iii) pay
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directly to the Port Authority on demand any rental, fee, charge or other
amount due to Landlord if Landlord shall be under notice of default under the
Ground Lease. Notwithstanding the foregoing and, except as otherwise provided
herein, Tenant shall not be bound by or be required to comply with any payment
obligation of Landlord under the Ground Lease. If the default shall have been
remedied, the Port Authority shall remit to Landlord any such rentals, fees,
charges or other amounts it has collected and which have not been used by the
Port Authority to cure the default pursuant to the terms of the Ground Lease.
No change or modification to this Lease shall be binding on the Port Authority
unless and until the Port Authority shall have given its written approval to
such change or modification. This Lease shall terminate and expire, without
notice to Tenant, no later than the day preceding the date of expiration of
the Ground Lease, or on the earlier expiration date of the Lease Term, or on
the effective date of any revocation of the Port Authority's consent to this
Lease. The Ground Lease requires that this Lease contain the following
provision, and Tenant agrees to perform and comply with the covenants of the
"Tenant" contained therein:
"Tenant covenants and agrees that, if by reason of a default upon the part of
Landlord who is the Lessee under the Underlying Lease covering the demised
premises, to wit, the Agreement of Lease between The Port Authority of New
York and New Jersey as Lessor and TELEHOUSE International Corporation of
America, as Lessee, in the performance of any of the terms or provisions of
such Underlying Lease or if for any other reason of any nature whatsoever such
Underlying Lease and the leasehold estate of the Lessee thereunder are
terminated by summary dispossess proceedings or otherwise, Tenant, at the
request in writing of the then landlord under such Underlying Lease, shall
attorn to and recognize such landlord as Tenant's landlord under this lease.
Tenant covenants and agrees to execute and deliver, at any time and from time
to time, upon the request of the landlord under such Underlying Lease, any
instrument which may be necessary or appropriate to evidence such attornment.
Tenant further waives the provisions of any statute or rule of law now or
hereafter in effect which may terminate this lease or give or purport to give
Tenant any right of election to terminate this lease or to surrender
possession of the premises demised hereby in the event such Underlying Lease
terminates or in the event any such proceeding is brought by the landlord
under such Underlying Lease if such landlord shall have requested in writing
that Tenant attorn, as aforesaid, and in that circumstance Tenant agrees that
this lease shall not be affected in any way whatsoever by any such proceeding
or termination. Nothing contained herein shall obligate the landlord to
request the Tenant to attorn or to accept such attornment from the Tenant."
ARTICLE XVIII
QUIET ENJOYMENT
---------------
SECTION 18.1 Quiet Enjoyment. So long as Tenant timely pays all the Rents
---------------
and performs all of Tenant's other obligations hereunder within the time
periods permitted under this Lease, Tenant shall peaceably and quietly, hold
and enjoy the Premises during the Lease Term without hindrance or ejection by
Landlord or any person lawfully claiming through or under Landlord, subject,
nevertheless, to the provisions and to Superior Leases and Superior
Mortgages. This covenant is a covenant running with the land, and is not a
personal covenant of Landlord, except to the extent of Landlord's interest in
this Lease and for only so long as such
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interest shall continue.
ARTICLE XIX
ASSIGNMENTS AND SUBLEASES
-------------------------
SECTION 19.1 [INTENTIONALLY OMITTED]
SECTION 19.2 PROHIBITION. Tenant shall not mortgage, pledge, encumber or
-----------
otherwise hypothecate this Lease or the Premises or any part thereof in any
manner whatsoever, and any attempt to do so shall be void and a material
breach of this Lease. Provided that Tenant obtains the prior written consent
of the Port Authority pursuant to Section 17.6 and of Landlord in accordance
with the provisions of this Article XIX, then Tenant may (a) assign or
otherwise transfer this Lease or offer or advertise to do so; or (b) sublet
the Premises or any part thereof, or offer or advertise to do so. Any attempt
by Tenant to assign or transfer this Lease or offer or advertise to do so, or
sublet the Premises or offer or advertise to do so, without strictly complying
with the requirements of Section 17.6 and this Article XIX shall be void and a
material breach of this Lease. Use or occupancy of the Premises by a
licensee, concessionaire, or any other Person other than Tenant is a sublease
subject to the provisions of this Article XIX.
SECTION 19.3 CORPORATE AND PARTNERSHIP TRANSACTIONS. If Tenant is a
--------------------------------------
corporation, a dissolution of the corporation or a transfer (by one or more
transactions) of a majority of the voting stock of Tenant shall be deemed an
assignment of this Lease subject to the provisions of Section 17.6 and this
Article XIX; but the provisions of this Article XIX shall not apply to
transactions with a corporation into or with which Tenant is merged or
consolidated or to which substantially all of Tenant's assets are transferred
or which controls or is controlled by Tenant or is under common control with
Tenant, provided that a principal purpose of such merger or transfer is not
the assignment of this Lease and that in any of such events the successor to
Tenant has a net worth computed in accordance with generally accepted
accounting principles at least equal to the net worth of Tenant immediately
prior to such merger, consolidation or transfer. Proof satisfactory to
Landlord of such net worth shall be delivered to Landlord at least thirty (30)
days prior to the effective date of any such transaction. If Tenant is a
partnership, a dissolution of the partnership or a transfer of the
controlling interest in Tenant (including the admission of new partners or
withdrawal of existing partners having a controlling interest) shall be deemed
an assignment of this Lease subject to the provisions of Section 17.6 and this
Article XIX, regardless of whether the transfer is made by one or more
transactions, or whether one or more Persons hold the controlling interest
prior to the transfer or afterwards.
SECTION 19.4 NOTICE TO LANDLORD. Tenant shall give notice to Landlord of any
------------------
proposed assignment or sublease accompanied by: (a) a conformed or
photostatic copy of the proposed assignment or sublease; (b) a statement
setting forth in reasonable detail the identity of the proposed assignee or
sublessee, the nature of its business and (for a proposed sublease) the space
to be sublet; and (c) current financial information with respect to proposed
assignee or sublessee, including, without limitation, its most recent
financial report.
SECTION 19.5 [INTENTIONALLY OMITTED]
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SECTION 19.6 [INTENTIONALLY OMITTED]
SECTION 19.7 [INTENTIONALLY OMITTED]
SECTION 19.8 CONSENT BY LANDLORD. Landlord, in its reasonable judgment,
-------------------
shall either consent, or withhold its consent, to the proposed assignment or
sublease. Landlord may condition its consent on reasonable conditions,
including, without limitation, the following requirements:
19.8.1. The business of the proposed assignee or sub-tenant and its use
of the Premises, or the relevant portion thereof, must be consistent with the
Permitted Use and, in Landlord's judgment, in keeping with the standards of
the Building.
19.8.2 The proposed assignee or subtenant must be a reputable person of
good character, with sufficient assets and income, in Landlord's judgment, to
bear the financial responsibilities of Tenant under this Lease, and Landlord
must be furnished with reasonable proof thereof.
19.8.3 Neither the proposed assignee or sublessee, nor any person who
directly or indirectly, controls, is controlled by, or is under common control
with, the proposed assignee or sublessee or any person who controls the
proposed assignee or sublessee, may then be an occupant of any part of the
Building unless Landlord is unable to provide the proposed assignee or
subtenant with comparable space within the building.
19.8.4 The proposed assignee or sublessee is not presently negotiating
with Landlord to lease space in the Building (or with the Port Authority to
lease space in the Teleport).
19.8.5 The form of the proposed sublease must be reasonably satisfactory
to Landlord and shall comply with the applicable provisions of this Article
XIX.
19.8.6 There may not be more than one Person occupying the Premises, in
the case of an assignment of this Lease or a sublease of all of the Premises,
or occupying the Sublet Portion, in the case of a sublease of part of the
Premises.
19.8.7 In the case of a sublease, Tenant shall not advertise or permit
any broker or agent or other Person to advertise the availability of the
Premises or any portion thereof at an aggregate rent per square foot of
Rentable Area which is less than the current market rent per square foot of
Rentable Area of the Premises that could be obtained if the Premises were
vacant.
19.8.8 The Sublet Portion must be regular in shape and suitable for
normal leasing purposes.
19.8.9 The written consent of the Port Authority to the proposed
sublease or assignment must first be obtained. In this regard, Tenant
acknowledges that under the terms of the Ground Lease the Port Authority's
consent to any subletting or assignment is required and that the Port
Authority has no obligation whatsoever to give such consent.
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SECTION 19.9 MISCELLANEOUS.
--------------
19.9.1 GENERAL TERMS. Any sublease to which Landlord gives its consent
-------------
shall be expressly subject and subordinate to all of the covenants,
agreements, terms, provisions and conditions contained in this Lease and to
the Ground Lease. Tenant shall reimburse Landlord on demand for any
reasonable costs that may be incurred by Landlord in connection with any
proposed assignment or sublease, including, without limitation, the costs of
making investigations as to the acceptability of the proposed assignee or
subtenant, and legal costs incurred in connection with any request for
consent. Any assignment of this Lease to which Landlord gives its consent
shall not be valid or binding on Landlord unless and until the assignee
executes an agreement in form and substance reasonably satisfactory to
Landlord, and expressly enforceable by Landlord, whereby the assignee assumes
and agrees to be bound by all of the provisions of this Lease and to perform
all of the obligations of Tenant hereunder. Tenant's obligation to reimburse
Landlord for costs under this Section shall be limited to an amount equal to
the direct, out-of-pocket costs and expenses actually incurred by Landlord.
Upon request, Landlord shall provide Tenant with copies of all invoices for
which reimbursement is sought and any related documents.
19.9.2 TENANT REMAINS LIABLE. Notwithstanding any sublease to Landlord
---------------------
or any assignment or sublease to any other Person, Tenant will remain fully
liable for the payment of Rents and for the performance of all the other
obligations of Tenant contained in this Lease. Any act or omission of an
assignee or subtenant, or anyone claiming under or through any subtenant, that
violates any of the obligations of this Lease shall be deemed a violation of
this Lease by Tenant.
19.9.3 LANDLORD'S CONSENT REQUIRED. The consent by Landlord and the
---------------------------
Port Authority to any assignment or sublease shall not relieve Tenant or any
Person claiming through or under Tenant of the obligation to obtain the
consent of Landlord and the Port Authority, pursuant to the provisions of
Section 17.6 and this Article XIX, to any future assignment or sublease.
19.9.4 INDEMNIFICATION OF LANDLORD. If Landlord or the Port Authority
---------------------------
declines to give its consent to any proposed assignment or sublease, Tenant
shall indemnify, defend and hold Landlord and the Port Authority harmless
against and from any and all loss, liability, damages, costs and expenses
(including reasonable attorneys' fees) resulting from any claims that may be
made against Landlord or the Port Authority by the proposed assignee or
sublessee, or brokers or other persons claiming a commission or similar
compensation in connection with the proposed assignment or sublease.
19.9.5 GENERAL SUBLEASE PROVISIONS. With respect to each and every
---------------------------
sublease authorized by Landlord under the provisions of this Article XIX, it
is further agreed that:
(i) The term of the sublease must end no later than one day prior to the
last day of the Lease Term.
(ii) No sublease shall be valid, and no subtenant shall take possession
of the Premises or any part thereof, until a fully executed counterpart of
such sublease has been delivered to Landlord.
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(iii) Each sublease shall provide that it is subject and subordinate to
this Lease and the Ground Lease and to all Superior Leases and Superior
Mortgages; that Landlord may enforce the provisions of the sublease,
including collection of rents; that in the event of termination of this Lease
or re-entry or repossession of the Premises by Landlord, Landlord may, at its
option, take over all of the right, title and interest of Tenant, as
sublessor, under such sublease, and such subtenant shall, at Landlord's
option, attorn to Landlord but that nevertheless Landlord shall not: (1) be
liable for any previous act or omission of Tenant under such sublease; (2) be
subject to any defense or offset previously accrued in favor of the subtenant
against Tenant; or (3) be bound by any previous modification of such
sublease made without Landlord's written consent or by any previous prepayment
of more than one (1) month's rent.
19.9.6 MODIFICATION. Landlord shall not be bound by any modification or
------------
amendment to a sublease of the Premises which Landlord has not approved in
writing.
SECTION 19.10 [INTENTIONALLY OMITTED]
SECTION 19.11 ADDITIONAL CHARGES. If Landlord shall give its consent to any
------------------
assignment of this Lease or to any sub-lease, Tenant shall in consideration
therefor, pay to Landlord, as Additional Rent:
(a) in the case of an assignment, an amount equal to the Recapture
Percentage specified in Section 1.1 multiplied by all sums and other
consideration paid to Tenant by the assignee for or by reason of such
assignment (including sums paid for the purchase or rental of part or all of
Tenant's Property to the extent that such sums are intended as consideration
for the assignment of the Lease) less (ii) Tenant Expenses in connection with
such assignment; and
(b) in the case of a sublease, (i) the Recapture Percentage specified in
Section 1.1 multiplied by the amount by which the sublease rental exceeds the
portion of the Rents allocable to the subleased space less (ii) Tenant
Expenses in connection with such sublease. In computing this amount, the
sublease rental shall include all rents, charge and other consideration
payable to Tenant under the terms of the sublease and any collateral
agreements, and also sums paid by the sublessee for the purchase or rental of
all or part of Tenant's Property to the extent that such sums are intended as
sublease rental. The Rents allocable to the subleased space for any period
shall equal the total Rents accruing during such period, multiplied by a
fraction, the numerator of which is the Rentable Area of the subleased space
and the denominator of which is the Rentable Area of the Premises.
