<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 1999
REGISTRATION NO. 333-74441
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
XOOM.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
<TABLE>
<S> <C> <C>
DELAWARE 7310 88-0361536
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
</TABLE>
300 MONTGOMERY STREET, SUITE 300
SAN FRANCISCO, CALIFORNIA 94104
(415) 288-2500
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
PLACE OF BUSINESS)
----------------
JOHN HARBOTTLE
CHIEF FINANCIAL OFFICER
XOOM.COM, INC.
300 MONTGOMERY STREET, SUITE 300
SAN FRANCISCO, CALIFORNIA 94104
(415) 288-2500
(NAME, ADDRESS, AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
----------------
Copies to:
<TABLE>
<S> <C>
BRUCE ALAN MANN, ESQ. NORA L. GIBSON, ESQ.
KRISTIAN E. WIGGERT, ESQ. RODRIGO M. GUIDERO, ESQ.
JOEL S. FISCH, ESQ. TAYLOR L. STEVENS, ESQ.
MORRISON & FOERSTER LLP BROBECK, PHLEGER & HARRISON LLP
425 MARKET STREET SPEAR STREET TOWER, ONE MARKET STREET
SAN FRANCISCO, CALIFORNIA 94105-2482 SAN FRANCISCO, CALIFORNIA 94105
</TABLE>
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
----------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT 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>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be used
in connection with an offering in the United States and Canada and the other to
be used in a concurrent offering outside the United States and Canada. The
prospectuses are identical except for the front and back cover pages, the
inside front cover page, and the section entitled "Certain United States
Federal Tax Consequences to Non-United States Holders" (which appears only in
the international prospectus) and certain cross-references relating thereto.
The form of U.S. prospectus is included in this Registration Statement and is
followed by the alternate pages to be used in the international prospectus.
Each of the alternate pages for the international prospectus included in this
Registration Statement is labeled "Alternate Page for International
Prospectus." Final forms of each prospectus will be filed with the Securities
and Exchange Commission under Rule 424(b).
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE +
+CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT +
+FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THE +
+INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES +
+IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER +
+OR SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 30, 1999
PRELIMINARY PROSPECTUS
4,000,000 SHARES
XOOM.COM, INC.
COMMON STOCK
[LOGO OF XOOM.com]
-----------
This is a public offering of 4,000,000 shares of common stock of XOOM.com, Inc.
We are selling 2,000,000 shares of common stock and the selling stockholders
identified in this prospectus are selling 2,000,000 shares. We will not receive
any of the proceeds from the shares of common stock sold by the selling
stockholders. Of these 4,000,000 shares of common stock, 3,400,000 shares are
being offered for sale in the United States and Canada by the U.S. underwriters
and 600,000 shares are being concurrently offered for sale outside the United
States and Canada by the international underwriters.
The U.S. underwriters have an option to purchase a maximum of 600,000
additional shares of common stock from us to cover over-allotments of shares.
Our common stock is traded on the Nasdaq National Market under the symbol
"XMCM." On March 12, 1999, the last reported sale price for our common stock
was $67.00 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 TO READ ABOUT CERTAIN RISKS THAT YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
-----------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-----------
<TABLE>
<CAPTION>
PER
SHARE TOTAL
----- -----
<S> <C> <C>
Public offering price.............................................. $ $
Underwriting discount.............................................. $ $
Proceeds, before expenses, to us................................... $ $
Proceeds, before expenses, to the selling stockholders............. $ $
</TABLE>
-----------
The U.S. underwriters are severally underwriting the shares being offered in
this prospectus. The U.S. underwriters expect to deliver the shares against
payment in New York, New York on March , 1999.
-----------
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS
WIT CAPITAL CORPORATION
as e-Manager(TM)
The date of this Prospectus is , 1999
<PAGE>
[INSIDE FRONT COVER]
[DEPICTIONS OF XOOM.COM WEB SITE WELCOME PAGE AND EXAMPLES OF XOOM.COM MEMBER
SERVICES, WITH TEXT, "FREE SERVICES AND COMMUNITIES MADE XOOM.COM THE 11TH MOST
VISITED SITE IN THE INTERNET WITH A REACH OF 17% IN JANUARY 1999."]
[GATE 1]
[DEPICTIONS OF PROCEDURES FOR HOW MEMBERS JOIN, WITH TEXT, "MEMBERS REGISTER BY
GIVING A VALID E-MAIL ADDRESS, DEMOGRAPHIC INFORMATION AND PERMISSION TO BE
RECONTACTED WITH NEWS AND OFFERS." DEPICTIONS OF EXAMPLES OF COMMUNITIES WITH
TEXT, APPROXIMATELY 200 XOOM.COM COMMUNITIES BRING PEOPLE TOGETHER AND CREATE A
CONTEXT FOR BUYING."]
[GATE 2]
[DEPICTION OF PROCEDURES FOR PURCHASING PRODUCTS AND EXAMPLES OF PRODUCTS, WITH
TEXT, "MEMBERS GET GREAT DEALS ON MERCHANDISE AND SERVICES."]
2
<PAGE>
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read the entire prospectus carefully,
including the section entitled "Risk Factors" and our financial statements and
the related notes to those statements included in this prospectus. Except as
otherwise required by the context, references in this prospectus to "we," "us,"
"our" or "Xoom.com" refer to Xoom.com, Inc. and its subsidiaries. The term
"you" refers to prospective investors in the common stock. Unless otherwise
specified, all information in this prospectus assumes no exercise of the
underwriters' over-allotment option.
XOOM.COM, INC.
Xoom.com is one of the fastest growing direct e-commerce companies on the
Internet. We attract members to our community site with a variety of free
services, including homepages, e-mail, chat rooms, electronic newsletters, clip
art and software libraries, page counters and online greeting cards. Our
members can also join topical communities where they can exchange ideas and
information. Members may also enter specialized forums such as Investor Place,
Women's Circle or Health & Fitness, where they can gain access to professional
content and special product and service offers available only on our Web site.
Upon registration, members agree to receive periodic offers of products and
services via e-mail. These competitively priced and continuously updated offers
include computer software, computer accessories and peripherals, consumer
electronics, clip art on CD-ROM and collectible items. In addition, we offer
services such as a travel club, long distance telephone services and a DVD
club. Our new offerings will include services such as home and auto insurance,
wireless telecommunications services and membership clubs, and products such as
magazine subscriptions, appliances, games, photography supplies and gardening
tools, among others. We believe that our rapidly growing base of self-qualified
members provides us with highly attractive e-commerce opportunities. In
addition, we believe that our high levels of traffic and the number of unique
users that visit our site or affiliated sites on which we offer services on a
monthly basis, often referred to as reach, present an attractive platform for
advertising.
According to Media Metrix, Xoom.com was the eleventh most visited site on
the Internet in January 1999, and our reach increased to 17% in January 1999
from less than 2% in January 1998. In January 1999, the Xoom.com site and our
network of chat rooms and page counters had a total reach of 28%, according to
Media Metrix. We had approximately 6.6 million members as of March 15, 1999,
adding an average of approximately 23,000 new members per day for the last 30
days. We believe that our ability to achieve a high level of reach and
membership with minimal investment gives us a significant advantage as our e-
commerce and advertising businesses expand. In the quarter ended December 31,
1998, we derived 64% of our net revenue from e-commerce and approximately 18%
of net revenue from non-U.S. sales. Quarterly net revenue increased from
approximately $420,000 in the fourth quarter of 1997 to $3.5 million in the
fourth quarter of 1998, representing compound quarterly sales growth of
approximately 70%.
By offering our members a variety of attractive free services, participation
in virtual communities and competitively priced products, we believe we have
created an innovative online sales channel with low customer acquisition costs.
The key elements of our approach are:
. using the cost-effective direct e-commerce capabilities of the Web to
sell products to our members;
. rapidly initiating direct e-commerce campaigns using proprietary
campaign management software, allowing us to maximize response rates and
minimize inventory costs;
. offering a diverse product range and multiple e-commerce channels to
create an effective context for increased e-commerce transaction volume;
. providing free services to attract a growing membership base;
. collecting relevant information to develop a detailed member database;
and
. continuing to grow online reach and membership to create an attractive
advertising platform.
3
<PAGE>
Our objective is to be a leading direct e-commerce company on the Internet.
In order to accomplish this objective, we intend to continue to focus on
growing our membership base both in the U.S. and internationally, increasing
the rate at which we convert new members to buyers and building strong brand
recognition of the Xoom.com name. We also intend to significantly increase the
number and type of products and service offerings available to our members. We
believe that promoting repeat usage and member loyalty through free services
will help establish us as a preferred destination among Web users. We intend to
acquire other strategically complementary businesses and seek strategic
alliances that will increase our reach and membership.
"XOOM," "XOOM.com" and the "X-in-circle" logo are some of Xoom.com's
trademarks. This prospectus contains other product names, trade names and
trademarks of other organizations that are their property. We were incorporated
in Delaware on April 16, 1996 under the name Atomsoft, Inc., changed our name
to XOOM, Inc. in February of 1998 and to XOOM.com, Inc. in October of 1998. Our
principal executive offices are at 300 Montgomery Street, Suite 300, San
Francisco, California 94104, and our telephone number at this address is (415)
288-2500.
----------------
This prospectus includes statistical data about the Internet industry that
comes from information published by sources including Media Metrix, Inc., a
media research firm specializing in market and technology measurement on the
Internet. We also refer to Jupiter Communications, LLC, a media research firm
focusing on the Internet industry, and International Data Corporation, also
known as IDC, and Forrester Research, providers of market information and
strategic information for the information technology industry. Although we
believe that data from these companies is generally reliable, this type of data
is inherently imprecise. We caution you not to place undue reliance on this
data.
----------------
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered by us in the U.S. offering........... 1,700,000 shares
Common stock offered by us in the international offering.. 300,000 shares
Common stock offered by the selling stockholders in the
U.S. offering ........................................... 1,700,000 shares
Common stock offered by the selling stockholders
in the international offering............................ 300,000 shares
Common stock to be outstanding after the Offering(1)...... 16,082,672 shares
Use of proceeds........................................... For general corporate
purposes, including
developing new
e-commerce channels,
expanding operations
internationally,
enhancing the value of
the Xoom.com brand,
potential acquisitions
and minority investments
and working capital.
Nasdaq National Market symbol............................. XMCM
</TABLE>
- ----------
(1) The following information is based on shares outstanding as of December 31,
1998. It excludes (A) 2,415,258 shares of common stock subject to
outstanding options with a weighted average exercise price of $6.96 per
share as of December 31, 1998; (B) 736,849 shares of common stock reserved
for issuance under our stock option and stock purchase plans; (C) 3,468
shares of common stock issued to directors since December 31, 1998; and
(D) 116,231 shares of common stock issued in conjunction with the exercise
of warrants since December 31, 1998. It assumes the exercise of outstanding
options to purchase 383,117 shares of common stock by the selling
stockholders with a weighted average exercise price of $1.44. See
"Capitalization," "Management--Benefit Plans" and Note 10 of Notes to
Consolidated Financial Statements.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16 YEAR ENDED
(INCEPTION) TO DECEMBER 31,
DECEMBER 31, -----------------
1996 1997 1998
-------------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue:
E-commerce................................ $ -- $ 327 $ 5,582
Advertising............................... -- 60 2,144
License fees and other.................... -- 454 592
------ ------- --------
Total net revenue........................... -- 841 8,318
Gross profit................................ -- 522 4,734
Loss from operations........................ (440) (3,132) (9,356)
Net loss.................................... $ (440) $(3,132) $(10,798)
====== ======= ========
Net loss per share--basic and diluted(1).... $(0.89) $ (0.64) $ (1.37)
Number of shares used in per share
calculation--basic and diluted(1).......... 497 4,874 7,879
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------
ACTUAL AS ADJUSTED(2)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $56,575 $183,826
Working capital......................................... 52,560 179,811
Total assets............................................ 66,874 194,125
Long-term obligations, less current portion............. 528 528
Total stockholders' equity.............................. 60,332 187,583
</TABLE>
- ----------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used to compute basic and
diluted net loss per share.
(2) As Adjusted reflects (A) the exercise of outstanding options to purchase
383,117 shares of common stock with a weighted average exercise price of
$1.44 by the selling stockholders and (B) receipt of the net proceeds from
the sale of the 2,000,000 shares of common stock we are offering, after
deducting the underwriting discount and estimated offering expenses, at an
assumed public offering price of $67.00 per share. See "How We Intend to
Use the Proceeds from the Offering" and "Capitalization."
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties of which we
are unaware or that we currently think are immaterial may also impair our
business operations.
If any of the following risks actually occur, our business, financial
condition or results of operations could be materially adversely affected. This
could cause the trading price of our common stock to decline, and you could
lose all or part of your investment.
We cannot assure you that we will be profitable because we have operated our
business only for a short period of time
Xoom.com was founded in April 1996 and has a limited operating history. An
investor in our common stock must consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets, particularly those involved in e-commerce and the Internet. These
risks include:
. the level of use of the Internet and online services and consumer
acceptance of the Internet and other online services, particularly
direct e-mail marketing, for the purchase of consumer products such as
those we offer;
. the lack of broad acceptance of the community model on the Internet;
. our inability to generate significant e-commerce revenue or premium
service revenue from our members;
. our inability to maintain and increase levels of traffic on the Xoom.com
Web site;
. our failure to continue to develop and extend the Xoom.com brand;
. our inability to attract or retain members;
. our inability to meet minimum guaranteed impressions under advertising
agreements;
. our failure to anticipate and adapt to a developing market;
. our inability to upgrade and develop our systems and infrastructure and
attract new personnel in a timely and effective manner;
. the failure of our server and networking systems to efficiently handle
our Web traffic; and
. our inability to effectively manage rapidly expanding operations.
We cannot be certain that our business strategy will be successful or that we
will successfully address these risks.
As of December 31, 1998, we had an accumulated deficit of $14.4 million.
Although we have experienced growth in our net revenue, members, customers and
reach in recent periods, these growth rates are not sustainable and will
decrease in the future. To date, we have not been profitable on either a
quarterly or an annual basis, and we expect to incur net losses for the
foreseeable future. We expect our operating expenses to increase significantly,
especially in the areas of sales and marketing and brand promotion, and, as a
result, we will need to increase our revenue to become profitable. If our
revenue does not grow as expected or increases in our expenses are not in line
with forecasts, there could be a material adverse effect on our business,
results of operations and financial condition.
7
<PAGE>
The unpredictability of our quarter-to-quarter results could cause our stock
price to be volatile or decline
Our operating results have fluctuated in the past and will likely continue
to do so in the future. Some of the factors that could cause our operating
results to fluctuate are:
. the level of demand for the services and products offered in our direct
e-mail marketing and our ability to meet the demand in a timely manner;
. consumers' receptiveness to e-commerce and to direct e-mail marketing in
particular;
. developments relating to advertising on the Web;
. timely deployment and expansion of our network and network
architectures;
. new services offered by our competitors that affect the level of traffic
on our Web site and the continuing expansion of our membership base;
. our ability to predict demand for products and services we offer and to
optimize inventory levels accordingly;
. marketing costs that we will need to incur in order to maintain and
enhance the Xoom.com brand name;
. the loss of key business relationships;
. the mix of domestic and international sales;
. the costs of acquiring technology or businesses and our ability to
integrate them into our operations; and
. economic conditions generally, as well as those specific to the Internet
and related industries.
To respond to these and other factors, we may need to make business
decisions that could have a material adverse effect on our quarterly operating
results.
Our business fluctuates on a seasonal basis. Traffic on our site has
historically been lower during the summer and year-end vacation and holiday
periods when people tend to spend less time on the Internet. Advertising
revenue also varies with the seasons. Typically, advertisers spend less during
the first and third calendar quarters. Web-based commerce and advertising are
relatively new, which means that new trends may develop that could affect the
results of our operations.
As a relatively new company, it is difficult for us to plan or anticipate
our operating expenses based on our limited historical financial data. If our
actual revenue is lower than predicted, we may be unable to adjust our
operating expenses accordingly.
A substantial portion of our net revenue is from short-term advertising
contracts, usually one to two months in length. That means our quarterly net
revenue is a function of the contracts we enter into within the quarter and our
ability to adjust spending in light of any net revenue shortfalls. To date, our
advertising revenue comes from a small group of customers whose composition
periodically changes. For example, during the year ended December 31, 1998, our
five largest advertisers accounted for approximately 35% of our total
advertising revenue. As a result, the cancellation of even a small number of
these advertising contracts could affect our operating results. Advertising
revenue is also linked to the level of traffic on our Web site, so if traffic
is less than the level expected by our advertising customers, our revenue from
this source could be affected. We have guaranteed our advertisers a minimum
number of impressions on our Web site. Reduced traffic on our Web site would
cause us to fall short in meeting this minimum requirement and as a result we
may give credits to our advertisers and reduce advertising rates, which would
lead to a reduction in our revenue from advertising.
The Internet has not been available for a sufficient period of time to gauge
its effectiveness as an advertising medium when compared with traditional
media. Notwithstanding, there is intense competition among sellers of
advertising space on the Web. This makes it difficult to project pricing models
or to anticipate whether we will be successful in selling advertising space and
relying on advertising as a substantial source of revenue.
8
<PAGE>
Due to the foregoing factors, we believe that period-to-period comparisons
of our operating results are not necessarily meaningful, you should not view
them as indicators of our future performance. If our operating results in any
period fall below the expectations of securities analysts and investors, the
market price of our shares would likely decline.
Because our business model is unproven and depends on maintaining and expanding
our membership base, we do not know whether our business model will ultimately
be viable and profitable
Our business model relies on using our community platform and membership
base to generate revenues from different sources. To be profitable, we will
need to provide goods and services that are attractive to our members,
advertisers and vendors. We have relied on member-generated content and the
"grassroots" voluntary promotional efforts of our members to develop and
maintain our profile as a community site. A decline in voluntary promotional
activities by our members or member-generated content could make our Web site
less attractive. We cannot be sure that Internet users will continue to be
interested in communities on the Web, or that direct e-mail marketing will
prove to be a profitable or effective method of selling goods and services.
Our future success also depends on the continued growth in the use of the
Internet and the Web. Use of the Internet for retail transactions is a recent
development, and the continued demand and growth of a market for services and
products via the Internet is uncertain. For the year ended December 31, 1998,
e-commerce was the source of approximately 67% of our total net revenue. The
Internet may ultimately prove not to be a viable commercial marketplace for a
number of reasons, including:
. unwillingness of consumers to shift their purchasing from traditional
retailers to online purchases;
. lack of acceptable security for data and concern for privacy of personal
information;
. limitations on access and ease of use;
. congestion leading to delayed or extended response times;
. inadequate development of Web infrastructure to keep pace with increased
levels of use;
. increased or excessive government regulation; and
. problems regarding intellectual property ownership.
Because of these factors, we do not know whether our business model will
ultimately be viable and profitable.
Our international operations are subject to risks that could have a material
adverse effect on our results of operations
We market and sell our products in the United States and internationally.
Approximately 25% of our net revenue during 1998 came from sales outside the
United States. We plan to establish additional operations or form business
partnerships in other parts of the world. The expansion of our existing
international operations and entry into additional international markets will
require substantial management attention and financial resources. We cannot be
certain that our investment in establishing operations in other countries will
produce the desired levels of revenue. In addition, international operations
are subject to other inherent risks and problems, including:
. the impact of recessions in economies outside the United States;
. greater difficulty in accounts receivable collections;
. unexpected changes in regulatory requirements;
. difficulties and costs of staffing and managing foreign operations;
. reduced protection for intellectual property rights in some countries;
9
<PAGE>
. political and economic instability;
. the introduction of the euro;
. fluctuations in currency exchange rates; and
. difficulty in maintaining effective communications due to distance and
language and cultural barriers.
Some or all of the above factors could have a material adverse effect on the
results of our operations.
Any failure of our network infrastructure could have a material adverse effect
on our results of operations
Our success depends upon the capacity, reliability and security of our
networking hardware and software infrastructure. We have developed an open
standard hardware and software system that is designed for reliability. System
architecture is based on a distributed model that is highly scalable, flexible
and modular, emphasizing extensive automation and a high degree of redundancy
that is designed to minimize single points of failure. The system integrates
site management, network monitoring, quality assurance, transaction processing
and fulfillment services. Currently, the system has 2.5 terabytes of
unformatted disk space, supports over 25 million hits per day, has a peak
bandwidth of over 90 megabits per second and transfers 350 megabytes of data
each day.
We must continue to expand and adapt our system infrastructure to keep pace
with the increase in the number of our members who use the free services we
provide. Demands on our infrastructure that exceed our current forecasts could
result in technical difficulties with our Web site. Any system failure that
interferes with the access to our Web site and the use of the free services we
provide could diminish the level of traffic on our Web site. Continuing or
repeated system failures could impair our reputation and brand name and reduce
our commerce and advertising revenue. At present, we do not know if we will be
able to scale our systems to handle a larger amount of traffic at higher
transmission speeds. Expanding our network infrastructure will require
substantial financial, operational and management resources in 1999 and future
periods, all of which could affect the results of our operations.
We developed our systems for maintaining our Web site, processing
transactions and managing orders internally. If, in the future, we cannot
modify these systems to accommodate increased traffic and an increased volume
of transactions and orders, we could suffer slower response time, problems with
customer service and delays in reporting accurate financial information. Any of
these factors could significantly and adversely impact the results of our
operations.
We use network servers that are housed separately by application at Exodus
Communications, Inc. in Santa Clara, California and Frontier Global Center in
Sunnyvale, California. Our site is connected to the Internet via multiple DS-3
and OC-3 links on a 24 hour-a-day, seven days per week basis by Exodus and
Frontier Global Center. Exodus and Frontier Global Center also provide and
manage power and environmentals for our networking and server equipment. We
manage and monitor our servers and network remotely from our headquarters in
San Francisco, California. We strive to rapidly develop and deploy high-quality
tools and features into our system without interruption or degradation in
service.
Although the agreements we have with our hosting companies give us remedies
for service interruptions, we cannot guarantee that:
. we will have uninterrupted access to the Internet;
. our members will be able to reach our Web site; or
. communications via our Web site will be secure.
Any disruption in the Internet access provided by Exodus or Frontier Global
Center, or any interruption in the service that Exodus or Frontier Global
Center receives from other providers, or any failure of Exodus or
10
<PAGE>
Frontier Global Center to handle higher volumes of Internet users to the
Xoom.com site could have a material adverse effect on our business, results of
operations and financial condition.
Despite precautions taken by us and by the companies that host our Web site,
our system is susceptible to natural and man-made disasters such as
earthquakes, fires, floods, power loss and sabotage. Our system is also
vulnerable to disruptions from computer viruses and attempts by hackers to
penetrate our network security. Hackers have succeeded in penetrating our
network security in the past, and we expect such attempts to continue from time
to time.
We are covered for loss of income from some of the events listed above by a
$1.0 million insurance policy, but this insurance may not be adequate to cover
all instances of system failure. We have insurance coverage of $1.25 million
against loss of income due to earthquakes, but this amount may be insufficient,
especially given the frequency of earthquakes in Northern California.
Any of the events listed above could cause us interference, delays, or
service interruptions and adversely affect our business and results of
operations.
Breaches of our network security could also disrupt the operation of our Web
site and jeopardize the security of confidential information stored in our
servers
Our system is also vulnerable to disruptions from computer viruses and
attempts by hackers to penetrate our network security. Hackers have succeeded
in penetrating our network security in the past, and we expect such attempts to
continue from time to time. We may need to devote substantial capital and
resources to protect against the threat of unauthorized penetration of our
network security. Breaches of our network security could also disrupt the
operation of our Web site and jeopardize the security of confidential
information stored in our servers. The occurrence of any of the events listed
above could cause us to lose members and also expose us to liability and result
in litigation, all of which could have an adverse effect on our operations.
We depend on our vendors and suppliers
We rely on other companies for critical aspects of our business. Banta
Corporation is primarily responsible for fulfilling orders for products and
services sold via our Web site and in response to direct e-mail marketing.
Substantially all of our revenue from e-commerce comes from these sales. We do
not have a written agreement with Banta. If our relationship with Banta were to
terminate without sufficient advance notice, our operations would be negatively
affected, even if we were able to establish a relationship with a comparable
vendor to fulfill orders. An unanticipated termination of our relationship with
Banta would be particularly damaging during the fourth calendar quarter, in
which a high percentage of our annual sales are made. We would also be affected
by problems experienced by Banta, such as insufficient capacity and damage from
human error, sabotage, fire, flood, power loss and other similar man-made or
natural disasters. The success of our specific e-mail direct e-commerce
campaigns depends on the timely supply of inventory by the manufacturers and
suppliers of the products we offer for sale to our members. In particular, we
rely on Logic General, Inc. for all of our CD-ROM products, DVDs and DVD-ROMs
that contain software, clip art and classic movies. The failure of Logic
General or other suppliers on whom we depend would adversely affect the results
of our operations.
Imposition of new taxes or fees by the Federal government of the United States
or by foreign governments on Internet transactions or on the use of the
Internet as a means of communication could also adversely affect us
We do not currently collect sales or similar taxes for goods that we ship
into states other than California and New York. Imposition of sales or other
similar taxes on our sales of merchandise by states or countries where we ship
goods could have a material adverse effect on our results of operations.
Imposition of new taxes or fees by the Federal government of the United States
or by foreign governments on Internet transactions or on the use of the
Internet as a means of communication could also adversely affect us.
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Difficulties we may encounter dealing with our growth and expansion could
adversely affect the results of our operations
Our rapid rate of growth places a significant strain on our resources due
to:
. the need to manage relationships with various strategic partners,
technology licensors, members, advertisers, and other third parties;
. difficulties in hiring and retaining skilled personnel necessary to
support our business;
. the need to train and manage our growing employee base; and
. pressures for the continued development of our financial and information
management systems.
Difficulties we may encounter dealing successfully with the above risks
relating to our rapid growth could adversely affect the results of our
operations.
The loss of key personnel, or the inability to attract and retain additional,
qualified personnel, could have a material adverse effect on our results of
operations
Our success depends to a significant degree upon the continued contributions
of our executive management team, most of whom have worked together only for a
short time. We do not carry key man life insurance on the lives of any of our
employees, including senior management. Our success will also depend upon the
continued service of our senior management team as well as technical, marketing
and sales personnel. Competition for qualified employees is intense. Our
employees may voluntarily terminate their employment with us at any time. Our
success also depends upon our ability to attract and retain additional highly
qualified management, technical, sales and marketing and customer support
personnel. Locating personnel with the combination of skills and attributes
required to carry out our strategy is often a lengthy process. The loss of key
personnel, or the inability to attract and retain additional, qualified
personnel, could have a material adverse effect on our results of operations.
The results of our operations could be adversely affected if our investment of
financial and other resources in promoting our brand does not generate a
corresponding increase in net revenue, or if the expense of promoting our brand
name becomes excessive
As the number of Internet sites grow, brand recognition will play an
increasingly important role. Establishing and promoting the Xoom.com brand in
the face of pressures from our competitors will be critical to developing our
member base and strategic and commercial relationships. We will be required to
continue to devote substantial financial and other resources to maintaining the
distinctiveness of our brand to our members, advertisers and commerce partners
through:
. Web advertising and marketing;
. traditional media advertising campaigns in print, radio, billboards and
television; and
. providing a high quality community experience.
The results of our operations could be adversely affected if our investment
of financial and other resources in promoting our brand does not generate a
corresponding increase in net revenue, or if the expense of promoting our brand
name becomes excessive. Changes in the quality and type of services we offer
and the character of our company as perceived by our members could make our Web
site less attractive to our members, advertisers, and strategic partners, all
of which would have a material adverse effect on the results of our operations.
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If we are unable to integrate new technologies and standards effectively, the
results of our operations could be adversely affected
Our ability to remain competitive in our area of business will depend, in
part, on our ability to:
. enhance and improve the responsiveness, functionality and features of
our Web site;
. continue to develop our technical expertise;
. develop and introduce new services and technology to meet changing
customer needs and preferences;
. influence and respond to emerging industry standards and other
technological changes in a timely and cost effective manner; and
. license leading technologies useful in our business.
We cannot assure you that we will be successful in responding to the above
technological and industry challenges in a timely and cost-effective way. If we
are unable to integrate new technologies and standards effectively, there could
be an adverse effect on our results of our operations.
Privacy concerns, government regulation and legal uncertainties could have an
adverse effect on our business and results of operations
Laws and regulations that apply directly to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the United
States Congress resulted in Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union recently enacted its own privacy regulations. The law of the
Internet, however, remains largely unsettled, even in areas where there has
been some legislative action. It may take years to determine whether and how
existing laws that govern intellectual property, privacy, libel and taxation
apply to the Internet. The development of laws governing these areas may
decrease the growth in the use of the Internet, which could adversely impact
our business. In addition, the growth and development of the e-commerce market
may prompt calls for more stringent consumer protection laws, both in the
United States and abroad, that may impose additional burdens on companies
conducting business online. The adoption or modification of laws or regulations
relating to the Internet could adversely affect our business.
The Federal Communications Commission ("FCC") is currently reviewing its
regulatory positions on data transmissions over telecommunications networks and
could seek to impose some form of telecommunications carrier regulation on
telecommunications functions of information services. State public utility
commissions generally have declined to regulate information services, although
the public service commissions of some states continue to review potential
regulation of such services. Future regulation or regulatory changes could have
an adverse effect on our business and results of operations.
Our failure to attract advertising revenue in quantities and at rates that are
satisfactory to us could have a material adverse effect on our business,
results of operations and financial condition
We have derived a material portion of our net revenue to date from the sale
of advertisements, including banner advertising revenue. For the year ended
December 31, 1998, advertising revenue represented 26% of our total net
revenue. During the same period, our five largest advertising customers
accounted for approximately 35% of advertising revenue (approximately 9% of
total net revenue). We intend to continue to rely on advertising as a
significant source of revenue.
It is uncertain whether Web advertising will continue to grow at a rate that
will support expansion in our net revenue. The Internet as a marketing and
advertising medium has not been available for a sufficient period of time to
gauge its effectiveness as compared with traditional media. Many of our
suppliers and advertisers have only limited experience with the Web as a sales
and advertising medium. Advertisers have not yet devoted a significant portion
of their advertising budgets to Web-based advertising and may not find such
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advertising to be effective for promoting their products and services relative
to traditional print and broadcast media. For 1997, advertising on the Web
represented less than 0.5% of overall advertising revenue in the United States
according to industry sources.
It is also possible that in the future certain Internet access providers
will act to block or limit the use of e-mail direct e-commerce solicitations,
whether at their own behest or at the request of users. Members may also choose
not to receive our e-mail offerings or may fail to respond to such offerings.
Moreover, "filter" software programs that limit or remove advertising from a
Web user's desktop are available. If these programs become popular, there could
be a material adverse effect upon the viability of advertising on the Web and
on our business, results of operations and financial condition.
Any increase in competition could adversely affect our ability to maintain or
improve our position in the market relative to that of our competitors, which
could have a material adverse effect on our business and results of operations
The market for community-based direct selling channels on the Internet is
new and rapidly evolving. Competition for members, consumers, visitors and
advertisers is intense and is expected to increase over time. Barriers to entry
are relatively low. Other companies that are primarily focused on creating Web-
based communities on the Internet and with whom we compete are Tripod and
WhoWhere, subsidiaries of Lycos, GeoCities, recently acquired by Yahoo!, and
theglobe.com. We also face competition and compete for visitors and traffic
with Web directories, search engines, shareware archives, content sites, online
service providers, and traditional media companies such as ABC, America Online,
CBS, CNET, Excite, Infoseek, Lycos, NBC, Netscape, Microsoft, Time Warner and
Yahoo!.
We also expect intense competition in the e-commerce market from an ever
increasing number of companies selling goods and services over the Internet,
particularly goods and services that relate to the use of computers. These
competitors include:
. traditional computer retailers including CompUSA and Micro Electronics's
MicroCenter;
. various mail-order retailers including CDW Computer Centers, Micro
Warehouse, Insight Enterprises, Inc., PC Connection, Inc. and Creative
Computers;
. Internet-focused retailers including Amazon.com, Egghead's Egghead.com,
software.net, and New England Circuit Sales' NECX Direct;
. manufacturers that sell directly over the Internet including Dell
Computer, Gateway 2000, Apple Computer and many software companies;
. a number of online service providers including America Online and the
Microsoft Network that offer computer products directly or in
partnership with other retailers;
. some non-computer retailers such as Wal-Mart Stores that sell a limited
selection of computer products in their stores; and
. computer products distributors that may develop direct sales channels to
the consumer market.
Increased competition from these and other sources could require us to
respond to competitive pressures by establishing pricing, marketing and other
programs or seeking out additional strategic alliances or acquisitions that may
be less favorable to us than we could otherwise establish or obtain, and thus
could have a material adverse effect on our business, prospects, financial
condition and results of operations.
Many of our competitors have longer operating histories in the Web market,
greater name recognition, larger customer bases and significantly greater
financial, technical and marketing resources. In addition, substantially all of
our current advertising customers and strategic partners also have established
collaborative relationships with some of our competitors or other high-traffic
Web sites. Our advertising customers might also conclude that other Internet
businesses, such as search engines, commercial online services and sites that
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offer professional editorial content, are more effective sites for advertising.
Moreover, we may be unable to maintain the high level of traffic on our Web
site or our member base, which would make our site less attractive than those
of our competitors. Any of these factors could adversely affect our ability to
maintain or improve our position in the market relative to that of our
competitors.
Our inability to protect our intellectual property rights could have a material
adverse effect on our business and financial condition
We view our technology as proprietary and try to protect it under existing
United States and international laws relating to protection of intellectual
property. We have also developed internal procedures to control access and
dissemination of our proprietary information. Despite our precautions, third
parties may succeed in misappropriating our intellectual property or
independently developing similar intellectual property. Protecting our
intellectual property against infringement could result in substantial legal
and other costs and could divert our limited management resources and
attention. This could adversely impact our business and the results of our
operations.
Some of the technology incorporated in our Web site is based on technology
licensed from third parties. As we continue to introduce new services, we may
need to license additional technology. If we are unable to timely license
needed technology on commercially reasonable terms, we could experience delays
and reductions in the quality of our services, all of which could adversely
affect our business and results of operations. Our reputation and the value of
our proprietary information could also be adversely affected by actions of
third parties to whom we license our proprietary information and intellectual
property. If someone asserts a claim relating to proprietary technology or
information against us, we may seek licenses to such intellectual property. We
cannot assure you, however, that we could obtain licenses on commercially
reasonable terms, if at all. The failure to obtain the necessary licenses or
other rights could have a material adverse effect on our business and results
of operations.
Although we do not believe we infringe the proprietary rights of any third
parties, we cannot assure you that third parties will not assert claims against
us in the future. From time to time, we have been subject to claims of alleged
infringement of intellectual property rights of others on the basis of our
actions and the content generated by our members. These categories of claims,
whether or not meritorious, could result in litigation and become a drain on
our management and financial resources. If successful, claims of this nature
could subject us to liability, injunctive relief restricting our use of
intellectual property important to our operations, and could ultimately cause
us to lose rights to some of our intellectual property. Any of these events
could have a material adverse effect on our business and results of operations.
We could be subject to liability for online content that may not be covered by
our insurance
The nature and breadth of information disseminated on our Web site and
through the sites of our members could expose us to liability in various areas,
including claims relating to:
. product information and reviews we offer;
. the content and publication of various materials based on defamation,
libel, negligence, personal injury and other legal theories;
. copyright or trademark infringement and wrongful action due to the
actions of third parties;
. use of third party content made available through our Web site or
through content and material posted by members on their home pages or in
chat rooms and bulletin boards; and
. damages arising from the use or misuse of the free e-mail services we
offer.
Claims of these kinds against us would result in our incurring substantial
costs and would also be a drain on our financial and other resources. If there
were a sufficient number or severity of claims of this nature, we would need to
implement measures to reduce our exposure and potential liability. In addition
to being a drain
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on our resources, this may also require taking measure that could make our
services less attractive to our members and visitors. This in turn could reduce
traffic on our Web site, negatively impact our member base, and reduce our
revenue from e-commerce and advertising. We carry general liability insurance
in the aggregate amount of $2.0 million and umbrella coverage in an aggregate
amount of $5.0 million. This coverage may be insufficient to cover expenses and
losses arising in connection with any claims against us. To the extent our
insurance coverage does not cover liability or expenses we incur, our business
and results of operations would be adversely affected.
We could face liability from legal proceedings that could adversely affect our
business and results of operations
We are litigating a dispute with Imageline, Inc., which claims to own the
copyright in certain clip art images licensed to us by Sprint Software Pty Ltd,
an unrelated third party. Some of the disputed images were included in versions
of our Web Clip Empire CD-ROM product licensed by us to third parties,
including other software clip publishers. The images licensed from Sprint
Software generated less than 1.0% of our total net revenue in 1998, and since
September 30, 1998, we have not received any net revenue for images licensed
from Sprint Software.
To resolve this matter, we filed a lawsuit against Imageline in August 1998
in the United States District Court for the Eastern District of Virginia. We
asked for a declaration with respect to Imageline's allegations of copyright
infringement regarding the clip art images. In September 1998, Imageline filed
a counterclaim, which they amended in January 1999, seeking up to $60 million
in damages. In March 1999, the parties completed the discovery process and
filed separate motions for partial summary judgment. The lawsuit is scheduled
for trial on April 13, 1999.
We believe that the claims asserted in Imageline's counterclaim are without
merit and continue to defend against them vigorously. As part of the lawsuit,
we are seeking to enforce our right to indemnification under our license
agreement with Sprint Software for any damages that may be imposed on us,
although we do not know whether Sprint Software will be able to fulfill its
indemnity obligations. Depending on the outcome of the litigation, we may also
need to indemnify third parties for damages in connection with the use of the
Imageline images. An unfavorable outcome in this litigation could adversely
affect our business and results of operations.
Zoom Telephonics, Inc. filed a lawsuit against us in September 1998 in the
United States District Court for the District of Massachusetts alleging
trademark infringement and related statutory violations. We were not served
with Zoom Telephonics' complaint until January 1999. Zoom Telephonics has
demanded that we stop using the XOOM trademark and has asked for an unspecified
amount of money damages. We responded to the complaint in February 1999. We
believe that the claims asserted by Zoom Telephonics are without merit and
intend to defend against them vigorously. We cannot assure you, however, that
the results of this litigation will be favorable to us. An adverse result of
the litigation could have a material adverse effect on our business and results
of operations, particularly if the litigation forces us to make substantial
changes to our name and trademark usage. Any name change could result in
confusion to consumers and investors, which could adversely affect the results
of our operations and the market price of our common stock.
If we are unable to successfully integrate future acquisitions into our
operation, there could be an adverse effect on our business and results of
operations
Acquiring complementary businesses, products and technologies is an integral
part of our business strategy. Some of the risks attendant to this acquisition
strategy are:
. difficulties and expenses of integrating the operations and personnel of
acquired companies into our operations while preserving the goodwill of
the acquired entity;
. the additional financial resources that may be needed to fund the
operations of acquired companies;
. the potential disruption of our business;
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. our management's ability to maximize our financial and strategic
position by incorporating acquired technology or businesses;
. the difficulty of maintaining uniform standards, controls, procedures
and policies;
. the potential loss of key employees of acquired companies;
. the impairment of relationships with employees and customers as a result
of changes in management; and
. increasing competition with other entities for desirable acquisition
targets.
Any of the above risks could prevent us from realizing significant benefits
from our acquisitions. In addition, the issuance of our common stock in
acquisitions will dilute our stockholder interests in our company, while the
use of cash will deplete our cash reserves. Finally, if we are unable to
account for our acquisitions under the "pooling of interests" method of
accounting, we may incur significant, one-time write-offs and amortization
charges. These write-offs and charges could decrease our future earnings or
increase our future losses. Due to all of the foregoing, implementing our
acquisition strategy may have a material adverse effect on our business and
results of operations.
If our capital is insufficient to promote our business, and if we cannot obtain
needed financing, we will be unable to promote our brand name, exploit
acquisition opportunities and otherwise maintain our position relative to that
of our competitors
We believe that the proceeds from our initial public offering, together with
the proceeds from this offering, will be sufficient to support our operations
for the next 12 months. Notwithstanding, we may need to raise additional funds
to maintain and develop our position in the marketplace. It may be difficult or
impossible for us to obtain financing on favorable terms. Raising funds by
issuing equity securities or convertible debt securities will dilute the
percentage ownership of our current stockholders. Also, new securities we may
issue may have rights senior to the rights of our common stock. If we cannot
obtain needed financing, we will be unable to promote our brand name, exploit
acquisition opportunities and otherwise maintain our position relative to that
of our competitors.