Said Additional Rent shall be paid by Tenant to Landlord as and when said
sums, rentals, and other consideration (or any portion thereof) are received
by Tenant; provided that Tenant shall receive a credit toward such Additional
Rent in an amount equal to the net unamortized or undepreciated cost of any of
Tenant's Property that is sold to the assignee or sublessee in connection with
such assignment or sublease, determined on the basis of Tenant's federal
income tax returns, such credit to be prorated over the period during which
such sums, rentals, or other consideration are to be paid by the assignee or
sublessee, in proportion to the amount of such sums, rentals or other
consideration received by Tenant.
For purposes of this Section 19.11, "Tenant Expenses" in connection with
an
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assignment or sublease shall mean all brokerage commissions, legal fees,
takeover expenses and cash contributions or alteration expenses incurred, or
to be incurred, by Tenant in connection with such assignment or sublease.
SECTION 19.12 ACCEPTANCE OF RENT. If this Lease is assigned, whether or not
------------------
in violation of the provisions of this Lease, Landlord may collect Rents from
the assignee. If the Premises or any part thereof are sublet, whether or not
in violation of this Lease, Landlord may, after default by Tenant and
expiration of Tenant's time to cure such default, collect rent from the
sublessee. In either event, Landlord may apply the net amount collected to
payment of Rents, but no such assignment, subletting, or collection shall be
deemed a waiver of any of the provisions of this Article, an acceptance of the
assignee or sublessee as a lessee, or a release of Tenant from the performance
by Tenant of Tenant's obligations under this Lease.
SECTION 19.13 STANDARDS OF LANDLORD'S CONSENT. Landlord and Tenant agree
-------------------------------
that if Tenant desires to assign this Lease or sublet all or any part of the
Premises, and Landlord withholds its consent or conditions its consent and
Tenant believes that Landlord did so unreasonably, Tenant may prosecute an
action for declaratory relief to determine if Landlord unreasonably withheld
or conditioned its consent, but Tenant waives and discharges any claims it may
have against Landlord for damages arising from Landlord's withholding or
conditioning its consent. In any such action, each party shall bear its own
attorneys' fees. Tenant shall indemnify, defend and hold Landlord harmless
from any and all liability, losses, claims, damages, costs, expenses, causes
of action and proceedings involving any third party or parties (including
without limitation Tenant's proposed subtenant or assignee) who claim they
were damaged by Landlord's wrongful withholding or conditioning of Landlord's
consent.
ARTICLE XX
ESTOPPEL CERTIFICATES
---------------------
SECTION 20.1 ESTOPPEL CERTIFICATES. Landlord and Tenant each agree from time
---------------------
to time, within twenty (20) days after a request by the other, to execute and
deliver to the other an estoppel certificate, in form satisfactory to the
other, that: (a) certifies that this Lease is unmodified and in full force
and effect (or if there have been modifications, that the same is in full
force and effect as modified, and stating the modifications); (b) states the
expiration date of the Lease Term and that there are no agreements with either
party to extend or renew the Lease Term or to permit any holding over (or if
there are any such agreements, describes them and specifies the periods of
extension or renewal); (c) certifies the dates through which Rents have been
paid; (d) states whether or not, to the knowledge and belief of Landlord or
Tenant, Tenant or Landlord is in default in performance of any of its
obligations under this Lease, and specifies each default of which Landlord or
Tenant has knowledge; (e) states whether or not, to the knowledge and belief
of Landlord or Tenant, any event has occurred that, with the giving of notice
or passage of time, or both, would constitute a default by Tenant or Landlord
and, if such an event has occurred, specifies each such event; (f) states
whether Tenant is entitled to any credits, offsets, defenses or deductions
against payment of Rents, and, if so, describes them; and (g) states that
Tenant has no rights or options to purchase the Building or the Telehouse
Complex or the Premises. An estoppel certificate issued by Landlord or Tenant
pursuant to this Section 20.1 shall be a
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representation and warranty by such party which may be relied upon by the
other party and by others with whom the other party may be dealing, regardless
of independent investigation. Landlord or Tenant also shall include in any
estoppel certificate such other information concerning this Lease as the other
party may reasonably request. If Landlord or Tenant fails to execute and
deliver an estoppel statement within twenty (20) days after a request by the
other party: (i) the other party's representations concerning the factual
matters covered by an estoppel certificate, as described above, shall be
conclusively presumed to be correct, and (ii) such failure shall be a material
default. Upon request, Tenant shall execute and deliver estoppel certificates
to the Port Authority and any other Superior Lessor and any Superior
Mortgagee.
ARTICLE XXI
[INTENTIONALLY OMITTED]
-----------------------
ARTICLE XXII
BROKER
------
SECTION 22.1 BROKER. Tenant covenants, warrants and represents that no
------
broker was instrumental in bringing about or consummating this Lease and that
Tenant had no conversations or negotiations with any broker concerning the
leasing of the Premises. Tenant agrees to indemnify, defend and hold Landlord
harmless against and from any claims for any brokerage commissions or finder's
fees by persons other than Tenant's Broker, and all costs, expenses and
liabilities incurred in connection with such claims, including attorneys'
fees. Landlord agrees to indemnify, defend and hold Tenant harmless against
and from any claims for any brokerage commissions or finder's fees by persons
claiming under Landlord, and all costs, expenses and liabilities incurred in
connection with such claims, including attorneys' fees.
ARTICLE XXIII
CONDITIONAL LIMITATIONS
-----------------------
SECTION 23.1. CONDITIONAL LIMITATIONS. This Lease and the Lease Term and
-----------------------
estate hereby granted are subject to the limitation that if any of the
following (each a "Conditional Limitation") shall occur, Landlord may, at any
time thereafter, give a written notice to Tenant stating that this Lease and
the Lease Term and estate hereby granted shall automatically expire and
terminate on the date specified in such notice, which date shall be twenty
(20) days after the giving of such notice, and upon the expiration of such
twenty (20) day period this Lease and the Lease Term and estate hereby
granted shall automatically expire and terminate as if the last day of such
twenty (20) day period were the Expiration Date herein definitely fixed, and
Tenant immediately shall quit and surrender the Premises to Landlord, but
Tenant shall remain liable for damages as provided in this Article XXIII.
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23.1.1 [INTENTIONALLY OMITTED]
-----------------------
23.1.2 FAILURE TO PAY RENT. Any failure by Tenant to pay Base Rent or
-------------------
Additional Rent when due and such failure shall continue for ten (10) days
after notice thereof by Landlord to Tenant.
23.1.3 [INTENTIONALLY OMITTED]
-----------------------
23.1.4 FAILURE TO PERFORM UNDER THIS LEASE. The failure by Tenant to
-----------------------------------
observe and perform any other provisions of this Lease to be observed or
performed by Tenant, where such failure continues for thirty (30) days after
written notice thereof by Landlord to Tenant; provided, however, that if the
-------- -------
nature of such default is such that it cannot reasonably be cured within such
thirty (30) day period, Tenant shall not be deemed to be in default if Tenant
within that period commences to cure the default and thereafter diligently
proceeds to completion within a reasonable time; and provided further, that if
--------------------
such failure by Tenant would constitute a default under the Ground Lease,
Tenant shall have five (5) days after receipt of notice of default from the
Port Authority to cure such default (except where cure of not such default
requires more than five (5) days, Tenant shall not be deemed to be in default
if Tenant commences to cure the default within five (5) days and thereafter
diligently proceeds to completion within a reasonable time).
23.1.5 [INTENTIONALLY OMITTED]
-----------------------
23.1.6 ADMISSION OF INABILITY TO PAY DEBTS. Tenant shall be unable to,
-----------------------------------
or shall admit in writing its inability to, pay its debts as they become due.
23.1.7 VOLUNTARY PROCEEDING. Tenant shall commence any case, proceeding
--------------------
or other action (x) seeking relief on its behalf as debtor, or to adjudicate
it a bankrupt or insolvent, or seeking reorganization, arrangement,
adjustment, winding-up, liquidation, dissolution, composition or other relief
with respect to it or its debts under any law of any jurisdiction, domestic or
foreign, relating to bankruptcy, insolvency, reorganization or relief of
debtors, or (y) seeking appointment of a receiver, trustee, custodian or other
similar official for it or for any part of its property.
23.1.8 GENERAL ASSIGNMENT. Tenant shall make a general assignment for
------------------
the benefit of creditors.
23.1.9 INVOLUNTARY PROCEEDING. Any case, proceeding or other action
----------------------
shall be commenced against Tenant (x) seeking to enter an order against Tenant
as debtor or to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, winding-up, liquidation, dissolution,
composition or other relief with respect to it or its debts under any law of
any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, or (y) seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all or any part of
its property, which either results in the entry of such an order, adjudication
of bankruptcy or insolvency or such an appointment or the entry of any other
order having a similar effect or remains undismissed for a period of sixty
(60) days.
23.1.10 APPOINTMENT OF TRUSTEE. A trustee, receiver, custodian or other
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similar
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official is appointed for any substantial part of the assets of Tenant which
appointment is not vacated or effectively stayed within seven (7) business
days.
23.1.11 TENANT'S ACQUIESCENCE. Tenant shall consent to or acquiesce in,
---------------------
any of the acts set forth in Section 23.1.9 or 23.1.10.
23.1.12 [INTENTIONALLY OMITTED]
-----------------------
23.1.13 Waste. The committing of waste on the Premises.
-----
23.1.14 HYPOTHECATION OR ASSIGNMENT. The hypothecation or assignment of
---------------------------
this Lease or subletting of the Premises, or attempts at such actions, in
violation of Article XIX.
23.1.15 SERVICE OF NOTICE. The service by Landlord of a three-day
-----------------
notice under Section 711 of the New York Real Property Actions and Proceedings
Law more than once during each of any two (2) consecutive Lease Years of this
Lease.
23.1.16 RENT DELAYS. Payment of Base Rent or Additional Rent more than
-----------
ten (10) days after notice on two (2) or more occasions during each of any two
(2) consecutive Lease Years of this Lease.
23.1.17 LEGAL PROCESS. If Landlord, on two (2) or more occasions,
-------------
institutes legal proceedings to recover possession of the Premises from Tenant
on account of defaults.
SECTION 23.2 TERMINATION. Upon the occurrence of any Conditional Limitation,
-----------
Landlord shall have the separate and independent right to re-enter the
Premises and to remove Tenant by summary dispossess proceeding or other lawful
process. Notwithstanding anything to the contrary contained herein, if the
expiration and termination of the Lease Term shall be stayed by operation of
law or by order of any court having jurisdiction over any proceeding described
in Section 23.1 or if the trustee appointed in any such proceeding or Tenant
or Tenant as debtor-in-possession shall fail to assume Tenant's obligations
under this Lease within the period prescribed by law for such assumption or
within one hundred twenty (120) days after entry of the order for relief or
within any other period allowed by the court, or if said trustee or Tenant or
Tenant as debtor-in-possession shall fail to provide adequate protection of
Landlord's right, title and interest in and to the Premises; then, following
the lifting of any such stay, this Lease shall automatically expire and
terminate five (5) days after the lifting of such stay.
SECTION 23.3 REMEDIES AND DAMAGES.
--------------------
23.3.1 SURRENDER AND RE-ENTRY. If this Lease shall automatically expire
----------------------
or terminate pursuant to Section 23.1, or if this Lease shall otherwise expire
or be terminated or if Landlord shall re-enter or Tenant be removed from
possession of the Premises:
(i) Tenant shall immediately quit and peacefully surrender the Premises
to Landlord, and Landlord and its agents may immediately, or at any time after
such default or after the date upon which this Lease and the Lease Term shall
expire, re-enter and repossess the Premises, without notice, either by summary
proceedings or otherwise. In the event of any such re-entry, Landlord shall
have the right, with or without terminating this Lease, to remove all persons
and property
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from the Premises; the removed property may be stored in a public warehouse or
elsewhere at the cost of and for the account of Tenant.
(ii) Landlord, at Landlord's option, may relet the Premises from time to
time, either in the name of Landlord or otherwise, to such tenant or tenants,
for such term or terms ending before, on or after the Expiration Date, at such
rental or rentals and upon such other conditions, which may include
concessions and free rent periods, as Landlord, in its sole discretion, may
determine; provided, however, that Landlord shall have no obligation to relet
--------
the Premises and shall in no event be liable for refusal or failure to relet
the Premises or, in the event of any such reletting, for refusal or failure to
collect any rent due upon any such reletting, and no such refusal or failure
shall operate to relieve Tenant of any liability under this Lease or otherwise
affect any such liability. Landlord may make such repairs, replacements,
alterations, additions, improvements, decorations and other physical changes
in and to the Premises as Landlord, in its sole discretion, considers
advisable or necessary in connection with any such reletting or proposed
reletting, without relieving Tenant of any liability under this Lease or
otherwise affecting any such liability.
23.3.2 TENANT'S WAIVER OF NOTICE AND REDEMPTION. Tenant hereby waives
----------------------------------------
the service of any notice of intention to re-enter (which waiver shall not
constitute a waiver of any other notice required to be given to Tenant
pursuant to the terms of this Lease). Tenant does further hereby waive all
rights of Tenant to redeem the Premises, or to re-enter or repossess the
Premises, or to restore the operation of this Lease, after (i) Tenant shall
have been dispossessed by a judgment or by warrant of any court or (ii) any
re-entry by Landlord, or (iii) any expiration or termination of this Lease and
the Lease Term, whether such dispossess, re-entry, expiration or termination
shall be by operation of law or pursuant to the provisions of this Lease. The
terms "re-enter", "re-entry" and "re-entered" as used in this Lease shall not
be deemed to be restricted to their technical legal meanings.
23.3.3 DAMAGES. If this Lease and the Lease Term shall expire as
-------
provided in Section 23.1 or 23.2 hereof or by or under any summary proceeding
or any other proceeding, or if Landlord shall re-enter the Premises, then, in
any of said events:
(i) Tenant shall pay to Landlord all Base Rent and Additional Rent to the
date upon which this Lease and the Lease Term shall have expired or to the
date of re-entry upon the Premises by Landlord, as the case may be;
(ii) Tenant also shall pay to Landlord, as damages, any deficiency (a
"Deficiency") between the Rents for the period that otherwise would have
constituted the unexpired portion of the Lease Term and the net amount, if
any, of rents collected under any reletting effected pursuant to the
provisions of Section 23.3.1(ii) for any part of such period (first deducting
from the rents collected under any such reletting all of Landlord's expenses
in connection with the termination of this Lease, Landlord's re-entry upon the
Premises and such reletting including all repossession costs, brokerage
commissions, attorneys' fees and disbursements, alteration costs an other
expenses of preparing the Premises for such reletting); any such Deficiency
shall be paid in monthly installments by Tenant on the days specified in this
Lease for payment of installments of Base Rent, and Landlord shall be entitled
to recover from Tenant each monthly Deficiency as the same shall arise, and no
suit to collect the amount of the Deficiency for any month shall prejudice
Landlord's right to collect the Deficiency for any subsequent month by a
similar proceeding; and
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(iii) whether or not Landlord shall have collected any monthly Deficiency
as aforesaid, Landlord shall be entitled to recover from Tenant, and Tenant
shall pay to Landlord, within thirty (30) days after demand, in lieu of any
further Deficiency as and for liquidated damages, a sum equal to the amount by
which the Rents for the period that otherwise would have constituted the
unexpired portion of the Lease Term exceeds the then fair market rental value
of the Premises for the same period, both discounted to present value at the
rate of four per cent (4%) per annum less the aggregate amount of Deficiencies
theretofore collected by Landlord for the same period; if, before presentation
of proof of such liquidated damages to any court or tribunal, the Premises, or
any part thereof, shall have been relet by Landlord for the period which
otherwise would have constituted the unexpired portion of the Lease Term, or
any part thereof, the amount of rent reserved upon such reletting shall be
deemed, prima facie, to be the fair market rental value for the part of the
-----------
Premises so relet during the term of the reletting.
23.3.4 RENTS FROM RELETTING. If the Premises shall be relet together
--------------------
with other space in the Building, the rents collected or reserved under any
such reletting and the expenses of any such reletting shall be equitably
apportioned for the purposes of this Section 23.3. Tenant shall in no event
be entitled to any rents collected or payable under any reletting, whether or
not such rents shall exceed the Base Rent reserved in this Lease. Nothing
contained in this Article XXIII shall be deemed to limit or preclude the
recovery by Landlord from Tenant of the maximum amount allowed to be obtained
as damages by applicable law, or of any sums or damages to which Landlord may
be entitled in addition to the damages set forth in this Section 23.3.
23.3.5 MONIES RECEIVED. Any monies received by Landlord from or on
---------------
behalf of Tenant during the pendency of any proceedings between Landlord and
Tenant shall be deemed paid as compensation for the use and occupation of the
Premises, and the acceptance of any such compensation by Landlord shall not be
deemed an acceptance of Rents or a waiver on the part of Landlord of any
rights hereunder.
23.3.6 EQUITABLE REMEDIES. In the event of a breach or threatened
------------------
breach by Tenant of any of the provisions hereof, Landlord shall have the
right of injunction and the right to invoke any remedy allowed at law or in
equity as if re-entry, summary proceedings and other remedies were not herein
provided.
SECTION 23.4 WAIVER OF TRIAL BY JURY; TENANT NOT TO COUNTERCLAIM. Landlord
---------------------------------------------------
and Tenant each waive trial by jury in any action, proceeding or counterclaim
brought by either of them against the other on any matters not relating to
personal injury or property damage but otherwise arising out of or in any way
connected with this Lease, the relationship of Landlord and Tenant or Tenant's
use or occupancy of the Premises. Tenant shall not interpose any counterclaim
in a summary proceeding or in any action based on nonpayment of Rents or on
Tenant's holding over after expiration of the Lease Term or on any matter
relating to the foregoing unless the failure of Tenant to interpose such
counterclaim would result in the forfeiture or waiver of any claim raised
therein.
SECTION 23.5 NO HOLDOVER BY TENANT. Tenant waives any rights under Section
---------------------
2201 of the New York Civil Practice Law and Rules in connection with any
holdover proceedings which Landlord may properly institute against Tenant. If
the Premises shall not be surrendered within thirty (30) days the termination
of this Lease, Tenant hereby indemnifies Landlord against loss, cost, injury,
damage, claim, expense, or liability (including but not limited to attorneys'
fees and
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disbursements) resulting from delay by Tenant in so surrendering the Premises,
including any claims made by any succeeding tenant or prospective tenant
founded upon such delay.
SECTION 23.6 LANDLORD'S RIGHT TO CURE DEFAULTS. Landlord may, but shall not
---------------------------------
be obligated to, cure any default by Tenant under this Lease, at any time
after expiration of any applicable cure period, without notice; and whenever
Landlord so elects, all costs and expenses incurred by Landlord in curing any
such default, including, without limitation, reasonable attorneys' fees and
disbursements, together with interest on the amount of costs and expenses so
incurred at the Interest Rate, shall be paid by Tenant to Landlord within
thirty (30) days after demand, as Additional Rent.
SECTION 23.7. EFFECTS OF WAIVERS OF DEFAULT; NO OTHER WAIVER. No consent or
----------------------------------------------
waiver, express or implied, by Tenant or Landlord to or of any breach of any
obligation of the other party shall be construed as a consent or waiver to or
of any other breach of the same or any other obligation. The failure of
Landlord or Tenant at any time to insist upon the strict performance of any
obligation of the other party under this Lease or to exercise any right or
remedy herein contained, shall not be construed as a waiver or relinquishment
of the performance of such obligation or of the right to exercise any right or
remedy in the future. The following specific provision shall not limit the
generality of the provisions of this Section 23.7. The receipt or acceptance
by Landlord of Rents or the payment by Tenant of Rents with knowledge of a
breach by the other party of any term of this Lease shall not be deemed a
waiver of such breach. No payment by Tenant or receipt by Landlord of an
amount less than the correct Rents shall be deemed to be other than a payment
on account, nor shall any endorsement or statement on any check or any
accompanying letter be deemed to effect or evidence an accord and
satisfaction, and Landlord may accept such check or payment without prejudice
to Landlord's right to recover the balance or pursue any other rights of
Landlord.
SECTION 23.8 ELECTION TO TERMINATE. No re-entry or taking possession of the
---------------------
Premises by Landlord shall be construed as an election to terminate this Lease
unless a written notice of such intention be given to Tenant or unless the
termination thereof be decreed by a court of competent jurisdiction.
SECTION 23.9 REMEDIES NOT EXCLUSIVE. The rights and remedies of Landlord
----------------------
provided in this Lease for a default by Tenant are cumulative and not
exclusive, and the exercise by Landlord of any right or remedy it may have
shall not preclude the concurrent or subsequent exercise of any other right or
remedy it may have pursuant to this Lease, at law or in equity.
SECTION 23.10 PAYMENT OF LANDLORD'S EXPENSES. Any expenses incurred by
------------------------------
Landlord in connection with any performance by it for the account of Tenant,
and all costs and expenses, including reasonable attorneys' fees (whether or
not legal proceedings are instituted), involved in collecting Rents or
enforcing the obligations of Tenant under this Lease, including the cost and
expense of instituting and prosecuting legal proceedings or recovering
possession of the Premises after default by Tenant or upon expiration or
sooner termination of this Lease, shall be due and payable by Tenant, within
thirty (30) days after demand, as Additional Rent.
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ARTICLE XXIV
MISCELLANEOUS
-------------
SECTION 24.1 NO RECORDING OF LEASE. Neither Landlord nor Tenant shall record
---------------------
this Lease or any memorandum thereof.
SECTION 24.2 ENTIRE AGREEMENT. This Lease contains all of the agreements and
----------------
understandings related to the leasing of the Premises and the respective
obligations of Landlord and Tenant in connection therewith. All prior
agreements and understandings between the parties have merged into this Lease,
which alone fully and completely expresses the agreement of the parties.
SECTION 24.3 AMENDMENTS. No agreement shall be effective to amend, change,
----------
modify, waive, release, discharge, terminate or effect an amendment of this
Lease, in whole or in part, unless such agreement is in writing, refers
expressly to this Lease and is signed by Landlord and Tenant. Modifications
to this Lease will not be binding upon the Port Authority or any other
Superior Lessor or Superior Mortgagee who has a right to approve modifications
hereto under its Superior Lease or Superior Mortgage unless approved by the
Port Authority or by the other Superior Lessor or Superior Mortgagee.
SECTION 24.4 SUCCESSORS. Except as otherwise expressly provided herein, the
----------
obligations of this Lease shall bind and benefit the successors and assigns of
the parties hereto; provided, however, that no assignment, sublease or other
-------- -------
transfer in violation of the provisions of Article XIX shall operate to vest
any rights in any putative assignee, sublessee or transferee of Tenant.
SECTION 24.5 FORCE MAJEURE. Tenant and Landlord shall have no liability
-------------
whatsoever to the other on account of the inability of Tenant or Landlord to
fulfill, or delay in fulfilling, any of their respective obligations
(excluding obligations to pay money) under this Lease by reason of any strike,
lockout or other Labor Condition; inability to obtain labor, materials, coal,
oil, or other suitable fuel or reasonable substitutes therefor or the failure
of the supply of any thereof; acts of God, fire or other casualty;
governmental preemption of priorities or other controls in connection with a
public emergency; governmental restrictions or requirements of law; enemy or
hostile governmental action; civil commotion; or any other cause, whether
similar or dissimilar to the above, beyond Tenant's or Landlord's reasonable
control. (The foregoing events are collectively referred to as "Force
Majeure".) If this Lease specifies a time period for performance of an
obligation of Tenant or Landlord, that time period shall be extended by the
period of any delay in Tenant's or Landlord's performance caused by any of the
events of Force Majeure.
SECTION 24.6 POST-TERMINATION OBLIGATIONS. Upon the expiration of the Lease
----------------------------
Term or earlier termination of this Lease, neither party shall have any
further obligation or liability to the other except as otherwise expressly
provided in this Lease and except for such obligations as by their nature or
under the circumstances can only be, or by the provisions of this Lease, may
be, performed after such expiration or earlier termination. However, any
liability for a payment of Rents or indemnity shall survive the expiration of
the Lease Term or earlier termination of this Lease.
SECTION 24.7 CONSTRUCTION ON ADJACENT PREMISES. If any excavation or other
---------------------------------
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construction shall be made on any premises adjoining or above or below the
Building, Tenant shall permit Landlord, the Port Authority or the adjoining
owner, and their respective agents, employees, licensees and contractors to
enter upon the Premises and to shore the walls thereof and to erect
scaffolding and/or protective barricades around the Building (but not so as to
preclude entry thereto) and to do any act or thing necessary for the safety or
preservation of the Building. Tenant's obligations under this Lease shall not
be affected by any such construction or excavation work, shoring-up,
scaffolding or barricading. Landlord shall not be liable in any case for any
inconvenience, disturbance, loss of business or any other annoyance arising
from such construction, excavation, shoring-up, scaffolding or barricades, but
if Landlord is performing such work, Landlord shall use its best efforts so
that the work will cause as little inconvenience, annoyance and disturbance to
Tenant as possible, consistent with accepted construction practice in the
vicinity, so that such work shall be expeditiously completed.