If important strategic relationships are discontinued for any reason, there
would be a material adverse effect on our business and financial condition
Although our strategic relationships are a key factor in our overall
business strategy, our strategic partners may not view their relationships with
us as significant to their own business. There is a risk that parties with whom
we have strategic alliance agreements may not perform their obligations as
agreed. Our arrangements with strategic partners generally do not establish
minimum performance requirements but instead rely on the voluntary efforts of
our partners. In addition, most of our agreements with strategic partners may
be terminated by either party with little notice. If important strategic
relationships are discontinued for any reason, our business and results of
operations may be adversely affected.
Year 2000 issues could negatively affect our business
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
We have conducted an internal review of software systems which we use for
site management, network monitoring, quality assurance, transaction processing
and fulfillment services. Because we developed these software systems
internally, beginning at inception in 1996 when the Year 2000 problem already
had some visibility, we were largely able to anticipate four digit
requirements. In conjunction with ongoing reviews of our own products and
services, we are also reviewing our computer infrastructure, including network
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equipment and servers. We do not anticipate material problems with network
equipment, as our current configuration was installed within the last three
years. Similarly, we purchased most of our servers in 1997 and 1998. With this
relatively current equipment, we do not anticipate material Year 2000
compliance problems, and we will replace any servers that we cannot update
either in the normal replacement cycle or on an accelerated basis. We have also
internally standardized our personal computers on Windows NT 4.0, using
reasonably current service packs, which we are advised by our vendor are Year
2000 compliant. We use multiple software systems for internal business
purposes, including accounting, e-mail, development, human resources, customer
service and support and sales tracking systems. All of these applications have
been purchased within the last three years.
We have made inquiries of vendors of systems we believe to be mission
critical to our business regarding their Year 2000 readiness. Although we have
received various assurances, we have not received affirmative documentation of
Year 2000 compliance from any of these vendors and we have not performed any
operational tests on our internal systems. We generally do not have contractual
rights with third party providers should their equipment or software fail due
to Year 2000 issues. If this third party equipment or software does not operate
properly with regard to Year 2000, we may incur unexpected expenses to remedy
any problems. These expenses could potentially include purchasing replacement
hardware and software. We have not determined the state of compliance of
certain third-party suppliers of services such as warehousing and fulfillment
services, phone companies, long distance carriers, financial institutions and
electric companies, the failure of any one of which could severely disrupt our
ability to carry on our business.
We anticipate that our review of Year 2000 issues and any remediation
efforts will continue throughout calendar 1999. The costs incurred to date to
remediate our Year 2000 issues have not been material. If any Year 2000 issues
are uncovered with respect to these systems or our other internal systems, we
believe that we will be able to resolve these problems without material
difficulty, as replacement systems are available on commercially reasonable
terms. We presently estimate that the total remaining cost of addressing Year
2000 issues will not exceed $150,000. We derived these estimates using a number
of assumptions, including the assumption that we have already identified our
most significant Year 2000 issues. However, these assumptions may not be
accurate, and actual results could differ materially from those anticipated. In
view of our Year 2000 review and remediation efforts to date, the recent
development of our products and services, the recent installation of our
networking equipment and servers, and the limited activities that remain to be
completed, we do not consider contingency planning to be necessary at this
time.
Our applications operate in complex network environments and directly and
indirectly interact with a number of other hardware and software systems. We
are unable to predict to what extent our business may be affected if our
systems or the systems that operate in conjunction with it experience a
material Year 2000 failure. Known or unknown errors or defects that affect the
operation of our software and systems could result in delay or loss of revenue,
interruption of services, cancellation of contracts and memberships, diversion
of development resources, damage to our reputation, increased service and
warranty costs, and litigation costs, any of which could adversely affect our
business, financial condition and results of operations. The most likely worst
case scenario is that the Internet fails and we are unable to offer any
services on our community site or make any of our direct e-commerce offerings.
Our stock price has been and may continue to be volatile
The trading price of our common stock has been and is likely to be highly
volatile. Our stock price could be subject to wide fluctuations in response to
a variety of factors, including:
. actual or anticipated variations in quarterly operating results;
. announcements of technological innovations;
. new products or services offered by us or our competitors;
. changes in financial estimates by securities analysts;
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. conditions or trends in the e-commerce market;
. our announcement of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. additions or departures of key personnel;
. sales of common stock; and
. other events or factors that may be beyond our control.
In addition, the Nasdaq National Market, where most publicly held Internet
companies are traded, has recently experienced extreme price and volume
fluctuations. These fluctuations often have been unrelated or disproportionate
to the operating performance of these companies. The trading prices of many
Internet companies' stocks are at or near historical highs and these trading
prices and multiples are substantially above historical levels. These trading
prices and multiples may not be sustainable. These broad market and industry
factors may materially adversely affect the market price of our common stock,
regardless of our actual operating performance. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation often has been instituted against that company. Litigation
like this, if instituted, could result in substantial costs and a diversion of
management's attention and resources.
Anti-takeover provisions in our charter documents could negatively impact our
stockholders
Our Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock without need for stockholder approval. The board may also
determine the economic and voting rights, of this preferred stock. The holders
of our common stock could be adversely affected by the issuance of preferred
stock. Issuance of preferred stock could impede or prevent transactions that
would cause a change in control of our company. This might discourage bids for
our common stock at a premium over the market price of our common stock and
adversely affect the trading price of our common stock. We have no current
plans to issue shares of preferred stock. In addition, other provisions in our
charter documents could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders.
The sale of shares eligible for future sale in the open market could depress
our stock price
If our stockholders sell substantial amounts of our common stock (including
shares issued upon the exercise of outstanding options and warrants) in the
public market following this offering, the market price of our common stock
could fall. Such sales also might make it more difficult for us to sell equity
or equity related securities in the future at a time and price that we deem
appropriate.
Upon completion of the offering, we will have outstanding 16,082,672 shares
of common stock, based on shares outstanding as of December 31, 1998 and
assuming the exercise of options to purchase 383,117 shares of common stock by
the selling stockholders. Of these shares, the 4,000,000 shares sold in this
offering will be freely tradable without restriction under the Securities Act,
unless they are held by "affiliates" as defined under the Securities Act. In
addition, the 4,600,000 shares sold in our initial public offering in December
1998 and 5,000 shares released from the lock-up agreements executed by our
stockholders in connection with the initial public offering are freely
tradeable.
We sold the remaining 7,477,672 outstanding shares in reliance on exemptions
from the registration requirements of the Securities Act and therefore these
are "restricted securities" within the meaning of Rule 144 under the Securities
Act. Restricted securities may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144, 144(k)
or 701 promulgated under the Securities Act. In connection with our initial
public offering, our Directors, officers, stockholders and holders of options
to purchase common stock agreed that they will not sell, directly or
indirectly, any common stock without the prior written consent of Bear, Stearns
& Co. Inc. for a period of 180 days from the date of the initial public
offering. This period will expire on June 8, 1999. Bear, Stearns & Co. Inc.
may, however, in its sole discretion and at any time without notice, release
all or any portion of the shares subject to lock-up agreements. Subject to the
provisions of Rules 144, 144(k) and 701, 7,477,672 shares will be eligible for
sale on June 8, 1999 upon the expiration of the lock-up agreements.
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In February 1999, we filed Form S-8 registration statements under the
Securities Act to register all shares of common stock issuable pursuant to
outstanding options and all shares of common stock reserved for issuance under
our Stock Incentive Plan and Stock Purchase Plan. These registration statements
became effective immediately upon filing, and shares covered by those
registration statements are therefore eligible for sale in the public markets,
subject to options becoming exercisable, the lock-up agreements described above
and Rule 144 limitations applicable to affiliates. As of December 31, 1998,
assuming the exercise of options to purchase 383,117 shares of common stock by
the selling stockholders, there were outstanding options to purchase up to
2,415,258 shares of common stock that will be eligible for sale in the public
market following the offering from time to time subject to becoming exercisable
and the expiration of the lock-up agreements, and an additional 736,849 shares
of common stock were reserved for issuance under the Stock Incentive Plan and
the Stock Purchase Plan.
Our management can spend most of the proceeds from this offering in ways with
which stockholders might not agree
Our management can spend most of the proceeds from this offering in ways
with which the stockholders might not agree. We cannot predict that the
proceeds will be invested to yield a favorable return. See "How We Intend to
Use the Proceeds from the Offering."
A number of our stockholders are selling shares in this offering and will
realize substantial gains on sales of those shares
A number of our stockholders are selling shares in this offering. The
average price per share paid by these stockholders is $1.19. Based on an
assumed public offering price of $67.00 per share, the average realized gain
per share to these stockholders will be approximately $65.81.
As a new investor, you will experience immediate and substantial dilution
Investors purchasing shares of common stock in the offering will incur
immediate and substantial dilution in net tangible book value per share of the
common stock from the offering price of $55.68 per share. To the extent
outstanding options or warrants to purchase common stock are exercised, there
will be further dilution. See "Dilution."
The forward looking statements we make in this prospectus might prove
inaccurate, resulting in a material difference between our actual results,
levels of activity, performance or achievements and those the forward looking
statements express or forecast
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute forward-
looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, those listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue"
or the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor anyone else
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the
date of this prospectus.
20
<PAGE>
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
The net proceeds to us from the sale of the 2,000,000 shares of common stock
we are offering are estimated to be $126,700,000 (approximately $164,890,000 if
the underwriters' over-allotment option is exercised in full) at an assumed
public offering price of $67.00 per share, after deducting the estimated
underwriting discount and offering expenses. We will not receive any proceeds
from the sale of the shares that the selling stockholders are selling.
We expect to use the net proceeds for general corporate purposes, including
developing new e-commerce channels, expanding operations internationally,
enhancing the value of the Xoom.com brand, making potential acquisitions or
minority investments and for working capital. The amounts we actually spend for
these purposes may vary significantly and will depend on a number of factors,
including our future revenue and cash generated by operations and the other
factors described under "Risk Factors." In the ordinary course of business, we
evaluate potential acquisitions of businesses, technologies and product
offerings or minority investments in businesses. However, we have no current
agreements or commitments with respect to any such acquisitions or investments.
Pending use of the net proceeds, we intend to invest them in short-term,
interest-bearing, investment grade securities. Therefore, we will have broad
discretion in the way we use the net proceeds. See "Risk Factors--If we are
unable to successfully integrate future acquisitions into our operation, there
could be an adverse effect on our business and results of operations" and "--
Our management can spend most of the proceeds from this offering in ways with
which stockholders might not agree."
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock and do
not anticipate paying any cash dividends in the foreseeable future. We intend
to retain our earnings, if any, for use in our growth and ongoing operations.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol "XMCM" since our initial public offering on December 9, 1998. The
following table sets forth, for the periods indicated, the high and low sales
prices for our common stock as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
Fiscal Year Ended December 31, 1998:
Fourth Quarter (from December 9, 1998)..................... $45 1/8 $21 1/8
Fiscal Year Ended December 31, 1999:
First Quarter (through March 12, 1999)..................... $77 $28 1/4
</TABLE>
On March 12, 1999, the last reported sale price for our common stock on the
Nasdaq National Market was $67.00 per share. As of March 11, 1999, we estimated
that there were approximately 238 holders of record and over 16,402 beneficial
owners of the common stock.
21
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998
(A) on an actual basis and (B) on an as adjusted basis to reflect the sale of
the 2,000,000 shares of common stock we are offering at an assumed public
offering price of $67.00 per share, after deducting the underwriting discount
and estimated offering expenses and the application of the net proceeds
therefrom.
<TABLE>
<CAPTION>
December 31, 1998
---------------------
Actual As Adjusted
-------- -----------
(in thousands,
except share data)
<S> <C> <C>
Current portion of notes payable......................... $ 1,276 $ 1,276
Current portion of capital lease obligation.............. 37 37
-------- --------
$ 1,313 $ 1,313
======== ========
Long-term obligations, less current portion.............. $ 528 $ 528
Stockholders' equity:
Preferred Stock, $0.0001 par value; 5,000,000 shares
authorized, actual and as adjusted; no shares issued
and outstanding, actual and as adjusted............... -- --
Common Stock, $0.0001 par value; 40,000,000 shares
authorized, actual and as adjusted; 13,699,555 shares
issued and outstanding, actual; 16,082,672 shares
issued and outstanding, as adjusted(1)................ 75,605 202,856
Deferred compensation.................................. (904) (904)
Accumulated deficit.................................... (14,369) (14,369)
-------- --------
Total stockholders' equity........................... 60,332 187,583
-------- --------
Total capitalization..................................... $ 60,860 $188,111
======== ========
</TABLE>
- ----------
(1) The following information is based on shares outstanding as of December 31,
1998. It excludes (A) 2,798,375 shares of common stock subject to
outstanding options with a weighted average exercise price of $6.20 per
share as of December 31, 1998; (B) 736,849 shares of common stock reserved
for issuance under our stock option and stock purchase plans; (C) 3,468
shares of common stock issued to directors since December 31, 1998; and (D)
116,231 shares issued in conjunction with the exercise of options and
warrants since December 31, 1998. As adjusted assumes the exercise of
outstanding options to purchase 383,117 shares of common stock by the
selling stockholders with a weighted average exercise price of $1.44. See
"Management--Benefit Plans" and Note 10 of Notes to Consolidated Financial
Statements.
22
<PAGE>
DILUTION
Our actual net tangible book value as of December 31, 1998 was approximately
$54.8 million, or $4.00 per share. Actual net tangible book value per share
represents the amount of total actual tangible assets less total actual
liabilities, divided by the shares of common stock outstanding as of December
31, 1998. After giving effect to (A) the exercise of outstanding options by
selling stockholders to purchase 383,117 shares of common stock with a weighted
average exercise price of $1.44 per share and (B) the sale of the
2,000,000 shares of common stock we are offering (after deducting the
underwriting discount and estimated offering expenses and assuming a public
offering price of $67.00 per share), our adjusted net tangible book value as of
December 31, 1998 would have been $182.1 million, or $11.32 per share. This
represents an immediate increase in as adjusted net tangible book value of
$7.32 per share to existing stockholders and an immediate dilution of $55.68
per share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share....................... $67.00
Actual net tangible book value per share as of December 31,
1998......................................................... $4.00
Increase per share attributable to new investors.............. 7.32
-----
As adjusted net tangible book value per share after the
offering..................................................... 11.32
------
Dilution per share to new investors........................... $55.68
======
</TABLE>
The following table sets forth, as of December 31, 1998, the difference
between existing stockholders and the new investors (before deducting the
underwriting discount and estimated offering expenses) with respect to the
number of shares purchased from us, the total consideration paid and the
average price per share paid:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 13,699,555 87.3% $ 76,256,136 36.3% $ 5.57
New investors........... 2,000,000 12.7% $134,000,000 63.7% 67.00
---------- ------ ------------ ------
Total................... 15,699,555 100.00% $210,256,136 100.00%
========== ====== ============ ======
</TABLE>
The foregoing discussion and tables exclude (A) the exercise of 2,415,258
stock options with a weighted average exercise price of $6.96 outstanding as of
December 31, 1998; (B) 736,849 shares of common stock reserved for issuance
under our stock option and stock purchase plans; (C) 3,468 shares of common
stock issued to directors since December 31, 1998; and (D) 116,231 shares of
common stock issued in conjunction with the exercise of warrants since December
31, 1998. They assume (A) the exercise of outstanding options by selling
stockholders to purchase 383,117 shares of common stock with a weighted average
exercise price of $1.44 per share and (B) and the sale of 2,000,000 shares of
common stock we are offering. Assuming the exercise of the remaining 2,415,258
outstanding options, the as adjusted net tangible book value per share after
the offering would be $10.75, and the dilution per share to new investors would
be $56.25. See "Risk Factors--As a new investor, you will experience immediate
and substantial dilution," "Capitalization," "Management--Benefit Plans" and
Note 10 of Notes to Consolidated Financial Statements.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with the Consolidated Financial Statements and the Notes thereto
beginning on page F-1 of this prospectus and "Management's Discussion And
Analysis Of Financial Condition And Results Of Operations" beginning on page 25
of this prospectus. The selected historical consolidated statements of
operations data presented below for the period from April 16, 1996 (inception)
through December 31, 1996 and for the years ended December 31, 1997 and 1998
and the selected historical consolidated balance sheet data at December 31,
1996, 1997 and 1998 are derived from our consolidated financial statements,
which have been audited by Ernst & Young LLP, independent auditors, and are
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
APRIL 16, 1996 DECEMBER 31,
(INCEPTION) THROUGH -----------------
DECEMBER 31, 1996 1997 1998
------------------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenue:
E-commerce............................ $ -- $ 327 $ 5,582
Advertising........................... -- 60 2,144
License fees and other................ -- 454 592
------ ------- --------
Total net revenue.................... -- 841 8,318
Cost of net revenue:
Cost of e-commerce.................... -- 171 3,542
Cost of license fees and other........ -- 148 42
------ ------- --------
Total cost of net revenue............ -- 319 3,584
------ ------- --------
Gross profit............................ -- 522 4,734
Operating expenses:
Operating and development............. 266 1,150 3,841
Sales and marketing................... 24 292 2,834
General and administrative............ 150 721 3,366
Purchased in-process research and
development.......................... -- -- 790
Amortization of deferred
compensation......................... -- 248 1,416
Amortization of intangible assets..... -- -- 1,843
Non-recurring charges................. -- 1,243 --
------ ------- --------
Total operating expenses............. 440 3,654 14,090
------ ------- --------
Loss from operations................. (440) (3,132) (9,356)
Interest income, net.................... -- -- 52
Interest expense related to warrant..... -- -- (1,494)
------ ------- --------
Net loss................................ $ (440) $(3,132) $(10,798)
====== ======= ========
Basic and diluted net loss per
share(1)............................... $(0.89) $ (0.64) $ (1.37)
====== ======= ========
Number of shares used in per share
calculation--basic and diluted(1)...... 497 4,874 7,879
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments............. $ 6 $56,575
Working capital (deficit)..................................... (1,400) 52,560
Total assets.................................................. 782 66,874
Long-term obligations, less current portion................... -- 528
Total stockholders' equity (deficit).......................... (873) 60,332
</TABLE>
- ----------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used to compute net loss per
share.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes included elsewhere in this prospectus. The results
shown in this prospectus do not necessarily indicate the results to be expected
in any future periods. This discussion contains forward-looking statements
based on current expectations that involve risks and uncertainties. Actual
results and the timing of certain events may differ significantly from those
projected in such forward looking statements due to a number of factors,
including those set forth in the section entitled "Risk Factors" and elsewhere
in this prospectus.
Overview
Xoom.com is one of the fastest growing direct e-commerce companies on the
Internet. We attract members to our community site with a variety of free
services, including homepages, e-mail, chat rooms, electronic newsletters, clip
art and software libraries, page counters and online greeting cards. Our
members can also join topical communities where they can exchange ideas and
information. Members may also enter specialized forums such as Investor Place,
Women's Circle or Health & Fitness, where they can gain access to professional
content and special product and service offers available only on our Web site.
Upon registration, members agree to receive periodic offers of products and
services via e-mail. These competitively priced and continuously updated offers
include computer software, computer accessories and peripherals, consumer
electronics, clip art on CD-ROM and collectible items. In addition, we offer
services such as a travel club, long distance telephone services and a DVD
club. Our new offerings will include services such as home and auto insurance,
wireless telecommunications services and membership clubs, and products such as
magazine subscriptions, appliances, games, photography supplies and gardening
tools, among others. We believe that our rapidly growing base of self-qualified
members provides us with highly attractive e-commerce opportunities. In
addition, we believe that our high levels of traffic and the number of unique
users that visit our site or affiliated sites on which we offer services on a
monthly basis, often referred to as reach, present an attractive platform for
advertising.
We were incorporated in April 1996 and commenced offering products for sale
on our Web site in March 1997. From inception through December 1996, we had no
sales and our operating activities related primarily to developing necessary
computer infrastructure, recruiting personnel, raising capital and initial
planning and development of the Xoom.com site. For the period beginning with
the operation of the Xoom.com site through December 31, 1997, we continued
these activities and focused on building sales momentum, establishing
relationships with manufacturers, marketing the Xoom.com brand and establishing
customer service and fulfillment operations.
We generate net revenue from e-commerce, primarily through the use of direct
e-mail marketing, licensing and the sale of advertising on our Web site. Total
net revenue was $8.3 million and $841,000 for the years ended December 31, 1998
and 1997, respectively. The increase in total net revenue was primarily due to
the growth of our member base, which resulted in increases in e-commerce
revenue, increased Web-based advertising revenue and, to a lesser extent, an
increase in license and other fees. Cost of net revenue increased substantially
in absolute dollars, reflecting our increased sales volume. As we have grown,
our operating expenses in absolute dollars have increased. We expect that the
dollar amount of our operating expenses will continue to increase as a result
of acquisitions, sales and marketing efforts, increased funding of site
development, branding of the Xoom.com name and expansion of technology,
operating infrastructure and general and administrative staff needed to support
our growth.
From inception through December 31, 1998, we generated total net revenue of
approximately $9.2 million. Over the last year, quarterly net revenue increased
from approximately $420,000 to $3.5 million. Since January 1998, the number of
members has grown from 100,000 to 6.6 million as of March 15, 1999.
25
<PAGE>
As of December 31, 1998, we had an accumulated deficit of $14.4 million.
Although we have experienced growth in net revenue, members, customers and
reach in recent periods, these growth rates are not sustainable. These growth
rates will decrease and are not indicative of future growth rates that we may
experience.
We have not achieved profitability on a quarterly or annual basis to date,
and anticipate that we will incur net losses for the foreseeable future. The
extent of these losses will depend, in part, on the amount and rates of growth
in our net revenue from e-commerce and advertising. We expect our operating
expenses to increase significantly, especially in the areas of sales and
marketing and brand promotion. As a result, we will need to increase our
quarterly net revenue to achieve profitability. We believe that period-to-
period comparisons of our operating results are not meaningful and that you
should not rely upon the results for any period as an indication of future
performance. Our business, results of operations and financial condition will
be materially and adversely affected if:
. net revenue does not grow at anticipated rates;
. increases in operating expenses are not offset by commensurate increases
in net revenue; or
. we are unable to adjust operating expense levels in light of net
revenue.
Our operating losses might increase in the future, and we cannot guarantee
that we will ever achieve or sustain profitability. See "Risk Factors--We
cannot assure you that we will be profitable because we have operated our
business only for a short period of time."
To date, we have entered into business and technology acquisitions, license
arrangements and strategic alliances in order to build our communities, provide
community-specific content, generate additional traffic, increase the number of
members and establish additional sources of net revenue. In March 1998, we
acquired Paralogic, a chat service, for a purchase price of approximately $3.0
million (consisting of 682,410 shares of our common stock with a fair value of
$2.31 per share, $1.4 million of debt, and $61,000 of acquisition costs). We
also acquired Sitemail, an HTML-based e-mail product, through our purchases of
Global Bridges and certain assets of Revolutionary Software in June 1998.
Global Bridges, which we purchased for approximately $1.2 million (consisting
of 215,018 shares of common stock with a weighted average fair value of $4.64
per share, $142,500 in cash, a note payable for $62,500 and approximately
$23,000 of acquisition costs), owned the exclusive selling rights to Sitemail.
Revolutionary Software, from which we purchased certain assets for
approximately $1.7 million (consisting of 191,232 shares of common stock with a
weighted average fair value of $6.28 per share, $272,500 in cash and a note
payable for $262,500, along with certain earnout provisions), developed
Sitemail and had licensed it to Global Bridges. Also in June 1998, we purchased
from ArcaMax an exclusive, perpetual license to use Greetings Online, an online
greeting card service, for approximately $644,000 (consisting of 133,334 shares
of common stock with a fair value of $3.33 per share, $20,000 in cash and a
note payable for $180,000). Additionally, in July 1998, we acquired Pagecount,
a Web page counter and guestbook service, for approximately $1.5 million
(consisting of $200,000 in cash, a note payable for $1.2 million and
approximately $60,000 of acquisition costs).
During 1998, we expensed $790,000 for purchased in-process research and
development and approximately $1.8 million for the amortization of goodwill and
purchased technology. Because most Internet business acquisitions involve the
purchase of significant amounts of intangible assets, acquisitions of such
businesses also result in goodwill and purchased technology and significant
charges for purchased in-process research and development.
We intend to continue making acquisitions to increase online reach and
membership and to seek additional strategic alliances with content and
distribution partners, including alliances that create co-branded sites through
which we market our services. Acquisitions carry numerous risks and
uncertainties, including:
. difficulties in integrating operations, personnel, technologies,
products and the information systems of the acquired companies;
26
<PAGE>
. diversion of management's attention from other business concerns;
. risks of entering geographic and business markets in which we have
little or no prior experience; and
. potential loss of key employees of acquired entities.
We cannot guarantee that we will be able to successfully integrate any
businesses, products, technologies or personnel that might be acquired in the
future. A failure to successfully integrate acquired entities or assets could
have a material adverse effect on our business, results of operations and
financial condition. In addition, we cannot guarantee that we will be
successful in identifying and closing transactions with potential acquisition
candidates. See "Risk Factors--If we are unable to successfully integrate
future acquisitions into our operation, then our business and results of
operations could be adversely affected."
International sales comprised approximately 25% and 30% of total net revenue
for the years ended December 31, 1998 and 1997, respectively. This consisted of
$2.1 million and $252,000 in net revenue, respectively, during such periods.
See "Risk Factors--Our international operations are subject to risks that could
have a material adverse effect on our results of operations."
We have recorded deferred stock compensation charges of $2.0 million,
$551,000, and $0 during the years ended December 31, 1998 and 1997 and the
period from April 16, 1996 (inception) through December 31, 1996, respectively.
These charges account for the difference between the exercise price and the
deemed fair value of certain stock options we granted to our employees. The
deferred compensation charges include options granted to various employees that
vested upon certain events, such as the successful completion of an initial
public offering or individual performance goals. In June 1998, we modified
these options so that they fully vest upon the earlier of such an event or two
years from the date of grant. Therefore, we recorded related deferred
compensation charges of approximately $783,000 and amortization charges (based
on cumulative vesting to that date) of approximately $618,000 in June 1998. We
recorded amortization of deferred stock compensation of $1.4 million and
$248,000 in the years ended December 31, 1998 and 1997, respectively. We expect
to record amortization expense related to these deferred stock compensation
charges of approximately $580,000, $225,000, $80,000 and $20,000 in the years
ended December 31, 1999, 2000, 2001 and 2002, respectively. We cannot
guarantee, however, that we will not accrue additional charges for other
reasons or that our current estimates of these charges will prove accurate,
either of which events could have a material adverse effect on our business,
results of operations and financial condition.
We will need to increase our inventory levels in the future to support a
wider base of e-commerce products and to take advantage of volume purchase
discounts. We contract with a third party warehousing and order fulfillment
company to stock inventory and ship products directly to customers. We take
title to this inventory, have responsibility for this inventory, and record
inventory on our balance sheet until the final shipment to customers or other
disposition of the inventory. There are inherent risks and costs in stocking
inventory and coordinating with a third party warehousing and order fulfillment
company. These risks include, but are not limited to, product obsolescence,
excess inventory, inventory shortages resulting in unfulfilled orders, which
could materially adversely affect operating results in the future. See "Risk
Factors--Any failure of our network infrastructure could have a material
adverse effect on our results of operations" and "--We depend on our vendors
and suppliers."
27
<PAGE>
Results of Operations
From inception through the first quarter of 1997, our operations were
limited and consisted primarily of start-up activities. Accordingly, we believe
that year-to-year comparisons of 1996 against 1997, and 1997 against 1998, are
not meaningful.
The following table presents certain consolidated statement of operations
data for the periods indicated as a percentage of total net revenue. From
inception through December 31, 1996, we had no net revenue as operations were
limited and consisted primarily of start-up activities.
<TABLE>
<CAPTION>
Year ended
December 31,
---------------
1997 1998
------ ------
<S> <C> <C>
Net revenue:
E-commerce............................................... 38.9% 67.1%
Advertising.............................................. 7.1 25.8
License fees and other................................... 54.0 7.1
------ ------
Total net revenue....................................... 100.0 100.0
Cost of net revenue(/1/):
Cost of e-commerce....................................... 20.3 42.6
Cost of license fees and other........................... 17.6 0.5
------ ------
Cost of net revenue........................................ 37.9 43.1
------ ------
Gross profit............................................... 62.1 56.9
Operating expenses:
Operating and development................................ 136.8 46.2
Sales and marketing...................................... 34.7 34.1
General and administrative............................... 85.7 40.5
Purchased in-process research and development............ -- 9.5
Amortization of deferred compensation.................... 29.5 17.0
Amortization of intangible assets........................ -- 22.1
Non-recurring charges.................................... 147.8 --
------ ------
Total operating expenses................................ 434.5 169.4
------ ------
Loss from operations....................................... (372.4) (112.5)
Other income, net.......................................... -- 0.6
Interest expense related to warrant........................ -- (17.9)
------ ------
Net loss................................................... (372.4)% (129.8)%
====== ======
</TABLE>
- ----------
(1) There are no material costs of advertising revenue.
Net revenue
We began generating net revenue in the first quarter of 1997. Our total net
revenue increased to $8.3 million in the year ended December 31, 1998 from
$841,000 in the year ended December 31, 1997. Net revenue is composed of e-
commerce product sales (which includes outbound shipping and handling fees),
advertising revenue and licensing and other fees revenue. The increase in net
revenue was primarily due to the following four factors: (A) the expansion of
our membership base; (B) an increase in the frequency of e-mail offerings and
broader product offerings (which resulted in an increase in product sales
through e-commerce); (C) an increase in Web-based advertising (our higher Web
site traffic increased our attractiveness to advertisers); and to a lesser
extent (D) an increase in license fees. No customer accounted for more than 10%
of total net revenue for the year ended December 31, 1998, and one licensing
customer accounted for 12% of total net revenue for the year ended December 31,
1997.
28
<PAGE>
E-commerce revenue
E-commerce revenue increased to $5.6 million in the year ended December 31,
1998 from $327,000 in the year ended December 31, 1997. The increase in net
revenue was primarily due to the expansion of our membership base, which
resulted in an increase in product sales, as well as expansion of the breadth
of products offered. The percentage of our total net revenue attributable to e-
commerce revenue increased to 67.1% in the year ended December 31, 1998 from
38.9% in the year ended December 31, 1997. We expect e-commerce revenue to
continue to account for a large percentage of net revenue as we expand our
product offerings and increase our direct e-commerce response rates through
better member demographic information and targeting of product offers.
We believe that offering our customers attractive prices is an essential
component of our business strategy. We may in the future increase the discounts
we offer our customers and may otherwise alter our pricing structures and
policies. We anticipate that any increase in discounts or price reductions will
reduce gross margins below those we experienced for the years ended December
31, 1998 and 1997.
Advertising revenue
Advertising revenue increased to $2.1 million in the year ended December 31,
1998 from $60,000 in the year ended December 31, 1997. The increase in
advertising revenue is primarily a result of the increase in our membership,
site traffic and expansion of our advertising sales force. The percentage of
our total net revenue attributable to advertising revenue increased to 25.8% in
the year ended December 31, 1998 from 7.1% in the year ended December 31, 1997.
License fees and other revenue
License fees and other revenue increased to $592,000 in the year ended
December 31, 1998 from $454,000 in the year ended December 31, 1997. The
increase in license fees and other revenue is primarily a result of additional
clip art and other utilities we were able to license to third parties. The
percentage of our total net revenue attributable to license fees decreased to
7.1% in the year ended December 31, 1998 from 54% in the year ended December
31, 1997. As we expand our e-commerce and advertising revenue, license fees and
other revenue will continue to represent a smaller percentage of net revenue.
Cost of net revenue
Gross margins decreased to 56.9% in the year ended December 31, 1998 from
62.1% in the year ended December 31, 1997, as a result of the increase in e-
commerce revenue as a percentage of total net revenue. As a percentage of total
net revenue, the cost of e-commerce increased to 42.6% of net revenue in the
year ended December 31, 1998 from 20.3% of net revenue in the year ended
December 31, 1997. There were no material costs of net revenue associated with
advertising.
Cost of e-commerce revenue
Cost of e-commerce consists primarily of the costs of merchandise sold to
customers, credit card commissions, product fulfillment, and outbound shipping
and handling costs. Cost of e-commerce was $3.5 million and $171,000 for the
years ended December 31, 1998 and 1997, respectively. As a percentage of e-
commerce revenue, the cost of e-commerce was 63.4% and 52.3% for the years
ended December 31, 1998 and 1997, respectively. The increase was primarily
attributable to the fact that in 1998 we broadened our product offerings. Our
new product offerings included items with higher costs than in the prior year.
Cost of license fees and other revenue
Cost of license fees and other consists primarily of royalties on net
revenue of license fees. Cost of license fees were $42,000 and $148,000 for the
years ended December 31, 1998 and 1997, respectively. As a percentage of
license fees and other, cost of license fees and other were 7.2% and 32.7% for
the years ended December 31, 1998 and 1997, respectively. Cost of license fees
and other for the year ended December 31,
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<PAGE>
1997 included $81,000 in amortization of prepaid royalties related to a product
that we discontinued in the fourth quarter of 1997.
The mix of products we sell will impact our gross margins and the overall
mix of e-commerce revenue, advertising revenue and license and other fees. We
typically recognize higher gross margins on advertising revenue and license and
other fees, which are expected to comprise a lower percentage of total net
revenue in the future. Therefore, we expect shifts in the mix of sales will
adversely impact our overall gross margin and could materially adversely impact
our business, results of operations and financial condition.
Operating and development expenses
Operating and development expenses consist primarily of payroll and related
expenses for development and network operations personnel and consultants,
costs related to systems infrastructure including Web site hosting, and costs
of acquired content to enhance our Web site. Operating and development expenses
increased to $3.8 million in the year ended December 31, 1998 from $1.2 million
in the year ended December 31, 1997, and $266,000 in the period from April 16,
1996 through December 31, 1996. From inception to the year ended December 31,
1997, we incurred approximately $300,000 in costs relating to the development
of a home office software product, apart from our Web site, which was
subsequently abandoned due to low sales volume. From June 30, 1997 the absolute
dollar increases from quarter to quarter in operating and development expenses
were primarily attributable to increases in the number of personnel and
associated costs related to enhancing the functionality and content of our Web
site. Operating and development costs decreased as a percentage of total net
revenue to 46.2% in the year ended December 31, 1998 from 136.8% in the year
ended December 31, 1997.
We believe operating and development expenses will increase significantly in
the future, especially in relation to Web site hosting costs, as our membership
grows, thus requiring additional bandwidth to support the many free services
offered to members. We believe that we will need to make significant
investments in our Web site to remain competitive. Therefore, we expect that
our operating and development expenses will continue to increase in absolute
dollars for the foreseeable future.
Sales and marketing expenses
Sales and marketing expenses consist primarily of payroll and related
expenses for personnel engaged in sales, marketing, publishing and customer
support, as well as advertising and promotional expenditures. Sales and
marketing expenses increased to $2.8 million in the year ended December 31,
1998 from $292,000 in the year ended December 31, 1997, and $24,000 in the
period from April 16, 1996 to December 31, 1996. The absolute dollar increases
from period to period in sales and marketing expenses were primarily
attributable to increased personnel and related expenses required to implement
our sales and marketing strategy as well as increased public relations and
other promotional expenses. Sales and marketing costs decreased as a percentage
of total net revenue to 34.1% in the year ended December 31, 1998 from 34.7% in
the year ended December 31, 1997. We expect to continue hiring additional
personnel and to pursue a branding and marketing campaign. Therefore, we expect
marketing and sales expenses to increase significantly in absolute dollars.
General and administrative expenses
General and administrative expenses consist primarily of payroll and related
costs for general corporate functions, including finance, accounting, business
development, human resources, investor relations, facilities and
administration, as well as legal fees, and fees for professional services and
directors. General and administrative expenses increased to $3.4 million in the
year ended December 31, 1998 from $721,000 in the year ended December 31, 1997,
and $150,000 from April 16, 1996 to December 31, 1996. The absolute dollar
increases from period to period in general and administrative expenses were
primarily due to increases in the
30
<PAGE>
number of general and administrative personnel, professional services,
directors fees and facility expenses to support the growth of our operations.
General and administrative expenses decreased as a percentage of total net
revenue to 40.5% in the year ended December 31, 1998 from 85.7% in the year
ended December 31, 1997. General and administrative expenses as a percentage of
net revenue have decreased because of the growth in net revenue. We expect
general and administrative expenses to increase in absolute dollars in future
periods as we expand our staff, incur additional costs related to our
operations, and are subject to the requirements of being a publicly traded
company.
Purchased in-process research and development
For the year ended December 31, 1998, we recognized the cost of purchased
in-process research and development of $330,000 in connection with the
acquisition of Paralogic, $330,000 in connection with the purchase of certain
assets of Revolutionary Software and $130,000 in connection with the
acquisition of Pagecount. We did not recognize such charges for the year ended
December 31, 1997 or for the period from April 16, 1996 through December 31,
1996. See Note 2 of Notes to Consolidated Financial Statements.
In connection with the Paralogic acquisition, we acquired Paralogic's chat
technology, called ParaChat. ParaChat is designed to provide Web sites with an
option to offer chat technology without requiring Web site hosts to buy the
software, maintain or upgrade the software, or learn any additional skills
beyond what is necessary to construct a Web site. The chat software is
maintained on ParaChat's server and the Web site host is provided bits of
source code or "tags" that are incorporated into the Web site. The tags
interface via the Internet with the ParaChat server, and thus provide the Web
site with chat capabilities. In exchange for the free service, the Web site
host allows banner advertising on its site.
As of the time of acquisition, ParaChat was not completely functional as a
commercially viable product. The nature, amount and timing of the remaining
estimated efforts necessary to develop the acquired, incomplete ParaChat
technology into a commercially viable product included:
(A) Remote database authentication: The chat server used a very simple flat-
file database to maintain authentication information. In order to allow users
to control their own password and user information, it was necessary to design
a protocol using the Java programming language. This language enabled the chat
server to remotely query an external Oracle database through the Internet to
retrieve and modify information relating to the user and the chat room (e.g.,
the topic of discussion).
(B) Creation of new chat client: The chat software is comprised of two
parts: the client and the server. Although the server claimed compatibility
with Internet Standard RFC1459 (a standard message format for Internet relay
chat, allowing usage on multiple platforms), this feature was not useable on a
commercial basis. The server functioned only with the limited ParaChat client,
which did not allow for configuration or reconfiguration by the end-user to
match the look and feel of an existing Web site. In order to allow deployment
on an existing site, it was necessary to create an entirely new client that
consisted of various building blocks that could be composed by the end-user
using Hypertext Markup Language, also known as HTML, a computer language that
people use widely to create Web sites. These building blocks would then use a
Java-based communication protocol known as Inter-Applet-Communication (IAC) to
communicate with each other and coordinate communication with the chat server.
Since IAC is not well defined, and differs between browser implementations, a
substantial amount of additional software development was required,
particularly because no comparable client exists in the market today.
(C) Control interface: The acquired ParaChat network did not allow users to
control or administer their chat room in any way (e.g., eject abusive users,
close the chat room or even specify a discussion topic). The enhancements
necessary to make these features available, and to allow them to be maintained
and administered via the central authentication database (also still under
development at the time of acquisition), were complex and required significant
additional development.
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<PAGE>
(D) Advances in browser technology: In addition to the above modifications
and other maintenance modifications and bug fixes, the rapid advances in Web
browser technology implied continuous implementation of new features to exploit
new browser technologies.
As of the date of the technology's valuation, we estimated that 55% of the
research and development effort had been completed at the date of acquisition
and expected the remaining research and development efforts relating to the
completion of the ParaChat technology would require approximately six months of
effort from the date of valuation through its release date of September 1,
1998. We estimated that three full-time engineers would be required to complete
the in-process projects. These projects included the use of one full-time
engineer for six months to work on the external database connectivity efforts,
one full-time engineer for six months to work on the client layout efforts, and
one full-time engineer for six months to work on the management and control
interface efforts. Accordingly, it was determined that total estimated research
and development costs-to-complete for the ParaChat in-process project were
$112,500. We completed the project by the scheduled date and the actual costs
of completion were not materially different than estimated.
As of the date of valuation, we expected the benefit of the acquired project
to begin immediately after the estimated completion date. We expected that the
in-process project would be developed to technological feasibility concurrent
with the September 1998 release date. We have demonstrated the ability to
implement the on-going research and development on time and on budget.
The technology that we acquired from Revolutionary Software was a Web-based
e-mail technology known as SiteMail. This in-process Web-based e-mail
technology was designed to allow users to receive and send e-mail through the
Internet using a Web browser. Since the technology was Web-based, it would
allow for the integration of e-mail functionality into Web sites and would be
accessible by any Web-connected device anywhere in the world. Furthermore, by
integrating e-mail into a specific site, it would force the subscriber to visit
that site to access e-mail, thereby increasing traffic. In addition, when users
apply for e-mail accounts at Web sites offering SiteMail, they are given the
domain name of that Web site or company. The personalization of the domain name
in an e-mail address has become an innovative way of promoting a company's name
or Web site.
As of the date of acquisition, SiteMail was in the alpha testing stage of
development and required the resolution of certain scalability technological
hurdles in order to complete the technology. In addition to the scalability
issues, the following functionality requirements also needed to be addressed by
on-going research and development efforts: (A) improving the user interface;
(B) connecting the e-mail server with external databases; (C) completing spam
detection and filtering functions; and (D) completing security enhancements for
Unix Internet applications.
As of the date of acquisition, we estimated that approximately 50% of the
research and development effort had been completed and expected the remaining
research and development efforts relating to the completion of the SiteMail
technology to continue from the date of acquisition through the release date of
November 1998. The remaining development effort was estimated to require
approximately 4.5 months of engineering effort. We estimated that 3.5 full-time
developers would be required to complete this project. The total cost of
remaining development was estimated to be approximately $98,000. We completed
the project by the scheduled date and the actual costs of completion were not
materially different than estimated.
In connection with the Pagecount acquisition, we acquired a Web page counter
product, titled Pagecount. This product is a banner page counter that tracks
the number of visitors that view a member's site. It further breaks down
impression statistics, or page views by day, date, and time. Other statistics
include a list of locations from where the requests originated and the host
names of up to 100 visitors. The software is maintained on the Pagecount server
and tags are integrated into the Web site which interface with the Pagecount
server. In exchange for the use of the Pagecount service, a banner
advertisement may be placed on each counter image.
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<PAGE>
Specifically, the nature, amount and timing of the remaining estimated
efforts necessary to develop the acquired incomplete Pagecount technology into
a commercially viable product included:
(A) Stage of development: As of the date of the transaction, Pagecount was
in the market research and coding stage of development and required the
completion of certain engineering technological hurdles in order to complete
the technology. Specifically, Pagecount was not yet able to handle large usage
volumes and was only able to maintain statistical information for small members
experiencing low levels of traffic. In addition, Pagecount did not have an
advertising delivery capability and, historically, advertisements had to be
superimposed onto the Web site by a human operator. This is a very inefficient
method of placing advertisements onto Web sites and as volume increases it
would be impossible to maintain the advertising inventory. At the date of
valuation, Pagecount was in development on an advertising delivery system that
would maximize the advertising inventory being generated. Furthermore,
additional development was required to integrate the Pagecount technology into
our infrastructure in order for it to be compatible with our network.
(B) Additional research and development required: Ultimately the most
significant research and development efforts related to the remaining
engineering of the Pagecount server to permit (A) advertisers in the network
access to industry-standard reports, (B) advertisements to be placed into the
network using industry standard delivery software and (C) users to attain
enhanced reporting and possibly, credit for having displayed a large number of
banners (perhaps as a banner exchange offering).
We estimated that approximately 55% of the research and development effort
had been completed at the date of acquisition and expected the remaining
research and development efforts relating to the completion of the Pagecount
technology to continue from the date of acquisition through the release date of
mid-December 1998. The remaining development effort at the date of acquisition
was estimated to require approximately five months of engineering effort. We
estimated that 2.5 full-time developers would be required to complete this
project. The total estimated remaining development effort equates to a total
cost to complete of approximately $78,000. We completed the project by the
scheduled date and the actual costs of completion were not materially different
than estimated.
Amortization of deferred compensation
Deferred compensation expense reflects the amortization of stock
compensation charges resulting from stock options and restricted stock purchase
agreements. Stock compensation charges increased to $1.4 million for the year
ended December 31, 1998 from $248,000 for the year ended December 31, 1997.
This increase was primarily attributable to the modification of certain
options, which required us to accelerate the amortization of the related
deferred compensation, which occurred during the quarter ended June 30, 1998,
as well as an increase in the number of options we granted to employees and
consultants.
Amortization of intangible assets
Amortization of intangible assets totaled $1.8 million for the year ended
December 31, 1998. This amount represents amortization of intangible assets and
goodwill resulting from our acquisitions of Paralogic, Global Bridges and
Pagecount and the purchase of certain assets of Revolutionary Software,
amortized over periods ranging from 24 to 42 months.
We have determined the appropriateness of 2 to 3.5 year estimated useful
lives related to the intangible assets based on general and specific analysis.
In general, the Internet is characterized by rapid technological change,
changes in users and customer requirements and preferences, frequent new
product and service introductions and the emergence of new industry standards
and practices.
The market for community-based direct selling channels on the Internet is
new and rapidly evolving and competition for members, consumers, visitors and
advertisers is intense. In addition, we attract members to our Web site with a
variety of free services, including home pages, e-mail, chat rooms, electronic
newsletters, clip
33
<PAGE>
art and software libraries, online greeting cards and page counters. In order
to continue attracting members using these various methods, the free services
must be constantly updated and improved.
With respect to the purchased technology associated with all business and
technology acquisitions, we considered the effects of obsolescence, demand,
competition, and other economic factors. Due to the rapid technological change
involved in the Internet, we estimated that new technologies would replace the
intangible assets relating to the purchased technology within a 2 to 3.5 year
period.
With respect to the goodwill associated with all of the acquisitions, we
considered the effects of obsolescence, demand, competition, other economic
factors and expected actions of competitors and others. Based on these
considerations, we determined the positive effect of the acquisitions, and
therefore the life of the goodwill, to be from 24 to 42 months. See "Risk
Factors--If we are unable to integrate new technologies and standards
effectively, the results of our operations could be adversely affected," "--Any
increase in competition could adversely affect our ability to maintain or
improve our position in the market relative to that of our competitors which
could have a material adverse effect on our business and results of operations"
and "--If we are unable to successfully integrate future acquisitions into our
operation, then our business and results of operations could be adversely
affected."
With respect to the intangible assets associated with Global Bridges,
Pagecount, Revolutionary Software, and ArcaMax, we considered the competition
for users of electronic mail, Web page counters, and online greeting card
services. We also considered the fact that they provide free e-mail and online
greeting card services to all members. We expect to generate revenue from
advertising and direct e-commerce to such users. In addition, the competition
for these users is intense and we expect that within two years we or our
competitors will develop new technologies that will render the existing
products obsolete. The obsolescence of our existing technologies, without the
introduction of new products, could result in a loss of members. As a result,
we determined the positive effect of the Global Bridges, Pagecount,
Revolutionary Software and ArcaMax transactions, and therefore the life of
intangible assets, to be from 24 to 42 months. See "Risk Factors--If we are
unable to integrate new technologies and standards effectively, the results of
our operations could be adversely affected," "--Any increase in competition
could adversely affect our ability to maintain or improve our position in the
market relative to that of our competitors, which could have a material adverse
effect on our business and results of operations."
Non-recurring charges
Non-recurring charges totaled approximately $1.2 million in the year ended
December 31, 1997. These charges consisted of a $243,000 write-off of costs
associated with a discontinued product, and a $1.0 million provision for a
legal dispute for a copyright infringement claim from Imageline relating to
certain clip art images that we had licensed from an unrelated third party.
This litigation might subject us to significant liability for damages which
could have a material adverse impact on our business, results of operations,
cash flows and financial condition. This might result in invalidation of our
proprietary rights. Even if the suit is without merit, it could be time
consuming and expensive to defend, and this could result in the diversion of
management time and attention, any of which might have a material adverse
impact on our business, results of operations, cash flows and financial
condition. See "Risk Factors--We could face liability from legal proceedings
that could adversely affect our business and results of operations,"
"Business--Legal Proceedings" and Note 9 of Notes to Consolidated Financial
Statements.
Income taxes
There was no provision for federal or state income taxes for any period as
we have incurred operating losses. As of December 31, 1998, we had net
operating loss carryforwards for federal income tax purposes of approximately
$4.9 million. We cannot assure you that we will realize the benefit of the net
operating loss carryforwards. The federal net operating loss carryforwards will
expire at various dates beginning in fiscal year 2011 through 2018 if we do not
use them. Due to the "change of ownership" provisions of the Internal
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<PAGE>
Revenue Code, the availability of our net operating loss and credit
carryforwards may be subject to an annual limitation against taxable income in
future periods. This consequence would result if a change in ownership of more
than 50% of the value of our stock should occur over a three year period, and
this could substantially limit the eventual tax utilization of these
carryforwards. See Note 7 of Notes to Consolidated Financial Statements.
Quarterly Results of Operations
The following tables present certain consolidated statements of operations
data for our eight most recent quarters ended December 31, 1998 in dollars and
as a percentage of net revenue. In management's opinion, this unaudited
information has been prepared on the same basis as the audited annual financial
statements and includes all adjustments (consisting only of normal recurring
adjustments) necessary for fair presentation of the unaudited information for
the quarters presented. You should read this information in conjunction with
the consolidated financial statements, including the notes thereto, included
elsewhere in this prospectus. The results of operations for any quarter are not
necessarily indicative of results that we might achieve for any subsequent
periods.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue:
E-commerce............. $ 9 $ 12 $ 38 $ 268 $ 677 $ 1,157 $ 1,532 $ 2,216
Advertising............ -- 7 14 39 83 272 598 1,191
License fees and
other................. 20 151 170 113 89 287 170 46
----- ----- ------- ----- ------- ------- ------- -------
Total net revenue..... 29 170 222 420 849 1,716 2,300 3,453
----- ----- ------- ----- ------- ------- ------- -------
Cost of net revenue(1):
Cost of e-commerce..... 4 49 19 99 278 621 1,067 1,576
Cost of license fees
and other............. 82 23 31 12 8 19 7 8
----- ----- ------- ----- ------- ------- ------- -------
Total cost of net
revenue.............. 86 72 50 111 286 640 1,074 1,584
----- ----- ------- ----- ------- ------- ------- -------
Gross profit............ (57) 98 172 309 563 1,076 1,226 1,869
Operating expenses:
Operating and
development........... 397 350 132 271 576 773 1,209 1,283
Sales and marketing.... 37 83 51 121 262 455 853 1,264
General and
administrative........ 152 130 195 244 316 783 1,059 1,208
Purchased in-process
research and
development........... -- -- -- -- 330 330 130 --
Amortization of
deferred
compensation.......... 5 6 100 137 79 728 304 305
Amortization of
intangible assets..... -- -- -- -- -- 346 741 756
Non-recurring charges.. -- 243 1,000 -- -- -- -- --
----- ----- ------- ----- ------- ------- ------- -------
Total operating
expenses............. 591 812 1,478 773 1,563 3,415 4,296 4,816
----- ----- ------- ----- ------- ------- ------- -------
Loss from operations... (648) (714) (1,306) (464) (1,000) (2,339) (3,070) (2,947)
Other income, net...... -- -- -- -- -- -- 17 35
Interest expense
related to warrant.... -- -- -- -- -- -- -- (1,494)
----- ----- ------- ----- ------- ------- ------- -------
Net loss................ $(648) $(714) $(1,306) $(464) $(1,000) $(2,339) $(3,053) $(4,406)
===== ===== ======= ===== ======= ======= ======= =======
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue:
E-commerce............. 31.0% 7.1% 17.1% 63.8% 79.7% 67.4% 66.6% 64.2%
Advertising............ -- 4.1 6.3 9.3 9.8 15.9 26.0 34.5
License fees and
other................. 69.0 88.8 76.6 26.9 10.5 16.7 7.4 1.3
-------- ------ ------ ------ ------ ------ ------ ------
Total net revenue..... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of net revenue(1):
Cost of e-commerce..... 13.8 28.9 8.6 23.5 32.8 36.2 46.4 45.6
Cost of license fees
and other............. 282.8 13.5 13.9 2.9 0.9 1.1 0.3 0.2
-------- ------ ------ ------ ------ ------ ------ ------
Total cost of net
revenue.............. 296.6 42.4 22.5 26.4 33.7 37.3 46.7 45.9
-------- ------ ------ ------ ------ ------ ------ ------
Gross profit............ (196.6) 57.6 77.5 73.6 66.3 62.7 53.3 54.1
Operating expenses:
Operating and
development........... 1,369.0 205.9 59.5 64.6 67.8 45.0 52.6 37.2
Sales and marketing.... 127.6 48.8 23.0 28.8 30.9 26.5 37.1 36.6
General and
administrative........ 524.1 76.5 87.8 58.1 37.2 45.7 46.0 35.0
Purchased in-process
research and
development........... -- -- -- -- 38.9 19.2 5.7 --
Amortization of
deferred
compensation.......... 17.2 3.5 45.0 32.6 9.3 42.4 13.2 8.8
Amortization of
intangible assets..... -- -- -- -- -- 20.2 32.2 21.9
Non-recurring charges.. -- 142.9 450.5 -- -- -- -- --
-------- ------ ------ ------ ------ ------ ------ ------
Total operating
expenses............. 2,037.9 477.6 665.8 184.1 184.1 199.0 186.8 139.5
-------- ------ ------ ------ ------ ------ ------ ------
Loss from operations... (2,234.5) (420.0) (588.3) (110.5) (117.8) (136.3) (133.5) (85.3)
Other income, net...... -- -- -- -- -- -- 0.7 1.0
Interest expense
related to warrant.... -- -- -- -- -- -- -- (43.3)
-------- ------ ------ ------ ------ ------ ------ ------
Net loss................ (2,234.5)% (420.0)% (588.3)% (110.5)% (117.8)% (136.3)% (132.8)% (127.6)%
======== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ----------
(1) There are no material costs of advertising revenue.
Our operating expenses have increased significantly in absolute dollar
amounts in each quarter during 1998, 1997 and 1996 as we have transitioned from
the development stage to the commercialization of our services and products and
expansion of our business. We expect operating expenses will continue to
increase in the future as we continue to seek to expand our business. To the
extent that these expenses are not accompanied by an increase in net revenue,
our business, results of operations and financial condition could be materially
adversely affected.
We expect operating results to fluctuate significantly in the future as a
result of a variety of factors, many of which are outside of our control. See
"Risk Factors--We cannot assure you that we will be profitable because we have
operated our business only for a short period of time" and "--The
unpredictability of our quarter-to-quarter results could cause our stock price
to be volatile or decline."
As a strategic response to changes in the competitive environment, we might
from time to time make certain pricing, service or marketing decisions or
pursue business combinations that could have a material adverse effect on our
business, results of operations and financial condition. In order to accelerate
the promotion of the Xoom.com brand, we intend to significantly increase our
marketing budget, which could materially and adversely affect our business,
results of operations and financial condition. We expect to experience
seasonality in our business, with user traffic on the Xoom.com site potentially
being lower during the summer and year-end vacation and holiday periods when
overall usage of the Web is lower. Additionally, seasonality may significantly
affect our advertising revenue during the first and third calendar quarters, as
advertisers historically spend less during these periods. Because Web-based
commerce and advertising is an emerging market, additional seasonal and other
patterns may develop in the future as the market matures. Any seasonality is
likely to cause quarterly fluctuations in our operating results, and these
patterns could have a material adverse effect on our business, results of
operations and financial condition.
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<PAGE>
Due to the foregoing factors, our quarterly net revenue and operating
results are difficult to forecast. Consequently, we believe that period to
period comparisons of our operating results will not necessarily be meaningful
and you should not rely on them as an indication of future performance. It is
likely that in some future quarter or quarters our operating results will fall
below the expectations of securities analysts and investors. In such event, the
trading price of our common stock would likely be materially and adversely
affected. See "Risk Factors--We cannot assure you that we will be profitable
because we have operated our business only for a short period of time" and "--
The unpredictability of our quarter-to-quarter results could cause our stock
price to be volatile or decline."
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, we financed our operations primarily
through the private placement of common stock. On December 9, 1998, we
completed our initial public offering of common stock, in which we issued
4,600,000 shares of common stock at a price of $14.00 per share. Proceeds from
the offering were approximately $57.3 million, net of offering costs.
At December 31, 1998, we had cash and cash equivalents and short-term
investments of approximately $56.6 million. We regularly invest excess funds in
short-term money market funds, government securities and commercial paper.
Net cash used in operating activities for the years ended December 31, 1998
and 1997 and for the period from April 16, 1996 through December 31, 1996 was
$3.6 million, $1.4 million, and $635,000, respectively. Cash used in operating
activities for the year ended 1997 was primarily the result of net losses,
partially offset by an increase in the contingency accrual. Cash used in
operating activities for the year ended December 31, 1998 was primarily the
result of net losses and an increase in accounts receivable related to the
growth of advertising revenues, partially offset by amortization of intangible
assets related to our acquisitions, amortization of deferred compensation
incurred in connection with the granting of options to employees to purchase
common stock, an increase in current liabilities as a result of the growth of
our business, and a non-cash charge related to the issuance of warrants in
connection with a loan agreement.
Net cash used in investing activities for the years ended December 31, 1998
and 1997 and for the period from April 16, 1996 through December 31, 1996 was
$4.7 million, $393,000, and $64,000, respectively. Cash used in investing
activities in each period was primarily related to purchases of fixed assets,
except for the year ended December 31, 1998, in which cash used in investing
activities also included $2 million for the purchase of short-term investments
and $731,000 of net cash for business and asset acquisitions. From time to
time, we expect to evaluate the acquisition of products, businesses and
technologies that complement our business. These acquisitions may involve a
cash investment.
Net cash provided by financing activities for the years ended December 31,
1998 and 1997 and for the period from April 16, 1996 through December 31, 1996
was $62.8 million, $1.8 million, and $700,000, respectively. Cash provided by
financing activities was primarily attributable to net proceeds from the
issuance of common stock and the issuance of notes payable to stockholders. In
addition, for the year ended December 31, 1998, cash provided by financing
activities include $511,715 received in connection with a secured financing
agreement with a leasing company and $1,250,000 received in connection with a
loan agreement. See Note 6 of Notes to Consolidated Financial Statements. For
the year ended December 31, 1998, cash provided by financing activities also
included cash received from the issuance of 4,600,000 shares of common stock
upon the completion of our initial public offering. Proceeds from the offering
were approximately $57.3 million, net of offering costs. Offsetting the cash
generated by financing activities in 1998 was $3.2 million used to repay notes
payable.
As of December 31, 1998, our principal commitments consisted of obligations
outstanding under operating and capital leases. Although we have no material
commitments for capital expenditures, we anticipate a substantial increase in
our capital expenditures and lease commitments consistent with anticipated
growth in operations, infrastructure and personnel. Also, in the future, we may
require a larger merchandise inventory in order to provide better availability
to customers and achieve purchasing efficiencies.
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As of December 31, 1998, we had a total of $1.7 million in notes payable
relating to our acquisitions, $1.3 million of which was due in 1999. This
includes a non-interest bearing note payable in the amount of $1.1 million
payable to the stockholders of Paralogic in minimum monthly installments of
$30,000 through September 1999, including additional payments up to $860,000
based on performance measurements. Total notes payable also includes a note
payable of $47,500, which bears interest at a rate of 5% and is due in equal
monthly payments of $2,500 through August 2000 to the stockholders of Global
Bridges. See Note 2 of Notes to Consolidated Financial Statements.
In the year ended December 31, 1998, we issued warrants to purchase a total
of 314,747 shares of common stock at a price of $3.33 per share. These warrants
were exercised prior to our initial public offering on December 9, 1998. See
Note 10 of Notes to Consolidated Financial Statements.
On October 1, 1998, we entered into a secured financing agreement with a
leasing company. The agreement provides for borrowings of up to a cumulative
amount of $1.0 million through July 31, 1999. As of December 31, 1998, our
outstanding principal balance under this agreement was approximately $155,000.
On November 3, 1998, we entered into a secured loan agreement, which
provided for borrowings of up to $2,750,000. In November 1998, we borrowed
$1,250,000 under this agreement. Under the terms of the loan agreement, we
issued the lender a warrant to purchase up to 183,333 shares of common stock at
an exercise price equal to $14 share. We recorded a non-cash charge classified
as a non-operating expense of approximately $1.5 million during the fourth
quarter of 1998 based on the fair value of this warrant. As of December 31,
1998, all interest and principal amounts had been fully paid, and the loan
agreement had been canceled. On January 11, 1999, the lender exercised the
warrants in a net exercise transaction and purchased 116,231 shares of our
common stock at a price of $14 per share. The effective interest rate on this
secured loan agreement for the year ended December 31, 1998 was approximately
1,450%.
We believe that we have the financial resources needed to meet our presently
anticipated business requirements, including capital expenditure and strategic
operating programs, for at least the next 12 months. Thereafter, if cash
generated by operations is insufficient to satisfy our liquidity requirements,
we may need to sell additional equity or debt securities or obtain additional
credit facilities. The sale of additional equity or convertible debt securities
may result in additional dilution to our stockholders. We may not be able to
raise any such capital on terms acceptable to us or at all.
DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is principally confined to our short-term
available-for-sale securities, which have short maturities and, therefore,
minimal and immaterial market risk.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
We have conducted an internal review of software systems which we use for
site management, network monitoring, quality assurance, transaction processing
and fulfillment services. Because we developed these software systems
internally, beginning at inception in 1996 when the Year 2000 problem already
had some visibility, we were largely able to anticipate four digit
requirements. In conjunction with ongoing reviews of our own products and
services, we are also reviewing our computer infrastructure, including network
equipment and servers. We do not anticipate material problems with network
equipment, as our current configuration was installed within the last three
years. Similarly, we purchased most of our servers in 1997 and 1998. With this
relatively current equipment, we do not anticipate material Year 2000
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compliance problems, and we will replace any servers that cannot be updated
either in the normal replacement cycle or on an accelerated basis. We have also
internally standardized our personal computers on Windows NT 4.0, using
reasonably current service packs, which we are advised by our vendor are Year
2000 compliant. We use multiple software systems for internal business
purposes, including accounting, e-mail, development, human resources, customer
service and support and sales tracking systems. All of these applications have
been purchased within the last three years.
We have made inquiries of vendors of systems we believe to be mission
critical to our business regarding their Year 2000 readiness. Although we have
received various assurances, we have not received affirmative documentation of
Year 2000 compliance from any of these vendors and we have not performed any
operational tests on our internal systems. We generally do not have contractual
rights with third party providers should their equipment or software fail due
to Year 2000 issues. If this third party equipment or software does not operate
properly with regard to Year 2000, we may incur unexpected expenses to remedy
any problems. These expenses could potentially include purchasing replacement
hardware and software. We have not determined the state of compliance of
certain third-party suppliers of services such as warehousing and fulfillment
services, phone companies, long distance carriers, financial institutions and
electric companies, the failure of any one of which could severely disrupt our
ability to carry on our business.
We anticipate that our review of Year 2000 issues and any remediation
efforts will continue throughout calendar 1999. The costs incurred to date to
remediate our Year 2000 issues have not been material. If any Year 2000 issues
are uncovered with respect to these systems or our other internal systems, we
believe that we will be able to resolve these problems without material
difficulty, as replacement systems are available on commercially reasonable
terms. We presently estimate that the total remaining cost of addressing Year
2000 issues will not exceed $150,000. We derived these estimates using a number
of assumptions, including the assumption that we have already identified our
most significant Year 2000 issues. However, these assumptions may not be
accurate, and actual results could differ materially from those anticipated. In
view of our Year 2000 review and remediation efforts to date, the recent
development of our products and services, the recent installation of our
networking equipment and servers, and the limited activities that remain to be
completed, we do not consider contingency planning to be necessary at this
time.
Our applications operate in complex network environments and directly and
indirectly interact with a number of other hardware and software systems. We
are unable to predict to what extent our business may be affected if our
systems or the systems that operate in conjunction with it experience a
material Year 2000 failure. Known or unknown errors or defects that affect the
operation of our software and systems could result in delay or loss of revenue,
interruption of services, cancellation of contracts and memberships, diversion
of development resources, damage to our reputation, increased service and
warranty costs, and litigation costs, any of which could adversely affect our
business, financial condition and results of operations. The most likely worst
case scenario is that the Internet fails and we are unable to offer any
services on our community site or make any of our direct e-commerce offerings.
Concurrently with the two-phase analysis of its internal systems, Xoom.com
has begun to survey third-party entities with which Xoom.com transacts
business, including critical vendors and financial institutions, for Year 2000
compliance. Xoom.com expects to complete this survey in the second quarter of
1999. At this time Xoom.com cannot estimate the effect, if any, that non-
compliant systems at these entities could have on the business, results of
operations or financial condition of Xoom.com, and there can be no assurance
that the impact, if any, would not be material. See "Risk Factors--Year 2000
issues could negatively affect our business."
Recent Accounting Pronouncements
As of January 1, 1998 we adopted Financial Accounting Standards Board
Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. We had no
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material components of comprehensive income. The adoption of this standard has
had no impact on our consolidated financial position, stockholders' equity,
results of operations or cash flows. Accordingly, our comprehensive loss for
the year ended December 31, 1998 is equal to its reported loss.
Additionally, the Financial Accounting Standards Board issued Statement No.
131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related
Information," which establishes standards for the way public business
enterprises report information in annual statements and interim financial
reports regarding operating segments, products and services, geographic areas
and major customers. This statement is effective for financial statements for
periods beginning after December 15, 1997. The adoption of this statement did
not have a significant impact on the way we report information in our annual
statements and interim financial reports.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which establishes guidelines
for the accounting for the costs of all computer software developed or obtained
for internal use. We are required to adopt SOP 98-1 effective January 1, 1999.
The adoption of SOP 98-1 is not expected to have a material impact on our
consolidated financial statements.
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BUSINESS
Overview
Xoom.com is one of the fastest growing direct e-commerce companies on the
Internet. We attract members to our community site with a variety of free
services, including homepages, e-mail, chat rooms, electronic newsletters, clip
art and software libraries, page counters and online greeting cards. Our
members can also join topical communities where they can exchange ideas and
information. Members may also enter specialized forums such as Investor Place,
Women's Circle or Health & Fitness, where they can gain access to professional
content and special product and service offers available only on our Web site.
Upon registration, members agree to receive periodic offers of products and
services via e-mail. These competitively priced and continuously updated offers
include computer software, computer accessories and peripherals, consumer
electronics, clip art on CD-ROM and collectible items. In addition, we offer
services such as a travel club, long distance telephone services and a DVD
club. Our new offerings will include services such as home and auto insurance,
wireless telecommunications services and membership clubs, and products such as
magazine subscriptions, appliances, games, photography supplies and gardening
tools, among others. We believe that our rapidly growing base of self-qualified
members provides us with highly attractive e-commerce opportunities. In
addition, we believe that our high levels of traffic and the number of unique
users that visit our site or affiliated sites on which we offer services on a
monthly basis, often referred to as reach, present an attractive platform for
advertising.
According to Media Metrix, Xoom.com was the eleventh most visited site on
the Internet in January 1999, and our reach increased to 17% in January 1999
from less than 2% in January 1998. In January 1999, the Xoom.com site and our
network of chat rooms and page counters had a total reach of 28%, according to
Media Metrix. We had approximately 6.6 million members as of March 15, 1999,
adding an average of approximately 23,000 new members per day for the last 30
days. We believe that our ability to achieve a high level of reach and
membership with minimal investment gives us a significant advantage as our e-
commerce and advertising businesses expand. In the quarter ended December 31,
1998, we delivered 64% of our net revenue from e-commerce and approximately 18%
of net revenue from non-U.S. sales. Quarterly net revenue increased from
approximately $420,000 in the fourth quarter of 1997 to $3.5 million in the
fourth quarter of 1998, representing compound quarterly sales growth of
approximately 70%.
Industry Background
Growth of the Internet
The Internet has emerged as a global medium, enabling millions of people
worldwide to share information, communicate and conduct business
electronically. IDC estimates that the number of Web users will grow from
approximately 97 million worldwide in 1998 to approximately 320 million
worldwide by the end of 2002. This growth is expected to be driven by the large
and growing number of PCs installed in homes and offices, the decreasing cost
of PCs, easier, faster and cheaper access to the Internet, improvements in
network infrastructure, the proliferation of Internet content and the
increasing familiarity with and acceptance of the Internet by businesses and
consumers. The Internet possesses a number of unique characteristics that
differentiate it from traditional media: a lack of geographic or temporal
limitations; real-time access to dynamic and interactive content; and
instantaneous communication with a single individual or with groups of
individuals. As a result of these characteristics, Web usage is expected to
continue to grow rapidly. The proliferation of users, combined with the Web's
reach and lower cost of marketing, has created a powerful channel for
conducting commerce, marketing and advertising.
The growth of online communities and other free Internet services
Traditional use of the Web has consisted largely of one-way communications
in which users "surf" and view different Web sites containing professionally-
created content on topics of general interest such as news,
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sports and weather. However, there is a growing demand for online community
sites where users can publish content and engage in community activities
including home page building, chat and discussion forums. In addition, many
users are interested in gaining access to other free services for
entertainment, such as interactive games or streaming video, or for their
utility to the end user, such as e-mail or greeting cards. Online communities
provide a medium for such access and interaction. Communities generate
significant volumes of traffic, as visitors tend to return to those sites where
they have established an online presence or have become familiar with the
services. According to statistics published by Media Metrix, online community
sites have recently been one of the fastest growing sectors of the Web.
E-commerce and advertising
The growing adoption of the Web represents a significant opportunity for
businesses to conduct commerce over the Internet. The Internet allows companies
to develop one-to-one relationships with customers worldwide without making
significant investments in traditional infrastructure such as retail outlets,
distribution networks and sales personnel. The Internet is an increasingly
significant global medium for e-commerce. According to IDC, transactions on the
Internet are expected to increase from approximately $32 billion in 1998 to
approximately $426 billion in 2002, with the number of users that are buyers of
products and services rising from 26% to 40% in the same period.
Increases in consumer purchases on the Internet are expected to be a
significant factor in the growth of e-commerce. Online shopping is a shopping
experience that offers convenience to the shopper. An online consumer's ability
to comparison shop is greatly enhanced by the ability to access multiple
retailers via the Internet. Products commonly sold on the Internet included
items such as software, books, music CDs, videocassettes, and airline tickets.
More recently, businesses have begun selling specialty retail products, service
items and large ticket household consumer goods, as Internet usage and
familiarity has increased.
According to Forrester Research, total online retail sales in the U.S. are
expected to increase from $7.8 billion in 1998 to $76.3 billion in 2002,
representing a compound annual growth rate of 76.9%. Forrester Research also
projects that the number of U.S. households that shop online will increase from
8.7 million in 1998 to 30.3 million in 2002.
Growth in the Web has also created an important new advertising channel.
Tools not available in traditional advertising media, such as real-time
measurement of "click-through" on advertising banners, further increase the
attractiveness of Web advertising by giving advertisers instant feedback on
campaigns. Jupiter Communications projects that the dollar value of advertising
on the Web is expected to increase from approximately $1.9 billion in 1998 to
approximately $7.7 billion in 2002. To date, businesses and advertisers have
typically used traditional navigational sites and professionally-created
content sites for the sale and marketing of their products and services online.
In addition, online community sites provide more detailed demographic data and
self-selected groups of consumers with an affinity for particular products.
Advertisers can thus more easily deliver targeted messages in a cost-effective
manner.
The direct e-commerce opportunity on the Internet
The same advantages that facilitate the growth of e-commerce and advertising
make the Internet a compelling medium for direct e-commerce campaigns. Direct
e-commerce over the Internet uses e-mail to reach potential buyers worldwide,
potentially offering them a significantly broader selection of products and
services than is available locally. Internet-based direct e-commerce also
allows marketers to rapidly collect meaningful demographic information from
consumers and to use this information to target their direct e-commerce
campaigns. Further, the costs of direct e-commerce via e-mail are dramatically
lower than those of traditional direct e-commerce techniques. As a result,
Internet-based direct e-commerce campaigns can be profitable at response rates
that are a fraction of the rates for traditional campaigns.
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Our Approach
We use the unique characteristics of the Web to cost-effectively market
products and services to our rapidly growing member base. By offering our
members a variety of compelling free services and communities and competitively
priced product offerings, we believe we have created an innovative online sales
channel with low customer acquisition costs. The key elements of our approach
are:
Cost-effective direct e-commerce capability
We apply a sophisticated direct e-commerce approach, modeled after
traditional direct mail campaigns, to generate product sales. Unlike
traditional direct e-commerce campaigns, which typically use paper-based
promotional materials delivered by mail, our campaigns use regular e-mails to
communicate offers to members, significantly reducing the cost of reaching the
consumer. The interactive nature of the Web and the ability to display
attractive graphics to users clicking through on product offerings enable us to
present such offerings in a more complete and dynamic manner than allowed by
paper-based delivery systems.
Rapid formulation of effective direct e-commerce campaigns
Prior to introducing new product offerings to our entire membership base, we
select a subset of members for the purpose of test-marketing a campaign. We
have developed campaign-management software that uses statistical techniques to
analyze a test campaign and to predict the expected response rate to such a
campaign if it is rolled out to a larger group of members. We can also analyze
the effects of variations in price, graphics and copy. Results are usually
available in less than one day. On the basis of these tests, we select product
offers for a larger audience and modify them to maximize response rates, sales,
profitability and member retention. Testing also increases the accuracy of our
forecasts of product demand. As a result, we are typically able to carry small
amounts of inventory, thus lowering overhead and the risk of write-offs.
Diverse product offerings and multiple e-commerce channels
We establish a relationship with our members by providing free services,
which helps create a context for commerce opportunities. Because of these
relationships, we are able to offer a wide variety of product and service
offerings to our members under the Xoom.com brand name. We are also able to
reach our members with offers through multiple direct e-commerce channels. In
addition to offers via e-mail, members may purchase products through various
themed areas on the Xoom.com site such as Investor Place and Health & Fitness
and, beginning in the second quarter of 1999, through other sites controlled by
us such as the Xoom.com shopping channel.
Provision of free services to attract a growing membership base
We offer our members a variety of free services, including home pages, e-
mail, chat rooms, electronic newsletters, clip art and software libraries, page
counters and online greeting cards. We provide our members with unlimited disk
space on our servers to develop personal Web sites or to use as personal Web
storage space. We also allow members to access proprietary software in order to
quickly create a Web page, as well as ready-made multimedia tools that can be
used to develop a fully-customized, content-rich site. Members can join one or
more of over 200 communities free of charge. Members also promote their Web
sites elsewhere on the Internet, using hyperlinks on other individual sites as
well as listings on directories and search engines, resulting in millions of
new visitors to the Xoom.com site. We believe that providing free services is
critical to maintaining membership growth.
Development of detailed member database
To date, we have gathered a significant base of information about our
members through registration information, responses to promotional campaigns
and purchasing information obtained from third parties. As more members join
Xoom.com and participate in our topical communities and use our other free
services, and
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as we obtain additional purchasing history data, the level of information about
our members will continue to grow. We intend to use this growing database to
target offers, increase the range of product offerings and encourage future
transactions and involvement with the Xoom.com site.
Attractive advertising platform
Our free services and extensive community offerings create high volumes of
traffic, enabling business advertisers to cost-effectively promote their
products and services on the Xoom.com site. Our community structure and
registration data provide valuable demographic information and affinity-based
member segmentation that increase advertisers' ability to target campaigns.
Further, the diversity of interest groups among members creates potential
markets for a broad range of products and services, resulting in a
correspondingly broad range of advertising customers.
Our Strategy
Our objective is to be a leading direct e-commerce company on the Internet.
Key strategies to achieve this objective include:
Focus on membership growth
A key element to the success of our business model is the ability to attract
visitors to our Web site and to convert them to become members of Xoom.com. We
plan to continue to attract visitors to our Web site by: (A) adding additional
free services and offering relevant information and content; (B) maintaining a
large and diverse range of active communities focused on special interest
categories; (C) using e-mails, banner advertisements in our network of chat
rooms and page counters and other methods of Web-based promotion; and (D)
offering special incentives and promotions. In addition, we intend to continue
to seek acquisitions and strategic alliances to increase membership.
Convert more members to buyers through new initiatives
We believe we are one of the few high traffic sites positioned to
effectively convert reach into e-commerce revenue and to capture the lifetime
value of a customer. We intend to convert more members to buyers through the
development of new channels of e-commerce, thereby enhancing the Xoom.com
database and increasing the number of members qualified to receive relevant
direct product offers. To accomplish this, we will invest in the development of
the Xoom.com site and seek acquisitions, partnerships and alliances that
diversify the number and types of e-commerce channels available through or
distributed by us. We also intend to improve the shopping experience of our
members and provide unique promotional incentives for our members to make
purchases.
Continue to offer new products and services
Our primary product offerings currently include computer software, computer
accessories and peripherals, consumer electronics and clip art on CD-ROM. We
have also introduced a DVD movie club, gift items, health related products, a
travel club, long distance services and personal finance newsletters, among
other products. New offerings will include services such as home and auto
insurance, wireless telecommunications services and membership clubs, and
products such as magazine subscriptions, appliances, games, photography
supplies and gardening tools, among others. We intend to significantly increase
the number of product and service offerings available to our members both
through direct offers from manufacturers and distributors and through strategic
alliances with partners that have access to offers created specifically for our
members.
Build the Xoom.com brand
To support our e-commerce strategies and capitalize on our reach, we intend
to build our brand recognition through a variety of diversified media. We are
focused on cost-effective methods of branding that not only increase awareness
of the Xoom.com name but also help build reach and membership. These branding
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strategies will include a radio component to position Xoom.com in major markets
throughout the United States as a unique e-commerce community on the Web. The
radio strategy is based on providing the Xoom.com community services and e-
commerce platform to local radio stations in return for highly discounted
promotional opportunities on the air and on station Web sites. In addition to
radio, we plan to selectively promote Xoom.com in relevant media, potentially
including print and television, using methods to create opportunities for both
branding and commerce.
Expand internationally
We believe that the anticipated international growth of Internet usage has
the potential to generate significant additional revenue for us. According to
IDC, the number of Web users outside of the United States is projected to
increase from approximately 46 million in 1998 to approximately 184 million in
2002. For the year ended December 31, 1998, international sales comprised 25%
of our total net revenue and 31% of e-commerce revenue. See Note 1 of Notes to
Consolidated Financial Statements. We believe that we are particularly well-
positioned to benefit from international sales growth because, unlike
traditional retailers, we are not encumbered with an international distribution
infrastructure that can depress margins. In addition, we believe that we have a
distinct advantage over catalog and store-based retailers located in the United
States because such retailers are typically prohibited from shipping products
internationally due to restrictions in their agreements with product
manufacturers. In February 1999, in partnership with WebNext s.r.l., an Italian
corporation, we launched our Italian site, Xoom.it, the first of our
international partnerships. We are currently targeting the United Kingdom,
France and Spain for additional potential international expansion
opportunities.
Pursue strategic acquisitions and alliances
To date, we have entered into a number of acquisitions, license arrangements
and strategic alliances in order to build our membership base and services,
provide community-specific content, generate additional traffic and establish
additional sources of net revenue. A typical alliance provides the partner with
branding flexibility, incremental traffic, potential increases in membership
and revenue and integration of service offerings at no extra cost to the
partner. We intend to continue making acquisitions to increase reach and
membership and to seek additional strategic alliances with content and
distribution partners, including alliances that create co-branded sites through
which we market our services.
Use database expertise to gain access to members of third party sites
We currently manage e-mail databases on behalf of third party sites in
exchange for the right to conduct direct e-commerce campaigns to the members of
those sites. We currently manage approximately three million e-mail addresses
for third party Web sites through such agreements. We generally share the
revenue generated through direct offers with the partner site. In addition, we
currently manage community service offerings on behalf of several third party
sites. We intend to use our expertise in direct e-commerce and in driving
membership through community services to gain access to members of additional
third party sites, thereby increasing the number of e-mail addresses under
management and the number of individuals receiving offers from us.
Develop leading edge targeting technology and software
We are currently developing a proprietary database stratification, offer
targeting and delivery system. The system will review demographic and personal
interest information provided by our members as well as prior purchasing
history to determine a set of offers most likely to appeal to individual
members. Information collected on the Xoom.com site will be appended with data
available through third party providers to enhance our database. The system
will then automatically deliver targeted offers having the highest likelihood
of success to subsets of the membership base. The system will tailor each
offer, creating a unique one-to-one automated marketing system, available
exclusively to us, which maximizes user interaction, response, and conversion
rates. In addition, the system will track users throughout each stage of the
selling process to assess
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the relevance of the offer to the end user. Database information developed
through this process will also eventually be used to create highly targeted
advertising campaigns based on a user's Web site activity and known purchase
history.
Increase advertising revenue
We intend to increase advertising revenue by focusing on a number of key
strategies, including expanding our advertising customer base, increasing
advertising rates, page views and the average size and length of advertising
contracts, hiring additional direct sales representatives and continuing to
invest in improving our ad serving and targeting technology. We also intend to
offer special sponsorship and events-driven promotional advertising programs to
build brand awareness, generate leads and drive traffic to an advertiser's site
and to sell sponsorships of special interest pages where topically focused
content is aggregated on a permanent area within a community.