SECTION 24.8 NO REPRESENTATIONS BY LANDLORD. Landlord and Landlord's agents
------------------------------
have made no representations, warranties or promises whatsoever with respect
to the Premises, the Building and the Teleport, except as expressly set forth
herein, and no rights, easements or licenses are acquired by Tenant by
implication or otherwise except as expressly set forth herein. Tenant
represents and warrants that it has thoroughly inspected the Premises and is
fully familiar with the Premises.
SECTION 24.9 LANDLORD'S CONSENT. All references in this Lease to the consent
------------------
or approval of Landlord shall be deemed to mean the written consent or
approval of Landlord, and no consent or approval of Landlord shall be
effective for any purpose unless such consent or approval is in writing.
SECTION 24.10 INTERPRETATION.
--------------
24.10.1 GOVERNING LAW. Irrespective of the place of execution or
-------------
performance, this Lease shall be governed by and construed in accordance with
the laws of the State of New York.
24.10.2 INVALIDITY. If any provision of this Lease or the application
----------
thereof to any Person or circumstance shall, for any reason and to any extent,
be invalid or unenforceable, the remainder of this Lease and the application
of that provision to other Persons or circumstances shall not be affected but
rather shall be enforced to the fullest extent permitted by law.
24.10.3 CAPTIONS. The Table of Contents, captions, headings and titles
--------
of this Lease are solely for convenience of reference and shall not affect its
interpretation.
24.10.4 PRESUMPTIONS. This Lease shall be construed without regard to
------------
any presumption or other rule requiring construction against the party
drafting a document. It shall be construed neither for nor against Landlord or
Tenant, but shall be given a reasonable interpretation in accordance with the
plain meaning of its terms and the intent of the parties.
24.10.5 INDEPENDENT COVENANTS. Each covenant, agreement, obligation or
---------------------
other provision of this Lease on Tenant's part to be performed shall be deemed
and construed as a separate and independent covenant of Tenant, not dependent
on any other provision of this Lease.
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24.10.6 NUMBER AND GENDER. All terms and words used in this Lease,
-----------------
regardless of the number or gender in which they are used, shall be deemed to
include any other number and any other gender as the context may require.
24.10.7 EXHIBITS. All exhibits, schedules and riders appended to this
--------
Lease are incorporated herein and by this reference made a part hereof.
SECTION 24.11 JOINT AND SEVERAL LIABILITY. If, at any time during the Lease
---------------------------
Term, Tenant comprises more than one person, all such persons shall be jointly
and severally liable for payment of Rents and for performance of every
obligation of Tenant under this Lease.
SECTION 24.12 SUBMISSION OF LEASE. The submission of this Lease by Tenant or
-------------------
Landlord or by Landlord to Tenant for review or signature does not constitute
an offer by or to Tenant to lease the Premises or the granting of an option to
do so. This instrument shall have no binding force or effect until its
execution and delivery by both Landlord and Tenant.
SECTION 24.13 NOTICES FROM ONE PARTY TO THE OTHER. Any notice or demand from
-----------------------------------
Landlord to Tenant or from Tenant to Landlord shall be in writing and shall be
deemed duly served if personally delivered, sent by a nationally recognized
courier service, or mailed by registered or certified mail, return receipt
requested, addressed, if to Tenant, at the Premises or such other address as
Tenant shall have last designated by notice in writing to Landlord and, if to
Landlord, to the Address of Landlord or at such other address as Landlord
shall have last designated by notice in writing to Tenant. Notices to the
Port Authority shall be delivered to the Executive Director at One World Trade
Center, New York, New York 10048 or to such other address as the Port
Authority may hereafter designate. Notices shall be deemed received and
served when personally delivered or upon receipt if mailed or sent by a
courier service.
SECTION 24.14 PARTNERSHIP TENANT. If Tenant is a partnership (or is
------------------
comprised of two (2) or more Persons, individually or as partners of a
partnership) or if Tenant's interest in this Lease shall be assigned to a
partnership (or to two (2) or more Persons, individually or as partners of a
partnership) in a manner permitted under Article XIX (any such partnership and
such Persons are referred to as "Partnership Tenant"), the following
provisions shall apply to such Partnership Tenant: (a) the liability of each
of the parties comprising Partnership Tenant shall be joint and several; (b)
each of the parties comprising Partnership Tenant hereby consents in advance
to, and agrees to be bound by (i) any written instrument which may hereafter
be executed by Partnership Tenant or any successor partnership, changing,
modifying, extending or discharging this Lease, in whole or in part, or
surrendering all or any part of the Premises to Landlord, and (ii) any
notices, demands, requests or other communications which may hereafter be
given by Partnership Tenant; (c) any bills, statements, notices, demands,
requests or other communications given or rendered to Partnership Tenant or to
any of such parties shall be binding upon Partnership Tenant and all such
parties; (d) if Partnership Tenant shall admit new partners, all of such new
partners shall, by their admission to Partnership Tenant, be deemed to have
assumed joint and several liability for the performance of all of the
provisions of this Lease on Tenant's part to be observed and performed from
and after the date of their admission to Partnership Tenant; and (e)
Partnership Tenant shall give prompt notice to Landlord of the admission of
any such new partners, and upon demand of Landlord, shall cause each such new
partner to execute and deliver to Landlord an agreement in form satisfactory
to Landlord, wherein each such new partner shall assume joint and several
liability for the performance of all the
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provisions of this Lease on Tenant's part to be observed and performed from
and after the date of their admission to Partnership Tenant, but neither
Landlord's failure to request any such agreement nor the failure of any such
new partner to execute or deliver any such agreement to Landlord shall vitiate
the provisions of clause (d) of this Section 24.14.
SECTION 24.15 PORT AUTHORITY'S IMMUNITY. No immunity or exemption (actual,
-------------------------
alleged or imputed) of the Port Authority from any law or other requirement
shall excuse compliance, or be grounds for noncompliance, therewith by Tenant.
SECTION 24.16 NO DISCRIMINATION. Tenant shall treat all employees and
-----------------
applicants for employment at the Premises without unlawful discrimination as
to race, creed, color, national origin, sex, age, handicap, marital status,
sexual orientation or affectional preference in all employment divisions,
including but not limited to recruitment, hiring, compensation, training and
apprenticeship, promotion, upgrading, demotion, downgrading, transfer, lay-
off, and termination, and all other terms and conditions of employment except
as provided by law, and shall state in all solicitations for employment at the
Premises that all qualified applicants will receive consideration for
employment without regard to race, color, religion, national origin, sex,
sexual orientation or affectional preference.
IN WITNESS WHEREOF, Landlord and Tenant have hereunto executed this
Lease as of the day and year first above written.
LANDLORD: TELEHOUSE INTERNATIONAL CORPORATION
of America, a Delaware corporation
By: /s/ Yasuhiro Shintani
__________________________
Name: Yasuhiro Shintani
Title: President
TENANT: theglobe.com, a Delaware corporation
By: /s/ Vance Huntley
__________________________
Name: Vance Huntley
Title: Director of Technology
Attachments:
EXHIBIT A Floor Plans
EXHIBIT B Special Site Fitout
EXHIBIT C TELEHOUSE Tenant Cleaning Specifications
EXHIBIT D Rules and Regulations
EXHIBIT E Excessive Electricity
EXHIBIT F Appurtenant Facilities
EXHIBIT Z Consent Agreement
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EXHIBIT "A"
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FLOOR PLANS
-----------
[Floor Plan]
SITE E - theglobe.com
TELEHOUSE CENTER
THIRD FLOOR
8/98
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EXHIBIT "A"
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FLOOR PLANS
-----------
[Floor Plan]
theglobe.com
SITE E
TELEHOUSE CENTER 2,895 USF
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EXHIBIT "B"
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SPECIAL SITE FITOUT
-------------------
In connection with the Lease to which this Exhibit B is attached,
Landlord has performed certain work ("SPECIAL SITE FITOUT") in the Premises as
hereinafter set forth. Capitalized terms used in this Exhibit without definition
shall have the respective meanings ascribed to them in the Lease.
1. Description of Work. Landlord has provided the following
-------------------
modifications to the standard site buildout as described in Section 2.3:
I. Chairs and desks in support room (as is) with critical power and power
strips.
II. Power distribution: two 20 amp circuits each with one L5-20R IG
receptacle for 32 cabinet positions.
III. Subfloor panels for telecommunications cab ling
IV. Floor tile cutouts for 32 cabinets.
V. Open relay rack with four shelves.
2. Tenant's Cost. Tenant shall be responsible for payment of the actual
-------------
cost of the Special Fitout work, including both subcontracted work and work
performed by Landlord's own staff at a one time cost of $22,875.00 plus
applicable sales tax.
3. Payments. All amounts payable by Tenant to Landlord pursuant to this
--------
Exhibit B shall be paid by Tenant upon completion of all Special Fitout Work and
within thirty (30) days after Landlord has rendered an invoice therefor to
Tenant.
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EXHIBIT "C"
----------
TELEHOUSE TENANT CLEANING SPECIFICATIONS
----------------------------------------
There Shall Be No Cleaning In the Computer Room. The Following Cleaning
Specifications Apply Only To The Office Space In the Premises And To The Common
Areas.
A. General Cleaning - 5 Nights Per Week - Monday through Friday Inclusive:
----------------------------------------------------------------------
1. Basic Service -- Common Areas
-----------------------------
a. Empty and damp wipe all ashtrays and smoking urns.
b. Empty and dust wipe all trash receptacles. Replace liner three
times per week.
c. Dust all areas up to six feet in height. Including window sills,
walls, ledges, chairs, desks, tables, baseboard, file cabinets,
radiators, pictures and all office furniture.
d. Damp wipe all glass top desks and tables.
e. Damp wipe spillage on all furniture, including lounge and
cafeteria areas.
f. Sweep with treated cloths all composition tile flooring and
remove any spillage.
g. Vacuum or wash rubber mats as necessary
h. Vacuum all carpeted areas and remove spots (when possible).
i. Remove fingermarks where possible from painted wall partitions,
doors and glass partitions.
j. Clean interior surfaces of elevator cabs and wash composition
tile flooring, or vacuum carpet.
k. Wash clean water fountains and coolers, emptying waste water as
necessary.
l. Remove fingermarks and smudges from entrance doors and partition
glass surfaces.
m. Sweep public stairwells and dust wipe rails.
2. Basic Services -- Office Areas
------------------------------
a. Vacuum office area.
b. Empty and dust wipe all desk waste receptacles. Replace
liners three times per week.
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c. Empty and remove all computer waste paper from
receptacles.
d. Damp mop raised tile floor (not wet).
e. Remove scuff marks and spillage from raised tile
flooring walls and columns.
f. Remove finger marks and smudges from partition glass
surfaces.
g. Dust wipe with treated cloths all manner of office
furniture, i.e. desks, chairs, cabinets, credenzas, etc.
3. Basic Service -- Lavatories
---------------------------
a. Wash and dry all bowls, seats, urinals, washbasins and
mirrors.
b. Empty paper towel and sanitary napkin disposal receptacles.
c. Damp wipe exterior of waste cans and dispensing units.
Replace plastic liners.
d. Sweep and wash floors with disinfectant.
e. Dust all sills, partitions and ledges.
f. Insert toilet tissue, toweling and soap in dispensers.
B. Common Area Cleaning Service -- Three Nights Per Week.
-----------------------------------------------------
a. Clean all food equipment in cafeteria, beverage machines,
etc.
C. Common Area Cleaning Service -- One Night Per Week
--------------------------------------------------
a. Clean passenger elevator saddles.
b. Clean interior partition glass.
c. Wash public stairs.
D. Common Area Cleaning Service -- Twice a Month
---------------------------------------------
a. Replace sand in smoking urns.
E. Common Area Cleaning Service -- Monthly
---------------------------------------
a. Wash booth partitions in lavatories.
b. Wash tile walls in lavatories.
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c. Wash interior of waste cans and sanitary
disposal containers in lavatories.
d. Clean freight elevator saddles.
F. Common Area Cleaning Service -- Quarterly
-----------------------------------------
a. High dust all walls, ledges, pictures and all areas not
reached in normal nightly cleaning.
G. Cleaning Service -- Semi-Annually
---------------------------------
a. Dust venetian blinds.
H. Cleaning Service -- Annually
----------------------------
a. Bonnet shampoo all carpets in office areas.
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EXHIBIT "D"
----------
RULES AND REGULATIONS
---------------------
1. The sidewalks, areas, entrances, vestibules, passages, corridors,
halls, elevators and stairways shall not be encumbered nor obstructed by any of
the tenants, their agents, clerks, servants or visitors, or be used by them for
any other purpose than for ingress and egress to and from their respective
premises. Landlord reserves the right to restrict and regulate the use of
aforementioned public areas of the Building by the tenants, their employees,
guests, contractors and customers and by persons making deliveries to tenants,
including but not limited to the right to allocate certain elevators for
delivery service, and the right to designate which building entrances shall be
used by persons making deliveries in the Building.