Our Products and Services
By offering free services, we create a diverse range of communities and a
critical mass of members with whom to interact. We provide each member with
unlimited disk space on our servers and the use of powerful Web publishing
tools for the rapid creation of a personalized Web site. Additionally, we offer
members free e-mail, chat, page counters, online clip art, electronic
newsletters and online greeting cards, while also providing excellent customer
service and high-quality site performance. Members can participate in one or
more of over 200 communities and link to their personal Web sites, allowing
them to take advantage of our services without the need to access the Xoom.com
site directly.
How visitors become members
To become a member, a visitor must provide a valid e-mail address as well as
permission to be re-contacted with targeted news and product offers by e-mail.
A new member can then use one or more of our free services, such as building a
Web page, joining a community or sending an online greeting card, or can
purchase products at a discount. Our services are designed so that their use
attracts new members. For example, online greeting cards contain a message that
informs the recipient of the card's origins and provides information on how the
recipient can learn more about Xoom.com and become a member. We also encourage
members to link their Web sites and communities to users outside of Xoom.com,
thereby increasing our visibility among potential members.
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Converting membership into e-commerce revenue
Following membership registration, we send the new member an e-mail with
password and membership confirmation, along with an initial product offer.
Thereafter, we send the member an e-mail approximately once a week, containing
product offerings or informational newsletters. Each e-mail contains directions
for removal from our address list, should the member wish to stop receiving
offers. Product offers are made to members worldwide using direct e-commerce
techniques. Currently, we typically make product offers to our entire
membership base or target segments of our membership based on the Web services
they use. As we include additional purchasing history and third party data in
our member database, we believe we will be able to effectively target consumers
having an affinity for certain products and services. Frequent directed e-mail
offers, combined with ease of ordering, provide a context for on-demand
purchases of products and services. The following chart details our major
product and service offerings for the year ended December 31, 1998 and prices
for each category:
<TABLE>
<CAPTION>
PRICE
PRODUCT CATEGORIES RANGE OFFERINGS
------------------ ----- ---------
<C> <C> <S>
Computer Software..................... $ 15-$ 50 Photo editing software, Web
utilities, operating systems,
video games, reference,
hobby, voice recognition
Computer Accessories and Peripherals.. $ 19-$ 99 Modems, digital video
cameras, hard drives,
keyboards, mice, cables, CD
cleaner
Consumer Electronics.................. $179-$399 Digital cameras, DVD players
DVD Movies............................ $ 16-$ 37 Comedy, drama, horror, action
Collectibles.......................... $ 6-$130 Beanie Babies, Furbys, South
Park collections
Gifts................................. $ 14-$ 99 Jewelry, picture frames,
Xoom.com branded gifts
Clip Art.............................. $ 19-$ 79 CD-ROM clip art collections
Services.............................. $ 10-$199 Long distance telephone
service, financial
newsletters
</TABLE>
Xoom.com Buyer's Club and list partnering
The Xoom.com Buyer's Club affiliate program allows third party sites to
place a Xoom.com registration engine on their site. The registration engine
allows users to opt-in to receive direct e-mail offers from Xoom.com. The
revenue we generate from members registering through this program is shared
with the site hosting the registration engine. Sites participating in the
Xoom.com Buyer's Club include InfoSpace.com, Talk City, Deja News, Mplayer.com
and NetNoir among others. In addition, a number of third party sites allow us
to send pre-approved product offers to their membership base in exchange for
managing the e-mail database of such sites and sharing revenue generated from
product sales. Among the sites participating in this program are Talk City,
Deja News, Ulead Software, BUYDIRECT.com and Sausage Software. We currently
manage approximately three million e-mail addresses on behalf of third party
sites through these two programs.
STRATEGIC ALLIANCES
We have entered into a number of strategic alliances, including the
following:
. Hanover Direct. We have formed a strategic alliance with Hanover Direct,
a leading catalog direct e-commerce company, to create a new Internet e-
commerce shopping channel. Under the alliance, we and Hanover Direct
plan to combine our respective products and those of third parties for
sale via the channel, which will operate 24 hours-a-day, seven days per
week on the Xoom.com site. New merchandise in limited quantities will be
rotated on an hourly basis around the clock, so that consumers are
motivated toward immediate purchases. We will share revenue from this
channel with Hanover Direct.
. Phillips Publishing. We have developed a co-branded investing community
called Investor Place with Phillips Publishing, the largest publisher of
newsletters in the U.S. The site features investment
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advisers and their newsletter content, a stock ticker and portfolio
service, subscription opportunities and other merchandise offerings. We
will share revenue with Phillips from advertising and product and
service sales in this co-branded investing community.
. ZDNet. We have created and host a co-branded site, with the look and
feel of the ZDNet Web site, that will market our clip art to ZDNet
visitors. We and ZDNet will share revenue from advertising and product
sales on the co-branded site. Also, ZDNet has created and hosts a co-
branded site, with the look and feel of the Xoom.com Web site, that
promotes ZDNet's Software Library to Xoom.com members. The Library
consists of thousands of shareware and freeware programs that have been
carefully reviewed and are available for free download. Xoom.com is
offering the co-branded Software Library as a new, free member service,
and will share revenue from advertising on the co-branded site.
. Quintel Communications. We have signed an agreement with Quintel
Communications, the nation's leading direct marketer of
telecommunications products to consumers and small businesses, to offer
Qwest Communications' long distance service to our members. We expect to
offer in conjunction with Quintel Communications additional
telecommunications services in the near future, such as IP telephony and
unified messaging. The Qwest long distance rate is being offered to our
members throughout the Xoom.com network of sites, within our member
newsletter and through our direct e-mail offers.
. InfoSpace.com. We have formed a strategic alliance with InfoSpace.com,
Inc., a leading aggregator, integrator and syndicator of Web content
services, under which InfoSpace.com is the exclusive provider of online
white pages, yellow pages and classified ads for our members. The white
pages, yellow pages and classified ads are in a co-branded environment
available through the Xoom.com site. As part of the agreement, InfoSpace
users are offered membership in the Xoom.com Buyers Club and the
opportunity to receive offers from us.
Our strategic alliances are under agreements with a duration of one year or
less. Although we view our strategic relationships as a key factor in our
overall business strategy, it is not certain that our strategic partners will
view their relationships with us as significant to their own business or that
they will not reassess their commitment to us in the future. In addition, it
is possible that one of our strategic partners will break its agreement with
us, and we might not be able to specifically enforce the terms of the
agreement. Our arrangements with strategic partners generally do not establish
minimum performance requirements for our strategic partners but instead rely
on their voluntary efforts. In addition, most of our agreements with strategic
partners may be terminated by either party with little notice. Therefore,
there is no guarantee these relationships will be successful. In the event
that a strategic relationship is discontinued for any reason, our business,
results of operations and financial condition may be materially adversely
affected. In addition, we cannot guarantee that we will be successful in
establishing additional strategic relationships. See "Risk Factors--If
important strategic relationships are discontinued for any reason, our
business and financial condition may be adversely affected."
Sales and Marketing
Our sales and marketing strategy is designed to strengthen awareness of the
Xoom.com brand, increase online traffic, build member loyalty, maximize repeat
purchases, increase the size and frequency of e-commerce transactions and
develop additional revenue opportunities.
Marketing the Xoom.com site
Historically, we have marketed our services primarily by word-of-mouth and
indirect promotions by members with links to the Xoom.com site and through the
use of our services. For example, each e-mail that a member sends using our e-
mail service contains a message from us that promotes our service offerings.
We believe that such relationship marketing will continue to generate a
substantial amount of additional traffic and new members.
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We expect to use a portion of the net proceeds from the offering to develop
other cost-effective methods of marketing the Xoom.com brand through relevant
media, potentially including print, radio and television, in the future. All
promotions will be designed to increase traffic and brand awareness of the
Xoom.com name. We also intend to introduce a number of other brand awareness
and membership retention programs on our own site to make use of our large and
growing member base and visitor traffic. See "Risk Factors--If important
strategic relationships are discontinued for any reason, our business and
financial condition may be adversely affected."
Product marketing
We apply a sophisticated direct e-commerce program, modeled after
traditional direct mail campaigns, to generate product sales. Regular e-mails
communicate targeted offers to members at an extremely low cost. As we gather
additional information about our members, we intend to further target our
offers and increase our range of product offerings. We have developed marketing
campaign-management software that uses statistical techniques to analyze a test
campaign and to predict the expected response rate to such campaign if it is
rolled out to a larger group of members. Results are usually available in less
than one day. This allows us to quickly and efficiently test-market potential
product offerings. On the basis of these tests, we select product offers for a
larger audience and tests price to maximize response, sales or profitability.
Tests also allow us to structure campaigns that maximize member retention.
Advertising
We have a direct sales organization, located in New York and San Francisco,
that is dedicated to developing and maintaining close relationships with top
advertisers and leading advertising agencies nationwide. As of February 28,
1999, we had 15 employees in our direct sales organization. From time to time
we also enter into arrangements with a number of third-party advertising sales
representatives, although, as of February 28, 1999, we had no such
arrangements. Our sales organization is focused solely on selling advertising
on all Xoom.com properties. Our sales organization consults regularly with
advertisers and agencies on design and placement of their Web-based
advertising, provides advertisers with advertising measurement analysis and
focuses on providing a high level of customer service and satisfaction.
Advertisers and advertising agencies typically enter into short-term
agreements, on average one to two months, under which they receive a guaranteed
number of impressions for a fixed fee. We have experienced, and expect to
continue to experience, a variable renewal rate for our advertising contracts.
Advertising on the Xoom.com site currently consists primarily of banner-style
advertisements that are prominently displayed at the top of pages on a rotating
basis throughout the Xoom.com site. From each banner advertisement, viewers can
hyperlink directly to the advertiser's own Web site, thus providing the
advertiser an opportunity to directly interact with an interested customer. Our
standard rate card cost per thousand impressions for banner advertisements
currently ranges from $8 to $12, depending upon location of the advertisement
and the extent to which it is targeted for a particular audience. We may
provide discounts from standard rates for higher volume, longer-term
advertising contracts.
Advertising sponsorships
We have signed a number of long-term sponsorships of a minimum of six months
in length as a result of the growth in reach of the Xoom.com site and the
desire of advertisers to reach our membership and user base. Such sponsorships
generally provide for specific placement on the Xoom.com site and the delivery
of a minimum number of impressions over the course of the contract. We have
signed such agreements with BUYDIRECT.com, eBay, Goto.com, Inc., InfoSpace and
NECX, among others.
Advertising customers
During the twelve months ended December 31, 1998, we had approximately 133
advertisers on our Web site. For the year ended December 31, 1998, our five
largest advertising customers, namely Goto.com, The
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Mining Co., Maaznet Directory Services, NECX and Yoyodyne Entertainment,
accounted for approximately 35% of advertising revenue (approximately 9% of
total net revenue). The following is a list of our top 15 advertising customers
by net revenue for the year ended December 31, 1998:
<TABLE>
<S> <C> <C>
Apartments.com The Mining Co. USA Net
BUYDIRECT.com Musicblvd Network Visual Properties
eBay NECX VR Services
Goto.com Sportsline USA Yoyodyne Entertainment
Maaznet Directory Services Spree.com Ziff-Davis
</TABLE>
Customer Service and Support
We believe that the strength of our customer service and technical support
operations is critical to our success in maintaining our membership base,
increasing membership and encouraging repeat usage and purchases. We have
established a team of customer service and technical support professionals who
process inquiries and monitor the status of orders, shipments and payments,
operating from 7 a.m. to 6 p.m. Pacific time Monday through Friday. Members can
access customer service by e-mail and customers can access a toll-free
telephone number. We intend to enhance and automate the e-mail response
portions of our customer service and technical support operations in the near
future.
Warehousing and Fulfillment
We have no fulfillment operation or warehouse facility of our own, and
currently rely primarily on Banta for warehousing and fulfillment services. As
a result of our product testing, we do not generally carry large amounts of
inventory of any given product. Most shipments are made from Banta's warehouse
in Orem, Utah. In the event that our product sales increase substantially,
particularly abroad, Banta has facilities within and outside of the United
States that can handle additional shipment and warehousing needs. See "Risk
Factors--We depend on our vendors and suppliers."
We use automated interfaces for accepting, sorting and processing orders to
enable us to achieve the most rapid and economical purchase and delivery terms.
We process approximately 95% of orders online, with the remainder by telephone,
fax or mail. Once we receive an order, we send a confirmation by e-mail to the
customer. At the end of each day, we send orders to Banta or to other suppliers
for processing. When we send orders to Banta, Banta provides confirmation to us
along with shipping information for all ground-shipped U.S. orders.
International orders through Banta are sent by international air mail. We
forward shipping information by e-mail to customers.
Technology and Infrastructure
We have developed an open standard hardware and software system that is
designed for reliability. System architecture is based on a distributed model
that is highly scalable, flexible and modular, emphasizing extensive automation
and a high degree of redundancy that is designed to minimize single points of
failure. The system integrates site management, network monitoring, quality
assurance, transaction processing and fulfillment services. Currently, the
system has 2.5 terabytes of unformatted disk space, supports over 25 million
hits per day, has a peak bandwidth of over 90 megabits per second and transfers
350 megabytes of data each day.
We use network servers that are housed separately by application at Exodus
Communications, Inc. in Santa Clara, California and Frontier Global Center in
Sunnyvale, California, third-party and public domain server software that we
have optimized internally and internally developed tools and utilities.
Requests for files are distributed to the appropriate servers using load
distribution and balancing hardware. We also employ in-house monitoring
software that includes automated diagnostic programs and intelligent agents,
which test and measure system response, create reports for evaluation by
technical staff and generate pager calls in the event of system failures.
Additional software monitors abuse of the site by members and potential
hackers. Reporting and tracking systems generate daily membership, order and
campaign reports. Membership and mailing engines allow for efficient deployment
of member data and targeting of e-mail campaigns.
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We store member-generated content on a redundant array of independent disks.
We store member profile information on multiple disk arrays using Oracle
database software and back it up to long-term tape storage devices on a daily
basis. We will continue to upgrade and expand our server and networking
infrastructure in an effort to improve our fast and reliable access to our Web
site and communities. Any system failure that causes an interruption in service
or a decrease in responsiveness of our Web site could result in less traffic on
our Web site and, if sustained or repeated, could impair our reputation and the
attractiveness of our brand.
Our site is connected to the Internet via multiple DS-3 and OC-3 links on a
24 hour-a-day, seven days per week basis by Exodus and Frontier Global Center.
Exodus and Frontier Global Center also provide and manage power and
environmentals for Xoom.com's networking and server equipment. We manage and
monitor servers and network remotely from our headquarters in San Francisco,
California. We strive to rapidly develop and deploy high-quality tools and
features into our system without interruption or degradation in service. Any
disruption in the Internet access provided by Exodus or Frontier Global Center,
or any interruption in the service that Exodus or Frontier Global Center
receives from other providers, or any failure of Exodus or Frontier Global
Center to handle higher volumes of Internet users to the Xoom.com site could
have a material adverse effect on our business, results of operations and
financial condition. See "Risk Factors--Any failure of our network
infrastructure could have a material adverse effect on our results of
operations."
Competition
The market for community-based direct selling channels on the Internet is
new and rapidly evolving. Competition for members, consumers, visitors and
advertisers is intense and is expected to increase over time. Barriers to entry
are relatively low. Other companies that are primarily focused on creating Web-
based communities on the Internet and with whom we compete are Tripod and
WhoWhere, subsidiaries of Lycos, GeoCities, recently acquired by Yahoo!, and
theglobe.com. We also face competition and compete for visitors and traffic
with Web directories, search engines, shareware archives, content sites, online
service providers, and traditional media companies such as ABC, America Online,
CBS, CNET, Excite, Infoseek, Lycos, NBC, Netscape, Microsoft, Time Warner and
Yahoo!.
We also expect intense competition in the e-commerce market from an ever
increasing number of companies selling goods and services over the Internet,
particularly goods and services that relate to the use of computers. These
competitors include:
. traditional computer retailers including CompUSA and Micro Electronics's
MicroCenter;
. various mail-order retailers including CDW Computer Centers, Micro
Warehouse, Insight Enterprises, Inc., PC Connection, Inc. and Creative
Computers;
. Internet-focused retailers including Amazon.com, Egghead's Egghead.com,
software.net, and New England Circuit Sales' NECX Direct;
. manufacturers that sell directly over the Internet including Dell
Computer, Gateway 2000, Apple Computer and many software companies;
. a number of online service providers including America Online and the
Microsoft Network that offer computer products directly or in
partnership with other retailers;
. some non-computer retailers such as Wal-Mart Stores that sell a limited
selection of computer products in their stores; and
. computer products distributors that may develop direct sales channels to
the consumer market.
Increased competition from these and other sources could require us to
respond to competitive pressures by establishing pricing, marketing and other
programs or seeking out additional strategic alliances or acquisitions that may
be less favorable to us than we could otherwise establish or obtain, and thus
could have a material adverse effect on our business, prospects, financial
condition and results of operations.
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Many of our competitors have longer operating histories in the Web market,
greater name recognition, larger customer bases and significantly greater
financial, technical and marketing resources. In addition, substantially all of
our current advertising customers and strategic partners also have established
collaborative relationships with some of our competitors or other high-traffic
Web sites. Our advertising customers might also conclude that other Internet
businesses, such as search engines, commercial online services and sites that
offer professional editorial content, are more effective sites for advertising.
Moreover, we may be unable to maintain the high level of traffic on our Web
site or our member base, which would make our site less attractive than those
of our competitors. Any of these factors could adversely affect our ability to
maintain or improve our position in the market relative to that of our
competitors.
Intellectual Property and Proprietary Rights
We view our technology as proprietary and try to protect it under existing
United States and international laws relating to protection of intellectual
property. We have also developed internal procedures to control access and
dissemination of our proprietary information. Despite our precautions, third
parties may succeed in misappropriating our intellectual property or
independently developing similar intellectual property. Protecting our
intellectual property against infringement could result in substantial legal
and other costs and could divert our limited management resources and
attention. This could adversely impact our business and the results of our
operations.
Some of the technology incorporated in our Web site is based on technology
licensed from third parties. As we continue to introduce new services, we may
need to license additional technology. If we are unable to timely license
needed technology on commercially reasonable terms, we could experience delays
and reductions in the quality of our services, all of which could adversely
affect our business and results of operations. Our reputation and the value of
our proprietary information could also be adversely affected by actions of
third parties to whom we license our proprietary information and intellectual
property. If someone asserts a claim relating to proprietary technology or
information against us, we may seek licenses to such intellectual property. We
cannot assure you, however, that we could obtain licenses on commercially
reasonable terms, if at all. The failure to obtain the necessary licenses or
other rights could have a material adverse effect on our business and results
of operations.
Although we do not believe we infringe the proprietary rights of any third
parties, we cannot assure you that third parties will not assert claims against
us in the future. From time to time, we have been subject to claims of alleged
infringement of intellectual property rights of others on the basis of our
actions and the content generated by our members. These categories of claims,
whether or not meritorious, could result in litigation and become a drain on
our management and financial resources. If successful, claims of this nature
could subject us to liability, injunctive relief restricting our use of
intellectual property important to our operations, and could ultimately cause
us to lose rights to some of our intellectual property. Any of these events
could have a material adverse effect on our business and results of operations.
Legal Proceedings
We are litigating a dispute with Imageline, Inc., which claims to own the
copyright in certain clip art images licensed to us by Sprint Software Pty Ltd,
an unrelated third party. Some of the disputed images were included in versions
of our Web Clip Empire CD-ROM product licensed by us to third parties,
including other software clip publishers. The images licensed from Sprint
Software generated less than 1.0% of our total net revenue in 1998, and since
September 30, 1998, we have not received any net revenue for images licensed
from Sprint Software.
To resolve this matter, we filed a lawsuit against Imageline in August 1998
in the United States District Court for the Eastern District of Virginia. We
asked for a declaration with respect to Imageline's allegations of copyright
infringement regarding the clip art images. In September 1998 Imageline filed a
counterclaim, which they amended in January 1999, seeking up to $60 million in
damages. In March 1999, the parties completed the discovery process and filed
separate motions for partial summary judgment. The lawsuit is scheduled for
trial on April 13, 1999.
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We believe that the claims asserted in Imageline's counterclaim are without
merit and continue to defend against them vigorously. As part of the lawsuit,
we are seeking to enforce our right to indemnification under our license
agreement with Sprint Software for any damages that may be imposed on us,
although we do not know whether Sprint Software will be able to fulfill its
indemnity obligations. Depending on the outcome of the litigation, we may also
need to indemnify third parties for damages in connection with the use of the
Imageline images. An unfavorable outcome in this litigation could adversely
affect our business and results of operations.
Zoom Telephonics, Inc. filed a lawsuit against us in September 1998 in the
United States District Court for the District of Massachusetts alleging
trademark infringement and related statutory violations. We were not served
with Zoom Telephonics' complaint until January 1999. Zoom Telephonics has
demanded that we stop using the XOOM trademark and has asked for an unspecified
amount of money damages. We responded to the complaint in February 1999. We
believe that the claims asserted by Zoom Telephonics are without merit and
intend to defend against them vigorously. We cannot assure you, however, that
the results of this litigation will be favorable to us. An adverse result of
the litigation could have a material adverse effect on our business and results
of operations, particularly if the litigation forces us to make substantial
changes to our name and trademark usage. Any name change could result in
confusion to consumers and investors, which could adversely affect the results
of our operations and the market price of our common stock.
Employees
As of February 28, 1999, we had 95 full-time employees, including 58 in
sales and marketing, 15 in operating and development and 22 in finance and
administration. Our future success will depend, in part, on our ability to
continue to attract, retain and motivate highly qualified technical and
management personnel, for whom competition is intense. From time to time, we
also employ independent contractors to support our research and development,
marketing, sales and support and administrative organizations. Our employees
are not covered by any collective bargaining agreement, and we have never
experienced a work stoppage. We believe our relations with our employees are
good.
Facilities
Our headquarters are currently located in a leased facility in San
Francisco, California, consisting of approximately 18,700 square feet of office
space, which is under a lease that expires September 30, 2007. We also lease
approximately 6,531 square feet of office space in New York, New York for our
East Coast sales offices under a lease that expires July 15, 2004.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors and key employees and their respective
ages as of March 1, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Chris Kitze......................... 39 Chairman of the Board, Secretary and
Director
Laurent Massa....................... 39 Chief Executive Officer, President and
Director
John Harbottle...................... 44 Vice President, Finance and Chief
Financial Officer
Vijay Vaidyanathan.................. 33 Chief Technology Officer
Rajesh Aji.......................... 36 Vice President, Corporate and Legal
Affairs and General Counsel
Scott Duffy......................... 28 Vice President, Sponsorships and Online
Sales Development
Russell S. Hyzen.................... 33 Vice President, Business Development
Alicia Molnar....................... 33 Vice President, Advertising Sales
Janine Popick....................... 31 Vice President, E-commerce
Marc Sznajderman.................... 32 Vice President, Corporate Development
Bob Ellis(2)........................ 62 Publisher and Director
James Heffernan(1)(2)............... 57 Director
Jeffrey Ballowe..................... 43 Director
Philip Schlein(1)................... 64 Director
Robert C. Harris, Jr................ 52 Director
</TABLE>
- ----------
(1) Member of Audit Committee.
(2) Member of Compensation Committee
Chris Kitze co-founded Xoom.com and has served as Chairman of the Board and
Secretary since that time. Since December 1996, Mr. Kitze has been an
independent investor. From April 1996 until December 1996, Mr. Kitze also
served as our President and Chief Executive Officer. In June 1995, Mr. Kitze
co-founded Point Communications Corporation, a Web directory company, which was
acquired by Lycos in October 1995, after which Mr. Kitze served as Lycos' Vice
President of Marketing until June 1996. From June 1994 until June 1995, Mr.
Kitze served as Publisher at Softkey International (now The Learning Company).
In September 1991, Mr. Kitze co-founded Aris Entertainment, a CD-ROM publishing
company and served as its President until June 1994. Mr. Kitze holds a B.S. in
Chemical Engineering from the University of Colorado.
Laurent Massa co-founded Xoom.com and has served as its Chief Executive
Officer and President since December 1996. Mr. Massa has also served on our
Board of Directors since February 1998. From September 1996 to June 1998, Mr.
Massa also served as our Chief Financial Officer. From May 1995 until September
1996, Mr. Massa served as Vice President of New Ventures of Olivetti Telemedia,
a telecommunications company based in Milan. Prior to joining Olivetti, Mr.
Massa joined WordStar International in March 1991 as Director of Marketing,
Europe, and became Vice President, International of Softkey International (now
The Learning Company), following Softkey's merger with WordStar and Spinaker in
February 1993. Mr. Massa holds an MBA from the European Business School.
John Harbottle has served as our Vice President, Finance and Chief Financial
Officer since August 5, 1998. From February 1996 to February 1998, Mr.
Harbottle was the Vice President of Finance and Chief Financial Officer of
Mastering Computers, Inc., an information technology training and CBT software
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development and manufacturing company, and then worked as an independent
consultant for Mastering Computers, Inc. from February to July 1998. From
October 1994 to February 1996, Mr. Harbottle was the Vice President of Finance
and Chief Financial Officer of Zenger-Miller, an international
management/leadership training, consulting and education company. From January
1992 to October 1994, Mr. Harbottle was the Vice President of Finance and Chief
Financial Officer of IFS, an international consumer products and direct
marketing company. Mr. Harbottle is a director of WebSoftware Corporation. Mr.
Harbottle holds a B.S. in Business Administration from the University of
California, Berkeley.
Vijay Vaidyanathan has served as our Chief Technology Officer and as a
Director since March 1998 and was a Director from March 1998 to February 1999.
Prior to joining us, Mr. Vaidyanathan co-founded Paralogic Corporation, an
Internet software company, and served as its President and Chief Executive
Officer from January 1995 until we acquired it in March 1998. Prior to founding
Paralogic Corporation Mr. Vaidyanathan served as Engineering Manager at
Frontline Design Automation, an electronic design automation company from July
1994 until December 1994 and as Engineering Manager at Zycad Corporation, an
electronic design automation company from February 1991 until July 1994.
Mr. Vaidyanathan also serves on the board of Paralogic Software Corporation, a
software company, and Santa Clara Valley School, Inc., a non-profit school he
co-founded in 1995. Mr. Vaidyanathan holds an M.S. in Instrumentation
Technology from the Birla Institute of Technology and Science in India and an
M.S. in Computer Science from the State University of New York at Albany.
Rajesh Aji has served as our Vice President of Corporate and Legal Affairs
and General Counsel since January 1999. Prior to joining us, Mr. Aji was an
attorney with the law firms of Wilson Sonsini Goodrich & Rosati and McCutchen
Doyle Brown & Enersen from September 1994 to January 1999, where he served as
primary outside counsel for more than twenty-five private and public companies,
specifically in the areas of venture capital and corporate financing, public
offerings, mergers and acquisitions, and securities and intellectual property
law. Mr. Aji holds a Bachelor of Technology degree from the Indian Institute of
Technology, a Master of Science degree from the University of Iowa and a Juris
Doctor degree from the University of California, Berkeley.
Scott Duffy has served as our Vice President, Sponsorships and Online Sales
Development since August 1998. Prior to joining us, Mr. Duffy served as Western
Region Sales Manager for SportsLine USA, Inc. from August 1997 to August 1998.
From January 1996 to March 1997, Mr. Duffy held a number of positions for
Quote.com, Inc., an Internet financial services company, including Business
Development Manager and most recently Director of Advertising Sales. Prior to
that, Mr. Duffy served as an Account Executive for Seven Worldwide, Inc., a
worldwide imaging company that manages the production of advertising,
promotional and packaging artwork and interactive multimedia, from 1993 to
1995.
Russell S. Hyzen has served as our Vice President, Business Development
since December 1997 and as Xoom.com's director of Business Development from
November 1996 to December 1997. Prior to joining us, Mr. Hyzen served as
Business Development Manager for Quote.com, an Internet Financial Services
Company, from December 1995 to October 1996. From November 1993 to December
1995, he worked as an independent consultant. In August 1991, Mr. Hyzen founded
Pacific Coast Lending, a mortgage brokerage company, and he served as its
President until November 1993. Mr. Hyzen holds a B.S. in Business
Administration from California State University, Northridge.
Alicia Molnar has served as our Vice President, Advertising Sales, since
December 1997. From October 1995 to November 1997, Ms. Molnar held a number of
management positions with Lycos, most recently as Director of Sales, Eastern
Region. From December 1994 until September 1995, Ms. Molnar served as Director
of Network Sales for Point Communications. Prior to joining Point
Communications, Ms. Molnar was a Regional Sales Manager for College Bound
Magazine from September 1993 until October 1994. From February 1992 to August
1993, she was employed as a Senior Account Manager for Linnette & Harrison, an
advertising agency. From January 1990 to December 1992, she worked as an
Account Manager for Chalek & Chalek, an advertising agency. Ms. Molnar holds a
B.A. in Communications from Montclair State University.
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Janine Popick has served as our Vice President, E-commerce since April 1998.
From November 1997 until April 1998, Ms. Popick served as Manager of Direct
Marketing for FileMaker, Inc., a wholly-owned subsidiary of Apple Computer.
From January 1996 to November 1997, Ms. Popick served as Manager of Direct
Marketing of Insignia Solutions, a computer software company. Prior to joining
Insignia Solutions, Ms. Popick served as Manager of Direct Marketing of Claris
Corporation, a computer software company, from September 1994 to January 1996.
From December 1993 to August 1994, Ms. Popick served as Manager of Direct
Marketing for Symantec Corporation, a software company. She was an account
executive at JDA Corp., an enterprise software solutions company, from
September 1993 to December 1993. Ms. Popick holds a B.A. in Communications and
English from Hofstra University.
Marc Sznajderman has served as our Vice President, Corporate Development
since December 1998. From August 1993 until November 1998, Mr. Sznajderman
served as a member of the Investment Banking Division of Bear, Stearns & Co.
Inc., most recently as Vice President. Prior to joining Bear Stearns, Mr.
Sznajderman served as Vice President of Business Development for Qantix
Corporation, a manufacturer and marketer of computer accessories, from August
1991 until June 1992. From August 1989 until July 1991 Mr. Sznajderman was a
member of the Investment Banking Division of Goldman, Sachs & Co.
Mr. Sznajderman holds a B.S. in Finance from Syracuse University and a Masters
in Management from the J.L. Kellogg Graduate School of Management at
Northwestern University.
Bob Ellis has served as one of our Directors and as Publisher since August
1997. From July 1995 to July 1997, Mr. Ellis was President of Paris
Productions, an online publishing company. In January 1988, he founded Compact
Publishing Company ("Compact"), a publishing company and served as its Chief
Executive Officer until its acquisition by Softkey International (now The
Learning Company) in July 1994, after which he served as Vice President of
Publishing of Softkey until July 1995. Prior to founding Compact, Mr. Ellis was
a Vice President of Time-Life, Inc. and President of Time-Life Software. Mr.
Ellis holds a B.A. in Philosophy from Yale and an M.A. in History from the
University of Chicago.
James Heffernan has served as one of our Directors since June 1998. Mr.
Heffernan co-founded USWeb Corporation, an Internet professional services
company, in December 1995 and has served as its Executive Vice President, Chief
Financial Officer, Secretary and a director since that time. From May 1993
to July 1994, he worked as an independent consultant and then joined Interlink
Computer Sciences, Inc. in July 1994 as Chief Financial Officer, where he
served until January 1996. From March 1992 to May 1993, Mr. Heffernan served as
Chief Financial Officer and Chief Operating Officer of Serius. Mr. Heffernan
has also served as an officer of several other technology companies, including
Software Publishing Corp., Zital Inc. and Measurex Corp. Mr. Heffernan is a
director of Savoir Technology Group, Inc and USWeb Corporation. Mr. Heffernan
has a B.S. in Business and an MBA from Santa Clara University.
Jeffrey Ballowe has served as one of our Directors since July 1998. Mr.
Ballowe retired at the end of 1997 from Ziff-Davis, where during his 11 years
at the company he was instrumental in transforming Ziff-Davis from a U.S.
magazine publisher to an international, integrated media company. Aside from
serving in magazine publishing roles including Publisher of PC Magazine, Mr.
Ballowe held number of corporate posts in which he was responsible for
establishing Ziff-Davis' European operations, managing Ziff-Davis' largest
magazine group, launching the company's Internet publications, creating ZDNet,
and launching ZDTV. At his retirement he was President, Interactive Media and
Development Group, in charge of Ziff-Davis' Internet publications, ZDNet, ZDTV,
and all development at the company. Among his development activities included
spearheading Ziff-Davis' and Softbank's investments in Yahoo!, USWeb
Corporation (where he served as a founding Director), Gamespot, and Herring
Communications. Prior to his work at Ziff-Davis, Mr. Ballowe worked as a
marketing executive at various technology and marketing services companies.
Currently Mr. Ballowe is Chairman of Deja News and serves on the boards of
drkoop.com, VerticalNet and ZDTV. He received a bachelor's degree from Lawrence
University, a master's degree in French from the University of Wisconsin-
Madison, and an MBA from the University of Chicago.
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Philip Schlein has served as one of our Directors since July 1998. Since
April 1985, Mr. Schlein has been a general partner of U.S. VenturePartners, a
venture capital firm specializing in retail and consumer products companies.
From January 1974 to January 1985, Mr. Schlein served as President and Chief
Executive Officer of Macy's California, a division of R. H. Macy & Co., Inc., a
department store chain. Mr. Schlein also serves on the board of directors of
Ross Stores, Inc., ReSound Corporation, Quick Response Services, Burnham
Pacific Properties, Inc. and Bebe Stores. Mr. Schlein holds a B.S. in Economics
from the University of Pennsylvania.
Robert C. Harris, Jr. has served as one of our Directors since August 1998.
Mr. Harris is a Senior Managing Director at Bear, Stearns & Co. Inc. From 1989
to October 1997, he was a co-founder and Managing Director of Unterberg Harris.
From 1984 to 1989, he was a General Partner, Managing Director and Director of
Alex. Brown & Sons Inc. Mr. Harris is also a director of N2K, Inc., MDSI Mobile
Data Solutions, Inc. and SoftNet Systems, Inc. Mr. Harris holds a B.S. and MBA
from the University of California at Berkeley.
All Directors hold office until the next annual meeting of the stockholders
and until their successors have been duly elected and qualified. Executive
officers are elected by and serve at the direction of the Board of Directors.
There are no family relationships among any of our Directors or executive
officers other than between Mr. Kitze and Ms. Molnar, who is Mr. Kitze's
sister-in-law.
Board Committees
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee, consisting of James J. Heffernan and Philip
Schlein, recommends the selection of independent public accountants to the
Board of Directors, reviews the scope and results of the audit and other
services provided by our independent accountants, and reviews our accounting
practices and systems of internal accounting controls.
The Compensation Committee, consisting of James J. Heffernan and Bob Ellis,
reviews and approves the salaries, bonuses and other compensation payable to
our executive officers and administers and makes recommendations concerning our
employee benefit plans. See "Certain Transactions."
Director Compensation
Except as set forth below, our Directors receive no cash compensation for
their services as Board members or committee members and we do not reimburse
them for expenses incurred in connection with attending Board and committee
meetings. On May 15, 1998, Mr. Heffernan, an outside Director, entered into a
consulting agreement with us under which he is entitled to receive compensation
in the form of common stock and options to purchase common stock for his
services, which services include serving as a member of the Board of Directors.
See "Certain Transactions."
On August 4, 1997, Bob Ellis, one of our outside Directors, entered into a
letter agreement with us under which Mr. Ellis agreed to provide certain
services to us, including serving as a member of the Board of Directors. This
agreement provided for compensation in the form of options to buy 222,222
shares of common stock at an exercise price of $0.03 per share, which vest
ratably over an 18 month period. The agreement terminated on February 3, 1999.
On July 28, 1998, Jeffrey Ballowe, one of our outside Directors, entered
into a letter agreement with us, which was amended as of December 2, 1998.
Under this agreement, as amended, Mr. Ballowe agreed to serve as a member of
the Board of Directors. The agreement provides for compensation in the form of
options to buy 23,334 shares of common stock at an exercise price of $6.75 per
share, which will vest monthly over a two year period or immediately upon a
sale of Xoom.com. Mr. Ballowe also receives a monthly fee of $10,000 as
compensation for his service as a Director. This fee is payable in shares of
common stock based upon the stock's closing price on the last trading day of
the month. Mr. Ballowe will also receive compensation equal to 5% of all funds
he raises for us, payable in common stock. Mr. Ballowe's agreement has a term
of 18 months.
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On July 28, 1998, Philip Schlein, one of our outside Directors, entered into
a letter agreement with us, which was amended as of December 2, 1998. Under
this agreement, as amended, Mr. Schlein agreed to serve as a member of the
Board of Directors. The agreement provides for compensation in the form of
options to buy 23,334 shares of common stock at an exercise price of $6.75 per
share, which will vest monthly over a two year period or immediately upon a
sale of Xoom.com. Mr. Schlein also receives a monthly fee of $10,000 payable in
cash or in common stock, at Mr. Schlein's option, as compensation for his
service as a Director. Mr. Schlein's agreement has a term of 18 months.
On July 28, 1998, Robert Harris, one of our outside Directors, entered into
a letter agreement with us, which was amended as of December 2, 1998. Under
this agreement, as amended, Mr. Harris agreed to serve as a member of the Board
of Directors. The agreement provides for compensation in the form of options to
buy 23,334 shares of common stock at an exercise price of $6.75 per share,
which will vest monthly over a two year period or immediately upon a sale of
Xoom.com. Mr. Harris also receives a monthly fee of $10,000 payable in cash or
in common stock, at Mr. Harris' option, as compensation for his service as a
director. Mr. Harris' agreement has a term of 18 months.
Compensation Committee Interlocks and Insider Participation
No member of our Compensation Committee serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of our Board of Directors or
Compensation Committee.
Executive Compensation
The following table sets forth certain information concerning compensation
of our Chief Executive Officer and each of our three other most highly
compensated executive officers whose aggregate salary, bonus and other
compensation exceeded $100,000 during the fiscal year ended December 31, 1998
(collectively, the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ---------------------
Name and Principal Salary Bonus Securities Underlying
Position Year ($) ($) Options (#)
- ------------------ ---- ------- ------ ---------------------
<S> <C> <C> <C> <C>
Laurent Massa............ 1998 216,124 15,593 158,333
President and Chief
Executive Officer 1997 182,600 -- 83,333
1996 42,000 -- 258,334
Russell S. Hyzen......... 1998 120,011 40,000 53,333
Vice President, Business
Development 1997 120,000 3,333 53,333
1996 20,000 -- 83,333
Alicia Molnar............ 1998 150,085 24,573 26,667
Vice President,
Advertising Sales 1997 10,865 -- 120,000
1996 -- -- --
Janine Popick............ 1998 73,547 26,480 136,666
Vice President, Direct
Marketing 1997 -- -- --
1996 -- -- --
</TABLE>
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning grants to
purchase shares of common stock to each of the Named Executive Officers during
the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE VALUE AT
NUMBER OF TOTAL OPTIONS ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM(3)
OPTIONS FISCAL YEAR PRICE PER EXPIRATION ------------------------------
NAME GRANTED(1) 1998(2) SHARE DATE 5% ($) 10% ($)
- ---- ---------- ------------- --------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Laurent Massa........... 158,333 8.1% $14.00 12/7/2008 $ 1,394,047 $ 3,532,788
Russell S. Hyzen........ 13,333 0.7% $ 3.33 6/1/2008 27,922 70,760
40,000 2.0% $14.00 12/7/2008 352,181 892,496
Alicia Molnar........... 26,667 1.4% $14.00 12/7/2008 234,790 595,005
Janine Popick........... 33,333 1.7% $ 2.31 3/17/2008 48,424 122,717
43,333 2.2% $ 3.33 6/1/2008 90,749 229,975
60,000 3.1% $14.00 12/7/2008 528,271 1,338,744
</TABLE>
- ----------
(1) Options granted under our 1998 Stock Incentive Plan have a maximum ten-year
term measured from the date of grant. Such options generally vest over
either a four-year period or a two-year period. The four-year period
options become exercisable for 25% of the option shares commencing upon the
optionee's completion of one year of service measured from the vesting
commencement date and the balance in a series of 36 successive monthly
installments upon the optionee's completion of each additional month of
service over the 36-month period measured from the first anniversary of the
vesting commencement date. The two-year period options vest in a series of
24 successive monthly installments and become exercisable for 100% of the
option shares upon achievement of certain performance targets. Under the
1998 Stock Incentive Plan, the exercise price per share generally is the
closing selling price of our common stock the day before the vesting
commencement date. In the event of a "change of control," as defined in the
1998 Stock Incentive Plan, 75% of any outstanding unvested options shall
accelerate to become exercisable in full.
(2) Based on options to purchase an aggregate of 1,957,225 shares of common
stock granted during fiscal 1998.