2. The doors, skylights, and windows that reflect or admit light into
passageways or into any place in the Building shall not be covered or obstructed
by any tenant.
3. The water-closets, wash-closets, urinals and other water apparatus
shall not be used for any purposes other than those for which they were
constructed and no sweepings, rubbish, rags, ashes, chemicals, refuse from
electric batteries, or other substances shall be thrown therein. No tenant shall
lay linoleum or other similar floor covering so that the same shall come in
direct contact with the floor covering of its premises, and if linoleum or other
similar floor covering is desired to be used, an interlining of builder's
deadening felt shall be first affixed to the floor by a paste, or other
material, which may easily be removed with water, the use of cement or other
similar adhesive material being expressly prohibited.
4. No tenant shall mark, paint, drill into, drive nails into, or in
any way mutilate or deface any walls, ceilings, partitions, floors, wood, stone
or iron work of the Building.
5. Each tenant may display one company sign on the exterior door of
its premises. No other display may be made on any windows or doors or on any
other part of the outside or the inside of the Building, without the prior
consent in writing of the Port Authority and Landlord or its agents. Landlord
will name painters who must be employed for all sign painting and other
painting, at the expense of Tenant.
6. No tenant shall do anything or permit anything to be done, in its
premises, or bring or keep anything therein, that will in any way obstruct or
interfere with the rights of other tenants, or in any way injure or annoy them,
or those having business with them. Tenants, their agents, clerks, servants or
visitors, shall not make or cause any improper noises in the Building, or
interfere in any way with other tenants, or those having business with them.
7. No freight, furniture, or bulky matter of any description will be
received into the Building, or carried up or down, except during hours and in
the manner designated by Landlord, which may involve overtime work for
Landlord's employees. Tenants shall reimburse Landlord for extra costs incurred
by Landlord including but not limited to the cost of such overtime work. The
moving of safes shall occur at such times as Landlord shall designate upon
previous notice to Landlord or Landlord's agent; and the persons employed to
move the safes in and out of the Building must be acceptable to Landlord.
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8. Tenants shall not install any locks or bolts on any doors nor make
any changes in existing locks. Each tenant must, upon the termination of the
tenancy, restore to Landlord all the keys of offices, rooms and toilet-rooms
which shall have been furnished the tenant or which the tenant shall have had
made and in the event of loss of any keys so furnished shall pay Landlord
therefor.
9. Nothing shall be swept or thrown by the tenants or by their agents,
clerks, servants or visitors into the corridors, halls, stairways, elevators, or
light shafts, or upon the skylights of the Building, or into or upon any heating
or ventilating registers, or plumbing apparatus in the Building, or upon
adjoining buildings or upon the street. No awnings or other projections shall be
attached to the outside walls of the Building.
10. No animals or birds shall be kept in or about the premises.
11. Tenants shall not bring into the Building or keep to use in the
Building any gasoline, kerosene, camphene, burning fluid, or other inflammable,
combustible or explosive fluid, chemical or substance.
12. No tenant shall cause or permit any odors of cooking or other
processes or any unusual or objectionable odors to emanate from the premises. No
tenant shall install or permit the installation or use of any machine dispensing
goods for sale, including without limitation foods, beverages, cigarettes or
cigars; or permit the delivery of any food or beverage to the premises. No food
or beverages shall be carried in the public halls and elevators of the Building
except in closed containers.
13. Tenants shall not obtain any towel supply service or ice service
except from Persons approved by Landlord, nor obtain drinking water for delivery
on the premises from any source. Canvassing, peddling and soliciting are
prohibited in the Building and each tenant shall cooperate to prevent the same.
14. Telegraph, telephone and other wires and instruments shall not be
introduced by Tenant without previous notice to Landlord and with its reasonable
approval.
15. Landlord reserves the right to exclude from the Building between
the hours of 6:00 o'clock p.m. and 8:00 o'clock a.m. on weekdays, between the
hours of 1:00 o'clock p.m. and 8:00 o'clock a.m. on Saturdays and at all hours
on Sundays and legal holidays all Persons who do not present a pass to the
Building signed by Landlord or Landlord's agent. Landlord or its agent will
furnish passes to Persons for whom any tenant requests same in writing. Each
tenant shall be responsible for all Persons for whom he requests such pass and
shall be liable to Landlord for all acts of such Persons. Landlord may require
all such Persons to sign a register on entering and leaving the Building.
16. Landlord shall not be responsible to any tenant for the non-
observance or violation of these rules and regulations by any other tenant.
17. Landlord may from time to time adopt additional systems and
procedures to improve the security or safety of the Building, any persons
occupying, using or entering the same, or any equipment, finishings or contents
thereof, and Tenant shall comply with Landlord's reasonable requirements
relative thereto.
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18. Tenant shall conduct all aspects of its operations so as to
preserve labor harmony and to insure that the security and operations of the
Building shall not be disrupted.
19. No tenant shall use the passenger elevators for the hauling and
removal of materials or debris and same shall be done only after business hours
and only via the Building freight elevator.
20. Landlord reserves the right to rescind, alter, waive or add, as to
one or more or all tenants, any rule or regulation at any time prescribed for
the Building when, in the judgment of Landlord, Landlord deems it necessary or
desirable for the reputation, safety, character, security, care, appearance or
interests of the Building, or the preservation of good order therein, or the
operation or maintenance of the Building or the equipment thereof, or the
comfort of tenants or others in the Building. No rescission, alteration, waiver
or addition of any rule or regulation in respect of one tenant shall operate as
a rescission, alteration or waiver in respect of any other tenant.
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EXHIBIT "E"
----------
EXCESSIVE ELECTRICITY
---------------------
The following is the charging schedule for consumption of electrical power in
excess of standard consumption which is 40 Volt-Amps per square foot of Useable
Area. For consumption over 100 VA/usf, the same method of calculation for the
lesser consumption will be applied.
VA/usf $/YEAR/RENTABLE SQUARE FEET
------ ---------------------------
0- 40 0.00
41-45 5.00
46-50 10.00
51-55 15.00
56-60 20.00
61-70 25.00
71-80 35.00
81-90 45.00
91-100 55.00
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EXHIBIT "F"
----------
APPURTENANT FACILITIES
----------------------
Tenant has the benefit of using, in addition to the Premises, the following
facilities (the "Appurtenant Facilities"), subject to payment of Landlord's
standard reasonable charge for such use, if any.
- Guest receiving room
- Conference room
- Lounge
- Food/drink vending area
- Private rest facility with bed
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EXHIBIT "Z"
----------
CONSENT AGREEMENT
-----------------
Port Authority Lease No. TP-004
(said Lease being dated as of August 9, 1988)
THIS AGREEMENT, made as of April 12, 1993 by and among THE PORT
AUTHORITY OF NEW YORK AND NEW JERSEY (hereinafter called "the Port Authority"),
a body of corporate and politic, created by Compact between the States of New
Jersey and New York, with the consent of the Congress of the United States of
America and having an office at One World Trade Center, in the Borough of
Manhattan, City, County and State of New York, and TELEHOUSE International
Corporation of America (hereinafter called "the Lessee"), and theglobe.com
(hereinafter called "the Space Lessee), whose representative is Vance Huntley.
WITNESSETH, that:
WHEREAS, the Port Authority and the Lessee have heretofore
entered into an agreement dated August 9, 1988 (which agreement, as the same has
been or may hereafter be supplemented and amended, is hereinafter called "the
Main Lease" covering the construction and operation of an office building or
buildings at the Teleport (located in a portion of the Staten Island Industrial
Park leased by the City of New York to the Port Authority and hereinafter called
"the Facility"); and
WHEREAS, pursuant to and in accordance with the terms of the
Main Lease, the Lessee proposes as of the effective date hereof to enter into a
lease with the Space Lessee dated September 1, 1998 a copy of which is attached
hereto, made a part hereof and hereafter called "the Space Lease", subject to
the consent of the Port Authority and the execution of a Consent Agreement by
and among the Lessee, the Space Lessee and the Port Authority;
NOW, THEREFORE, for and in consideration of the covenants and
mutual agreements herein contained, the Port Authority, the Lessee and the Space
Lessee hereby agree effective as of September 1, 1998, as follows:
1. On the terms and conditions hereinafter set forth, the Port
Authority consents to the Space Lease.
2. The Space Lease shall terminate, without notice to the Space
Lessee, on the day preceding the date of expiration or earlier termination of
the Main Lease, or on such earlier date as the Lessee and the Space Lessee may
agree upon. The Space Lessee shall quit the space covered by the Space Lease and
remove its property for which it is responsible therefrom on or before the
termination of the Space Lease.
3. Neither this Consent Agreement, or anything contained herein nor
the consent granted hereunder shall constitute or be deemed to constitute a
consent to nor shall they create an implication that there has been consent to
any enlargement or change in the rights, powers and privileges granted to the
Lessee under the Main Lease, nor consent to the granting of any rights or
privileges to the Space Lessee as may be provided by the Space Lease if not
granted to the Lessee under the Main Lease. The Space Lease is an agreement
between the Lessee and the Space Lessee with respect to the various matters set
forth
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therein. Neither this Consent nor anything contained herein nor the consent
granted hereunder shall constitute an agreement between the Port Authority and
the Lessee that the provisions of the Space Lease shall apply and pertain as
between the Lessee and the Port Authority, it being understood that the terms,
conditions and agreements of the Main Lease shall, in all respects, be
controlling and determinative. The specific mention of or reference to the Port
Authority in any part of the Space Lease, including without limitation thereto,
any mention of any consent or approval of the Port Authority now or hereafter to
be obtained, shall not be or be deemed to create an inference that the Port
Authority has granted its consent or approval thereto under this Consent
Agreement or shall thereafter grant its consent or approval thereto or that the
Port Authority's discretion pursuant to the Main Lease as to any such consents
or approvals shall in any way be affected or impaired. The lack of any specific
reference in any provisions of the Space Lease to Port Authority approval or
consent shall not be deemed to imply that no such approval or consent is
required and the Main Lease shall, in all respects, be controlling.
No provision of the Space Lease, including, but not limited to,
those imposing obligations on the Space Lessee with respect to laws, rules,
regulations, taxes, assessments and liens shall be construed as a submission or
admission by the Port Authority that the same could or does lawfully apply to
the Port Authority, nor shall the existence of any provision of the Space Lease
covering actions which shall or may be undertaken by the Space Lessee or the
Lessee including, but not limited to, construction on the space covered by the
Space Lease, be deemed to imply or infer that Port Authority consent or approval
thereto pursuant to the Main Lease will be given or that Port Authority
discretion with respect thereto will in any way be affected or impaired.
4. The Space Lessee, in its operations under or in connection
with the Space Lease and in its use of the space covered by the Space Lease,
shall be subject to the applicable terms, provisions, covenants and conditions
of the Main Lease. Without in any way affecting the obligations of the Lessee
under the Main Lease and under this Consent Agreement, all acts and omissions of
the Space Lessee shall be deemed acts and omissions of the Lessee under the Main
Lease, but notwithstanding the foregoing, the Lessee shall not be or be deemed
to be in default of the Main Lease to the extent that any of the foregoing shall
constitute a breach thereof if, except for causes beyond the control of the
Lessee, it shall have commenced to remedy said default within twenty (20) days
after receipt of notice thereof from the Port Authority and continues diligently
to pursue such remedy.
5. The Space Lease shall not be changed, modified, discharged
or extended except by written instrument duly executed by the parties thereto
and only with the express written consent of the Port Authority. Without
limiting the generality of the foregoing, the Space Lessee shall use the space
covered by the Space Lease for the following purpose and for no other purpose or
purposes whatsoever: Data processing and data, video and voice communications in
connection with Space Lessee's Business, office space and incidental and usual
activities compatible therewith and for no other purpose whatsoever.
6. If the Lessee shall at any time be in default of its
obligations under the Main Lease to make payments to the Port Authority, or if
there shall occur at any time an event involving insolvency, bankruptcy,
arrangement or reorganization of the Lessee which under the terms of the Main
Lease would constitute an event the occurrence of which grants the Port
Authority the right to terminate the Main Lease, and provided the same has not
been cured within the time granted therefor, if any, under the Main Lease, the
Space Lessee on demand of the Port Authority shall pay directly to the Port
Authority any fee or other amount due to the Lessee. No such payment shall
relieve the Lessee from any obligations under the Main Lease or under this
Consent Agreement but all such payments shall be credited against the
obligations of the Lessee and of the Space Lessee for each payment or part
thereof.
7. The granting of the consent hereunder by the Port Authority
shall not be or be deemed to operate as a waiver of consent to any subsequent
agreement with respect to the use or occupancy of space at the Facility (by the
Lessee or by the Space Lessee) or to any assignment of the Main Lease or the
Space Lease
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or of any rights under either of them, whether in whole or in part.
8. In the event of any substantial default by the Space Lessee
under any of the provisions of this Consent Agreement and said default has not
been cured within thirty (30)days after the Port Authority has served a notice
of such default upon the Lessee and the Space Lessee, the Port Authority shall
have the right to revoke the consent granted hereunder upon thirty (30) days'
written notice to the Lessee and the Space Lessee, but no such revocation shall
be deemed to affect the Main Lease and the continuance thereof, it being
understood, moreover, that the foregoing shall not be deemed to affect or limit
any rights of the Port Authority under the Main Lease. In the event of the
revocation of the consent hereunder as hereinabove provided, the Lessee shall
immediately terminate the Space Lease.
9. Reference herein to the Space Lessee shall mean and include
the Space Lessee, its officers, agents, employees and also others using the
space covered by the Space Lease or on the Facility with the consent of the
Space Lessee.
10. Neither the Commissioners of the Port Authority nor any of
them, nor any officer, agent or employee thereof shall be held personally liable
to the Lessee or to the Space Lessee under any term or provision of this Consent
Agreement or because of its execution or because of any breach or alleged breach
hereof.
IN WITNESS WHEREOF, the Port Authority, the Lessee and the
Space Lessee have executed these presents.
THE PORT AUTHORITY OF NEW YORK
AND NEW JERSEY
ATTEST: By:
------------------------- --------------------------
Name:
Title:
TELEHOUSE INTERNATIONAL CORP.
OF AMERICA
ATTEST: /s/ Mike Richard By: /s/ Yasuhiro Shintani
------------------------- --------------------------
Name: Yasuhiro Shintani
Title: President
theglobe.com
ATTEST: By: /s/ Vance Huntley
------------------------- --------------------------
Name: Vance Huntley
Title: Dir. of Technology
Z-3
<PAGE>
STATE OF NEW YORK
ss.
COUNTY OF RICHMOND
On the 2nd day of September, 1998 before me personally came Yasuhiro Shintani to
me known, who, being by me duly sworn, did depose and say that he resides at
150 West 56th St., Apt 4103, New York 10019; that he is the President of
TELEHOUSE International Corporation of America, one of the corporations
described in and which executed the foregoing instrument; and that he signed his
name thereto by order of the Board of Directors of the said corporation.
/s/ Gisele Shields
----------------------
Notary Public
GISELE SHIELDS
NOTARY PUBLIC, STATE OF NEW YORK
NO. 01SH6010376
QUALIFIED IN RICHMOND COUNTY
COMMISSION EXPIRES JULY 19, 2000
STATE OF NEW YORK
ss.
COUNTY OF NEW YORK
On the 1st day of Sept., 1998 before me personally came Vance Huntley,
to me known, who, being by me duly sworn, did depose and say that he resides at
132 E. 17 St., #51 New York, N.Y. 10003; that he is the Director of Technology
of theglobe.com, one of the corporations described in and which executed the
foregoing instrument; and that he signed his name thereto by order of the Board
of Directors of the said corporation.
/s/ Meena M. Gulati
-------------------
Notary Public
MEENA M. GULATI
NOTARY PUBLIC, STATE OF NEW YORK
NO. 31-5015872
QUALIFIED IN NEW YORK COUNTY
COMMISSION EXPIRES AUGUST 2, 1999
STATE OF NEW YORK
)
) ss.:
COUNTY OF NEW YORK
On the __ day of __________, 1993 before me personally came __________,
to me known, who, being by me duly sworn, did depose and say that he resides at
___________________________; that he is the __________________ of the Port
Authority of New York and New Jersey, one of the corporations described in and
which executed the foregoing instrument; that he knows the seal of said
corporation; that it was so affixed by order of the Board of Commissioners of
said corporation; and that he signed his name thereto by like order.
________________________
Notary Public
<PAGE>
EXHIBIT 10.14
TRAVEL SERVICES ALLIANCE AGREEMENT
This Travel Services Alliance Agreement (the "Agreement") is made as of
this 15th day of September, 1998 (the "Effective Date") between theglobe.com,
inc., a New York corporation with its principal place of business at 31 West
21st Street, New York, NY 10010 ("theglobe.com"), and Lowestfare.com, a division
of Global Discount Travel Services, LLC, a Nevada limited liability company with
its principal place of business at 980 Kelly Johnson Drive, Las Vegas, NV 89119
("Lowestfare").
Recitals
--------
WHEREAS, Lowestfare wishes to act as theglobe.com's exclusive provider
of travel-related content, and to place certain advertisements on website
locations owned or controlled by theglobe.com;
WHEREAS, theglobe.com wishes to enter into such an exclusive
relationship, and to accept such advertising, subject to the terms of this
Agreement.
NOW THEREFORE, theglobe.com and Lowestfare, for good and valuable
consideration the receipt and sufficiency of which are hereby acknowledged,
hereby agree as follows:
Agreement
---------
1. Definitions.
Capitalized terms used in this Agreement shall have the following meanings:
"Co-Branded Site" shall have the meaning assigned to it in Subsection 3.2
("Co-Branded Site").
"Confidential Information" shall have the meaning assigned to it in Section 9
("Confidentiality").
"Disclosing Party" shall have the meaning assigned to it in Section 9
("Confidentiality").
"Editorial Content" shall mean travel-related editorial content and related
materials provided by Lowestfare hereunder.
"End User" means a person who visits theglobe.com Site, or who links from
theglobe.com Site to the Co-Branded Site, or both.
"Fee" shall have the meaning assigned to it in Subsection 6.1 ("Fees").
"Indemnified Party" shall have the meaning assigned to it in Section 15
("Indemnity").
"Indemnifying Party" shall have the meaning assigned to it in Section 15
("Indemnity").
1.
<PAGE>
"Lowestfare Content" shall mean all materials delivered by Lowestfare to
theglobe.com for display on theglobe.com Site, including without limitation the
Lowestfare Marks, the Editorial Content, "buttons", "banners", and other
materials described in Exhibit A ("Lowestfare Content").
"Lowestfare Marks" shall mean the trademarks, logos and other product and
service identifiers of Lowestfare described in Exhibit B ("Marks"), and as may
be modified from time to time during the Term upon the agreement of the parties.
"Monthly Sweepstakes" shall have the meaning assigned to it in Subsection 3.3
("Monthly Sweepstakes").
"Phase" shall mean the periods of time and the corresponding work assigned to
such periods as described in Exhibit C ("Phases"). For purpose of this
Agreement, there shall be three (3) Phases, designated as "Phase I", "Phase II"
and "Phase III".
"Quarterly Sweepstakes" shall have the meaning assigned to it in Subsection
2.1(b) ("Quarterly Sweepstakes").
"Receiving Party" shall have the meaning assigned to it in Section 9
("Confidentiality").
"Registered User" shall mean an End User who has registered at theglobe.com
Site.
"Registration Page" shall mean the web page so designated by theglobe.com at
theglobe.com Site.
"Template" shall have the meaning assigned to it in Subsection 8.2 ("Template").
"Term" shall have the meaning assigned to it in Section 12 ("Term and
Termination").
"theglobe.com Site" shall mean http://www.theglobe.com, or such other site so
designated by theglobe.com.
"theglobe.com Marks" shall mean the domain name and theglobe.com's trademarks,
service marks, logos and other company and product identifiers provided by
theglobe.com to Lowestfare under this Agreement, and as may be added to, deleted
from or modified from time to time by theglobe.com.
"Travel Services Company" shall have the meaning assigned to it in Subsection
3.1 ("Exclusive Travel Services Relationship").
"User Information" shall have the meaning assigned to it in Section 11 ("User
Information and Registration Data").
2.
<PAGE>
2. Phase I Services
The parties shall provide Phase I Services as provided herein and as provided in
Exhibit C ("Phases"):
2.1 Registration And Email.
(a) "Opt In" Registration. During the period of the Term before the
commencement of the activities described in Subsection 2.1(b) ("Quarterly
Sweepstakes"), theglobe.com shall place a "check box", including the name of
Lowestfare and the terms of the associated offer, on the Registration Page, by
means of which End Users may be automatically registered with Lowestfare also.
(b) Quarterly Sweepstakes. Lowestfare shall provide to theglobe.com
no less frequently than one (1) time each calendar quarter commencing with the
Effective Date, a prize for distribution by theglobe.com to winners of
theglobe.com's quarterly registration sweepstakes. The rules and operation of
such quarterly registration sweepstakes ("Quarterly Sweepstakes") shall be
determined solely by theglobe.com, in reasonable consultation with the original
provider of the prize. Lowestfare shall not be held liable by theglobe.com or
any third party for the administration, operation or legality of the Quarterly
Sweepstakes. theglobe.com intends that new Registered Users will be
automatically entered into such Quarterly Sweepstakes, and that such Registered
Users who do not wish to participate in such Quarterly Sweepstakes will be
offered the opportunity not to participate by checking an "opt out" box on the
Registration Page.
2.2 E-mail Promotion. At least one (1) time each calendar quarter during
the Term, commencing with the Effective Date, theglobe.com will direct an e-mail
campaign to all Registered Users. Such e-mail campaign shall, at a minimum,
reasonably promote the Co-Branded Site, and may, at theglobe.com's discretion,
include additional material regarding theglobe.com and its goods and services.
2.3 Framing. theglobe in its sole discretion may frame all or any part of
the Lowestfare website (currently, "http///www.lowestfare.com"), or the
Co-Branded Site, and any revenue theglobe derives from banner sales shall be
solely theglobe's.
3. Phase II Services.
The parties shall provide Phase II Services as provided herein and as provided
in Exhibit C ("Phases"):
3.1 Exclusive Travel Services Relationship. theglobe.com shall not, during
the Term, enter into any agreements with any of the companies ("Travel Services
Companies") described in Exhibit F ("Travel Services Companies") whereby such
Travel Services Companies shall provide travel-related content substantially
similar to that listed in Exhibit A ("Lowestfare Content") to theglobe.com and
receive placement of the trademarks, logos, or other company or product
identifiers on theglobe.com Site. Notwithstanding the foregoing: (a)
theglobe.com shall not be restricted in any manner from accepting banner ads or
banner-like ads
3.
<PAGE>
from any party; and (b) the foregoing restriction shall not apply to Registered
User web pages (including any "theglobe.com Stores" located at such web pages)
hosted by theglobe.com.
3.2 Co-Branded Site. Lowestfare shall, according to the schedule
contained in Exhibit C ("Phases"), develop and operate a web page (the
"Co-Branded Site"), to be located at one (1) or more server computers owned or
controlled by Lowestfare, which shall include content provided by Lowestfare and
shall reflect the user interface of the Template as licensed by theglobe.com
pursuant to Section 8 ("Licenses and Standards"). The design, layout, and "look
& feel" of the Co-Branded Site shall be mutually agreed to by the parties.
3.3 Placement.
(a) Linking to Co-Branded Site. theglobe.com shall link by
contextual links, "buttons", or similar identifiers determined by theglobe.com,
from theglobe.com Site to the Co-Branded Site. The specific pages at
theglobe.com Site from which such links may be made shall be determined by and
agreed to by both parties, but may include the following pages as may exist as
of the Effective Date, or as may be created or modified by theglobe.com during
the Term:
(i) theglobe.com homepage
(ii) What's New Area
(iii) Business & Finance Theme Area
(iv) Metro Theme Area
(v) Romance Theme Area
(vi) Life/College Theme Areas
(vii) Assorted (News, Sports, etc.)
(viii) NavBar
(ix) Myglobe.com
(x) Travel
(b) Impressions. theglobe.com shall deliver at least: (i)
( ) End User page impressions of Lowestfare Content at the.globe,com Site
during the first year of the Term in locations at theglobe.com Site to be
mutually agreed upon by both parties; (ii) ( ) End User
page impressions of Lowestfare Content at theglobe.com Site during the second
year of the Term in locations at theglobe.com Site to be mutually agreed upon
by both parties; and (iii) ( ) End User page impressions of
Lowestfare Content at theglobe.com Site during the third year of the Term in
locations at theglobe.com Site to be mutually agreed upon by both
4.
<PAGE>
parties. Such page impressions shall include, without limitation, all
impressions given at theglobe.com Site for all Lowestfare banner ads and
contextual button impressions. It is the parties' shared expectation that the
foregoing page impressions shall be provided in the quantities and from the
locations at theglobe.com Site described in Exhibit D ("Locations"); provided,
however, that the parties understand and agree that such expectation does not
represent any binding obligation on either party. theglobe.com will work with
Lowestfare to identify the most effective mix of banner ads, contextual links,
and "buttons" to be used on different pages of theglobe.com Site, including but
not limited to new sections of theglobe.com Site as they are launched. The
number of the foregoing page impressions shall be remeasured monthly, and any
overages or shortfalls from the pro rated monthly quantity (i.e.,
( ) impressions per month during the first year of the
Term), shall be rolled forward into the overall total in subsequent months on an
ongoing basis until the end of the Term.
3.4 Online Promotion. theglobe.com shall provide the relationship
between the parties with advertisements in accordance with Exhibit D
("Locations"), with online advertising solutions companies determined by
theglobe.com such as DoubleClick Inc. and 24/7 Media Inc.