(3) In accordance with the rules of the Securities and Exchange Commission,
shown are the hypothetical gains or "option spreads" that would exist for
the respective options. These gains are based on assumed rates of annual
compounded stock price appreciation of 5% and 10% from the date the option
was granted over the full option term, assuming a fair market value equal
to the exercise price per share on the date of grant. The 5% and 10%
assumed rates of appreciation are mandated by the Commission and do not
represent our estimate or projection of future increases in the price of
our common stock.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1998 AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information as of December 31, 1998
concerning exercisable and unexercisable stock options held by each of the
Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
VALUE YEAR END (#) FISCAL YEAR END ($)(1)
SHARES ACQUIRED REALIZED ------------------------- -------------------------
NAME ON EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- --------------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Laurent Massa........... -- -- 247,398 / 252,602 8,156,712 / 6,116,376
Russell S. Hyzen........ -- -- 104,722 / 85,277 3,452,684 / 2,208,784
Alicia Molnar........... -- -- 68,334 / 78,333 2,252,972 / 2,210,101
Janine Popick........... -- -- 10,000 / 126,666 296,700 / 3,151,980
</TABLE>
- ----------
(1) Based on the fair market value of our common stock at December 31, 1998, of
$33.00 per share, less the exercise price for such shares.
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<PAGE>
Employment Agreements
Laurent Massa
On July 1, 1998, Laurent Massa, our President and Chief Executive Officer,
entered into an employment agreement with us. This agreement provides for an
annual salary of $216,000. Mr. Massa is also eligible for an annual bonus of up
to 33% of his base salary, paid quarterly based on the following criteria: (A)
exceeding quarterly revenue goals: 50% of the eligible Bonus; (B) achieving
specific management team goals: 25% of the eligible bonus; and (C) achieving
personal objectives that improve the organization: 25% of the eligible bonus.
The Compensation Committee will set the goals and review them quarterly. Should
we terminate Mr. Massa without Cause (as defined in the agreement), we must
provide Mr. Massa 180 days' advance written notice, and we may in our
discretion terminate Mr. Massa's employment at any time prior to the end of
this notice period, provided we pay Mr. Massa an amount equal to his base
compensation plus benefits Mr. Massa would have earned through the balance of
the notice period. If we exercise our right to terminate Mr. Massa without
Cause, Mr. Massa shall be immediately entitled to exercise 100% of any stock
options we have granted to him that had not previously vested. Mr. Massa may
exercise his vested stock options for a four month period from the date we
notify him of our intention to terminate his employment.
Should we terminate Mr. Massa for Cause, we must pay Mr. Massa all
compensation due on the date of termination. In the event of a Change in
Control or Corporate Transaction (as defined in the agreement) as a result of
which Mr. Massa's employment with us is involuntarily terminated, with or
without cause, Mr. Massa will be entitled to payment of an amount equal to one
year's base compensation plus benefits, and all stock options we previously
granted to Mr. Massa will immediately become fully vested and exercisable.
Under the terms of his agreement, Mr. Massa may terminate his employment
with us at any time for any reason by providing us with thirty days' advance
written notice. Should Mr. Massa's employment with us terminate for any reason,
the agreement further provides that Mr. Massa: (A) will not use any of our
proprietary information without our prior written consent; (B) will not use any
confidential information to compete against us or any of our employees; and (C)
will not, for one year following termination, solicit any of our customers or
employees.
Mr. Massa will be eligible for an annual review of his agreement no later
than July 20, 1999.
Pursuant to a letter agreement entered into prior to fiscal 1998, we granted
Mr. Massa options to purchase up to an aggregate of 341,667 shares of common
stock at a per share exercise price of $0.03.
John Harbottle
On August 4, 1998, John Harbottle, our Chief Financial Officer, entered into
an employment agreement with us. The agreement provides for an annual salary of
$144,000. Mr. Harbottle is also eligible for a discretionary quarterly bonus of
up to $10,000. Should we terminate Mr. Harbottle without Cause (as defined in
the agreement), we must provide Mr. Harbottle 180 days' advance written notice,
and we may in our discretion terminate Mr. Harbottle's employment at any time
prior to the end of this notice period, provided we pay Mr. Harbottle an amount
equal to his base compensation plus benefits Mr. Harbottle would have earned
through the balance of the notice period. If we exercise our right to terminate
Mr. Harbottle without Cause, Mr. Harbottle shall be immediately entitled to
exercise 100% of any stock options we have granted to him that had not
previously vested. Mr. Harbottle may exercise his vested stock options for a
four month period from the date we notify him of our intention to terminate his
employment.
Should we terminate Mr. Harbottle for Cause, we must pay Mr. Harbottle all
compensation due on the date of termination. In the event of a Change in
Control or Corporate Transaction (as defined in the agreement) as a result of
which Mr. Harbottle's employment with us is involuntarily terminated, with or
without cause, Mr. Harbottle will be entitled to payment of an amount equal to
6 months' base compensation plus benefits, and all stock options we previously
granted to Mr. Harbottle will immediately become fully vested and exercisable.
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Under the terms of his agreement, Mr. Harbottle may terminate his employment
with us at any time for any reason by providing us with thirty days' advance
written notice. Should Mr. Harbottle's employment with us terminate for any
reason, the agreement further provides that Mr. Harbottle: (A) will not use any
of our proprietary information without our prior written consent; (B) will not
use any confidential information to compete against us or any of our employees;
and (C) will not, for one year following termination, solicit any of our
customers or employees.
Pursuant to a letter agreement entered into prior to Mr. Harbottle's
employment agreement, we granted to Mr. Harbottle options to purchase up to
86,667 shares of common stock at a per share exercise price of $6.75 and
options to purchase up to 20,000 shares of common stock at a per share exercise
price of $12.00.
Vijay Vaidyanathan
We have entered into an employment agreement, dated March 10, 1998, as
amended on August 12, 1998, with Vijay Vaidyanathan, our Chief Technical
Officer. The agreement provides that Mr. Vaidyanathan receives a yearly salary
of $120,000. Mr. Vaidyanathan is also entitled to participate in our medical,
dental and vision insurance plan and in any other employee benefit plan we
adopt. Should we terminate Mr. Vaidyanathan without Cause (as defined in the
agreement), we must provide Mr. Vaidyanathan 90 days' advance written notice,
and we may in our discretion terminate Mr. Vaidyanathan's employment at any
time prior to the end of this notice period, provided we pay Mr. Vaidyanathan
an amount equal to his base compensation plus benefits Mr. Vaidyanathan would
have earned through the balance of the notice period. In the event we exercise
our right to terminate Mr. Vaidyanathan without Cause, Mr. Vaidyanathan shall
be immediately entitled to exercise 100% of any stock options we have granted
to him that had not previously vested. Mr. Vaidyanathan may exercise his vested
stock options for a four month period from the date we notify him of our
intention to terminate his employment.
Should we terminate Mr. Vaidyanathan for Cause, we must pay Mr. Vaidyanathan
all compensation due on the date of termination. In the event of a Change in
Control or Corporate Transaction (as defined in the agreement) as a result of
which Mr. Vaidyanathan's employment with us is involuntarily terminated, with
or without cause, Mr. Vaidyanathan will be entitled to payment of an amount
equal to 6 months' base compensation plus benefits, and all stock options we
previously granted to Mr. Vaidyanathan will immediately become fully vested and
exercisable.
Under the terms of his agreement, Mr. Vaidyanathan may terminate his
employment with us at any time for any reason by providing us with thirty days'
advance written notice. Should Mr. Vaidyanathan's employment with us terminate
for any reason, the agreement further provides that Mr. Vaidyanathan: (A) will
not use any of our proprietary information without our prior written consent;
(B) will not use any confidential information to compete against us or any of
our employees; and (C) will not, for one year following termination, solicit
any of our customers or employees.
Mr. Vaidyanathan will be eligible for an annual review of his agreement no
later than August 12, 1999. Under the agreement, we granted Mr. Vaidyanathan
options to purchase up to 93,334 shares of common stock at a per share exercise
price of $2.31.
Russell Hyzen
On July 20, 1998, Russell S. Hyzen, our Vice President Business Development,
entered into an employment agreement with us. The agreement provides for an
annual salary of $120,000 and a discretionary bonus of up to $10,000 per
quarter to be paid upon achievement of personal and company targets to be
defined. Should we terminate Mr. Hyzen without Cause (as defined in the
agreement), we are required to provide Mr. Hyzen 90 days' advance written
notice, and we may in our discretion terminate Mr. Hyzen's employment at any
time prior to the end of this notice period, provided we pay Mr. Hyzen an
amount equal to his base compensation plus benefits Mr. Hyzen would have earned
through the balance of the notice period. If we exercise our right to terminate
Mr. Hyzen without Cause, Mr. Hyzen shall be immediately entitled to exercise
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100% of any stock options we have granted to him that had not previously
vested. If Mr. Hyzen is terminated without Cause, he may exercise his vested
stock options for a four month period from the date we notify him of our
intention to terminate his employment.
Should we terminate Mr. Hyzen for Cause, we must pay Mr. Hyzen all
compensation due on the date of termination. In the event of a Change in
Control or Corporate Transaction (as defined in the agreement) as a result of
which Mr. Hyzen's employment with us is involuntarily terminated for any
reason, with or without cause, Mr. Hyzen will be entitled to payment of an
amount equal to 6 months' base compensation plus benefits, and any and all
stock options we previously granted to him will immediately become fully vested
and exercisable.
Under the terms of the agreement, Mr. Hyzen may terminate his employment
with us at any time for any reason by providing us with thirty days' advance
written notice. Should Mr. Hyzen's employment with us terminate for any reason,
the agreement further provides that Mr. Hyzen: (A) will not use any of our
proprietary information without our prior written consent; (B) will not use any
confidential information to compete against us or any of our employees; and (C)
will not, for one year following termination, solicit any of our customers or
employees.
Pursuant to a letter agreement entered into prior to fiscal 1998, we granted
Mr. Hyzen options to purchase up to 136,667 shares of common stock at a per
share exercise price of $0.03.
Benefit Plans
1998 Stock Incentive Plan
Our 1998 Stock Incentive Plan was approved by the Board of Directors and by
our stockholders in February 1998. The Stock Incentive Plan provides for the
grant of options intended to qualify as "incentive stock options" under Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), nonqualified
stock options and stock appreciation rights. The Stock Incentive Plan also
provides for the transfer or sale of common stock to selected individuals in
connection with the performance of services for us or our affiliates. A total
of 2,000,000 shares of common stock have been reserved for issuance under the
Stock Incentive Plan. As of December 31, 1998, no shares of common stock had
been issued upon exercise of options granted under the Stock Incentive Plan,
1,563,151 shares remained reserved for future issuance upon the exercise of
outstanding options, and 436,849 shares remained available for future grant.
The Board of Directors or a committee designated by the Board is authorized to
administer the Stock Incentive Plan, including the selection of individuals
eligible for grants of options, issuances of common stock, the terms of such
grants or issuances, possible amendments to the terms of such grants or
issuances and the interpretation of the terms of, and adoption of rules for,
the Stock Incentive Plan. The maximum term of any stock option granted under
the Stock Incentive Plan is ten years, except that with respect to incentive
stock options granted to a person possessing more than 10% of our combined
voting power (a "10% Stockholder"), the term of such stock options shall be for
no more than five years.
The exercise price of nonqualified stock options and incentive stock options
granted under the Stock Incentive Plan must be at least 85% and 100%,
respectively, of the fair market value of the common stock on the grant date
except that the exercise price of incentive stock options granted to a 10%
Stockholder must be at least 110% of such fair market value on the grant date.
The aggregate fair market value on the date of grant of the common stock for
which incentive stock options are exercisable for the first time by an employee
during any calendar year may not exceed $100,000. The purchase price of shares
of common stock granted under the Stock Incentive Plan must be at least 85% of
the fair market value of the common stock on the grant date except that the
purchase price of shares of common stock granted to a 10% Stockholder must be
at least 100% of such fair market value on the grant date. The individual
agreements under the Stock Incentive Plan may provide for repurchase rights for
us under the terms and conditions set forth in the Stock Incentive Plan. The
Stock Incentive Plan will terminate in 2008, unless earlier terminated by the
Board.
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In the event of a merger in which we are not the surviving entity, the sale
of all or substantially all of our assets or a reverse merger resulting in a
change of control, each grant which is at the time outstanding under the Stock
Incentive Plan shall, unless the plan administrator in its discretion decides
differently, immediately prior to the specified effective date of such
transaction, automatically become fully vested and exercisable with respect to
75% of the unvested shares at the time represented by such grant. To the extent
it has not been previously exercised, the grant will terminate immediately
prior to the consummation of such proposed transaction, unless the grant is
assumed or an equivalent grant is substituted by the successor corporation.
1998 Employee Stock Purchase Plan
Our Stock Purchase Plan was approved by the Board of Directors in August
1998 and by our stockholders in October 1998. The Stock Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Code in order to provide our employees with an opportunity to purchase
common stock through payroll deductions. An aggregate of 300,000 shares of
common stock has been reserved for issuance under the Stock Purchase Plan and
made available for purchase thereunder, subject to adjustment in the event of a
stock split, stock dividend or other similar change in the common stock or our
capital structure. All of our employees (and employees of our "subsidiary
corporations" and "parent corporations" (as defined by the Code) designated by
the administrator of the Stock Purchase Plan) whose customary employment is for
more than five months in any calendar year and more than 20 hours per week are
eligible to participate in the Stock Purchase Plan. Employees hired after the
consummation of our initial public offering are eligible to participate in the
Stock Purchase Plan, subject to a six-month waiting period after hiring. Non-
employee directors, consultants, and employees subject to the rules or laws of
a foreign jurisdiction that prohibit or make impractical the participation of
such employees in the Stock Purchase Plan are not eligible to participate in
the Stock Purchase Plan.
The Stock Purchase Plan designates Offer Periods, Purchase Periods and
Exercise Dates. Offer Periods are generally overlapping periods of 24 months.
The initial Offer Period began on the effective date of the Stock Purchase
Plan, which was December 8, 1998, the effective date of our Registration
Statement relating to its initial public offering, and ends on December 31,
2000. Additional Offer Periods will commence each July 1 and January 1.
Purchase Periods are generally six month periods, with the initial Purchase
Period commencing on the effective date of the Stock Purchase Plan and ending
on June 30, 1999. Thereafter, Purchase Periods will commence each July 1 and
January 1. Exercise Dates are the last day of each Purchase Period. In the
event we merge with or into another corporation or sell all or substantially
all of our assets, or certain other transactions in which our stockholders
before the transaction own less than 50% of the total combined voting power of
our outstanding securities following the transaction, the administrator of the
Stock Purchase Plan may elect to shorten the Offer Period then in progress.
On the first day of each Offer Period, a participating employee is granted a
purchase right, which is a form of option to be automatically exercised on the
forthcoming Exercise Dates within the Offer Period during which deductions are
to be made from the pay of participants (in accordance with their
authorizations) and credited to their accounts under the Stock Purchase Plan.
When the purchase right is exercised, the participant's withheld salary is used
to purchase shares of common stock. The price per share at which shares of
common stock are to be purchased under the Stock Purchase Plan during any
Purchase Period is the lesser of (A) 85% of the fair market value of the common
stock on the date of the grant of the option (the commencement of the Offer
Period) or (B) 85% of the fair market value of the common stock on the Exercise
Date (the last day of a Purchase Period). The participant's purchase right is
exercised in this manner on each Exercise Date arising in the Offer Period
unless, on the first day of any Purchase Period, the fair market value of the
common stock is lower than the fair market value of the common stock on the
first day of the Offer Period. If so, the participant's participation in the
original Offer Period is terminated, and the participant is automatically
enrolled in the new Offer Period effective the same date.
Payroll deductions may range from 1% to 10% (in whole percentage increments)
of a participant's regular base pay, exclusive of bonuses, overtime, shift-
premiums, commissions, reimbursements or other expense
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allowances. Participants may not make direct cash payments to their accounts.
The maximum number of shares of common stock that any employee may purchase
under the Stock Purchase Plan during an Purchase Period is 1,250 shares. The
Code imposes certain additional limitations on the amount of common stock that
may be purchased during any calendar year.
The Compensation Committee administers the Stock Purchase Plan, and has the
authority to terminate or amend the Stock Purchase Plan (subject to specified
restrictions) and otherwise to administer the Stock Purchase Plan and to
resolve all questions relating to the administration of the Stock Purchase
Plan.
Option grants outside the 1998 Stock Incentive Plan
In the period between August 1996 and December 1998, options to purchase
1,235,224 shares of common stock were granted to our directors, officers and
all of our employees, as well as to a number of consultants. The options were
granted outside the Stock Incentive Plan by the Board of Directors under
individual stock option agreements under substantially similar terms as the
options granted under the Stock Incentive Plan.
Limitation of Liability and Indemnification Matters
Our Bylaws provide that we will indemnify our Directors and executive
officers and may indemnify our other officers, employees and other agents to
the fullest extent permitted by the Delaware General Corporation Law, as
amended. We have entered into indemnification agreements with our Directors and
officers and are also empowered under our Bylaws to purchase insurance on
behalf of any person whom we are required or permitted to indemnify. We have
obtained a policy of directors' and officers' liability insurance that insures
such persons against the cost of defense, settlement or payment of a judgment
under certain circumstances.
In addition, our Certificate of Incorporation provides that the liability of
our Directors for monetary damages shall be eliminated to the fullest extent
permissible under the Delaware General Corporation Law, as so amended. This
provision in the Certificate of Incorporation does not eliminate a Director's
duty of care, and in appropriate circumstances equitable remedies such as an
injunction or other forms of non-monetary relief would remain available. Each
Director will continue to be subject to liability for breach of the Director's
duty of loyalty, for acts or omissions not in good faith or involving
intentional misconduct or knowing violations of law, for acts or omissions that
the Director believes to be contrary to our or our stockholders' best
interests, for any transaction from which the Director derived an improper
personal benefit, for improper transactions between the Director and us and for
improper distributions to stockholders and loans to Directors and officers.
This provision also does not affect a Director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our Directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
There is no pending litigation or proceeding involving one of our Directors
or officers as to which indemnification is being sought, nor are we aware of
any pending or threatened litigation that may result in claims for
indemnification by any Director or officer.
64
<PAGE>
CERTAIN TRANSACTIONS
Some of our Directors, executive officers and affiliates have entered into
stock purchase transactions with us, as follows:
. Following our incorporation, Chris Kitze, one of our founders, purchased
333,334 shares of common stock for cash at a price of $0.0003 per share,
resulting in aggregate proceeds to us of $100; and, pursuant to a Common
Stock Purchase Agreement dated August 26, 1996, Naveen Jain, an
affiliate of ours, purchased 333,334 shares of common stock for cash at
a price of $0.0003 per share, resulting in aggregate proceeds to us of
$100. In connection with these transactions, we entered into a
Stockholders' Agreement with Mr. Kitze and Mr. Jain. This Stockholders'
Agreement was terminated on February 10, 1998.
. Pursuant to a Common Stock Purchase Agreement dated December 31, 1996,
Mr. Kitze and Mr. Jain purchased an additional 2,333,334 and 1,000,000
shares, respectively, of common stock in exchange for the cancellation
of promissory notes in the amount of $700,000 and $300,000,
respectively. In the same agreement, Mr. Jain contributed 666,667 shares
of common stock to us.
. Pursuant to Common Stock Purchase Agreements dated February 13, 1997 and
November 23, 1997, Flying Disc Investments Limited Partnership, of which
Mr. Kitze is a general partner, purchased an additional 1,333,336 and
94,445 shares of common stock, respectively, from us for cash at $0.45
and $0.90 per share, respectively, resulting in aggregate proceeds to us
of approximately $685,000.
. Flying Disc purchased an additional 108,228 shares of common stock in
February 1998 pursuant to a Common Stock Purchase Agreement for cash at
a price of $2.31 per share.
. Under a Common Stock and Warrant Purchase Agreement dated as of April
25, 1998, Flying Disc purchased 30,030 shares of common stock for cash
at a per share price of $3.33 along with a warrant to purchase an
additional 6,006 shares at $3.33 per share, resulting in aggregate
proceeds to us of approximately $100,000.
. Under a Common Stock and Warrant Purchase Agreement dated as of June 18,
1998, Internet Ventures, LLC purchased 30,030 shares of common stock for
cash at a per share price of $3.33 along with a warrant to purchase an
additional 6,006 shares at $3.33 per share, resulting in aggregate
proceeds to us of approximately $100,000. Mr. Jain is the managing
member of Internet Ventures.
All of the warrants described above were exercised before the completion of
our initial public offering.
In addition to these purchases, under a Stock Purchase Agreement dated
February 13, 1997, Bob Ellis, one of our Directors, purchased 55,556 shares of
common stock for cash at a price of $1.80 per share, resulting in aggregate
proceeds to us of approximately $100,000. On August 4, 1997, due to a
revaluation of the shares Mr. Ellis purchased, he was awarded an additional
55,556 shares of common stock at the new price of $0.90 per share. In
addition, on the same date, Mr. Ellis purchased an additional 222,222 shares
of common stock for cash at $0.90 per share, resulting in aggregate proceeds
to us of approximately $200,000.
We have entered into a Consulting Agreement, dated May 15, 1998, with James
J. Heffernan, an outside Director. The agreement will terminate on November
15, 1999. The agreement provides for Mr. Heffernan to receive a monthly
compensation of $10,000, paid in the form of common stock, and options to buy
16,667 shares of common stock at an exercise price of $3.33 per share. Mr.
Heffernan was granted stock options to buy an additional 16,667 shares of
common stock at an exercise price of $3.33 per share upon completion of our
initial public offering. In addition, Mr. Heffernan was entitled to a finder
fee, payable in shares of common stock, of 5% of any investment he secured on
our behalf between May 15, 1998 and June 30, 1998. Under this arrangement, Mr.
Heffernan received 50,203 shares of common stock. See "Director Compensation."
We have entered into a Content License Agreement dated February 22, 1998,
with Classic Media Holdings, whereby we were granted certain non-exclusive,
perpetual, world-wide licensing rights in connection
65
<PAGE>
with Classic Media Holdings' library of public domain movies. As consideration
for the license, we issued 43,290 shares of common stock to Classic Media
Holdings' principals. Mr. Kitze is a principal of Classic Media Holdings.
We have entered into employment agreements, indemnification agreements and
other compensation arrangements with our directors and officers. See
"Management--Employment Agreements," "--Director Compensation" and "--
Limitation Of Liability And Indemnification Matters."
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us
and our officers, Directors, principal stockholders and their affiliates will
be approved by a majority of the Board of Directors, including a majority of
the independent and disinterested outside Directors on the Board of Directors,
and be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
66
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to us with respect
to beneficial ownership of common stock as of February 28, 1999 and as adjusted
to reflect the sale of the shares offered hereby, by (A) each person known by
us to own beneficially more than 5% of the outstanding shares of common stock,
(B) each of our directors, (C) each of the Named Executive Officers, (D) all
executive officers and directors of us as a group and, (E) selling stockholders
owning more than 1% of the outstanding shares of common stock (F) other selling
stockholders, each owns less than 1% of the outstanding shares of common stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED
OWNED PRIOR TO THE OFFERING(1) NUMBER OF AFTER THE OFFERING(1)
-----------------------------------SHARES BEING-------------------------------
NUMBER PERCENTAGE OFFERED(2) NUMBER PERCENTAGE
------------------ ---------------------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Chris Kitze(3).......... 4,188,350 30.6% 837,670 3,350,680 20.8%
Naveen Jain(4).......... 702,702 5.1% 133,333 569,369 3.5%
Vijay Vaidyanathan(5)... 607,243 4.4% 200,000 407,243 2.5%
Bob Ellis(6)............ 549,443 3.9% 137,117 412,326 2.5%
Laurent Massa(7)........ 209,896 1.5% 100,000 109,896 0.7%
James Heffernan(8)...... 139,157 1.0% -- 139,157 *
Russell S. Hyzen(9)..... 125,277 * 50,000 75,277 *
Alicia Molnar(10)....... 86,667 * 25,000 61,667 *
John Harbottle(11)...... 37,779 * 30,000 7,779 *
Janine Popick(12)....... 26,937 * 13,470 13,467 *
Jeffrey Ballowe(13)..... 17,363 * 3,084 14,279 *
Philip Schlein(14)...... 12,732 * 10,787 1,945 *
Robert C. Harris,
Jr.(15)................ 12,732 * -- 12,732 *
All executive officers
and directors as a
group (12
persons)(16)........... 6,013,576 41.6% 1,407,128 4,606,448 27.7%
Other Selling
Stockholders........... 1,419,759 10.3% 592,872 826,887 5.1%
</TABLE>
- ----------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options held by that person that
are currently exercisable or exercisable within 60 days of February 28,
1999 and warrants to purchase shares of common stock that are exercisable
within 60 days of February 28, 1999 are deemed outstanding. Percentage of
beneficial ownership is based upon 13,699,555 shares of common stock
outstanding prior to the offering and 16,082,672 shares of common stock
outstanding after the Offering, as of December 31, 1998 and assuming no
exercise of the Underwriters' over-allotment option. To our knowledge,
except as set forth in the footnotes to this table and subject to
applicable community property laws, each person named in the table has
sole voting and investment power with respect to the shares set forth
opposite such person's name. Except as otherwise indicated, the address of
each of the Directors, Named Executive Officers and 5% stockholders in
this table is as follows: c/o XOOM.com, Inc., 300 Montgomery Street, Suite
300, San Francisco, California 94104.
(2) Includes an aggregate of 383,117 shares issued upon the exercise of
outstanding options and sold in the offering.
(3) Includes 4,188,350 shares of common stock held by Flying Disc, of which
Mr. Kitze is a general partner. Mr. Kitze may be deemed to be the
beneficial owner of the shares held by Flying Disc.
(4) Includes 36,036 shares of common stock held by Internet Ventures. Mr. Jain
is the managing member of Internet Ventures and may be deemed to be the
beneficial owner of the shares held by Internet Ventures. Mr. Jain's
address is 16115 N.E. 49th Ct., Redmond, WA 98052.
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<PAGE>
(5) Includes 80,000 shares of common stock held by the Vijay Vaidyanathan and
Sheena Vaidyanathan Family Trust. Mr. Vaidyanathan disclaims beneficial
ownership of these shares. Also includes options exercisable for 25,277
shares of common stock exercisable within 60 days after February 28, 1999.
(6) Includes 323,333 shares of common stock held by the Robert A. Ellis
Revocable Trust. Also includes options exercisable for 226,110 shares of
common stock exercisable within 60 days after February 28, 1999.
(7) Includes options exercisable for 209,896 shares of common stock
exercisable within 60 days after February 28, 1999.
(8) Includes options exercisable for 22,917 shares of common stock exercisable
within 60 days after February 28, 1999. Also includes 12,000 shares of
common stock held by J.J. Heffernan, LLC, of which Mr. Heffernan is the
managing member, and 100,239 shares of common stock held by the Heffernan
Family Trust. Mr. Heffernan may be deemed to be the beneficial owner of
the shares and warrants to purchase shares of common stock held by the
Heffernan LLC and the Heffernan Family Trust. Also includes 4,000 shares
of common stock held by Sandra Heffernan, who is Mr. Heffernan's wife.
(9) Includes options exercisable for 113,611 shares of common stock
exercisable within 60 days after February 28, 1999.
(10) Includes options exercisable for 76,667 shares of common stock exercisable
within 60 days after February 28, 1999.
(11) Includes options exercisable for 32,779 shares of common stock exercisable
within 60 days after February 28, 1999. Also includes 4,000 shares of
common stock held by Claire Harbottle, who is Mr. Harbottle's wife.
(12) Includes options exercisable for 23,334 shares of common stock exercisable
within 60 days after February 28, 1999.
(13) Includes options exercisable for 16,694 shares of common stock exercisable
within 60 days after February 28, 1999.
(14) Includes options exercisable for 8,750 shares of common stock exercisable
within 60 days after February 28, 1999.
(15) Includes options exercisable for 8,750 shares of common stock exercisable
within 60 days after February 28, 1999.
(16) Includes options exercisable for 764,785 shares of common stock
exercisable within 60 days after February 28, 1999.
68
<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue up to 40,000,000 shares of common stock, $0.0001
par value per share, and 5,000,000 shares of preferred stock, $0.0001 par value
per share.
The following summary of certain provisions of the common stock and
preferred stock does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of our Certificate of
Incorporation, which is included as an exhibit to the Registration Statement of
which this prospectus is a part, and by the provisions of applicable law.
Common Stock
As of December 31, 1998, there were 13,699,555 shares of common stock
outstanding that were held of record by approximately 90 stockholders. There
will be 16,082,672 shares of common stock outstanding (assuming the exercise of
383,117 options to purchase shares of common stock by the selling stockholders,
no exercise of the Underwriters' over-allotment option, no exercise of
outstanding options to purchase 2,415,258 shares of common stock, and excluding
issuances of common stock since December 31, 1998 of 3,468 shares of common
stock to directors or 116,231 shares of common stock as a result of the
exercise of outstanding warrants) after giving effect to the sale of the common
stock we are offering.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. We do not have
cumulative voting rights in the election of Directors, and accordingly, holders
of a majority of the shares voting are able to elect all of the Directors.
Subject to preferences that may be granted to any then outstanding preferred
stock, holders of common stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor as well as any distributions to the stockholders. See "Dividend
Policy." In the event of our liquidation, dissolution or winding up, holders of
common stock are entitled to share ratably in all of our assets remaining after
payment of liabilities and the liquidation preference of any then outstanding
preferred stock. Holders of common stock have no preemptive or other
subscription of conversion rights. There are no redemption or sinking fund
provisions applicable to the common stock.
Preferred Stock
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of 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, sinking fund terms and the number of
shares constituting any series or the designation of such series, any or all of
which may be greater than the rights of common stock, without any further vote
or action by stockholders. The issuance of preferred stock could adversely
affect the voting power of holders of common stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control. We
have no present plan to issue any shares of preferred stock.
Antitakeover Effects of Provisions of Our Charter and Bylaws
Our Bylaws provide that all stockholder action must be effected at a duly
called meeting of stockholders and not by a consent in writing; the Bylaws also
provide that only our Chief Executive Officer and President may call a special
meeting of stockholders.
These provisions will make it more difficult for our existing stockholders
to replace the Board of Directors as well as for another party to obtain
control by replacing the Board of Directors. Since the Board of Directors has
the power to retain and discharge our officers, these provisions could also
make it more difficult for existing stockholders or another party to effect a
change in management.
69
<PAGE>
These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control or management. These provisions are
intended to enhance the likelihood of continued stability in the composition of
the Board of Directors and in the policies furnished by the Board of Directors
and to discourage certain types of transactions that may involve an actual or
threatened change of control. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal. The provisions also are
intended to discourage certain tactics that may be used in proxy fights.
However, the provisions could have the effect of discouraging others from
making tender offers for our shares and, as a consequence, they also may
inhibit fluctuations in the market price of our shares that could result from
actual or rumored takeover attempts. These provisions also may have the effect
of preventing changes in our management. See "Risk Factors--Anti-takeover
provisions in our charter documents could negatively impact our stockholders."
Section 203 of the Delaware General Corporation Law
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless: (A) prior to such date, the board of directors
of the corporation approved either the business combination or the transaction
that resulted in the stockholder becoming an interested holder; (B) upon
consummation of the transaction that that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (1) by persons who are directors and also
officers and (2) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (C) on or subsequent to
such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of the stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
Section 203 defines a business combination to include: (A) any merger or
consolidation involving the corporation and the interested stockholder; (B) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (C) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (D)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock or any class or series of the corporation
beneficially owned by the interested stockholder; or (E) the receipt by the
interested stockholder of the benefit of any loss, advances, guarantees,
pledges or other financial benefits by or through the corporation. In general,
Section 203 defines an interested stockholder as an entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person. See "Risk Factors--Anti-takeover
provisions in our charter documents could negatively impact our stockholders."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is BankBoston, N.A.
Its address is c/o Boston EquiServe Trust Company, 150 Royall Street, Canton,
Massachusetts 02021, and its telephone number is (617) 575-6127.
70
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of common stock after the offering
could adversely affect the market price of the common stock and could impair
our ability to raise capital through the sale of equity securities. Upon
completion of the offering, we will have outstanding 16,082,672 shares of
common stock, based on shares outstanding as of December 31, 1998 and assuming
the exercise of options to purchase 383,117 shares of common stock by the
selling stockholders. Of these shares, the 4,000,000 shares sold in this
offering will be freely tradable without restriction under the Securities Act,
unless they are held by "affiliates" as defined under the Securities Act. In
addition, the 4,600,000 shares sold in our initial public offering in December
1998 and 5,000 shares released from the lock-up agreements executed by our
stockholders in connection with the initial public offering are freely
tradeable.
We sold the remaining 7,477,672 outstanding shares in reliance on exemptions
from the registration requirements of the Securities Act and therefore these
are "restricted securities" within the meaning of Rule 144 under the Securities
Act. Restricted securities may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144, 144(k)
or 701 promulgated under the Securities Act. In connection with our initial
public offering, our Directors, officers, stockholders and holders of options
to purchase common stock agreed that they will not sell, directly or
indirectly, any common stock without the prior written consent of Bear, Stearns
& Co. Inc. for a period of 180 days from the date of the initial public
offering. This period will expire on June 8, 1999. Bear, Stearns & Co. Inc.
may, however, in its sole discretion and at any time without notice, release
all or any portion of the shares subject to lock-up agreements. Subject to the
provisions of Rules 144, 144(k) and 701, 7,477,672 shares will be eligible for
sale on June 8, 1999 upon the expiration of the lock-up agreements.
In February 1999, we filed Form S-8 registration statements under the
Securities Act to register all shares of common stock issuable pursuant to
outstanding options and all shares of common stock reserved for issuance under
our Stock Incentive Plan and Stock Purchase Plan. These registration statements
became effective immediately upon filing, and shares covered by those
registration statements are therefore eligible for sale in the public markets,
subject to options becoming exercisable, the lock-up agreements described above
and Rule 144 limitations applicable to affiliates. As of December 31, 1998,
assuming the exercise of options to purchase 383,117 shares of common stock by
the selling stockholders, there were outstanding options to purchase up to
2,415,258 shares of common stock that will be eligible for sale in the public
market following the offering from time to time subject to becoming exercisable
and the expiration of the lock-up agreements, and an additional 736,849 shares
of common stock were reserved for issuance under the Stock Incentive Plan and
the Stock Purchase Plan. See "Management--Benefit Plans."
71
<PAGE>
UNDERWRITING
The underwriters of the offering named below, for whom Bear, Stearns & Co.
Inc., Hambrecht & Quist LLC, BancBoston Robertson Stephens and Wit Capital
Corporation as e-Manager(TM) are acting as U.S. representatives and Bear,
Stearns International Limited, Hambrecht & Quist LLC, BancBoston Robertson
Stephens International Ltd and Deutsche Bank AG London are acting as
international representatives, have severally agreed with us, 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 us and the selling stockholders the
aggregate number of shares of common stock set forth opposite their respective
names below:
<TABLE>
<CAPTION>
U.S. Underwriters Number of Shares
----------------- ----------------
<S> <C>
Bear, Stearns & Co. Inc. ....................................
Hambrecht & Quist LLC........................................
BancBoston Robertson Stephens................................
Wit Capital Corporation......................................
---------
Total...................................................... 3,400,000
=========
<CAPTION>
International Underwriters Number of Shares
-------------------------- ----------------
<S> <C>
Bear, Stearns International Limited..........................
Hambrecht & Quist LLC........................................
BancBoston Robertson Stephens International Ltd..............
Deutsche Bank AG London......................................
---------
Total...................................................... 600,000
=========
</TABLE>
The U.S. underwriters and the international representatives are
collectively referred to as the underwriters.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. underwriter has represented and agreed that, with certain exceptions set
forth below, (A) it is not purchasing any shares of common stock being sold by
it for the account of anyone other than a United States or Canadian person and
(B) it has not offered or sold, and will not offer or sell, directly or
indirectly, any U.S. shares or distribute this prospectus outside the United
States or Canada or to anyone other than a United States or Canadian person.
Pursuant to the Agreement Between U.S. and International Underwriters, each
international underwriter has represented and agreed that, with certain
exceptions set forth below, (A) it is not purchasing any shares of common
stock being sold by it for the account of any United States or Canadian person
and (B) it has not offered or sold, and will not offer or sell, directly or
indirectly, any international shares or distribute this prospectus within the
United States or Canada or to any United States or Canadian person. The
foregoing limitations do not apply to stabilization transactions or to certain
other transactions specified in the Agreement Between the U.S. and
International Underwriters. With respect to the U.S. representatives and the
international representatives, the foregoing representations or agreements (A)
are made by each of them in their capacity as a U.S. underwriter shall apply
only to shares of common stock purchased by each of them in their capacity as
a U.S. underwriter, (B) are made by each of them in their capacity as an
international underwriter shall apply only to shares of common stock purchased
by each of them in their capacity as an international underwriter and
(C) shall not restrict either of their abilities to distribute the prospectus
to any person. As used herein, United States or Canadian person means any
national or resident of the United States or Canada or any corporation,
pension, profit-sharing or other trust or other entity organized under the
laws of the United States or Canada or of any political subdivision thereof
(other than a branch located outside of the United States or Canada of any
United States or Canadian person) and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian person and
United States means the United States of America, its territories, its
possessions and all areas subject to its jurisdiction.
72
<PAGE>
Pursuant to the Agreement Between the U.S. and International Underwriters,
sales may be made between the U.S. underwriters and international underwriters
of any number of shares of common stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares so sold shall be the offering price set forth on the cover page hereof,
in United States Dollars, less an amount not greater than the per share amount
of the concession to dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. underwriter has represented that it has not offered or sold, and has
agreed not to offer or sell, any shares of common stock, directly or
indirectly, in Canada in contravention of the securities laws of Canada or any
province or territory thereof and has represented that any offer of shares of
common stock in Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province or territory of Canada in
which such offer is made. Each U.S. underwriter has further agreed to send to
any dealer who purchases from it any shares of common stock a notice stating in
substance that, by purchasing such shares such dealer represents and agrees
that it has not offered or sold, and will not offer or sell, directly or
indirectly, any of such shares in Canada or to, or for the benefit of, any
resident of Canada in contravention of the securities laws of Canada or any
province or territory thereof and that any offer of shares of common stock in
Canada will be made only pursuant to an exemption from the requirement to file
a prospectus in the province or territory of Canada in which such offer is
made, and that such dealer will deliver to any other dealer to whom it sells
any of such shares of common stock a notice to the foregoing effect.
Pursuant to the Agreement Between U.S. and International Underwriters, each
international underwriter has represented and agreed that (A) it has not
offered or sold and will not offer or sell any shares of common stock to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their business or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (B) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 and the regulations
with respect to anything done by it in relation to the shares of common stock
in, from or otherwise involving the United Kingdom; and (C) it has only issued
or passed on and will only issue or pass on to any person in the United Kingdom
any document received by it in connection with the issue of the shares of
common stock if that person is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996
or is a person to whom such document may otherwise lawfully be issued or passed
on.
If the underwriters sell more than the total number set forth in the table
above, the U.S. underwriters have an option to buy up to an additional 600,000
shares from us to cover such sales. They may exercise that option for 30 days.
If any shares are purchased pursuant to this option, the Underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by us. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by Us
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.......................................... $ $
Total.............................................. $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the public offering price set forth on the cover of this prospectus. Any shares
sold by the underwriters to securities dealers may be sold at a discount of up
to $ per share from the public offering price. Any such securities dealers
may resell any shares purchased from the underwriters to certain other brokers
or dealers at a discount of up to $ per share from the public offering
price. Any such securities dealers may resell any shares purchased from the
underwriters to certain other brokers or dealers at a discount of up to $
per share from the public offering price. If all the shares are not
73
<PAGE>
sold at the offering price, the U. S. and international representatives may
change the offering price and the other selling terms.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the U.S. and international representatives have
repurchased shares sold by or for the account of such underwriter in
stabilizing or short covering transactions. These activities by the
underwriters may stabilize, maintain or otherwise affect the market price of
the common stock. As a result, the price of the common stock may be higher than
the price that otherwise might exist in the open market. If these activities
are commenced, they may be discontinued by the underwriters at any time. These
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market or otherwise.
In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in the common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended, during the business day prior to
the pricing of the offering before the commencement of offers or sales of the
common stock. Passive market makers must comply with applicable volume and
price limitations and must be identified as such. In general, a passive market
maker must display its bid at a price not in excess of the highest independent
bid of such security; if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain
purchase limits are exceeded.
A U.S. prospectus in electronic format is being made available to U.S.
investors only on an Internet Web site maintained by Wit Capital Corporation.
Other than the U.S. prospectus in electronic format, the information on such
Web site and any information contained on any other Web site maintained by Wit
Capital Corporation is not part of this prospectus or the registration
statement of which this prospectus forms a part, has not been approved and/or
endorsed by us or any underwriter in such capacity and should not be relied on
by prospective investors.
We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ .
We and the selling stockholders have agreed to indemnify the several
underwriters against certain liabilities, including liabilities under the
Securities Act.
From time to time Bear, Stearns & Co. Inc. provides financial advisory
services to Xoom.com and receives customary fees for such services.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Xoom.com by Morrison & Foerster LLP, San Francisco, California. Certain legal
matters in connection with the offering will be passed upon for the
Underwriters by Brobeck, Phleger & Harrison LLP, San Francisco, California. As
of the date of this prospectus, partners and employees of Morrison & Foerster
LLP own an aggregate of 1,250 shares of our common stock.
74
<PAGE>
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as of December 31, 1997 and 1998 and the period from April
16, 1996 (inception) to December 31, 1996 and the years ended December 31, 1997
and 1998, as set forth in their report, included in this prospectus and
registration statement. Our consolidated financial statements are included in
this prospectus and registration statement in reliance on their report, given
on their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with Securities and Exchange Commission in Washington, D.C. a
Registration Statement on Form S-1 under the Securities Act with respect to the
common stock offered in this prospectus. This prospectus, filed as part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and its exhibits and schedules, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information about us and the common stock, we refer you
to the Registration Statement and to its exhibits and schedules. Statements in
this prospectus about the contents of any contract, agreement or other document
are not necessarily complete and, in each instance, we refer you to the copy of
such contract, agreement or document filed as an exhibit to the Registration
Statement, and each such statement being qualified in all respects by reference
to the document to which it refers. Anyone may inspect the Registration
Statement and its exhibits and schedules without charge at the public reference
facilities the Commission maintains at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at 7 World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois, 60661. You may obtain copies of all or any part of
these materials from the Commission upon the payment of certain fees prescribed
by the Commission. You may also inspect these reports and other information
without charge at a Web site maintained by the Commission. The address of this
site is http://www.sec.gov.
We are subject to the informational requirements of the Exchange Act and, in
accordance therewith, file reports, proxy statements and other information with
the Commission. You can inspect and copy these reports, proxy statements and
other information at the public reference facilities maintained by the
Commission and at the Commission's regional offices at the addresses noted
above. You can also obtain copies of this material from the Public Reference
Section of the Commission as described above, or inspect them without charge at
the Commission's Web site. Our common stock is quoted on the Nasdaq National
Market. You may inspect reports, proxy and information statements and other
information concerning us at the National Association of Securities Dealers,
Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
75
<PAGE>
XOOM.com, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of XOOM.com, Inc.
We have audited the accompanying consolidated balance sheets of XOOM.com,
Inc. as of December 31, 1997 and 1998, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for the period
from April 16, 1996 (inception) through December 31, 1996 and for the years
ended December 31, 1997 and 1998. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of XOOM.com, Inc. at December 31, 1997 and 1998, and the consolidated results
of its operations and its cash flows for the period from April 16, 1996
(inception) through December 31, 1996 and for the years ended December 31, 1997
and 1998 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
January 25, 1999
F-2
<PAGE>
XOOM.com, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
----------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 5,587 $ 54,575,200
Short-term investments.................................. -- 2,000,000
Accounts receivable, net of allowance for doubtful
accounts of $48,702 in 1997 and $194,919 in 1998....... 173,223 1,368,062
Stock subscription receivable........................... 75,000 --
Inventories............................................. -- 321,541
Other current assets.................................... 906 308,452
----------- ------------
Total current assets.................................. 254,716 58,573,255
Fixed assets, net........................................ 413,685 2,070,742
Goodwill, net............................................ -- 3,749,945
Purchased technology, net................................ -- 1,766,456
Prepaid royalties and licenses........................... 53,556 216,131
Other assets............................................. 59,713 496,974
----------- ------------
Total assets........................................ $ 781,670 $ 66,873,503
=========== ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable........................................ $ 461,931 $ 1,229,103
Accrued compensation and related expenses............... 38,391 496,213
Other accrued liabilities............................... 4,700 1,531,067
Deferred revenue........................................ -- 443,154
Note payable to stockholder............................. 150,000 --
Notes payable........................................... -- 1,276,439
Capital lease obligations............................... -- 37,441
Contingency accrual..................................... 1,000,000 1,000,000
----------- ------------
Total current liabilities............................. 1,655,022 6,013,417
Notes payable, less current portion...................... -- 410,528
Capital lease obligations, less current portion.......... -- 117,148
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.0001 par value:
Authorized shares--5,000,000
Issued and outstanding shares--none in 1997 and 1998.. -- --
Common stock, $0.0001 par value:
Authorized shares--40,000,000
Issued and outstanding shares--5,541,367 and
13,699,555 in 1997 and 1998, respectively............ 3,001,424 75,605,835
Deferred compensation.................................... (302,924) (904,031)
Accumulated deficit...................................... (3,571,852) (14,369,394)
----------- ------------
Total stockholders' equity (deficit).................. (873,352) 60,332,410
----------- ------------
Total liabilities and stockholders' equity
(deficit).......................................... $ 781,670 $ 66,873,503
=========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
XOOM.com, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from Year ended December 31,
April 16, 1996 (inception) -------------------------
Through December 31, 1996 1997 1998
-------------------------- ----------- ------------
<S> <C> <C> <C>
Net revenue:
E-commerce............ $ -- $ 327,080 $ 5,582,397
Advertising........... -- 60,251 2,143,532
License fees and
other................ -- 453,556 591,969
--------- ----------- ------------
Total net revenue... -- 840,887 8,317,898
Cost of net revenue:
Cost of e-commerce.... -- 170,957 3,541,272
Cost of license fees
and other............ -- 148,375 42,463
--------- ----------- ------------
Total cost of net
revenue............ -- 319,332 3,583,735
--------- ----------- ------------
Gross profit............ -- 521,555 4,734,163
Operating expenses:
Operating and
development.......... 265,769 1,150,299 3,840,559
Sales and marketing... 23,719 291,675 2,834,611
General and
administrative....... 150,487 720,534 3,365,964
Purchased in-process
research and
development.......... -- -- 790,000
Amortization of
deferred
compensation......... -- 247,924 1,415,857
Amortization of
intangible assets.... -- -- 1,842,869
Non-recurring
charges.............. -- 1,243,000 --
--------- ----------- ------------
Total operating
expenses........... 439,975 3,653,432 $ 14,089,860
--------- ----------- ------------
Loss from operations.... (439,975) (3,131,877) (9,355,697)
Other income (expense):
Interest income....... -- -- 187,587
Interest expense...... -- -- (135,268)
Interest expense
related to warrant... -- -- (1,494,164)
--------- ----------- ------------
Net loss................ $(439,975) $(3,131,877) $(10,797,542)
========= =========== ============
Net loss per share--
basic and diluted...... $ (0.89) $ (0.64) $ (1.37)
========= =========== ============
Number of shares used in
per share calculation--
basic and diluted...... 496,733 4,874,319 7,879,497
========= =========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
XOOM.com, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Common Stock Stockholders'
---------------------- Deferred Accumulated Equity
Shares Amount Compensation Deficit (Deficit)
---------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Issuance of common
stock to founders at
inception............. 666,668 $ 200 $ -- $ -- $ 200
Issuance of common
stock in exchange for
cancellation of notes
payable to
stockholders.......... 2,666,667 1,000,000 -- -- 1,000,000
Net loss............... -- -- -- (439,975) (439,975)
---------- ----------- ---------- ------------ -----------
Balances at December 31,
1996................... 3,333,335 1,000,200 -- (439,975) 560,225
Issuance of common
stock for cash........ 1,914,452 1,223,000 -- -- 1,223,000
Issuance of common
stock in exchange for
cancellation of notes
payable to
stockholders.......... 38,889 35,000 -- -- 35,000
Issuance of common
stock in exchange for
stock subscription
receivable............ 254,691 175,000 -- -- 175,000
Issuance of stock
options to
consultants........... -- 17,376 -- -- 17,376
Deferred compensation
related to grant of
stock options......... -- 550,848 (550,848) -- --
Amortization of
deferred
compensation.......... -- -- 247,924 -- 247,924
Net loss............... -- -- -- (3,131,877) (3,131,877)
---------- ----------- ---------- ------------ -----------
Balances at December 31,
1997................... 5,541,367 3,001,424 (302,924) (3,571,852) (873,352)
Issuance of common
stock for cash, net of
issuance costs of
$139,316.............. 1,815,432 5,532,046 -- -- 5,532,046
Issuance of common
stock in exchange for
Classic Media Holdings
license rights........ 43,292 100,000 -- -- 100,000
Issuance of common
stock in connection
with acquisitions..... 1,221,992 4,218,235 -- -- 4,218,235
Issuance of common
stock in exchange for
cancellation of notes
payable to
stockholders.......... 64,937 150,000 -- -- 150,000
Issuance of common
stock in exchange for
stock subscription
receivable............ 78,224 260,480 -- -- 260,480
Issuance of common
stock to directors and
consultants in
exchange for
services.............. 19,564 205,160 -- -- 205,160
Issuance of stock
options to
consultants........... -- 237,830 -- -- 237,830
Issuance of common
stock in initial
public offering, net
of offering costs of
$7,058,634............ 4,600,000 57,341,366 -- -- 57,341,366
Issuance of common
stock upon exercise of
warrants, net of
issuance costs of
$27,863............... 314,747 1,048,166 -- -- 1,048,166
Issuance of warrant in
connection with loan
agreement............. -- 1,494,164 -- -- 1,494,164
Deferred compensation
related to grant of
stock options......... -- 2,016,964 (2,016,964) -- --
Amortization of
deferred
compensation.......... -- -- 1,415,857 -- 1,415,857
Net loss............... -- -- -- (10,797,542) (10,797,542)
---------- ----------- ---------- ------------ -----------
Balances at December 31,
1998................... 13,699,555 $75,605,835 $ (904,031) $(14,369,394) $60,332,410
========== =========== ========== ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
XOOM.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1996 YEAR ENDED DECEMBER 31,
(INCEPTION) THROUGH -------------------------
DECEMBER 31, 1996 1997 1998
------------------- ----------- ------------
<S> <C> <C> <C>
CASH USED IN OPERATING
ACTIVITIES:
Net loss....................... $(439,975) $(3,131,877) $(10,797,542)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Interest expense related to
warrant...................... -- -- 1,494,164
Purchased in-process research
and development.............. -- -- 790,000
Depreciation and
amortization................. 2,496 254,077 796,238
Amortization of intangible
assets....................... -- -- 1,842,869
Amortization of deferred
compensation................. -- 247,924 1,415,857
Write-off of prepaid
royalties.................... -- 243,000 --
Issuance of common stock in
exchange for Classic Media
Holdings license rights...... -- -- 100,000
Issuance of stock options to
consultants.................. -- 17,376 237,830
Issuance of common stock to
directors and consultants.... -- -- 205,160
Changes in operating assets
and liabilities:
Accounts receivable.......... -- (173,223) (1,167,261)
Inventories.................. -- -- (321,541)
Other current assets......... -- (906) (303,093)
Prepaid royalties and
licenses.................... (324,000) (185,815) (425,993)
Other assets................. (18,544) (41,169) (444,662)
Accounts payable............. 136,122 325,809 762,054
Accrued compensation and
related expenses............ 8,906 29,485 417,556
Other accrued liabilities.... -- 4,700 1,402,683
Deferred revenue............. -- -- 443,154
Contingency accrual.......... -- 1,000,000 --
--------- ----------- ------------
Net cash used in operating
activities..................... (634,995) (1,410,619) (3,552,527)
Cash used in investing
activities:
Purchases of fixed assets...... (64,153) (392,846) (1,954,221)
Purchase of short-term
investments................... -- -- (2,000,000)
Business combinations, net of
cash acquired................. -- -- (458,644)
Cash paid in connection with
the purchase of certain assets
from Revolutionary Software,
Inc........................... -- -- (272,500)
--------- ----------- ------------
Net cash used in investing
activities.................... (64,153) (392,846) (4,685,365)
Cash provided by financing
activities:
Proceeds from issuance of
common stock in initial public
offering...................... -- -- 57,341,366
Proceeds from issuance of
common stock.................. 200 1,223,000 5,532,046
Proceeds from exercise of
warrants...................... -- -- 1,048,166
Proceeds from issuance of notes
payable to stockholders....... 700,000 185,000 --
Proceeds from repayment of
stock subscriptions
receivable.................... -- 400,000 335,480
Proceeds from notes payable.... -- -- 1,761,715
Principal payments on capital
lease obligations............. -- -- (10,089)
Repayment of notes payable..... -- -- (3,201,179)
--------- ----------- ------------
Net cash provided by financing
activities.................... 700,200 1,808,000 62,807,505
--------- ----------- ------------
Net increase in cash........... 1,052 4,535 54,569,613
Cash and cash equivalents at
beginning of period........... -- 1,052 5,587
--------- ----------- ------------
Cash and cash equivalents at
end of period................. $ 1,052 $ 5,587 $ 54,575,200
========= =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
XOOM.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER
APRIL 16, 1996 31,
(INCEPTION) THROUGH -------------------
DECEMBER 31, 1996 1997 1998
------------------- -------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Non-cash transactions:
Issuance of common stock in exchange
for stock subscriptions
receivable......................... $ -- $175,000 $ 260,480
========== ======== ==========
Issuance of notes payable to
stockholders for stock
subscriptions receivable........... $ 300,000 $ -- $ --
========== ======== ==========
Issuance of common stock in exchange
for cancellation of notes payable
to stockholder..................... $1,000,000 $ 35,000 $ 150,000
========== ======== ==========
Deferred compensation resulting from
grant of stock options............. $ -- $550,848 $2,016,964
========== ======== ==========
Fixed assets acquired under capital
lease obligations.................. $ -- $ -- $ 164,678
========== ======== ==========
Common stock issued to satisfy
Paralogic legal obligation......... $ -- $ -- $ 164,802
========== ======== ==========
Issuance of common stock in
conjunction with business and
technology acquisitions:
Paralogic Corporation............... $ -- $ -- $1,576,364
========== ======== ==========
Global Bridges Technologies, Inc.... $ -- $ -- $ 997,694
========== ======== ==========
Revolutionary Software, Inc......... $ -- $ -- $1,200,178
========== ======== ==========
ArcaMax, Inc........................ $ -- $ -- $ 444,000
========== ======== ==========
Issuance of notes payable in
conjunction with business and
technology acquisitions:
Paralogic Corporation............... $ -- $ -- $1,400,000
========== ======== ==========
Global Bridges Technologies, Inc.... $ -- $ -- $ 62,500
========== ======== ==========
Revolutionary Software, Inc......... $ -- $ -- $ 262,500
========== ======== ==========
ArcaMax, Inc........................ $ -- $ -- $ 180,000
========== ======== ==========
Pagecount, Inc...................... $ -- $ -- $1,200,000
========== ======== ==========
Cash paid for interest................ $ -- $ -- $ 57,386
========== ======== ==========
</TABLE>
See accompanying notes.
F-7
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
XOOM.com, Inc. (the "Company"), was formerly known as XOOM, Inc., Xoom
Software, Inc. and originally incorporated as Atomsoft, Inc. in the State of
Delaware on April 16, 1996.
The Company provides free community services such as Web site hosting, e-
mail, on-line chat networks and free proprietary content such as clip art and
greeting cards. The Company uses these free services and content to build a
membership base to direct market goods and services targeted to the interests
of its members. The Company derives a substantial portion of its revenue from
e-commerce, and to a lesser extent from advertising and licensing.
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
Dependence on certain vendors
The Company currently depends on one vendor to provide warehousing and order
fulfillment. Although the Company believes that there are alternative vendors
for warehousing and order fulfillment, there can be no assurance that the
Company will maintain its relationship with this vendor as the agreement is
cancelable at any time. The loss of this relationship could have a material
adverse effect on the Company's financial condition and results of operations.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported results of operations during the reporting period. Actual
results could differ from those estimates.
Cash and cash equivalents
The Company considers investments in highly liquid instruments purchased
with original maturities of 90 days or less to be cash equivalents. Cash
equivalents are recorded at cost, which approximates fair value. The Company
maintains its cash in depository accounts with three high credit quality
financial institutions.
Concentrations of credit risk and credit evaluations
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of trade accounts receivable. The Company conducts
business with companies in various industries throughout the world and with
individuals over the Internet. The Company performs ongoing credit evaluations
of its corporate customers and generally does not require collateral. Sales to
individuals are principally paid for via credit cards. Reserves are maintained
for potential credit losses, and such losses to date have been within
management's expectations. The Company provided $48,702 and $269,196 for
allowance for doubtful accounts in 1997 and 1998, respectively.
For the year ended December 31, 1997, one customer accounted for $100,000 or
12% of total net revenue. No balances were receivable from that customer at
December 31, 1997. For the year ended December 31, 1998, no single customer
accounted for greater than 10% of total net revenue.
F-8
<PAGE>
XOOM.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories
Inventories are carried at the lower of cost (determined on the average cost
basis) or market. Inventories consist of products available for sale.
Fixed assets
Fixed assets are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of three years. Fixed assets under capital leases are
amortized over the shorter of the estimated useful life or the life of the
lease. The Company identifies and records impairment losses on fixed assets
when events and circumstances indicate that such assets might be impaired. To
date, no such impairment has been recorded.
Goodwill and purchased technology, net
Goodwill and purchased technology consist of purchased technology and
goodwill related to acquisitions accounted for by the purchase method. See Note
2. Amortization of these purchased intangibles is provided on the straight-line
basis over the respective useful lives of the assets, which ranges from 2 to
3.5 years. Purchased in-process research and development without alternative
future use is expensed when acquired.
The Company identifies and records impairment losses on intangible assets
when events and circumstances indicate that such assets might be impaired. To
date, no such impairment has been recorded.
Prepaid royalties and licenses
Prepaid royalties represent prepayments of royalties due upon the sale or
sublicense of software technologies. Prepaid royalties are amortized as units
are sold or over estimated useful lives of approximately one year, whichever is
shorter. Licenses represent amounts paid to developers for fully paid licenses
to resell certain software. These licenses are amortized over the estimated
useful lives which are approximately one year. Amortization of prepaid
royalties and licenses, which is included in cost of e-commerce and cost of
license fee revenue, totaled $0, $213,259 and $263,418, for the period from
April 16, 1996 (inception) to December 31, 1996, and for the years ended
December 31, 1997 and 1998, respectively.
During the second quarter of 1997, the Company discontinued the sale of
certain products where royalty prepayments had been made and accordingly,
recorded a write-off of prepaid royalties included in non-recurring charges
totaling $243,000.
Other assets
Other assets consist of non-current deposits relating to various ongoing
agreements entered into by the Company.
Deferred revenue
Deferred revenue consists of advertising and e-commerce fees to be earned in
the future under agreements existing at the balance sheet date.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"), which requires the use of the liability method in accounting for income
taxes. Under FAS 109, deferred tax assets and liabilities are measured based on
differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse.
F-9
<PAGE>
XOOM.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-based compensation
The Company accounts for stock-based awards to employees under the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and has adopted the
disclosure-only alternative of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123").
Revenue Recognition
E-commerce
The Company recognizes revenue from e-commerce sales when the products are
shipped to customers. The Company provides for potential product returns and
estimated warranty costs in the period of the sale. Such costs have been
minimal to date.
Advertising
Advertising revenues are derived from the sale of banner advertisements and
sponsorships under short-term contracts. Through December 31, 1998, the
duration of the Company's advertising commitments has been principally from one
to two months to a year. Advertising revenues on banner contracts 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. To the
extent minimum guaranteed impressions are not met, the Company defers
recognition of the corresponding revenue until the remaining guaranteed
impression levels are achieved.
License fees
The Company licenses software under non-cancelable license agreements to
end-users and non-cancelable sub-license agreements to resellers. License fee
revenues are recognized when a non-cancelable license agreement has been
signed, the product has been delivered, there are no uncertainties surrounding
product acceptance, the fees are fixed and determinable, collection is
considered probable and all significant contractual obligations have been
satisfied.
Export sales
Export sales were 30% and 25% of net revenues for the years ended December
31, 1997 and 1998, respectively. The Company's export sales are as follows:
<TABLE>
<CAPTION>
Year ended December
31,
-------------------
1997 1998
-------- ----------
<S> <C> <C>
North America.......................................... $ 39,193 $ 288,493
Europe................................................. 157,228 1,007,974
Asia/Pacific........................................... 44,293 391,884
Rest of the World...................................... 11,412 365,009
-------- ----------
Total................................................ $252,126 $2,053,360
======== ==========
</TABLE>
Advertising expense
All advertising costs are expensed when incurred. Advertising costs, which
are included in sales and marketing expense, were $0, $50,000 and $51,000, for
the period from April 16, 1996 (inception) through December 31, 1996, and for
the years ended December 31, 1997 and 1998, respectively.
F-10
<PAGE>
XOOM.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Development Costs
Development costs are expensed as incurred and are included in operating and
development expenses.
Computation of net loss per share
The Company computes net loss per share based on Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share," ("SFAS 128"). In
accordance with SFAS 128, basic net income (loss) per share excludes dilutive
common stock equivalents and is calculated as net income (loss) divided by the
weighted average number of common shares outstanding. Diluted net income (loss)
per share is computed using the weighted average number of common shares
outstanding and dilutive common stock equivalents outstanding during the
period. Common equivalent shares from stock options and warrants (using the
treasury stock method) are excluded from the calculation of net loss per share
as their effect is anti-dilutive.
Recent accounting pronouncements
As of January 1, 1998 the Company adopted Financial Accounting Standards
Board Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. The Company
had no material components of comprehensive income. The adoption of this
standard has had no impact on the Company's consolidated financial position,
stockholders' equity, results of operations or cash flows. Accordingly, the
Company's comprehensive loss for the year ended December 31, 1998 is equal to
its reported loss.
Additionally, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement No. 131 ("SFAS 131") "Disclosure about
Segments of an Enterprise and Related Information," which establishes standards
for the way public business enterprises report information in annual statements
and interim financial reports regarding operating segments, products and
services, geographic areas, and major customers. This statement is effective
for financial statements for periods beginning after December 15, 1997. The
Company adopted SFAS 131 in 1998. The Company operates in one business segment,
Internet service to customers.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which establishes guidelines
for the accounting for the costs of all computer software developed or obtained
for internal use. The Company is required to adopt SOP 98-1 effective January
1, 1999. The adoption of SOP 98-1 is not expected to have a material impact on
the Company's consolidated financial statements.
2. Business Combinations and Technology Acquisitions
During the year ended December 31, 1998, the Company made the business and
technology acquisitions described in the paragraphs that follow, each of which
has been accounted for as a purchase. The consolidated financial statements
include the operating results of each business from the date of acquisition.
The amounts allocated to purchased research and development were determined
through established valuation techniques in the high-technology Internet
industry and were expensed upon acquisition, because technological feasibility
had not been established and no future alternative uses existed. Research and
development costs to bring the products from the acquired companies to
technological feasibility are not expected to have a material impact on the
Company's future results of operations or cash flows. Amounts allocated to
goodwill and other intangible assets are amortized on a straight-line basis
over periods of two to three and one-half years.
F-11
<PAGE>
XOOM.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Paralogic Corporation
On March 10, 1998, the Company acquired 100% of the outstanding shares of
Paralogic Corporation ("Paralogic"). Paralogic provides free communication
between members via a chat Web site network (i.e., chat rooms). The purchase
consideration was $3,037,607 consisting of 682,410 shares of common stock with
an estimated fair value of $2.31 per share, $1,400,000 of debt, and $61,243 of
acquisition costs. Contingent consideration, which the Company does consider
probable of paying, consists of an additional $860,000, included in debt above,
which will be paid if certain performance criteria are met.
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows:
<TABLE>
<S> <C>
Cash......................................................... $ 33,055
Accounts receivables and other current assets................ 8,725
Net fixed assets............................................. 50,112
Purchased in-process research and development charged to
operations in the quarter ended March 31, 1998.............. 330,000
Purchased technology......................................... 160,000
Goodwill..................................................... 2,538,929
Liabilities assumed.......................................... (83,214)
----------
Total purchase consideration............................... $3,037,607
==========
</TABLE>
Purchased In-Process Research and Development. Management estimates that
$330,000 of the purchase price represents purchased in-process technology that
had not yet reached technological feasibility and had no alternative future
use. Accordingly, this amount was expensed in the quarter ended March 31, 1998.
The value assigned to purchased in-process technology was determined by
identifying the on-going research projects for which technological feasibility
had not been achieved and assessing the date of completion of the research and
development effort. The state of completion was determined by estimating the
costs and time incurred to date relative to those costs and time to be incurred
to develop the purchased in-process technology into commercially viable
products, estimating the resulting net cash flows only from the percentage of
research and development efforts complete at the date of acquisition, and
discounting the net cash flows back to their present value. The discount rate
included a factor that took into account the uncertainty surrounding the
successful development of the purchased in-process technology projects.
Purchased Technology. To determine the value of purchased technology
($160,000), the expected future cash flows of the existing developed
technologies were discounted taking into account the characteristics and
applications of the product, the size of existing markets, growth rates of
existing and future markets as well as an evaluation of past and anticipated
product-life cycles.
Global Bridges Technologies, Inc.
On June 11, 1998, the Company acquired 100% of the outstanding shares of
Global Bridges Technologies, Inc. ("GBT"). GBT, owns the exclusive selling
rights to Sitemail, an HTML-based e-mail product, thus expanding the Company's
suite of member services. The purchase consideration was $709,077 consisting of
183,427 shares of common stock with an estimated fair value of $3.33 per share,
$12,500 cash, a note payable of $62,500 with fixed payment terms and $23,267 of
acquisition costs.
F-12
<PAGE>
XOOM.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows:
<TABLE>
<S> <C>
Other current assets............................................. $ 4,153
Goodwill......................................................... 766,621
Liabilities assumed.............................................. (61,697)
--------
Total purchase consideration..................................... $709,077
========
</TABLE>
In July 1998, the Company amended the purchase agreement with GBT to provide
for the issuance of an additional 17,304 shares of common stock with an
estimated fair value of $10.80 per share. Upon completion of the Company's
initial public offering, GBT received $200,000 of the Company's common stock at
$14 per share and additional cash consideration of $130,000. This additional
consideration was recorded as goodwill, raising the total consideration to
$1,225,962.
Revolutionary Software, Inc.
On June 11, 1998, the Company purchased certain technology of Revolutionary
Software, Inc. ("RSI"). RSI is the developer of the Sitemail technology and had
licensed Sitemail to GBT. The purchase consideration was $701,411, consisting
of 128,052 shares of common stock with an estimated fair value of $3.33 per
share, $12,500 cash and a note payable of $262,500 with fixed payment terms.
Initially, RSI may earn up to an additional 34,608 shares of common stock if
certain performance targets are met. In each of the twenty-four months
following June 1998, the stockholders of RSI will receive 5% of net revenues
less certain costs from e-commerce and banner advertising from e-mail
subscribers of certain Internet service providers.
The purchase consideration of the acquired assets was allocated based on
fair values as follows:
<TABLE>
<S> <C>
Purchased in-process research and development charged to
operations in the quarter ended June 30, 1998................. $330,000
Purchased technology........................................... 371,411
--------
Total purchase consideration................................... $701,411
========
</TABLE>
In July 1998, the Company amended the agreement with RSI to provide for the
issuance of an additional 34,608 shares of common stock with an estimated fair
value of $10.80 per share. Upon completion of the Company's initial public
offering, RSI received $400,000 of the Company's common stock at $14 per share
and additional cash consideration of $260,000. This additional consideration
was recorded as purchased technology, raising the total consideration to
$1,735,179.
Purchased In-Process Research and Development. Management estimates that
$330,000 of the purchase price represents purchased in-process technology that
had not yet reached technological feasibility and had no alternative future
use. Accordingly, this amount was expensed in the quarter ended June 30, 1998.
The value assigned to purchased in-process technology was determined by
identifying the on-going research projects for which technological feasibility
had not been achieved and assessing the state of completion of the research and
development effort. The state of completion was determined by estimating the
costs incurred to date relative to those costs to be incurred to develop the
purchased in-process technology into commercially viable products, estimating
the resulting net cash flows only from the percentage of research and
development efforts complete at the date of acquisition, and discounting the
net cash flows back to their present value. The discount rate included a factor
that took into account the uncertainty surrounding the successful development
of the purchased in-process technology projects.
F-13
<PAGE>
XOOM.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
To determine the value of purchased technology ($130,000), the expected
future cash flows of the existing developed technologies were discounted taking
into account the characteristics and applications of the product, the size of
existing markets, growth rates of existing and future markets as well as an
evaluation of past and anticipated product-life cycles. The purchase
consideration above the purchased in-process research and development and
purchased technology amounts were also included in purchased technology.
ArcaMax, Inc.
In June 1998, the Company purchased certain intellectual property and
licensed certain technology from ArcaMax, Inc. ("ArcaMax") for $644,000,
consisting of 133,334 shares of common stock with an estimated fair value of
$3.33 per share, $20,000 cash and a note payable of $180,000 with fixed payment
terms. This technology acquisition gave the Company the ability to offer a free
online greeting card service to members. The Company recorded this amount as
purchased technology and is amortizing it over its estimated useful life of two
years.
Pagecount, Inc.
On July 24, 1998, the Company acquired substantially all of the assets of
Pagecount, Inc. ("Pagecount"). The consideration was $1,460,000 and consisted
of $200,000 cash, a note payable of $1,200,000 with fixed payment terms, and
acquisition costs of approximately $60,000.
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows:
<TABLE>
<S> <C>
Cash......................................................... $ 31,598
Accounts receivable and other current assets................. 19,154
Net fixed assets............................................. 20,866
Purchased in-process research and development charged to
operations in the quarter ended September 30, 1998.......... 130,000
Purchased technology......................................... 140,000
Goodwill..................................................... 1,163,970
Liabilities assumed.......................................... (45,588)
----------
Total purchase consideration................................. $1,460,000
==========
</TABLE>
Purchased In-Process Research and Development. Management estimates that
$130,000 of the purchase price represents purchased in-process technology that
had not yet reached technological feasibility and had no alternative future
use. Accordingly, this amount was expensed in the quarter ended September 30,
1998. The value assigned to purchased in-process technology was determined by
identifying the on-going research projects for which technological feasibility
had not been achieved and assessing the date of completion of the research and
development effort. The state of completion was determined by estimating the
costs and time incurred to date relative to those costs and time to be incurred
to develop the purchased in-process technology into commercially viable
products, estimating the resulting net cash flows only from the percentage of
research and development efforts completed at the date of acquisition, and
discounting the net cash flows back to their present value. The discount rate
included a factor that took into account the uncertainty surrounding the
successful development of the purchased in-process technology projects.
Purchased Technology. To determine the value of purchased technology
($140,000), the expected future cash flows of the existing developed
technologies were discounted taking into account the characteristics and
applications of the product, the size of existing markets, growth rates of
existing and future markets as well as an evaluation of past and anticipated
product-life cycles.
F-14
<PAGE>
XOOM.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summary of Purchased In-Process Research and Development and Purchased
Technology. Values assigned to purchased in-process research and development
and purchased technology were generally determined using an income approach. To
determine the value of in-process research and development, the Company
considered, among other factors, the state of completion of each project, the
time and cost needed to complete each project, expected income, and associated
risks which included the inherent difficulties and uncertainties in completing
the project and thereby achieving technological feasibility and risks related
to the viability of and potential changes to future target markets. This
analysis results in amounts assigned to in-process research and development
projects that had not yet reached technological feasibility (as defined and
utilized by the Company in assessing software capitalization) and does not have
alternative future uses. To determine the value of the purchased technology,
the expected future cash flows of each existing technology product were
discounted taking into account risks related to the characteristics and
applications of each product, existing and future markets and assessments of
the life cycle stage of the product. Based on the analysis, the existing
technology that had reached technological feasibility was capitalized.
<TABLE>
<S> <C>
Purchased technology.......................................... $ 2,356,578
Goodwill...................................................... 5,002,692
-----------
Intangible assets............................................. 7,359,270
Accumulated amortization...................................... (1,842,869)
-----------
Intangible assets, net........................................ $ 5,516,401
===========
</TABLE>
The total purchased in-process research and development that had no
alternative future use, and as such was charged to operations in the year ended
December 31, 1998 is summarized below:
<TABLE>
<S> <C>
Paralogic Corporation............................................ $330,000
Revolutionary Software, Inc...................................... 330,000
Pagecount, Inc................................................... 130,000
--------
Total purchased in-process research and development.............. $790,000
========
</TABLE>
The following unaudited pro forma summary represents the consolidated
results of operations as if the acquisitions of Paralogic, GBT and Pagecount
had occurred at the beginning of the periods presented and are not intended to
be indicative of future results.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1997 1998
----------- ------------
(unaudited)
<S> <C> <C>
Pro forma net revenue......................... $ 1,371,101 $ 8,606,674
Pro forma loss from operations................ (5,835,010) (10,005,377)
Pro forma net loss............................ (5,882,729) (11,495,009)
Pro forma net loss per share--basic and
diluted...................................... (1.02) (1.41)
Number of shares used in pro forma per share
calculation--basic and diluted............... 5,740,156 8,142,364
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisitions had been in effect for the entire period
presented and are not intended to be a projection of future results. In-process
research and development charges of $0 and $460,000 were excluded from the pro
forma net loss and pro forma net loss per share figures for the years ended
December 31, 1997 and 1998, respectively.
F-15
<PAGE>
XOOM.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Related Party Transactions
During the period from April 16, 1996 (inception) through December 31, 1996,
and during the years ended December 31, 1997 and 1998, the Company issued stock
subscriptions receivable to related parties and to investors in exchange for
shares of common stock and, in some cases, notes payable. These subscriptions
receivable were due upon demand and bore no interest. As of December 31, there
were no outstanding amounts due under subscriptions receivable.
During the period from April 16, 1996 (inception) through December 31, 1996,
and during the years ended December 31, 1997 and 1998, the Company issued notes
payable to related parties in exchange for cash advances and stock
subscriptions receivable. All notes payable issued through December 31, 1998
have been converted into shares of common stock.
The Company entered into a Consulting Agreement, dated May 15, 1998, with an
outside director of the Company. The Consulting Agreement will terminate on
November 15, 1999. The Agreement provides for the director to receive monthly
compensation of $10,000, paid in the form of common stock. The director also
received options to buy 16,667 shares of the Company's common stock. The
options vest at the rate of 12.5% per quarter over two years. The director was
granted stock options to buy an additional 16,667 shares of common stock which
fully vested upon completion of the Company's initial public offering.
The Company has entered into a Content License Agreement dated February 22,
1998, with Classic Media Holdings, whereby the Company was granted certain non-
exclusive perpetual, world-wide licensing rights in connection with Classic
Media Holdings' library of public domain movies. As consideration for the
license, the Company issued 43,290 shares of the Company's common stock to the
principals of Classic Media Holdings. The fair value of the stock yielded a
$100,000 charge to operating and development expense in the year ended December
31, 1998. A director of the Company is a principal of Classic Media Holdings.
4. Cash and Cash Equivalents and Short-Term Investments
The Company has classified all short-term investments as available-for-sale.
Available-for-sale securities are carried at amounts that approximate fair
market value based on quoted market prices. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income. Interest on securities classified
as available-for-sale is also included in interest income.
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
------- ------------
<S> <C> <C>
Demand and money market instrument accounts....... $ 5,587 $ 8,730,977
Corporate bonds and notes......................... -- 36,444,223
Market auction preferred stock.................... -- 11,400,000
------- ------------
5,587 56,575,200
Less amounts included in cash and cash
equivalents...................................... (5,587) (54,575,200)
------- ------------
Short-term investments............................ -- $ 2,000,000
======= ============
</TABLE>
Unrealized gains and losses at December 31, 1998 and realized gains and
losses for the year then ended were not material. Accordingly, the Company has
not made a provision for such amounts in its consolidated balance sheet. The
cost of securities sold is based on the specific identification method. All
available-for-sale securities at December 31, 1998 have maturity dates in 1999.
F-16
<PAGE>
XOOM.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
-------- ----------
<S> <C> <C>
Computers and equipment, including assets under
capital leases of $0 and $52,758 for 1997 and 1998,
respectively......................................... $456,999 $2,527,770
Furniture and fixtures under capital leases........... -- 111,920
-------- ----------
Fixed assets.......................................... 456,999 2,639,690
Less accumulated depreciation and amortization,
including amounts related to assets under capital
leases of $0 and $18,298 for 1997 and 1998,
respectively......................................... (43,314) (568,948)
-------- ----------
$413,685 $2,070,742
======== ==========
</TABLE>
6. Notes Payable
Notes payable consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Note payable and other amounts due to the former stockholders
of Paralogic Corporation. The note is non-interest bearing
and payable in minimum monthly installments of $30,000
through September 1999. Additional payments are required for
the $860,000 of contingent payable as the amounts are earned.
As of December 31, 1998, $2,248 of the contingent
consideration had been earned and paid....................... $ 1,127,752
Note payable issued in connection with a secured financing
agreement (the "Agreement") with a leasing company. The
Agreement provides for borrowings of up to a cumulative
amount of $1,000,000 through July 31, 1999. All borrowings
under the Agreement are collateralized by computer and office
equipment and bear interest at the rate of 14.58% annually.
Payments are made monthly over 42 months from the date of
each borrowing in the amount of 2.87% of the amount borrowed,
plus a final payment equal to 10% of the amount borrowed..... 511,715
Note payable to the former stockholder of Global Bridges
Technologies, Inc. bearing interest of 5% annually. The note
is due in monthly installments of $2,500 through July 2000... 47,500
-----------
1,686,967
Less amounts due within one year from December 31, 1998....... (1,276,439)
-----------
Long-term notes payable....................................... $ 410,528
===========
</TABLE>
Scheduled maturities of notes payable and other amounts due are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1999............................................................ $1,276,439
2000............................................................ 154,694
2001............................................................ 158,585
2002............................................................ 97,249
----------
Total......................................................... $1,686,967
==========
</TABLE>
On November 3, 1998, the Company entered into a loan agreement with a
financing company which provided for borrowings up to $2,750,000. The loan bore
interest of 12% annually. All amounts borrowed under this loan agreement were
secured by certain fixed assets. Pursuant to the terms of the loan agreement,
the
F-17
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. NOTES PAYABLE (CONTINUED)
Company issued the lender a warrant to purchase 183,333 shares of the Company's
common stock at an exercise price equal to the initial public offering price
per share. The Company determined that the fair value of the warrant to be
$1,494,164 at the date of the initial public offering, and in connection with
this issuance recorded the fair value as interest expense. The effective
interest rate on this secured loan agreement for the year ended December 31,
1998 was approximately 1,450%. As of December 31, 1998, all outstanding
principal and interest amounts had been fully paid and the loan agreement had
been canceled.
7. INCOME TAXES
There has been no provision for U.S. federal or state income taxes for any
period as the Company has incurred operating losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets for federal and state income taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 537,000 $ 1,944,000
Purchased in-process technology.................. -- 311,000
Capitalized start up costs....................... 112,000 85,000
Prepaid royalties and licenses................... 257,000 496,000
Accrued liabilities.............................. 398,000 887,000
Other............................................ 17,000 50,000
----------- -----------
Total deferred tax assets.......................... 1,321,000 3,773,000
Valuation allowance................................ (1,321,000) (3,773,000)
----------- -----------
Net deferred tax assets............................ $ -- $ --
=========== ===========
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance as it is
more likely than not that the deferred tax assets will not be realized.
During the period from April 16, 1996 (inception) through December 31, 1996,
and during the years ended December 31, 1997 and 1998, the valuation allowance
for the deferred tax assets increased by $175,000, $1,146,000 and $2,452,000,
respectively.
As of December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $4,878,000. There can be no
assurance that the Company will realize the benefit of the net operating loss
carryforwards. The federal net operating loss carryforwards will expire at
various dates beginning in the fiscal year 2011 through 2018 if not utilized.
Due to the "change of ownership" provisions of the Internal Revenue Code,
the availability of the Company's net operating loss and credit carryforwards
will be subject to an annual limitation against taxable income in future
periods if a change in ownership of more than 50% of the value of the Company's
stock should occur over a three year period, which could substantially limit
the eventual utilization of these carryforwards.
F-18
<PAGE>
XOOM.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Commitments
The Company leases its facilities, furniture and fixtures and certain
computers and equipment under noncancelable leases for varying periods through
2007. The cost of assets acquired under capital leases during the year ended
December 31, 1998 was $164,678. Amortization expense related to these assets of
$18,298 is included in accumulated depreciation and amortization at December
31, 1998.