4. Phase III Services.
The parties shall provide Phase III Services as provided herein and as provided
in Exhibit C ("Phases");
4.1 Affiliate Program. At the discretion of Lowestfare, theglobe.com
shall promote an affiliate program, to be determined solely by theglobe.com, to
be located on the "Making Money" page at theglobe.com Site, or such other
location as determined by theglobe.com, to allow Registered Users who have
personal home pages located at theglobe.com Site to place on such home pages
certain Lowestfare Content with links to the Co-Branded Site.
4.2 Offline Promotion. The globe shall promote the relationship
between the parties with the advertisements in print media as determined by
theglobe.com.
5. Content and Liability.
5.1 Lowestfare Content. In addition to all other obligations of
Lowestfare with respect to the Phases, Lowestfare shall also from time to time
during the Term promptly deliver to theglobe.com the Lowestfare Content
described in Exhibit C ("Phases"), and shall continue to provide such Lowestfare
Content during the Term of the Agreement in accordance therewith. Such
Lowestfare Content shall be provided in file transfer protocol ("ftp") format,
at least one (1) time each week.
5.2 Liability. As between theglobe.com and Lowestfare, Lowestfare
is solely responsible for any legal liability arising out of or relating to
Lowestfare Content or the Co-Branded Site. The Lowestfare Content and the
Co-Branded Site: (a) shall not infringe any third party's copyright, patent,
trademark, trade secret, or other proprietary rights or rights of publicity or
privacy; (b) shall not violate any law, statute, ordinance or regulation
(including without limitation the laws and regulations governing export control,
unfair competition, anti-discrimination or false advertising); (c) shall not
be defamatory, trade libelous, unlawfully
5.
<PAGE>
threatening or unlawfully harassing; (d) shall not be obscene, pornographic or
indecent or contain child pornography; and (e) shall not contain any viruses,
Trojan horses, worms, time bombs, cancelbots or other computer programming
routines that are intended to damage, detrimentally interfere with,
surreptitiously intercept or expropriate any system, data or personal
information.
6. Payment.
6.1 Fees. During the Term, Lowestfare shall pay to theglobe.com the
following fees: (a) During the first year of the Term, Lowestfare shall pay to
theglobe.com a fee ("Fee") of
($ ) in twelve (12) monthly payments of
($ ) each, the first two (2) of such Fee payments (totaling
to be made on the Effective Date, and each
subsequent payment ($ )) to be made
thirty (30) days after the immediately prior payment. (b) During the second
year of the Term, Lowestfare shall pay to theglobe.com a fee of
($ ) in twelve (12) equal monthly payments, the
first of such payments to be made on the one-year anniversary of the Effective
Date. (c) During the third year of the Term, Lowestfare shall pay to
theglobe.com a fee of ($ )
in twelve equal monthly payments, the first of such payments to be made on the
two-year anniversary of the Effective Date.
6.2 Taxes. All fees and payments stated herein exclude and
Lowestfare shall pay, any sales, use, property, license, value added,
withholding, excise or similar tax, federal, state or local, related to such
payments or the parties' performance of their obligations or exercise of their
rights under their Agreement and any related duties, tariffs, imposts and
similar charges, exclusive of taxes based on theglobe.com's net income.
7. Support.
At its sole expense, Lowestfare shall be responsible for, and shall provide, all
customer and technical support for End Users relating to the Co-Branded Site,
theglobe.com may redirect any End User inquiries regarding the travel component
of the Co-Branded Site to Lowestfare.
8. Licenses And Standards.
8.1 Content. Lowestfare hereby grants to theglobe.com a
non-exclusive, nontransferable worldwide, royalty-free license (without the
right to grant sublicenses) to use, download, or distribute publicly perform,
publicly display and digitally perform the Lowestfare Content on or in
conjunction with theglobe.com Site, and theglobe.com's performance under this
Agreement.
8.2 Template. theglobe.com hereby grants to Lowestfare a
non-exclusive, non-transferable, worldwide royalty-free license (without the
right to grant sublicenses) to install the object code version of the software
("Template") described in EXHIBIT E ("TEMPLATE") solely at the Co-Branded Site,
and solely to use and to permit End Users to use the Template pursuant to the
use of such Co-Branded Site. The Template shall at all times remain the sole
and exclusive property of theglobe.com, subject only to the license expressly
granted herein.
6.
<PAGE>
Lowestfare understands and agrees that theglobe.com may, from time to time and
in theglobe.com's discretion, provide modified, updated, correct or enhanced
versions of the Template to Lowestfare, and Lowestfare shall replace the prior
version with such new version within a reasonable amount of time. In the event
the Template is modified, updated, corrected or enhanced within six months from
the Effective Date, theglobe.com shall reimburse Lowestfare for any costs
incurred in implementing such Template.
8.3 Trademarks. Lowestfare hereby grants theglobe.com a non-
exclusive, nonsublicenseable license to use the Lowestfare Marks in links to and
advertisements and promotions for theglobe.com Site. theglobe.com hereby grants
to Lowestfare a non-exclusive, nonsublicenseable license to use theglobe.com's
Marks on the Co-Branded Site.
8.4 Restrictions. Each party, as a trademark owner hereunder, may
terminate the foregoing trademark license if, in its sole discretion, the
licensee's use of the marks does not conform to the such party's standards;
alternatively, the owner may specify that certain pages of the licensee's
website may not contain the licensed marks; provided, however, the objecting
-----------------
party must state in writing the basis for the objection and provide the other
party with a reasonable opportunity to cure such offending action. Title to and
ownership of the owner's marks shall remain with the owner. The licensee shall
use the marks exactly in the form provided and in conformance with any trademark
usage policies. The licensee shall not form any combination marks with the
owner's marks. The licensee shall not take any action inconsistent with
ownership of the marks and any benefits accruing from use of such trademarks
shall automatically vest in the owner.
9. Confidentiality.
9.1 Confidential Information. Each party (the "Disclosing Party")
may from time to time during the Term of this Agreement disclose to the other
party (the "Receiving Party") certain non-public information regarding the
Disclosing Party's business, including technical, marketing, financial,
personnel, planning, and other information ("Confidential Information"). The
Disclosing Party shall mark all such Confidential Information in tangible form
with the legend 'confidential', 'proprietary', or with similar legend. With
respect to Confidential Information disclosed orally, the Disclosing Party shall
describe such Confidential Information as such at the time of disclosure, and
shall confirm such Confidential Information as such in writing within thirty
(30) days after the date of oral disclosure. Regardless of whether so marked,
however, any non-public information regarding the Template, including the
Template itself, shall be deemed to be the Confidential Information of
theglobe.com.
9.2 Protection of Confidential Information. Except as expressly
permitted by this Agreement, the Receiving Party shall not disclose the
Confidential Information of the Disclosing Party using the same degree of care
which the Receiving Party ordinarily uses with respect to its own proprietary
information, but in no event with less than reasonable care. The Receiving Party
shall not use the Confidential Information of the Disclosing Party for any
purpose not expressly permitted by this Agreement, and shall limit the
disclosure of the Confidential Information of the Disclosing Party to the
employees or agents of the Receiving Party who have a need to know such
Confidential Information for purposes of this Agreement, and with respect to
agents who are recipients of the Confidential Information of the Disclosing
Party, who are
7.
<PAGE>
bound in writing by confidentiality terms no less restrictive than those
contained herein. The Receiving Party shall provide copies of such written
agreements to the Disclosing Party upon request; provided, however, that such
agreement copies shall themselves be deemed the Confidential Information of the
Receiving Party.
9.3 Exceptions. Notwithstanding anything herein to the contrary,
Confidential Information shall not be deemed to include any information which:
(a) was already lawfully known to the Receiving Party at the time of disclosure
by the Disclosing Party as reflected in the written records of the Receiving
Party; (b) was or has been disclosed by the Disclosing Party to a third party
without obligation of confidence; (c) was or becomes lawfully known to the
general public without breach of this Agreement; (d) is independently developed
by the Receiving Party without access to, or use of, the Confidential
Information; (e) is approved in writing by the Disclosing Party for disclosure
by the Receiving Party; (f) is required to be disclosed in order for the
Receiving Party to enforce its rights under this Agreement; or (g) is required
to be disclosed by law or by the order or a court or similar judicial or
administrative body, including as part of any filing with the Securities
Exchange Commission; provided, however, that the Receiving Party shall notify
the Disclosing Party of such requirement immediately and in writing, and shall
cooperate reasonably with the Disclosing Party, at the Disclosing Party's
expense, in the obtaining of a protective or similar order with respect thereto.
9.4 Return of Confidential Information. The Receiving Party shall
return to the Disclosing Party, destroy or erase all Confidential Information
of the Disclosing Party in tangible form: (a) upon the written request of the
Disclosing Party (except for Software or Modified Software contained in such
Confidential Information); or (b) upon the expiration or termination of this
Agreement, whichever comes first, and in both cases, the Receiving Party shall
certify promptly and in writing that it has done so.
10. USER INFORMATION AND REGISTRATION DATA.
10.1 User Information. Any information or data collected from or about
End Users (including without limitation voluntarily-disclosed information, any
information Lowestfare collects regarding End Users from their access or use of
the Co-Branded Site (including without limitation all statistical, demographic
and psychographic information about such End Users) and any reports about
traffic (collectively, "User Information")) shall be owned exclusively by
theglobe.com. However, during the Term of this Agreement, theglobe.com hereby
grants to Lowestfare a nonexclusive, nontransferable, nonsublicenseable license
to use User Information only as required to exercise its rights and carry out
its obligations hereunder. Lowestfare acknowledges that the User Information
constitutes extremely valuable trade secrets of theglobe.com. Lowestfare shall
not use the User Information for any purpose other than as expressly granted
under this Agreement nor disclose the User Information to any third party.
Without limiting the foregoing, under no circumstances may Lowestfare send
unsolicited emails to any End Users, nor may Lowestfare permit or authorize any
third parties to do so. Lowestfare shall use at least industry-standard methods
to protect the security of User Information. This Subsection 10.1 ("User
Information") shall not apply to End Users who (a) have registered as
Lowestfare.com users, including pursuant to Subsection 2.1 ("`Opt In'
Registration") and Subsection 2.1 (b) ("Quarterly Sweepstakes"); or (b) are or
become customers of
8.
<PAGE>
Lowestfare.com or Global Discount Travel Services, or its respective
subsidiaries, now existing or hereafter organized.
10.2 Registration Data. As part of the User Information, theglobe.com
shall provide to Lowestfare the email addresses and names of Registered Users.
11. Disclaimer of Warranties.
EACH PARTY PROVIDES ALL MATERIALS AND SERVICES TO THE OTHER PARTY "AS IS." EACH
PARTY DISCLAIMS ALL WARRANTIES AND CONDITIONS, EXPRESS, IMPLIED OR STATUTORY,
INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF TITLE, NON-INFRINGEMENT,
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. Each party acknowledges
that it has not entered into this Agreement in reliance upon any warranty or
representation except those specifically set forth herein.
12. Term and Termination.
12.1 Term. The term of this Agreement ("Term") shall continue for a
period of three (3) years following the Effective Date.
12.2 Termination for Cause. Notwithstanding the foregoing, this
Agreement may be terminated by either party upon notice for the material breach
of this Agreement by the other party which breach has remained uncured for a
period of thirty (30) days from the date of written notice thereof.
12.3 Effect of Expiration or Termination. Upon the expiration or
termination of this Agreement, all licenses granted hereunder shall immediately
terminate, and each party shall promptly remove all references to the other
party's trademarks from any site that caches, indexes or links to such party's
site.
13. Survival.
Upon the expiration or termination of this Agreement, Section 1 ("Definitions"),
Subsection 5.2 ("Liability"), Section 9 ("Confidentiality"), Section 11
("Disclaimer of Warranties"), Subsection 12.4 ("Effect of Expiration or
Termination"), Section 13 ("Survival"), Section 14 ("Limitation of Liability"),
Section 15 ("Indemnity") and Section 16 ("General Provisions") shall survive and
continue to bind the parties.
14. Limitation on Liability.
EXCEPT IN THE EVENT OF A BREACH OF SECTION 8 ("LICENSES AND STANDARDS") OR
SECTION 9 ("CONFIDENTIALITY"), NEITHER PARTY SHALL BE LIABLE FOR SPECIAL,
INCIDENTAL OR CONSEQUENTIAL DAMAGES OR LOST PROFITS (HOWEVER ARISING, INCLUDING
NEGLIGENCE) ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT. EXCEPT IN THE
EVENT OF A BREACH OF SECTION 8 ("LICENSES AND STANDARDS") OR SECTION 9
("CONFIDENTIALITY"), A FAILURE TO PAY FEES OWED, OR AN INDEMNITY CLAIM, IN NO
EVENT SHALL
9.