The following are the minimum lease obligations under these leases at
December 31, 1998:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
1999...................................... $ 63,264 $ 379,441
2000...................................... 63,264 385,253
2001...................................... 63,264 382,620
2002...................................... 17,027 387,190
2003...................................... -- 410,762
Thereafter................................ -- 1,637,372
-------- ----------
Minimum lease payments.................... 206,819 $3,582,638
==========
Less amount representing interest......... (52,230)
--------
Present value of minimum lease payments... 154,589
Less current portion...................... (37,441)
--------
Long-term portion......................... $117,148
========
</TABLE>
Rent expense under operating lease arrangements for the period from April
16, 1996 (inception) through December 31, 1996, and for the years ended
December 31, 1997 and 1998, totaled $5,400, $43,125 and $385,904, respectively.
9. Contingency Accrual and Other Matter
In January 1998, the Company became aware that Imageline, Inc. ("Imageline")
claimed to own the copyright in certain images that a third party, Sprint
Software Pty Ltd ("Sprint") had licensed to the Company. Some clip art images
that Imageline alleged infringed Imageline's copyright were included by the
Company in versions of the Company's Web Clip Empire product and licensed by
the Company to third parties, including other software clip publishers. The
Company's contracts with such publishers require the Company to indemnify the
publisher if copyrighted material licensed from the Company infringes a
copyright. Imageline claims that the Company's infringement of Imageline's
copyrights is ongoing. The Company and Imageline had engaged in discussions,
but were unable to reach any agreement regarding a resolution of this matter.
On August 27, 1998, the Company filed a lawsuit in the United States
District Court for the Eastern District of Virginia against Imageline, certain
parties affiliated with Imageline, and Sprint regarding the Company's and its
licensees' alleged infringement on Imageline's copyright in certain clip art
that the Company licensed from Sprint. The lawsuit seeks, among other relief,
disclosure of information from Imageline concerning the alleged copyright
infringement, a declaratory judgment concerning the validity and enforceability
of Imageline's copyrights and copyright registrations, a declaratory judgment
regarding damages, if any, owed by the Company to Imageline, and
indemnification from Sprint for damages, if any, owed by the Company to
Imageline. There is no contractual limitation on Sprint's indemnification.
While the Company is seeking indemnification from Sprint for damages, if any,
there can be no assurance that Sprint will be able to fulfill the indemnity
obligations under its license agreements with the Company. In addition, the
Company may be subject to claims by third parties seeking indemnification from
the Company in connection with the alleged infringement of the Imageline
copyrights.
F-19
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. CONTINGENCY ACCRUAL AND OTHER MATTER (CONTINUED)
On September 17, 1998, Imageline filed a counterclaim, which Imageline
amended in January 1999, seeking up to $60 million in damages. In March 1999,
the parties completed the discovery process and filed separate motions for
summary judgment. The lawsuit is scheduled for trial on April 23, 1999.
Based on the discussions with Imageline, the Company believes the range of
liability related to this matter is from $0 up to $10,000,000; however, the
Company believes it is unlikely that the liability would exceed $1,000,000.
Accordingly, the Company reserved $1,000,000 for this potential liability, the
expense of which is included in non-recurring charges for the year ended
December 31, 1997. The Company believes that the $1,000,000 accrual represents
a reasonable estimate of the loss that could be incurred in the Imageline
dispute. Based on information available to date management does not believe
that the outcome of this matter will have a material effect on the Company's
financial position, results of operations and cash flows over and above the
$1,000,000 accrued in the 1998 financial statements. If not successful in
defending this claim, the resulting outcome could have a material adverse
impact on the Company's business, results of operations, cash flows and
financial condition.
Zoom Telephonics, Inc. filed a lawsuit against the Company in September 1998
alleging trademark infringement and related statutory violations. The Company
was not served with Zoom Telephonics' complaint until January 1999. Zoom
Telephonics has demanded that the Company stop using the XOOM trademark and has
asked for an unspecified amount of money damages. The Company responded to the
complaint in February 1999. Although the Company believes that Zoom's claims
are without merit, such litigation could have a material adverse effect on the
Company's business, results of operations and financial condition, particularly
if such litigation forces the Company to make substantial changes to its name
and trademark usage. However, the Company does not believe that the ultimate
outcome of this matter will have a material adverse effect on its results of
operations, financial position or cash flows.
10. STOCKHOLDERS' EQUITY
In October 1998, the Company's Board of Directors authorized an increase in
the number of authorized shares of common stock and preferred stock from
20,000,000 to 40,000,000 and 1,000,000 to 5,000,000, respectively, each with a
par value of $.0001 per share.
On December 9, 1998, the Company completed its Initial Public Offering and
issued 4,600,000 shares (including 600,000 shares issued in connection with the
exercise of the underwriter over-allotment option) of its common stock to the
public at a price of $14.00 per share. The Company received net proceeds of
$57.3 million.
Founders stock
Pursuant to a Common Stock Purchase Agreement dated August 26, 1996 and
following the incorporation of the Company, two of the Company's founders each
purchased 333,334 shares (666,668 shares in total) of the Company's common
stock for an aggregate of $200 in cash. Pursuant to a Common Stock Purchase
Agreement dated December 31, 1996, the founders purchased an additional
2,333,334 and 1,000,000 shares, respectively, of the Company's common stock in
exchange for the cancellation of promissory notes that the Company owed to the
stockholders/founders in the amount of $700,000 and $300,000, respectively. In
the same agreement, one of the founders contributed 666,667 shares of his
common stock back to the Company without compensation pursuant to an agreement
between the founders.
F-20
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock splits
In February 1998, the Company completed a one-for-two reverse stock split of
the outstanding shares of common stock. In addition, in November 1998, the
Company completed a two-for-three reverse stock split of the outstanding shares
of common stock. All share information and per share amounts in the
accompanying consolidated financial statements has been retroactively adjusted
to reflect the effect of these stock splits.
Preferred stock
The Company is authorized to issue 5,000,000 shares of preferred stock, none
of which is issued or outstanding. The Board of Directors has the authority to
issue the preferred stock in one or more series and to fix the designations,
powers, preferences, rights, qualifications, limitations and restrictions with
respect to any series of preferred stock and to specify the number of shares of
any series of preferred stock without any further vote or action by the
stockholders.
Warrants
In connection with the issuance of common stock during the year ended
December 31, 1998, the Company issued warrants to purchase a total of 314,747
shares of common stock at an exercise price of $3.33 per share. These warrants
were exercised prior to the Company's initial public offering on December 9,
1998. In November 1998, in connection with the loan agreement mentioned in Note
6, the Company issued a warrant to the lender to purchase 183,333 shares of the
Company's common stock at an exercise price equal to the initial public
offering price per share ($14.00). On January 11, 1999, the lender exercised
the warrant in a net exercise transaction and received 116,231 shares of the
Company's common stock.
Stock option plan
On November 16, 1998, the Company's Board of Directors and stockholders
approved an increase in the number of shares authorized under its 1998 Stock
Incentive Plan (the "Plan") from 1,166,667 to 2,000,000. The Plan provides for
incentive stock options, as defined by the Internal Revenue Code, to be granted
to employees, at an exercise price not less than 100% of the fair value at the
grant date as determined by the Board of Directors. The Plan also provides for
nonqualified stock options to be issued to non-employee officers, directors and
consultants at an exercise price of not less than 85% of the fair value at the
grant date. Option vesting schedules are determined by the Board of Directors
at the time of issuance. Stock options generally vest over different periods
ranging from immediately to 25% at the end of the first year and monthly
thereafter up to a maximum of four years. Upon a change of control of the
Company, as defined in the Plan, 75% of unvested options become immediately
exercisable. Certain options' vesting can also accelerate based on the
achievement of specified performance criteria.
F-21
<PAGE>
XOOM.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the option activity follows (amounts include 1,235,224 options
granted outside of the Plan, all of which were outstanding as of December 31,
1998):
<TABLE>
<CAPTION>
Weighted-
Number of Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Balance at April 16, 1996.......................... -- $ --
Granted.......................................... 440,000 0.03
Exercised........................................ -- --
Canceled......................................... -- --
--------- -----
Balance at December 31, 1996....................... 440,000 0.03
Granted.......................................... 632,982 0.05
Exercised........................................ -- --
Canceled......................................... (95,000) 0.03
--------- -----
Balance at December 31, 1997....................... 977,982 0.05
Granted.......................................... 1,957,225 9.35
Exercised........................................ -- --
Canceled......................................... (136,832) 4.05
--------- -----
Balance at December 31, 1998....................... 2,798,375 $6.20
========= =====
</TABLE>
As of December 31, 1998, there were 436,849 options available for future
grant under the Plan.
The following table summarizes information about options outstanding and
exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
------------------------------- -----------------
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Number Average
Number of Life (in Exercise of Exercise
Exercise Price Shares years) Price Shares Price
-------------- --------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.03--$ 0.03........... 1,013,890 8.3 $ 0.03 721,547 $ 0.03
$ 0.90--$ 3.33........... 518,548 9.3 2.88 134,118 2.99
$ 6.30--$10.80........... 315,986 9.6 8.29 62,069 8.58
$12.00--$14.00........... 949,951 9.9 13.91 15,962 12.86
--------- -------
2,798,375 9.2 933,696
========= =======
</TABLE>
F-22
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred compensation
The Company has recorded deferred compensation charges of $0, $550,848 and
$2,016,964, for the period April 16, 1996 (inception) through December 31,
1996, and for the years ended December 31, 1997 and 1998, respectively, for the
difference between the exercise price and the deemed fair value of certain
stock options granted by the Company. These amounts are being amortized by
charges to operations, using the accelerated method, over the vesting periods
of the individual stock options, which range from three months to four years.
From December 1996 through June 1998 certain options were granted to various
employees which provided vesting only upon certain events, such as the
Company's successful completion of an initial public offering or individual and
Company performance goals. In June 1998 these options were modified to vest
upon the earlier of an event or two years from the date of grant. As a result,
the related compensation charge was determined in June 1998.
Options issued to consultants
The Company granted options to purchase 94,883 shares of common stock to
consultants at exercise prices ranging from $0.03 to $14.00 per share during
the period from January 1, 1997 through December 31, 1998. These options were
granted in exchange for consulting services performed. The Company valued these
options using the estimated fair value of the services performed which amounted
to $0, $20,277 and $246,231, for the period from April 16, 1996 (inception)
through December 31, 1996, and for the years ended December 31, 1997 and 1998,
respectively. These amounts are being amortized by charges to operations over
the respective consulting periods. The amounts charged to operations were $0,
$17,376 and $237,830, for the period from April 16, 1996 (inception) through
December 31, 1996, and for the years ended December 31, 1997 and 1998,
respectively.
1998 Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan was adopted by the Board of
Directors in October 1998. The Company has reserved a total of 300,000 shares
of common stock for issuance under the plan. Eligible employees may designate
up to 100% of their compensation subject to certain limitations as described in
the Plan, to be deducted each pay period for the purchase of common stock at
85% of the lesser of the fair market value of the Company's common stock on the
first day of the applicable purchasing period or the last day of the applicable
accrual period. As of December 31, 1998, no shares were issued or committed to
under this plan.
Shares reserved for future issuance
As of December 31, 1998, shares of common stock reserved for future issuance
were as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 Stock Incentive Plan and options issued outside the Plan..... 3,235,224
1998 Employee Stock Purchase Plan................................. 300,000
Warrants.......................................................... 183,333
---------
Total shares authorized for issuance............................ 3,718,557
=========
</TABLE>
Pro forma disclosure of the effect of stock-based compensation
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123
F-23
<PAGE>
XOOM.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Pro forma information regarding net income
(loss) and net income (loss) per share is required by FAS 123. This information
is required to be determined as if the Company has accounted for its employee
stock options under the fair value method of FAS 123. Under this method, the
estimated fair value of the options is amortized to expense over the options'
vesting period. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions:
<TABLE>
<CAPTION>
For the period
April 16, 1996 Year ended December 31,
(inception) through --------------------------
December 31, 1996 1997 1998
------------------- ------------ ------------
<S> <C> <C> <C>
Risk-free interest rate.. 6.5% 6.5% 4.52%
Expected life of the
option.................. 5 years 5 years 5 years
Expected volatility...... 0 0 0.7
Expected dividend yield.. 0% 0% 0%
</TABLE>
Because FAS 123 is applicable only to options granted since inception, its
adjusted effect will not be fully reflected until the year 2000.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The weighted-average fair value of options granted to employees during the
period from April 16, 1996 (inception) through December 31, 1996, and during
the years ended December 31, 1997 and 1998, were $.02, $0.36 and $8.01,
respectively.
The effect of applying the FAS 123 fair value method to the Company's stock-
based awards results in net loss and net loss per share as follows:
<TABLE>
<CAPTION>
Period from
April 16, 1996 Year ended December 31,
(inception) through -------------------------
December 31, 1996 1997 1998
------------------- ----------- ------------
<S> <C> <C> <C>
Net loss, as reported....... $(439,975) $(3,131,877) $(10,797,542)
Net loss, pro forma......... (441,946) (3,231,131) (11,367,024)
Net loss per share--basic
and diluted, as reported... (0.89) (0.64) (1.37)
Net loss per share--basic
and diluted, pro forma...... (0.91) (0.66) (1.44)
</TABLE>
F-24
<PAGE>
XOOM.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Retirement Plan
On March 26, 1998, the Company established a 401(k) Profit Sharing Plan (the
"Plan") available to all employees who meet the Plan's eligibility
requirements. Employees may elect to contribute from 1% to 25% of their
eligible earnings to the Plan subject to certain limitations. This defined
contribution plan provides that the Company may, at its discretion, make
contributions to the Plan on a periodic basis. The Company has not made
contributions to the Plan.
F-25
<PAGE>
SUPPLEMENTAL EASDAQ INFORMATION
Approval By The Belgian Banking And Finance Commission
The prospectus will be submitted for approval by the Belgian Banking and
Finance Commission ("Commissie voor bet Banken Financiewezen/Commission
Bancaire et Financiere") ("BFC") in accordance with Article 29, (S) 1, par, 1
of royal Decree n(degrees) 185 of July 9, 1935 and Article II of the Royal
Decrees of October 31, 1991 on the publication of prospectuses for public
issues of securities. The approval of the prospectus by the BFC does not imply
any judgement as to the appropriateness or the quality of this offering or the
securities being offered nor of our situation.
On March 8, 1999, we applied for admission of our common stock to trading on
EASDAQ. Admission to EASDAQ is subject to certain adequacy and liquidity
requirements determined by the EASDAQ Market Authority. Companies whose
securities are traded on EASDAQ are required to publish relevant financial and
other information regularly and to keep the public informed of all events
likely to affect the market price of their securities. Price sensitive
information is made available to investors in Europe through the EASDAQ Reuters
Regulatory Company Reporting System and international information vendors.
EASDAQ Settlement and Clearance
The following summarizes certain aspects of the operation of the EUROCLEAR
and DTC clearing systems. EASDAQ is a comparatively new quotation system. We
cannot guarantee that an active trading market for our common stock will
develop on EASDAQ upon completion of the offering. Persons proposing to trade
the common stock on EASDAQ should inform themselves about the costs of such
trading.
EUROCLEAR
Transactions executed on EASDAQ will be settled by delivery against payment
through the international settlement agency EUROCLEAR. EUROCLEAR holds
securities for its direct participants, which include banks, securities brokers
and dealers, other professional intermediaries and foreign depositories, and
facilitates the clearance and settlement of securities transactions between
EUROCLEAR participants through electronic book entry changes in the accounts of
EUROCLEAR participants. Book entry settlement is mandatory for all financial
instruments traded on EASDAQ. Physical certificates cannot be used to settle a
market transaction. Investors must hold a securities account with a financial
institute which directly or indirectly has access to EUROCLEAR's clearing and
settlement system. EUROCLEAR conducts a real-time gross payment system in
connection with its clearance operation, payments being made simultaneously
with the book entry transfers between securities accounts.
DTC
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provision of Section 17A of the Securities
Exchange Act of 1934. DTC was created to hold securities of its participants
and to facilitate the clearance and settlement of securities transactions among
its participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical
movement of securities certificates. DTC's participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations, some of whom (and/or their representatives) own DTC.
Access to the DTC book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. DTC agrees with
and represents to its participants that it will administer its book-entry
system in accordance with its roles and by-laws and requirements of the law.
A-1
<PAGE>
TRANSFERS BETWEEN EUROCLEAR AND DTC PARTICIPANTS
All common stock will be held through DTC. We will deliver to DTC a Global
Receipt registered in the name of Cede Co. as DTC's nominee. Common stock held
directly or indirectly by EUROCLEAR participants will be registered on the
books of DTC in the name of its nominee company acting as custodian for
EUROCLEAR.
Transfers of common stock will be effected in the following manner:
(i) transfers of common stock between EUROCLEAR participants will be
effected in accordance with procedures established for this purpose by
EUROCLEAR;
(ii) transfers of common stock between DTC participants will be effected in
accordance with procedures established for this purpose by DTC; and
(iii) transfers of common stock between EUROCLEAR participants and DTC
participants will be effected by an increase or a reduction of the
quantity of common stock held in EUROCLEAR's account.
PERSONS RESPONSIBLE FOR THE PROSPECTUS AND DECLARATION
Xoom.com, represented by Chris Kitze, Chairman of the Board, takes
responsibility for the contents of this prospectus.
To the best of our knowledge and belief, the information contained in this
prospectus is factually accurate in all material respects and is not misleading
and there is no omission of any information that would make any statement
herein materially misleading or be likely to affect the import of any
information in the prospectus.
XOOM.com, Inc.
by Chris Kitze
Chairman of the Board
CO MANAGERS AND MARKET MAKERS ON EASDAQ
Herzog Heine Geduld International
- ------------------------------- 11 Old Jewry
London EC2R 8DU
United Kingdom
TAXATION OF BELGIAN INVESTORS
The following is a summary of a certain Belgian tax consequences of the
acquisition, ownership and disposition of common stock. It is based on the tax
laws applicable in Belgium as in effect at the date of this prospectus, and is
subject to changes in Belgian law, including changes that could have
retroactive effect. The following summary does not take into account or discuss
the tax laws of any country other than Belgium, nor does it take into account
the individual circumstances of each investor.
Prospective investors in common stock are advised to consult their own tax
advisors as to the Belgian and other tax consequences of the acquisition,
ownership and disposition of common stock.
BELGIAN INDIRECT TAXES
Stamp Tax on Securities Transactions
In principle, a stamp tax is levied upon the subscription of new shares and
the purchase and sale in Belgium of shares through a professional intermediary.
The rate applicable to subscriptions of new shares is 0.35 percent but there is
a limit of 10,000 Belgian francs ("BEF") per transaction. The rate applicable
for
A-2
<PAGE>
secondary sales and purchases in Belgium of shares through a professional
intermediary is 0.17 percent but there is a limit of BEF 10,000 per
transaction.
An exemption is available to professional intermediaries (e.g., credit
institutions), insurance companies, pension funds and collective investment
vehicles who are acting for their own account. A non-resident shareholder who
is acting for his own account will also be entitled to an exemption from this
stamp tax, provided that he delivers to the issuer or the professional
intermediary, as the case may be, an affidavit confirming his non-resident
status in Belgium.
Tax on Delivery of Bearer Securities
A tax is levied upon the physical delivery of shares pursuant to their
subscription and their acquisition for consideration through a professional
intermediary. This tax is also due upon the delivery of shares pursuant to a
withdrawal of these shares from "open custody".
The tax is due, at the rate of 0.2 percent, on the sums payable by the
subscriber or the acquiror in case of subscription or acquisition on the sales
value of the shares, as estimated by the custodian in case of withdrawal from
"open custody".
However, an exemption is available for deliveries to professional
intermediaries (such as credit institutions) acting for their own account. An
exemption is also available for delivery to a non-resident of shares that are
held in "open custody".
To the extent that the shares remain in book-entry form only and will not be
physically delivered this tax does not apply to shares.
Taxation of Dividends
a) Belgian Withholding Tax
Dividends distributed on shares are, in principle, subject in Belgium to a
withholding tax at the rate of 25 percent, when paid or attributed through a
professional intermediary in Belgium The dividend withholding tax rate on
shares which are publicly issued after January 1, 1994 can be lowered to 15
percent. The benefit of the reduced withholding tax rate may be refused on the
basis of certain anti-abuse rules provided for by Belgian tax legislation.
These anti-abuse rules provide inter alia that the newly issued shares may not
have any preferential dividend rights and that any capital reduction which does
not correspond to genuine financial or economic needs will reduce the benefit
of the lower withholding tax.
No dividend withholding tax is due if the Belgian holder is a company
subject to Belgian corporate income tax provided that the appropriate
formalities have been fulfilled.
In the case where dividends are paid outside Belgium without any
intervention of a paying agent in Belgium, no dividend withholding tax is, in
principle, due. However, where the Belgian holder is a Belgian resident entity
subject to the Legal Entities Tax (e.g. a pension fund), the holder itself must
pay the dividend withholding tax at the rate of 25 percent (or 15 percent if
the reduced rate applies).
b) Income Tax for Belgian Resident Individuals
In the hands of an individual Belgian holder who is holding his shares as a
private investment, rather than as a business asset, the Belgian dividend
withholding tax is a final tax--the dividends need not be reported in the
individual's annual income tax return. If no withholding tax has been levied
(i.e. in case of payment or attribution outside Belgium), the individual must
report the dividends in his tax return as a dividend income. He will be taxed
at the separate rate of 25 percent (or at the separate rate of 15 percent if
the reduced rate applies), to be increased by a municipal surcharge (varying,
in general, from 6 percent to 9 percent of the State Tax).
A-3
<PAGE>
In the hands of an individual Belgian holder whose shares are effectively
connected with his business, the dividends are taxable at the ordinary rates
for business income (i.e., varying from 25 percent to 55 percent to be
increased by the municipal surcharge and a crisis contribution of 3 percent of
the tax due). Any Belgian withholding tax is creditable against the final
income tax due, provided that the holder has the full ownership of the shares
at the time of payment of the dividends and provided that the dividend
distribution does not entail a reduction in value of, or capital loss on, the
shares.
A-4
<PAGE>
[INSIDE BACK COVER]
[DEPICTIONS OF XOOM.COM'S BACK-OFFICE OPERATIONS AND
THE GEOGRAPHIC RANGE OF ITS CUSTOMER BASE.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Prospective investors may rely only on the information contained in this
prospectus. Neither XOOM.com, Inc. nor any underwriter has authorized anyone
to provide prospective investors with different or additional information.
This prospectus is not an offer to sell nor is it seeking an offer to buy
these securities in any jurisdiction where the offer or sale is not permitted.
The information contained in this prospectus is correct only as of the date of
this prospectus, regardless of the time of the delivery of this prospectus or
any sale of these securities.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
How We Intend to Use the Proceeds from the Offering...................... 21
Dividend Policy.......................................................... 21
Price Range of Common Stock.............................................. 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Consolidated Financial Data..................................... 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 41
Management............................................................... 54
Certain Transactions..................................................... 65
Principal and Selling Stockholders....................................... 67
Description of Capital Stock............................................. 69
Shares Eligible for Future Sale.......................................... 71
Underwriting............................................................. 72
Legal Matters............................................................ 74
Experts.................................................................. 75
Additional Information................................................... 75
Index to Consolidated Financial Statements............................... F-1
Supplemental EASDAQ Information.......................................... A-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,000,000 SHARES
[LOGO OF XOOM.com]
XOOM.COM, INC.
COMMON STOCK
--------------------------
PRELIMINARY PROSPECTUS
--------------------------
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS
WIT CAPITAL CORPORATION
as e-Manager(TM)
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE +
+CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT +
+FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THE +
+INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES +
+IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER +
+OR SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED MARCH 30, 1999
PRELIMINARY PROSPECTUS
4,000,000 SHARES
XOOM.COM, INC.
COMMON STOCK
[LOGO OF XOOM.com]
------------
This is a public offering of 4,000,000 shares of common stock of XOOM.com, Inc.
We are selling 2,000,000 shares of common stock and the selling stockholders
identified in this prospectus are selling 2,000,000 shares. We will not receive
any of the proceeds from the shares of common stock sold by the selling
stockholders. Of these 4,000,000 shares of common stock, 600,000 shares are
being offered hereby for sale outside the United States and Canada by the
international underwriters and 3,400,000 shares are being offered for sale in
the United States and Canada by the U.S. underwriters. The price to the public
and underwriting discounts and commissions per share in both offerings are
identical.
The U.S. underwriters have an option to purchase a maximum of 600,000
additional shares of common stock from us to cover over-allotments of shares.
Our common stock is traded on the Nasdaq National Market under the symbol
"XMCM." On March 12, 1999, the last reported sale price for our common stock
was $67.00 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 TO READ ABOUT CERTAIN RISKS THAT YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------
<TABLE>
<CAPTION>
PER
SHARE TOTAL
----- -----
<S> <C> <C>
Public offering price.............................................. $ $
Underwriting discount.............................................. $ $
Proceeds, before expenses, to us................................... $ $
Proceeds, before expenses, to the selling stockholders............. $ $
</TABLE>
------------
The international underwriters are severally underwriting the shares being
offered in this prospectus. The international underwriters expect to deliver
the shares against payment on March , 1999.
------------
BEAR, STEARNS INTERNATIONAL LIMITED
HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL LTD
DEUTSCHE BANK
The date of this Prospectus is , 1999
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
MATERIAL US. TAX CONSIDERATIONS APPLICABLE TO NON-U.S. HOLDERS
OF THE COMMON STOCK
The following is a general discussion of material U.S. federal income and
estate tax consequences of the ownership and disposition of common stock
applicable to non-U.S. holders who acquire and own it as a capital asset. A
"non-U.S. holder" is any person holding common stock other than: (a) a citizen
or resident of the United States, (b) a corporation or partnership created or
organized in the United States or under the laws of the United States or of any
state, unless otherwise provided in U.S. Treasury Regulations in the case of a
partnership, (c) an estate whose income is includible in gross income for U.S.
federal income tax purposes regardless of its source, or (d) a trust if (i) a
court within the United States is able to exercise primary supervision over the
administration of the trust and (ii) one or more "U.S. persons," as defined in
the Internal Revenue Code of 1986, as amended (the "Code"), have the authority
to control all substantial decisions of the trust.
For purposes of the withholding tax on dividends discussed below, a non-
resident fiduciary of an estate or trust will be considered a non-U.S. holder.
An individual may, subject to certain exceptions, be deemed to be a resident
alien, as opposed to a non-resident alien, by virtue of being present in the
United States on at least 31 days in the calendar and for an aggregate of at
least 183 days during a three-year period in the current calendar year
(counting for these purposes all of the days present in the current year, one-
third of the days present in the immediately preceding year, and one-sixth of
the days present in the second succeeding year). Resident aliens are subject to
U.S. federal tax as if they were U.S. citizens and, thus, are not non-U.S.
holders for purposes of this discussion.
This discussion does not consider specific facts and circumstances that may
be relevant to a particular non-U.S. holder's tax position, including the fact
that in the case of a non-U.S. holder that is a partnership, the U.S. tax
consequences of holding and disposing of shares of common stock may be affected
by certain determinations made at the partner level, and does not deal with all
aspects of U.S. federal income and other estate taxation that may be relevant
to non-U.S. holders (including special rules applicable to certain
U.S. expatriates). This discussion also does not consider U.S. state and local
or non-U.S. tax consequences. Further, it does not consider non-U.S. holders
subject to special tax treatment under the federal income tax laws, including
insurance companies, tax-exempt entities, financial institutions, dealers in
securities and holders of securities held as part of a "straddle," "hedge" or
"conversion transaction." In addition, persons that hold the common stock
through "hybrid entities" may be subject to special rules and may not be
entitled to the benefits of an otherwise applicable income tax treaty. The
following discussion is based on provisions of the Code, U.S. Treasury
Regulations and administrative and judicial interpretations as of the date
hereof, all of which are subject to change, possibly on a retroactive basis.
Any change could affect the continuing validity of this discussion.
THE FOLLOWING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION.
ACCORDINGLY, IF YOU ARE A NON-U.S. HOLDER WE URGE YOU TO CONSULT YOUR OWN TAX
ADVISOR WITH RESPECT TO THE U.S. FEDERAL TAX CONSEQUENCES OF HOLDING AND
DISPOSING OF THE COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE
UNDER THE LAWS OF ANY U.S. STATE OR MUNICIPALITY OR OTHER TAXING JURISDICTION.
Dividends
As described above, we do not expect to pay dividends. In the event we do
pay dividends amounts paid as dividends to a non-U.S. holder generally will be
subject to withholding of U.S. federal income tax at a 30% rate unless this
rate is reduced by an applicable income tax treaty. Dividends that are
"effectively connected" with the holder's conduct of a trade or business in the
United States, or in the case of an individual a "fixed
71
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
base," in the United States (any income so connected, including dividends,
"U.S. trade or business income") generally are subject to U.S. federal income
tax on a net income basis at applicable graduated individual or corporate rates
and generally are not subject to withholding if the non-U.S. holder files U.S.
Internal Revenue ("IRS") Form 4224 with the payor. Any U.S. trade or business
income received by a corporation that is a non-U.S. holder may also under
certain circumstances be subject to an additional "branch profits tax" at a
30% rate, or a lower rate that may be applicable under an income tax treaty.
Under current law, dividends paid to an addressee outside the United States
are presumed to be paid to a resident of the country of address (unless the
payor has knowledge to the contrary) for purposes of the withholding tax
discussed above and for purposes of determining the applicability of an income
tax treaty rate. Under final U.S. Treasury Regulations, generally effective
after December 31, 1999, a non-U.S. holder will be required to assist certain
certification and other requirements, including the filing of a completed IRS
Form W-8 with the payor, in order to claim the benefit of a reduced withholding
tax rite under an applicable income tax treaty. Non-U.S. holders are encouraged
to consult with their own tax advisors with respect to the application of these
final U.S. Treasury Regulations.
A non-U.S. holder that is eligible for a reduced rate of U.S. withholding
tax pursuant to an applicable income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for refund with the IRS.
Gains on Disposition of Common Stock
A non-U.S. holder generally will not be subject to U~.S. federal income
taxes in respect of gain recognized on a disposition of common stock unless:
(A) the gain is U~.S. trade or business income; (B) in the case of a non-U.S.
holder who is an individual such holder is present in the United States for 183
or more days in the taxable year of the sale and certain other conditions are
satisfied, or (C) we are or have been a "United States real property holding
corporation" for U.S. federal income tax purposes at any time during the five-
year period ending on the date of the disposition and the non-U.S. holder owned
more than 5% of our common stack at any time during such period. We believe
that we have not been and we are not a U.S. real property holding corporation
for U.S. federal income tax purposes and do not currently anticipate becoming a
U.S real property holding corporation. Different federal income tax
consequences would apply to certain non-U.S. holders if we were to become a
U.S. real property holding corporation. If an individual non-U.S. holder falls
under clause (A) above, he or she will be taxed on his or her gain derived from
the sale at regular graduated U.S. federal income tax rates. If an individual
non-U.S. holder falls under clause (B) above, he or she will be subject to a
flat tax 30% on the gain derived from the sale, which gain may be offset by
U.S. source capital losses recognized within the same taxable year of such
sale. If non-U.S. holder that is a foreign corporation falls under clause
(A) above, it will be taxed on its gain at regular graduated U.S. federal
income tax rates and, in addition, may be subject to the branch profits tax
described above.
Federal Estate Taxes
Common stock owned or treated as owned by a non-U.S. holder at the time of
death, or common stock of which the non-U.S. holder made certain lifetime
transfers, will be included in such holder's gross estate for U.S. federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
U.S. Information Reporting Requirements and Backup Withholding Tax
We must report annually to the IRS and to each non-U.S. holder the amount of
dividends paid to such holder (including~ the name and address of such holder)
and the tax withheld with respect to such dividends, regardless of whether
withholding was required. Copies of the information returns reporting such
dividends and
72
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
withholding may also be made available to the tax authorities in the county in
which the non-U.S. holder resides under the provisions of an applicable income
tax treaty.
Under current law, "backup withholding" (which generally is a withholding
tax imposed at the rate of 31% on certain payments to persons that fail to
furnish certain information under the U.S. information reporting requirements)
generally will not apply to dividends paid to a non-U.S. holder at an address
outside the United States unless such non-U.S. holder is engaged in a trade or
business in the United States or unless the payer has knowledge that the payee
is a U.S. person. However, under final U. S. Treasury Regulations, which
generally are effective after December 31, 1999, dividend payments may be
subject to backup withholding unless applicable certification requirements are
satisfied.
In general, backup withholding and information reporting will not apply to a
payment of the proceeds of a sale of common stock to or through a foreign
office of a broker. If, however, such broker is a U.S. person, a controlled
foreign corporation, a foreign person that derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the
United States or, effective for payments after December 31, 1999, a foreign
partnership (A) more than 50% of the income or capital interests of which are
owned by U.S. persons or (B) that is engaged in a U.S. trade or business, such
payments will not be subject to backup withholding but will be subject to
information reporting, unless (1) such broker has documentary evidence in its
records that the beneficial owner is a non-U.S. holder and certain other
conditions are met or (2) the beneficial owner otherwise establishes an
exemption.
Payment to or through a U.S. office of a broker of the proceeds of a sale of
common stock generally is subject to both backup withholding and information
reporting unless the beneficial owner certifies on an IRS Form W-8, or a
suitable substitute form, under penalties of perjury that it is a non-U.S.
holder, or otherwise a establishes an exemption.
Effective for payments after December 31, 1999, and subject to certain
transition rules, final U.S. Treasury Regulations unify certain certification
procedures and forms and the reliance standards relating to information
reporting and backup withholding.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against~ such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
73
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Prospective investors may rely only on the information contained in this pro-
spectus. Neither XOOM.com, Inc. nor any underwriter has authorized anyone to
provide prospective investors with different or additional information. This
prospectus is not an offer to sell nor is it seeking an offer to buy these se-
curities in any jurisdiction where the offer or sale is not permitted. The in-
formation contained in this prospectus is correct only as of the date of this
prospectus, regardless of the time of the delivery of this prospectus or any
sale of these securities.
--------------------
TABLE OF CONTENTS
--------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
How We Intend to Use the Proceeds from the Offering...................... 21
Dividend Policy.......................................................... 21
Price Range of Common Stock.............................................. 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Consolidated Financial Data..................................... 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 41
Management............................................................... 54
Certain Transactions..................................................... 65
Principal and Selling Stockholders....................................... 67
Description of Capital Stock............................................. 69
Certain United States Federal Tax Consequences to non-United States
Holders................................................................. 71
Shares Eligible for Future Sale.......................................... 74
Underwriting............................................................. 75
Legal Matters............................................................ 77
Experts.................................................................. 78
Additional Information................................................... 78
Index to Consolidated Financial Statements............................... F-1
Supplemental EASDAQ Information.......................................... A-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,000,000 Shares
[LOGO OF XOOM.com]
XOOM.com, Inc.
Common Stock
--------------------------
PRELIMINARY PROSPECTUS
--------------------------
Bear, Stearns International Limited
Hambrecht & Quist
BancBoston Robertson Stephens International Ltd
Deutsche Bank
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses to be paid by the Registrant in connection with the
distribution of the securities being registered, other than underwriting
discounts and commissions, are as follows:
<TABLE>
<CAPTION>
Amount*
--------
<S> <C>
Securities and Exchange Commission Filing Fee...................... $ 79,606
NASD Filing Fee.................................................... 29,135
Nasdaq National Market Listing Fee................................. 12,300
Accounting Fees and Expenses....................................... 75,000
Blue Sky Fees and Expenses......................................... 3,000
Legal Fees and Expenses............................................ 75,000
Transfer Agent and Registrar Fees and Expenses..................... 15,000
Printing Expenses.................................................. 150,000
Miscellaneous Expenses............................................. 160,959
--------
Total............................................................ $600,000
</TABLE>
- ----------
* All amounts are estimates except the SEC filing fee, the NASD filing fee and
the Nasdaq National Market listing fee.
Item 14. Indemnification of Directors and Officers
Under Section 145 of the General Corporate Law of the State of Delaware, the
Registrant has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Amended and Restated Bylaws (Exhibit 3.2 hereto) also provide for mandatory
indemnification of its directors and executive officers, and permissive
indemnification of its employees and agents, to the fullest extent permissible
under Delaware law.
The Registrant's Restated Certificate of Incorporation (Exhibit 3.1 hereto)
provides that the liability of its directors for monetary damages shall be
eliminated to the fullest extent permissible under Delaware law. Pursuant to
Delaware law, this includes elimination of liability for monetary damages for
breach of the directors' fiduciary duty of care to the Registrant and its
stockholders. These provisions do not eliminate the directors' duty of care
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for any transaction from which the director derived an improper personal
benefit, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
The Registrant has entered into agreements with its directors and certain of
its executive officers that require the Registrant to indemnify such persons
against expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred (including expenses of a derivative action) in connection
with any proceeding, whether actual or threatened, to which any such person may
be made a party by reason of the fact that such person is or was a director or
officer of the Registrant or any of its affiliated enterprises, provided such
person acted in good faith and in a manner such person reasonably believed to
be in or not opposed to the best interests of the Registrant and, with respect
to any criminal proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The indemnification agreements also set forth certain
procedures that will apply in the event of a claim for indemnification
thereunder.
II-1
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The Registrant has obtained a policy of directors' and officers' liability
insurance that insures the Company's directors and officers against the cost of
defense, settlement or payment of a judgment under certain circumstances.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act or otherwise.
Item 15. Recent Sales of Unregistered Securities
From its incorporation to December 31, 1998, the Registrant has granted or
issued and sold the following unregistered securities:
1. An aggregate of 7,543,252 shares of the Registrant's common stock in
the five rounds of private equity financing described below for an
aggregate purchase price of $8,615,592:
<TABLE>
<CAPTION>
Aggregate
Round Number of Shares Purchase Price
- ----- ---------------- --------------
<S> <C> <C>
1. 3,555,557 $1,200,200
2. 1,555,559 800,000
3. 397,783 358,000
4. 457,627 1,006,685
5. 1,576,726 5,250,707
--------- ----------
7,543,252 $8,615,592
</TABLE>
2. Stock options to employees, directors and consultants exercisable for
up to an aggregate of 1,235,224 shares of the Registrant's common stock at
a nominal exercise price.
3. Stock options to employees, directors and consultants under its 1998
Stock Incentive Plan exercisable for up to an aggregate of 1,726,817 shares
of the Registrant's common stock, at exercise prices ranging from $2.31 to
$14.00 per share, with a weighted average exercise price of $9.78 per
share.
4. An aggregate of 1,221,992 shares in connection with its acquisition
transactions with Paralogic, Global Bridges, Revolutionary Software and
ArcaMax.
5. An aggregate of 19,564 shares of the Registrant's Common Stock issues
to directors, consultants and employees in exchange for services rendered.
6. An aggregate of 314,747 shares of the Registrant's Common Stock
issued upon the exercise of warrants.
The issuances of the securities in the transactions above were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act or Regulation D promulgated
II-2
<PAGE>
thereunder as transactions by an issuer not involving a public offering, where
the purchasers represented their intention to acquire the securities for
investment only not with a view to distribution and received or had access to
adequate information about the Registrant, or Rule 701 promulgated thereunder
as transactions pursuant to a compensatory benefit plan or a written contract
relating to compensation.
Appropriate legends were affixed to the stock certificates issued in the
above transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. No Underwriters were employed in any
of the above transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The exhibits are as set forth in the Exhibit Index.
(b) Financial Statement Schedules
Not applicable.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco, State of
California on the 30th day of March, 1999.
XOOM.com, Inc.
/s/ Laurent Massa
By: _________________________________
LAURENT MASSA
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Laurent Massa Principal Executive March 30, 1999
______________________________________ Officer and Director
LAURENT MASSA
/s/ John Harbottle Principal Financial and March 30, 1999
______________________________________ Accounting Officer
JOHN HARBOTTLE
/s/ Chris Kitze* Chairman March 30, 1999
______________________________________
CHRIS KITZE
/s/ Bob Ellis* Director March 30, 1999
______________________________________
BOB ELLIS
/s/ James J. Heffernan* Director March 30, 1999
______________________________________
JAMES J. HEFFERNAN
/s/ Jeffrey Ballowe* Director March 30, 1999
______________________________________
JEFFREY BALLOWE
/s/ Philip Schlein* Director March 30, 1999
______________________________________
PHILIP SCHLEIN
/s/ Robert C. Harris, Jr.* Director March 30, 1999
______________________________________
ROBERT HARRIS
*By: /s/ Laurent Massa*
______________________________________
LAURENT MASSA
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT PAGE
------- -------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.........................
3.1 Restated Certificate of Incorporation of the
Registrant+............................................
3.2 Amended and Restated Bylaws of the Registrant+.........
4.1 Reference is made to Exhibits 3.1 and 3.2+.............
4.2 Warrant to purchase common stock made by the Registrant
in favor of Sand Hill Capital, LLC, dated as of
November 3, 1998+......................................