<PAGE>
EITHER PARTY BE LIABLE TO THE OTHER PARTY IN AN AMOUNT GREATER THAN THE AMOUNTS
ACTUALLY PAID BY LOWESTFARE TO THEGLOBE HEREUNDER.
15. Indemnity.
Each party (the "Indemnifying Party") shall indemnify the other party (the
"Indemnified Party") against any and all claims, losses, damages costs and
expenses, including reasonable attorneys' fees, which the Indemnified Party may
incur as a result of claims in any form by third parties arising from: (a) the
Indemnifying Party's acts, omissions or misrepresentations to the extent that
the Indemnified Party is deemed a principal of the Indemnifying Party, (b) the
violation of any third party proprietary right by the Indemnifying Party's
domain name, software or any content provided by the Indemnifying Party
(including without limitation the Lowestfare Content) for use on the Indemnified
Party's servers, or (c) breach of Subsection 16.5 ("Compliance with Laws"). In
addition, Lowestfare shall indemnify theglobe.com against any and all claims,
losses, damages, costs and expenses, including reasonable attorneys' fees, which
theglobe.com may incur as a result of claims in any form by third parties
arising from; the content on the Co-Branded Site. The foregoing obligations are
conditioned on the Indemnified Party's giving the Indemnifying Party notice of
the relevant claim, cooperating with the Indemnifying Party, at the Indemnifying
Party's expense, in the defense of such claim, and giving the Indemnifying Party
the right to control the defense and settlement of any such claim, except that
the Indemnifying Party shall not enter into any settlement that affects the
Indemnified Party's rights or interest without the Indemnified Party's prior
written approval. The Indemnified Party shall have the right to participate in
the defense at its expense.
16. General Provisions.
16.1 Governing Law. This Agreement will be governed and construed in
accordance with the laws of the State of New York without giving effect to
conflict of laws principles. Both parties consent to jurisdiction in New York
and further agree that any cause of action arising under this Agreement shall be
brought in a court in New York, New York. The parties exclude the application of
The United Nations Convention on Contracts for the International Sale of Goods
from this Agreement.
16.2 Severability; Headings. If any provision herein is held to be
invalid or unenforceable for any reason, the remaining provisions will continue
in full force without being impaired or invalidated in any way. Headings are for
reference purposes only and in no way define, limit, construe or describe the
scope or extent of such section.
16.3 Force Majeure. If performance hereunder is prevented, restricted
or interfered with by any act or condition whatsoever beyond the reasonable
control of a party, the party so affected, upon giving prompt notice to the
other party, shall be excused from such performance to the extent of such
prevention, restriction or interference. Each party acknowledges that the
operation of the other party's website and services may be interfered with by
numerous factors outside of a party's control, and theglobe.com does not
guarantee continuous or uninterrupted display of Lowestfare Content.
10.
<PAGE>
16.4 Independent Contractors. The parties are independent contractors,
and no agency, partnership, joint venture, employee-employer or franchisor-
franchisee relationship is intended or created by this Agreement. Neither party
shall make any warranties or representations on behalf of the other party.
16.5 Compliance with Laws. At its own expense, each party shall comply
with all applicable laws, regulations, rules, ordinances and orders regarding
the marketing, promotion and performance of its obligations hereunder, including
without limitation the operation of the Co-Branded Site and its other activities
related to this Agreement.
16.6 Notice. Any notices hereunder shall be given to the appropriate
party at the address specified above or at such other address as the party shall
specify in writing. Notice shall be deemed given: upon personal delivery; if
sent by fax, upon confirmation of receipt; or if sent by certified or registered
mail, postage prepaid, five (5) days after the date of mailing.
16.7 Entire Agreement; Waiver. This Agreement sets forth the entire
understanding and agreement of the parties, and supersedes any and all oral or
written agreements or understandings between the parties, as to the subject
matter of this Agreement, including the Travel Services Alliance Agreement
between theglobe.com and lowestfare.com dated as of September 9, 1998. It may
be changed only by a writing signed by theglobe.com and Lowestfare. The waiver
of a breach of any provision of this Agreement will not operate or be
interpreted as a waiver of any other or subsequent breach.
16.8 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
be taken together and deemed to be one instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Lowestfare.com, a division of theglobe.com, inc.
Global Discount Travel Services LLC
By: /s/ By: /s/
------------------------------ ------------------------------
Title: CEO Title:
------------------------------ ------------------------------
Date: 9-16-98 Date: 16\Sept.\98
------------------------------ ------------------------------
11.
<PAGE>
Exhibit A
Lowestfare Content
Editorial Content
- -----------------
. Travel
. Flight Reservations
. Quick Rez
. Vacation Packages
. Vacations
. Getaways
. Cruises
. Destination Guide
. Travel Articles
. Travel Resources
. Maps
. Weather
. Currency Converter
. Travel Affiliate Program
Buttons, Banners, Etc.
- ----------------------
Other Materials
- ---------------
12.
<PAGE>
Exhibit B
Marks
13.
<PAGE>
Exhibit C
Phases
Phase I
(To commence upon the Effective Date and to continue for the Term of the
Agreement)
Promotional Matters
Phase II
(To commence the fourth (4th) calendar quarter of 1998 (Q4,98) and to continue
for the Term of the Agreement)
Site Integration
Phase III
(To commence the first (1st) calendar quarter of 1999 (Q1,99) and to continue
for the Term of the Agreement)
Affiliate Program & Online Promotion
14.
<PAGE>
Exhibit D
Locations
- --------------------------------------------------------------------------------
Type Approx. Yearly Impressions Total Cost
- --------------------------------------------------------------------------------
Exclusive Travel Partner
Travel Content Area
Placement Theme Areas
Homepage Promotion
What's New
Business
Metro
Romance
Life College
Myglobe.com
Quarterly Registration Giveaway
Registered Users
Permanent Opt-in Registration Pg.
Registered Users
Monthly Travel Sweepstakes
Registered Users
Quarterly Email
Affiliate Membership Program
Online and Offline Promotion
Online
Offline Print
Assorted
- --------------------------------------------------------------------------------
Total
- --------------------------------------------------------------------------------
15.
<PAGE>
EXHIBIT E
Template
Subject to Subsection 8.2 ("Template"), the initial Template shall provide a
user interface substantially consistent with the following:
[TEMPLATE SCREEN]
16.
<PAGE>
Exhibit F
Travel Services Companies
Travel Service Companies shall mean all companies that provide full-service
travel content and reservations for airlines, hotels, vacations, cars, cruises
and charter flights, including, but not limited to:
Travelocity
Expedia
Preview Travel
Internet Travel Network (ITN)
American Express Travel
Carson-Wagonlits
Omega Travel
Cheap Tickets
Biz Travel
17.
<PAGE>
EXHIBIT 11.1
Computation of loss per share
<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
1995 1996 1997 1997 1998
------------ ------------- -------------- ----------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Basic:
Net loss ($65,706) ($750,180) ($3,584,400) ($767,435) ($5,824,270)
Net loss applicable to common
stockholders ($65,706) ($750,180) ($3,584,400) ($767,435) ($5,824,270)
============ ============= ============== =========== =============
Basic weighted average shares
outstanding 1,125,000 1,125,000 1,146,773 1,140,960 1,161,389
============ ============= ============== =========== =============
Basic loss per common share ($0.06) ($0.67) ($3.13) ($0.67) ($5.01)
============ ============= ============== =========== =============
Diluted:
Net loss applicable to common
stockholders ($65,706) ($750,180) ($3,584,400) ($767,435) ($5,824,270)
============ ============= ============== =========== =============
Basic weighted average shares
outstanding 2,250,000 2,250,000 2,293,545 1,140,960 1,161,389
Net effect of dilutive securities 0 0 0 0 0
------------ ------------- -------------- ----------- -------------
Diluted weighted average shares
outstanding 1,125,000 1,125,000 1,146,773 1,140,960 1,161,389
============ ============= ============== =========== =============
Diluted loss per common share ($0.06) ($0.67) ($3.13) ($0.67) ($5.01)
============ ============= ============== =========== =============
</TABLE>
<PAGE>
EXHIBIT 23.1
ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULE
The Board of Directors and Stockholders
theglobe.com, inc.:
The audits referred to in our report dated April 16, 1998, except for note 9,
which is as of July 22, 1998, included the related financial statement schedule
as of December 31, 1997, and for the period from May 1, 1995 (inception) to
December 31, 1995 and for the years ended December 31, 1996 and 1997, included
in the Registration Statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statements schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects, the information set forth therein.
We consent to the use of our report included herein and to the reference to our
firm under the headings "Selected Financial Data" and "Experts" in the
Prospectus.
KPMG PEAT MARWICK LLP
New York, New York
September 29, 1998
<PAGE>
EXHIBIT 23.3
[LETTERHEAD OF WWW ABC INTERACTIVE/TM/]
September 25, 1998
To Whom it May Concern:
Theglobe.com may refer to ABC Interactive in their financial documents as long
as it is not in the context of theglobe.com being a client of ABC Interactive or
audited by ABC Interactive.
In terms of the relationship ABC Interactive has with DoubleClick, DoubleClick
has engaged ABC Interactive, effective July 1997, to provide audits of the total
Ad Impressions served by the DoubleClick Network, DART, DoubleClick Direct, and
all ads served on behalf of DoubleClick's International partners.
During the course of the audit, ABC Interactive examines the activity records
and other data presented by DoubleClick for the period covered by the audit
report. The examination is made in accordance with ABC Interactive's established
audit procedures and includes such tests and other audit procedures as we
consider necessary under the circumstances.
Hope this is helpful.
Sincerely,
/s/ Mark A. Wachowicz
Mark A. Wachowicz
Senior Vice President
Marketing and Sales
<PAGE>
EXHIBIT 23.4
[LETTERHEAD OF JUPITER COMMUNICATIONS]
Disclosure Form
---------------
Jupiter Communications, LLC hereby grants theglobe.com, inc. permission
to disclose information from the 1998 Online Advertising Report and the 1998
Online Shopping Report, which is referenced and credited on pages 38 and 39 of
theglobe.com, inc. Form S-1 Registration Statement, Registration No. 333-59751.
JUPITER COMMUNICATIONS, LLC
/s/ Yvette DeBow
-------------------------------
Name: Yvette DeBow
Title: Vice President, Research
9-25-98
- ---------------
Date
<PAGE>
EXHIBIT 23.5
[IDC LOGO] INTERNATIONAL DATA CORPORATION
5 Speen Street
Framingham, MA 01701
(508) 872-8200
Fax: (508) 935-4789
Web Site: http://www.idcresearch.com
Disclosure Form
International Data Corporation grants
Ron DiPrete (on behalf of theglobe.com, inc.)
- ---------------------------------------------
(Individual's Name)
of Fried, Frank, Harris, Shriver & Jacobson permission to disclose
----------------------------------------
select
(Company's Name)
pages of International Data Corporation's publication, entitled
see attached* .
- ---------------------------------------------------------------
It is understood by both International Data Corporation and
that the information will
- --------------------------------------------
not
(Company's Name)
be sold. It is further understood International Data Corporation will be
credited as the source of publication. The original date of publication will
be noted.
/s/ Michael Sullivan
- ----------------------------------------
International Data Corporation Date
- ----------------------------------------
Requesting Individual, company Date
* The U.S. and Worldwide Forecast for Internet Usage and Commerce
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS OF THEGLOBE.COM AS OF JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY,
AND THE RELATED STATEMENTS OF OPERATIONS, STOCKHOLDERS' EQUITY (DEFICIENCY) AND
CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND FOR THE YEAR ENDED
DECEMBER 31, 1997, RESPECTIVELY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 DEC-31-1997
<CASH> 2,997,391 5,871,291
<SECURITIES> 10,157,830 13,003,173
<RECEIVABLES> 652,059 282,077
<ALLOWANCES> 27,868 27,868
<INVENTORY> 0 0
<CURRENT-ASSETS> 13,855,259 19,128,673
<PP&E> 1,519,901 435,394
<DEPRECIATION> 346,319 109,552
<TOTAL-ASSETS> 15,603,080 19,462,172
<CURRENT-LIABILITIES> 3,403,175 2,011,297
<BONDS> 0 0
0 0
2,900 2,900
<COMMON> 2,395 2,309
<OTHER-SE> 11,565,329 17,346,840
<TOTAL-LIABILITY-AND-EQUITY> 15,603,080 19,462,172
<SALES> 0 0
<TOTAL-REVENUES> 1,173,398 770,293
<CGS> 0 0
<TOTAL-COSTS> 503,181 423,706
<OTHER-EXPENSES> 7,140,624 4,213,739
<LOSS-PROVISION> 0 15,868
<INTEREST-EXPENSE> 30,460 0
<INCOME-PRETAX> (5,797,770) (3,548,300)
<INCOME-TAX> 26,500 36,100
<INCOME-CONTINUING> (5,824,270) (3,584,400)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,824,270) (3,584,400)
<EPS-PRIMARY> (5.01) (3.13)
<EPS-DILUTED> (5.01) (3.13)
</TABLE>