4.3 Specimen Stock Certificate of the Registrant+..........
5.1 Opinion of Morrison & Foerster LLP as to the legality
of the common stock....................................
10.1 Form of Indemnification Agreement between the
Registrant and each of its executive officers and
directors+.............................................
10.2 Agreement of Sublease between the Registrant and
Cornerstone Internet Solutions Company d/b/a USWeb
Cornerstone dated August, 1998+........................
10.3 Assignment of Lease by Xaos Tools, Inc. and Acceptance
of Assignment and Assumption of Lease by the
Registrant, dated July 31, 1998+.......................
10.4 Registrant's 1998 Stock Incentive Plan, including forms
of agreements thereunder+..............................
10.5 Registrant's 1998 Employee Stock Purchase Plan,
including forms of agreements thereunder+..............
10.6 Employment Agreement between the Registrant and Russell
Hyzen dated July 20, 1998+.............................
10.7 Employment Agreement between the Registrant and Vijay
Vaidyanathan, dated March 10, 1998 and Addendum No. 1
thereto, dated August 12, 1998+........................
10.8 Employment Agreement between the Registrant and Laurent
Massa, dated July 1, 1998+.............................
10.9 Employment Agreement between the Registrant and John
Harbottle dated August 4, 1998+........................
10.10 Agreement and Plan of Merger, among the Registrant,
XOOM Chat, Inc., Paralogic Corporation and shareholders
of Paralogic Corporation, dated March 10, 1998+........
10.11 Agreement and Plan of Merger, among the Registrant,
Xoom GBT Merger Corp., Global Bridges Technologies,
Inc. and Robert Kohler, dated June 11, 1998+...........
10.12 Asset Purchase Agreement, between the Registrant and
Revolutionary Software, Inc., dated June 11, 1998+.....
10.13 Purchase and License Agreement between the Registrant
and ArcaMax, Inc., dated June 18, 1998+................
10.14 Asset Purchase Agreement between the Registrant and
Pagecount, Inc., dated as of July 24, 1998+............
10.15 First Amendment, dated July 27, 1998, to Asset Purchase
Agreement, between the Registrant and Revolutionary
Software, Inc., dated June 11, 1998+...................
10.16 First Amendment, dated July 28, 1998, to Agreement and
Plan of Merger, among Registrant, Xoom GBT Merger
Corp., Global Bridges Technologies, Inc. and
Robert Kohler, dated June 11, 1998+....................
10.17 Letter Agreement between the Registrant and Robert
Ellis, dated August 4, 1997+...........................
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT PAGE
------- -------- ------------
<C> <S> <C>
10.18 Consulting Agreement between the Registrant and James
Heffernan, dated May 15, 1998+..........................
10.19 Letter Agreement between the Registrant and Jeffrey
Ballowe, dated July 28, 1998, as amended by letter
agreement dated December 2, 1998+.......................
10.20 Letter Agreement between the Registrant and Philip
Schlein, dated July 28, 1998, as amended by letter
agreement dated December 2, 1998+.......................
10.21 Letter Agreement between the Registrant and Robert C.
Harris, Jr., dated July 28, 1998, as amended by letter
agreement dated December 2, 1998+.......................
10.22 Equipment Financing Agreement between the Registrant and
Pentech Financial Services, Inc, dated October 1,
1998+...................................................
10.23 Loan Agreement between the Registrant and Sand Hill
Capital, LLC, dated as of November 3, 1998+.............
10.24 Agreement of Lease between Eleven Penn Plaza LLC and the
Registrant dated March 16, 1999.........................
21.1 Subsidiaries of the Registrant+.........................
23.1 Consent of Morrison & Foerster LLP. Reference is made to
Exhibit 5.1.............................................
23.2 Consent of Ernst & Young LLP, Independent Auditors......
24.1 Powers of Attorney**....................................
27.1 Financial Data Schedule**...............................
</TABLE>
- ----------
** Previously filed.
+ Incorporated by reference from Xoom.com, Inc.'s Registration Statement on
Form S-1 (No. 333-62395).
II-6
<PAGE>
4,000,000 Shares of Common Stock
XOOM.COM, INC.
UNDERWRITING AGREEMENT
----------------------
March ____,1999
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST LLC
BANCBOSTON ROBERTSON STEPHENS
WIT CAPITAL CORPORATION
as Representatives of the
several U.S. Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
BEAR, STEARNS INTERNATIONAL LIMITED
HAMBRECHT & QUIST LLC
BANCBOSTON ROBERTSON STEPHENS
INTERNATIONAL LTD
DEUTSCHE BANK AG LONDON
as Representatives of the
several International Underwriters
named in Schedule II hereto
c/o Bear, Stearns International Limited
Dear Sirs:
Xoom.com, Inc., a corporation organized and existing under the laws of
Delaware (the "Company"), proposes, subject to the terms and conditions stated
herein, to issue and sell to the several Underwriters (as defined below) and
Chris Kitze and Laurent Massa (the "Principal Selling Stockholders") and the
Stockholders of the Company named in Schedule III hereto (the "Other Selling
Stockholders", collectively with the Principal Selling Stockholders, the
"Selling Stockholders") propose to sell to the Underwriters (as defined below)
an aggregate of 4,000,000 shares of the Company's Common Stock par value $0.0001
per share (the "Common Stock") of which 2,000,000 shares are to be issued and
sold by the Company and 2,000,000 shares are to be sold by the Selling
Stockholders, each Selling Stockholder selling the amount set forth opposite
such Selling Stockholder's name in Schedule III hereto. The 4,000,000 shares of
Common Stock sold in the aggregate by the Company and the Selling Stockholders
are collectively called the "Firm Shares". It is understood that, subject to
the conditions hereinafter stated, 3,400,000 Firm Shares (the "U.S. Firm
Shares") will be sold to the several U.S. Underwriters named in Schedule I
hereto (the "U.S. Underwriters") in connection with the offering and sale of
such U.S. Firm Shares in the United States and Canada to United States and
Canadian Persons (as such terms are defined in the Agreement Between U.S.
Underwriters and International Underwriters of even date herewith), and 600,000
Firm Shares (the "International Shares") will be sold to the several
International Underwriters named in Schedule II hereto (the
<PAGE>
"International Underwriters") in connection with the offering and sale of such
International Shares outside the United States and Canada to persons other
than United States and Canadian Persons. Bear Stearns & Co. Inc., Hambrecht &
Quist LLC, BancBoston Robertson Stephens and Wit Capital Corporation shall act
as representatives (the "Representatives") of the several U.S. Underwriters,
and Bear, Stearns International Limited, Hambrecht & Quist LLC, BancBoston
Robertson Stephens International Ltd and Deutsche Bank AG London shall act as
representatives of the several International Underwriters. The U.S.
Underwriters and the International Underwriters are hereinafter collectively
referred to as the "Underwriters". In addition, for the sole purpose of
covering over-allotments in connection with the sale of the Firm Shares, at
the option of the U.S. Underwriters, the Company proposes to sell up to an
additional 600,000 shares (the "Additional Shares") of Common Stock to the
U.S. Underwriters. The Firm Shares and any Additional Shares purchased by the
Underwriters are referred to herein as the "Shares". The Shares are more fully
described in the Registration Statement referred to below.
1. A. Representations and Warranties of the Company and the Principal
---------------------------------------------------------------
Selling Stockholders. The Company and the Principal Selling Stockholders
- --------------------
represent and warrant to, and agree with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") in accordance with the provisions of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations of
the Commission thereunder (the "Regulations") a registration statement, and may
have filed an amendment or amendments thereto, on Form S-1 (No. 333-74441) for
the registration of the Shares under the Act. The registration statement
contains two prospectuses to be used in connection with the offering and sale of
the Shares: the U.S. prospectus, to be used in connection with the offering and
sale of Shares in the United States and Canada to United States and Canadian
Persons, and the international prospectus, to be used in connection with the
offering and sale of Shares outside the United States and Canada to persons
other than United States and Canadian Persons. The international prospectus is
identical to the U.S. prospectus except for the outside front and back cover
pages and the section captioned "Material U.S. Tax Considerations to Non-U.S.
Holders of the Common Stock" (which appears only in the international
prospectus) and certain cross-references relating thereto. All of the Shares
have been duly registered under the Act pursuant to the initial registration
statement, or if an abbreviated registration statement has been, or is proposed
to be, filed pursuant to Rule 462(b) of the Regulations (the "Rule 462(b)
Registration Statement"), all of the Shares have been or will be, on the date of
this Agreement, duly registered under the Act pursuant to the initial
registration statement and the Rule 462(b) Registration Statement. Such
registration statement, including the U.S. prospectus and the International
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 Regulations is herein called the "Registration Statement" and the U.S.
prospectus and the International prospectus, in the respective forms 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 434 or
Rule 424(b) filing is required, are hereinafter collectively referred to as the
"Prospectus". If the Company has filed or proposes to file a Rule 462
Registration Statement, then any reference herein to the term "Registration
Statement" shall include such Rule 462 Registration Statement. The term
"preliminary prospectus" as used herein means a
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<PAGE>
preliminary prospectus as described in Rule 430 of the Regulations. All
references in this Agreement to (i) the Registration Statement, the Rule
462(b) Registration Statement, a preliminary prospectus, the Prospectus or a
term sheet that complies with Rule 434, or any amendments or supplements to
any of the foregoing, shall include any copy thereof filed with the Commission
pursuant to its Electronic Data Gathering, Analysis and Retrieval System
("EDGAR") and (ii) the Prospectus shall be deemed to include the "electronic
Prospectus" provided for use in connection with the offering of the Shares as
contemplated by Section 4(g) of this Agreement.
(b) Each preliminary prospectus and the Prospectus when filed
complied in all material respects with the Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Act), was identical to the copy thereof delivered to the Underwriters
for use in connection with the offer and sale of the Shares. Each of the
Registration Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and at all
subsequent times, 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 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. 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) Ernst & Young 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 material
adverse change or any development involving a prospective material adverse
change in the business, prospects, properties, operations, condition (financial
or other) or results of operations of the Company and its subsidiaries taken as
a whole ("Material Adverse Change"), 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, neither the Company
nor any of its subsidiaries has incurred or undertaken
3
<PAGE>
any liabilities or obligations, direct or contingent, which are material to
the Company and its subsidiaries taken as a whole, except for liabilities or
obligations which are reflected in the Registration Statement and the
Prospectus.
(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 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, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the Company or
any of its subsidiaries pursuant to, the terms of (A) any agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which any of such corporations or their respective properties or assets may be
bound that is material to the Company and its subsidiaries, taken as a whole, or
(B) any governmental franchise, license, or permit heretofore issued to the
Company or any of its subsidiaries, or (ii) violate or conflict with any
provision of the certificate of incorporation or by-laws of the Company or any
of its subsidiaries 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 subsidiaries or any of their
respective 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 or any of its subsidiaries or any of their respective properties or
assets 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 nonassessable and were not issued
and are not now in violation of or subject to any preemptive rights. The Shares,
when issued, delivered and sold in accordance with this Agreement, will be duly
and validly issued and outstanding, fully paid and nonassessable, and will not
have been issued in violation of or be subject to any preemptive rights. The
Company had, at December 31, 1998, an authorized and outstanding capitalization
as set forth in the Registration Statement and the Prospectus. The Common Stock,
the Firm Shares and the Additional Shares conform to the descriptions thereof
contained in the Registration Statement and the Prospectus.
(h) Each of the Company and its subsidiaries has been duly
organized and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation. Each of the Company and its
subsidiaries 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
4
<PAGE>
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
and its subsidiaries taken as a whole (a "Material Adverse Effect"). Each of
the Company and its subsidiaries 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, which are necessary to own, lease and
operate its properties and conduct the business of the Company and its
subsidiaries, taken as a whole, 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. The Company is in compliance with
all applicable laws, orders, rules, regulations, ordinances and directives,
except where the failure to be in compliance would not have a Material Adverse
Effect.
(i) Neither the Company nor any of its subsidiaries is in
violation of any provision of its certificate of incorporation or of its by-laws
or in breach of, or in default under (nor has any event occurred that with
notice, lapse of time, or both, would constitute a breach of, or default under),
except where such breach or default would not have a Material Adverse Effect,
any provision of any agreement, instrument, franchise, license or permit to
which the Company or such subsidiary is a party or by which any of its
properties or assets may be bound or affected 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 such
subsidiary or any of its properties or assets.
(j) Except as described in the Registration Statement and the
Prospectus, there is no litigation, arbitration, proceeding, investigation or
claim to which the Company or any of its subsidiaries is a party or to which any
property or assets of the Company or any of its subsidiaries is subject or which
is pending or, to the knowledge of the Company, threatened or contemplated
against the Company or any of its subsidiaries which might result in any
Material Adverse Effect.
(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
or resale of the Shares or a violation of Regulation M under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
(l) The financial statements, including the notes thereto, and
supporting schedules included in the Registration Statement and the Prospectus
present fairly the consolidated financial position of the Company and its
subsidiaries as of the dates indicated and the results of their operations and
cash flows for the periods specified; said financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis throughout the periods involved, except as may be expressly
stated in the related notes thereto; and the supporting schedules included in
the Registration Statement present fairly the information required to be stated
therein.
(m) Except as described in the Registration Statement and the
Prospectus and except for rights that have been effectively waived in writing
(complete and accurate copies of
5
<PAGE>
which have been provided to the Underwriters prior to the date of this
Agreement), which waivers are in full force and effect, no holder of
securities of the Company has any rights to cause the Company to issue to it,
or register pursuant to the Act, any securities of the Company because of the
filing of the Registration Statement, in connection with the sale of the
Shares contemplated hereby or otherwise, nor does any holder of securities of
the Company have preemptive rights or other rights to purchase any of the
Shares.
(n) The Company is not, and upon consummation of the transactions
contemplated hereby and the application of the proceeds therefrom as described
in the Prospectus will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940.
(o) The Common Stock of the Company, including the Shares, are
registered pursuant to Section 12(g) of the Securities Exchange Act of 1934 (the
"Exchange Act") and are listed on the Nasdaq National Market and the Company has
taken no action designed to, or likely to have the effect of terminating the
registration of the Common Stock under the Exchange Act or delisting the Common
Stock from the Nasdaq National Market, nor has the Company received any
notification that the Commission or the National Association of Securities
Dealers, LLC (the "NASD") is contemplating terminating such registration or
listing.
(p) Except as described in the Registration Statement and the
Prospectus, the Company and its subsidiaries own or possess valid and
enforceable licenses or other rights to use all inventions, patents, patent
applications, trademarks, service marks, trade names, copyrights, technology,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures) proprietary
techniques (including processes and substances) and other intellectual property
rights necessary to conduct, the business now conducted or presently
contemplated to be conducted by the Company and its subsidiaries, taken as a
whole, as described in the Registration Statement and the Prospectus
("Intellectual Property"), subject to such exceptions as would not have a
Material Adverse Effect; other than as described in the Registration Statement
and the Prospectus: (i) there are no third parties who have any rights in the
Intellectual Property that could preclude the Company or its subsidiaries from
conducting its business as currently conducted or as presently contemplated to
be conducted as described in the Registration Statement and the Prospectus; (ii)
there are no pending or, to the Company's knowledge, threatened actions, suits,
proceedings, investigations or claims by others challenging the rights of the
Company, its subsidiaries or (if the Intellectual Property is licensed) the
licensor thereof in any Intellectual Property owned or licensed to the Company
or its subsidiaries; (iii) the Company, its subsidiaries and (if the
Intellectual Property is licensed) to the Company's knowledge the licensor
thereof has not infringed, or received any notice of infringement of or conflict
with, any rights of others with respect to the Intellectual Property; and (iv)
there is, to the knowledge of the Company, no dispute between it or any licensor
with respect to any Intellectual Property, subject, with respect to any of (i),
(ii), (iii) or (iv), to such exceptions, individually or in the aggregate, as
would not have a Material Adverse Effect. True and correct copies of all
material licenses and other material agreements between the Company, its
subsidiaries and any third party relating to the Intellectual Property, and all
amendments and supplements thereto, have been provided to the Underwriters.
6
<PAGE>
(q) The Company and its consolidated subsidiaries have timely
filed all material federal, state and foreign income and franchise tax returns
required to be filed as of the date hereof, and have paid all taxes shown as due
thereon, except to the extent such taxes are (A) currently payable without
penalty or interest or (B) being contested in good faith. All tax liabilities
are adequately provided for on the books of the Company and its consolidated
subsidiaries. There is no tax deficiency that has been asserted against the
Company or any of its consolidated subsidiaries that might have a Material
Adverse Effect.
(r) Each of the Company and its subsidiaries maintains insurance
with insurers of recognized financial responsibility of the types and in the
amounts (i) generally deemed adequate for its business and consistent with
insurance coverage maintained by similar companies in similar businesses and
(ii) required under any of the Company's or its subsidiaries' agreements,
licenses or other contracts, all of which insurance is in full force and effect;
the Company has no reason to believe that it will not be able to renew its
existing insurance as and when such coverage expires or to obtain similar
insurance adequate and customary for its business and sufficient to satisfy any
requirements of its contracts at a cost that would not have a Material Adverse
Effect.
(s) Except as disclosed in the Registration Statement and the
Prospectus, (i) the Company and each of its subsidiaries has good and marketable
title to all properties (real and personal) owned by the Company or such
subsidiary, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind, and (ii) all properties held
under lease or license by the Company and each of its subsidiaries are held
under valid, subsisting and enforceable leases or licenses; subject, with
respect to either (i) or (ii), to such exceptions as would not have a Material
Adverse Effect.
(t) 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 to be
described in the Registration Statement and the Prospectus that is not so
described.
(u) Except as disclosed in the Registration Statement or the
Prospectus, there are no issues related to the Company's or any of its
subsidiaries', preparedness for the Year 2000 that might reasonably be expected
to result in any Material Adverse Change. All internal computer systems and each
Constituent Component (as defined below) of those systems and all computer-
related products and each Constituent Component (as defined below) of those
products of the Company and each of its subsidiaries comply in all material
respects with Year 2000 Qualification Requirements. "Year 2000 Qualification
Requirements" means that the internal computer systems and each Constituent
Component (as defined below) of those systems and all computer-related products
and each Constituent Component (as defined below) of those products of the
Company and each of its Subsidiaries (i) have been reviewed to confirm that they
store, process (including sorting and performing mathematical operations,
calculations and computations), input and output data containing date and
information correctly regardless of whether the date contains dates and times
before, on or after January 1, 2000, (ii) have been designated to ensure date
and time entry recognition and calculations, and date data interface values that
reflect the century, (iii) accurately manage and manipulate data involving dates
and times, including single century formulas and multi-century formulas, and
will not cause an
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<PAGE>
abnormal ending scenario within the application or generate incorrect values
or invalid results involving such dates, (iv) accurately process any date
rollover, and (v) accept and respond to two-digit year date input in a manner
that resolves any ambiguities as to the century. "Constituent Component" means
all software (including operating systems, programs, packages and utilities),
firmware, hardware, networking components, and peripherals provided as part of
the configuration. The Company has inquired of material vendors as to their
preparedness for the Year 2000 and to its knowledge, except as disclosed in
the Registration Statement or the Prospectus, there are no issues relating to
such vendors' Year 2000 preparedness that might reasonably be expected to
result in any Material Adverse Change.
B. Representations and Warranties of the Selling Stockholders. Each
----------------------------------------------------------
Selling Stockholder represents, warrants and covenants to each Underwriter as
follows:
(a) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights and remedies of creditors or by general equitable principles.
(b) Each of the (i) Custody Agreement signed by such Selling
Stockholder and BancBoston, NA, as custodian (the "Custodian"), relating to the
deposit of the Shares to be sold by such Selling Stockholder (the "Custody
Agreement") and (ii) Power of Attorney appointing certain individuals named
therein as such Selling Stockholder's attorneys-in-fact (each, an "Attorney-in-
Fact") to the extent set forth therein relating to the transactions contemplated
hereby and by the Prospectus (the "Power of Attorney"), of such Selling
Stockholder has been duly authorized, executed and delivered by such Selling
Stockholder and is a valid and binding agreement of such Selling Stockholder,
enforceable in accordance with its terms, except as rights to indemnification
thereunder may be limited by applicable law and except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting the rights and remedies of creditors
or by general equitable principles. Each Selling Stockholder agrees that the
Shares to be sold by such Selling Stockholder on deposit with the Custodian is
subject to the interests of the Underwriters, that the arrangements made for
such custody are to that extent irrevocable, and that the obligations of such
Selling Stockholder hereunder shall not be terminated, except as provided in
this Agreement or in the Custody Agreement, by any act of the Selling
Stockholder, by operation of law, by death or incapacity of such Selling
Stockholder or by the occurrence of any other event. If such Selling Stockholder
should die or become incapacitated, or if any other event should occur, before
the delivery of the Shares to be sold by such Selling Stockholder hereunder, the
documents evidencing the Shares to be sold by such Selling Stockholder then on
deposit with the Custodian shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death, incapacity or
other event had not occurred, regardless of whether or not the Custodian shall
have received notice thereof.
(c) Such Selling Stockholder is the lawful owner of the Shares to
be sold by such Selling Stockholder hereunder and upon sale and delivery of, and
payment for, such Shares, as provided herein, such Selling Stockholder will
convey good and marketable title to such Shares, free and clear of all liens,
encumbrances, equities and claims whatsoever.
8
<PAGE>
(d) Such Selling Stockholder has, and on the First Closing Date
and the Additional Closing Date (as defined below) will have, good and valid
title to all of the Shares which may be sold by such Selling Stockholder
pursuant to this Agreement on such date and the legal right and power, and all
authorizations and approvals required by law and under its charter or by-laws,
partnership agreement, trust agreement or other organizational documents to
enter into this Agreement and its Custody Agreement and Power of Attorney, to
sell, transfer and deliver all of the Shares which may be sold by such Selling
Stockholder pursuant to this Agreement and to comply with its other obligations
hereunder and thereunder.
(e) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by such Selling
Stockholder of the transactions contemplated herein, except such as may have
been obtained under the Securities Act and such as may be required under the
federal and provincial securities laws of Canada or the blue sky laws or any
jurisdiction in connection with the purchase and distribution of the Shares by
the Underwriters and such other approvals as have been obtained.
(f) Neither the sale of the Securities being sold by such Selling
Stockholder nor the consummation of any other of the transactions herein
contemplated by such Selling Stockholder or the fulfillment of the terms hereof
by such Selling Stockholder will conflict with, result in a breach or violation
of, or constitute a default under any law or the terms of any indenture or other
agreement or instrument to which such Selling Stockholder is party or bound, any
judgement, order or decree applicable to such Selling Stockholder or any court
or regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over such Selling Stockholder.
(g) Such Selling Stockholder does not have any registration or
other similar rights to have any equity or debt securities registered for sale
by the Company under the Registration Statement or included in the offering
contemplated by this Agreement, except for such rights as are described in the
Prospectus under "Shares Eligible for Future Sale".
(h) Such Selling Stockholder does not have, or has waived prior to
the date hereof, any preemptive right, co-sale right or right of first refusal
or other similar right to purchase any of the Shares that are to be sold by the
Company or any of the other Selling Stockholders to the Underwriters pursuant to
this Agreement; and such Selling Stockholder does not own any warrants, options
or similar rights to acquire, and does not have any right or arrangement to
acquire, any capital stock, right, warrants, options or other securities from
the Company, other than those described in the Registration Statement and the
Prospectus.
(i) All information furnished by or on behalf of such Selling
Stockholder in writing expressly for use in the Registration Statement and
Prospectus is, and on the First Closing Date and the Additional Closing Date (as
defined below) will be, true, correct, and complete in all material respects,
and does not, and on the First Closing Date and the Additional Closing Date will
not, contain any untrue statement of a material fact or omit to state any
material fact necessary to make such information not misleading. To the extent
such information appears in the Prospectus, such Selling Stockholder confirms as
accurate the number of shares of
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Shares set forth opposite such Selling Stockholder's name in the Prospectus
under the caption "Principal and Selling Stockholders" (both prior to and
after giving effect to the sale of the Shares).
(j) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or that might be reasonably
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(k) The Selling Stockholder has not distributed and will not
distribute, prior to the later of the Additional Closing Date (as defined below)
and the completion of the Underwriters' distribution of the Shares, any offering
material in connection with the offering and sale of the Shares by such Selling
Stockholder other than a preliminary prospectus, the Prospectus or the
Registration Statement.
(l) Each Other Selling Stockholder has no reason to believe that
the representations and warranties of the Company and the Principal Selling
Stockholders contained in Section 1(A) hereof are not true and correct, is
familiar with the Registration Statement and the Prospectus and has no knowledge
of any material fact, condition or information not disclosed in the Registration
Statement or the Prospectus which has had or may result in a Material Adverse
Change on the condition, financial or otherwise, or on the earnings, business,
operation or prospects, whether or not arising from transactions in the ordinary
course of business of the Company and its subsidiaries, considered as one
entity, and is not prompted to sell the Shares to be sold by such Selling
Stockholder by any information concerning the Company which is not set forth in
the Registration Statement and the Prospectus.
Any certificate signed by or on behalf of any Selling Stockholder
and delivered to the Representatives or to counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Stockholder to each
Underwriter as to the matters covered thereby.
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, (i) the Company agrees to issue and sell to the several Underwriters an
aggregate of 2,000,000 Firm Shares and (ii) the Selling Stockholders agree to
sell to the several Underwriters an aggregate of 2,000,000 Firm Shares, each
Selling Stockholder selling the number of Firm Shares set forth opposite such
Selling Stockholder's name on Schedule III. On the basis of the representations,
------------
warranties, covenants and agreements herein contained the Underwriters agree,
severally and not jointly, to purchase from the Company and the Selling
Stockholders, at a purchase price per share of [$ ____ ], the number of Firm
Shares set forth opposite the respective names of the Underwriters in Schedules
I and II 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 Shares shall be made at the office of Morrison & Foerster
LLP, 425 Market Street, San Francisco, California 94105, or at such other place
as shall be agreed upon by you and the Company, at
10
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10:00 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 and the Selling Stockholders, (or the Custodian
named in the Custody Agreement on behalf of the Selling Stockholders), by wire
transfer of immediately available funds, against delivery to you for the
respective accounts of the Underwriters of certificates for the Firm Shares to
be purchased by them. Each Selling Stockholder hereby agrees that (i) it will
pay all stock transfer taxes, stamp duties and other similar taxes, if any,
payable upon the sale or delivery of the Shares to be sold by such Selling
Stockholder to the several Underwriters, or otherwise in connection with the
performance of such Selling Stockholders' obligations hereunder and (ii) the
Custodian is authorized to deduct for such payment any such amounts from the
proceeds to such Selling Stockholder hereunder and to hold such amounts for
the account of such Selling Stockholder with the Custodian under the Custody
Agreement. Certificates for the Firm 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 and package such certificates for delivery at least one
full business day prior to the Closing Date. If you so elect, delivery of the
Firm Shares purchased from the Company may be made by credit through full fast
transfer to the accounts at The Depository Trust Company designated by you.
(c) In addition, the Company hereby grants to the U.S.
Underwriters the option to purchase up to 600,000 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 U.S. Underwriters. This
option may be exercised at any time, in whole or in part, 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
(such date and time being herein sometimes referred to as the "Additional
Closing Date"); provided, however, that the Additional Closing Date shall not be
earlier than the Closing Date 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 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 the Additional Closing Date.
The Company will permit you to examine and package such certificates for
delivery at least one full business day prior to the Additional Closing Date. If
you so elect, delivery of the Additional Shares purchased from the Company may
be made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by you.
The number of Additional Shares to be sold to each U.S.
Underwriter shall be the number which bears the same ratio to the aggregate
number of Additional Shares being
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purchased as the number of Firm Shares set forth opposite the name of such
U.S. Underwriter in Schedule I hereto (or such number increased as set forth
in Section 9 hereof) bears to the total number of Firm Shares being purchased
from the Company by the U.S. Underwriters, 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 immediately available funds at the offices of Morrison & Foerster LLP, 425
Market Street, San Francisco, California 94105, or such other location as may be
mutually acceptable, upon delivery of the certificates for the Additional Shares
to you for the respective accounts of the U.S. Underwriters.
3. Offering. Upon your authorization of the release of the Firm
--------
Shares, the Underwriters propose to offer the Shares for sale to the public upon
the terms set forth in the Prospectus.
4. A. 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) 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 immediately (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 and (v) of the receipt of any comments from the Commission.
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 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 Underwriters or the Company, include
12
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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 conformed copies
of the Registration Statement, including exhibits and all amendments thereto,
and will maintain in the Company's files manually signed copies of such
documents for at least five years from the date of filing. The Company will
promptly deliver to each of the Underwriters such number of 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 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. The Company will promptly advise you of the
receipt by the Company of any notification with respect to suspension of the
qualification of the Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose and will use every reasonable
effort to obtain the withdrawal of any order of suspension as soon as possible.
(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) The Company shall engage and maintain, at its expense, a
registrar and transfer agent for the Common Stock.
(g) The Company shall cause to be prepared and delivered, at its
expense, within one business day from the effective date of this Agreement, to
the Underwriters an "electronic Prospectus" to be used by the Underwriters in
connection with the offering and sale of the Shares. As used herein, the term
"electronic Prospectus" means a form of Prospectus, and any amendment or
supplement thereto, that meets each of the following conditions: (i) it shall be
encoded in an electronic format, satisfactory to Bear, Stearns & Co. Inc., that
may be transmitted electronically by Bear, Stearns & Co. Inc. and the other
Underwriters to offerees and purchasers of the Shares for at least during the
period when the Prospectus is required to be delivered under the Act or the
Exchange Act ("the Prospectus Delivery Period"); (ii) it shall disclose the same
information as the paper Prospectus and Prospectus filed pursuant to EDGAR,
except to the
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extent that graphic and image material cannot be disseminated electronically,
in which case such graphic and image material shall be replaced in the
electronic Prospectus with a fair and accurate narrative description or
tabular representation of such material, as appropriate; and (iii) it shall be
in or convertible into a paper format or an electronic format, satisfactory to
Bear, Stearns & Co. Inc., that will allow investors to store and have
continuously ready access to the Prospectus at any future time, without charge
to investors (other than any fee charged for subscription to the system as a
whole and for on-line time). Such electronic Prospectus may consist of a Rule
434 preliminary prospectus, together with the applicable term sheet, provided
that it otherwise satisfies the format and conditions described in the
immediately preceding sentence. The Company hereby confirms that it has
included or will include in the Prospectus filed pursuant to EDGAR or
otherwise with the Commission and in the Registration Statement at the time it
was declared effective an undertaking that, upon receipt of a request by an
investor or his or her representative within the Prospectus Delivery Period,
the Company shall transmit or cause to be transmitted promptly, without
charge, a paper copy of the Prospectus.
(h) [During the period of [90] days following the date of the
Prospectus, the Company will not, without the prior written consent of Bear,
Stearns & Co. Inc. (which consent may be withheld at the sole discretion of
Bear, Stearns & Co. Inc.), directly or indirectly, issue, sell, offer, contract
or grant any option to sell, pledge, transfer or otherwise dispose of or
transfer, or announce the offering of, or file any registration statement under
the Act in respect of, any shares of Common Stock, options or warrants to
acquire shares of the Common Stock or securities exchangeable or exercisable for
or convertible into shares of Common Stock (other than as contemplated by this
Agreement with respect to the Shares); provided, however, that the Company may
(i) issue shares of its Common Stock or options to purchase its Common Stock, or
Common Stock upon exercise of options, pursuant to any stock option, warrant,
stock bonus or other stock plan or arrangement described in the Prospectus, or
(ii) issue shares of Common Stock in connection with acquisitions by the
Company, but only if the holders of such shares, options, warrants or shares
issued upon exercise of such options, agree in writing not to sell, offer,
contract or grant any option to sell (including without limitation any short
sale), pledge, transfer, or establish an open "put equivalent position" within
the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any
such shares or options during such [90] day period without the prior written
consent of Bear, Stearns & Co. Inc. (which consent may be withheld at the sole
discretion of the Bear, Stearns & Co. Inc.).]
(i) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports or other communications to its shareholders; and (ii) all reports,
financial statements and proxy or information statements filed by the Company
with the Commission or any national securities exchange.
(j) The Company will apply the proceeds from the sale of the
Shares as set forth under "Use of Proceeds" in the Prospectus.
(k) The Company will use its best efforts to cause the Shares to
be qualified for inclusion in the Nasdaq National Market.
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(l) The Company will file with the Commission in its periodic
reports pursuant to Section 13 or 15 of the Exchange Act such information as may
be required pursuant to Rule 463 of the Regulations.
(m) The Company, during the Prospectus Delivery Period, will file,
on a timely basis, with the Commission and the Nasdaq National Market all
reports and documents required to be filed under the Exchange Act.
Bear, Stearns & Co. Inc., on behalf of the several Underwriters,
may, in its sole discretion, waive in writing the performance by the Company of
any one or more of the foregoing covenants or extend the time for their
performance.
B. Covenants of the Selling Stockholders. Each Selling Stockholder
-------------------------------------
covenants and agrees with each Underwriter:
(a) [Other than the Shares sold pursuant to this Agreement, such
Selling Stockholder will not, during the period of 90 days from March __, 1999
(the "Lock-Up Period"), make a disposition of securities (as defined in Exhibit
A hereto) now owned or hereafter acquired directly by such person or with
respect to which such person has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, (ii) as a distribution
to partners or shareholders of such person, provided that the distributees
thereof agree in writing to be bound by the terms of this restriction, (iii)
with respect to dispositions of Common Stock acquired on the open market, or
(iv) with the prior written consent of Bear, Stearns & Co. Inc. The foregoing
restriction has been expressly agreed to preclude the holder of the securities
from engaging in any hedging or other transaction which is designed to or
reasonably expected to lead to or result in a disposition of securities during
the Lock-Up Period, even if such securities would be disposed of by someone
other than such holder. Such prohibited hedging or other transactions would
include, without limitation, any short sale (whether or not against the box) or
any purchase, sale or grant of any right (including, without limitation, any put
or call option) with respect to any securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from securities. Furthermore, such
person has also agreed and consented to the entry of stop transfer instructions
with the Company's transfer agent against the transfer of the securities held by
such person except in compliance with this restriction.]
(b) To deliver to the Representatives prior to the First Closing
Date a properly completed and executed United States Treasury Department Form
W-8 (if the Selling Stockholder is a non-United States Person) or Form W-9 (if
the Selling Stockholder is a United States Person).
(c) If, at any time prior to the date on which the distribution of
the Shares as contemplated herein and in the Prospectus has been completed, as
determined by the Representatives, such Selling Stockholder has knowledge of the
occurrence of any event as a result of which the Prospectus or the Registration
Statement, in each case as then amended or supplemented, would include an untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which they
15
<PAGE>
were made, not misleading, such Selling Stockholder will promptly notify the
Company and the Representatives.
5. Payment of Expenses. Whether or not the transactions contemplated
-------------------
in this Agreement are consummated 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 Master Agreement Among Underwriters and the Master 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, including any transfer or other taxes payable thereon, (iii) the
qualification of the Shares under state or foreign securities or Blue Sky laws
or regulations, including the costs of printing and mailing a preliminary and
final "Blue Sky Survey" and the fees of counsel for the Underwriters and such
counsel's disbursements in relation thereto, (iv) quotation of the Shares on the
Nasdaq National Market, (v) filing fees of the Commission and the National
Association of Securities Dealers, Inc.; (vi) the cost of printing certificates
representing the Shares and (vii) the cost and charges of any transfer agent or
registrar.
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company and the Principal Selling Stockholders, and the
Selling Stockholders herein contained, as of the date 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 any Additional Closing Date, if different,
for the Additional Shares), to the absence from any certificates, opinions,
written statements or letters furnished to you or to Brobeck, Phleger & Harrison
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 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
Morrison & Foerster LLP, 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:
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(i) Each of the Company and its subsidiaries has been duly
organized and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation. Each of the Company and its
subsidiaries 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 and its subsidiaries taken as a whole. Each of the Company and its
subsidiaries has all requisite corporate authority to own, lease and license its
respective properties and conduct its business as now being conducted and as
described in the Registration Statement and the Prospectus. All of the issued
and outstanding capital stock of each subsidiary of the Company has been duly
and validly issued and is fully paid and nonassessable and was not issued in
violation of preemptive rights and, is owned directly or indirectly by the
Company, free and clear of any lien, encumbrance, claim, security interest,
restriction on transfer, shareholders' agreement, voting trust or other defect
of title whatsoever.
(ii) The Company has an authorized capital stock as set forth
in the Registration Statement and the Prospectus. All of the outstanding shares
of Common Stock are duly and validly authorized and issued, are fully paid and
nonassessable and were not issued in violation of or subject to any preemptive
rights. The Shares to be delivered on the Closing Date have been duly and
validly authorized and, when delivered by the Company in accordance with this
Agreement, will be duly and validly issued, fully paid and nonassessable and
will not have been issued in violation of or subject to any preemptive rights.
The Common Stock, the Firm Shares and the Additional Shares conform to the
descriptions thereof contained in the Registration Statement and the Prospectus.
(iii) This Agreement has been duly and validly authorized,
executed and delivered by the Company.
(iv) There is no litigation or governmental or other action,
suit, proceeding or investigation before any court or before or by any public,
regulatory or governmental agency or body pending or to the best of such
counsel's knowledge, threatened against, or involving the properties or business
of, the Company or any of its subsidiaries, which is of a character required to
be disclosed in the Registration Statement and the Prospectus which has not been
properly disclosed therein.
(v) To such counsel's knowledge, all agreements,
instruments, franchises, licenses or permits required to be described in the
Registration Statement and the Prospectus or required to be filed as exhibits
to the Registration Statements have been so described and so filed.
(vi) The execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby by the
Company do not and will not (A) to such counsel's knowledge result in a material
breach of any of the terms and provisions of, or constitute a default (or an
event which with notice or lapse of time,
17
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or both, would constitute a default) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of
the Company or any of its subsidiaries pursuant to, any agreement, instrument,
franchise, license or permit known to such counsel to which the Company or any
of its subsidiaries is a party or by which any of such corporations or their
respective properties or assets may be bound or (B) violate or conflict with
any provision of the certificate of incorporation or by-laws of the Company or
any of its subsidiaries, or, to the best knowledge of such counsel, 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 subsidiaries or any of their respective 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 or any of its subsidiaries or any of their respective properties or
assets is required for the execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated hereby, except
for (1) such as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
Underwriters (as to which such counsel need express no opinion) and (2) such
as have been made or obtained under the Act.
(vii) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial statements
and schedules and other financial data derived therefrom, as to which no opinion
need be rendered) comply as to form in all material respects with the
requirements of the Act and the Regulations.
(viii) The Registration Statement and the Rule 462(b)
Registration Statement, if any, is effective under the Act, and, to the best
knowledge of such counsel, no stop order suspending the effectiveness of either
of the Registration Statement or the Rule 462(b) Registration Statement, if any,
has been issued and no proceedings therefor have been initiated or threatened by
the Commission and all filings required by Rule 424(b) of the Regulations have
been made.
In addition, such opinion shall also contain a statement that such
counsel has participated in conferences with officers and representatives of the
Company, representatives of the independent public accountants for the Company
and the Underwriters at which the contents of the Registration Statement and the
Prospectus and related matters were discussed and, no facts have come to the
attention of such counsel which would lead such counsel to believe that either
the Registration Statement at the time it became effective (including the
information deemed to be part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b) or Rule 434, if applicable), or any
amendment thereof made prior to the Closing Date as of the date of such
amendment, contained an untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus as of its date (or any
amendment thereof or supplement thereto made prior to the Closing Date as of the
date of such amendment or supplement) and as of the Closing Date contained or
contains an untrue statement of a material fact or omitted or omits to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (it being understood
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<PAGE>
that such counsel need express no belief or opinion with respect to the
financial statements and schedules and other financial data included therein).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the General Corporation Law of the
State of Delaware, the General Corporation Law of the State of California or the
federal law of the United States, 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 responsible 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 and its subsidiaries, 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) You shall have received on the Closing Date, the following
opinion of Morrison & Foerster LLP, counsel for the Selling Stockholders
substantially in the form of Exhibit B attached hereto, dated as of the Closing
---------
Date, addressed to the Underwriters and with reproduced copies or signed
counterparts thereof for each of the Underwriters.
In rendering such opinion, such counsel may rely as to questions
of law not involving the laws of the United States or the States of Delaware and
California upon opinions of local counsel and as to questions of fact upon
representations or certificates of the Selling Stockholders or officers of the
Selling Stockholders (when the Selling Stockholder is not a natural person), and
of governmental officials, in which case their opinion is to state that they are
so relying and that they have no knowledge of any material misstatement or
inaccuracy of any material misstatement or inaccuracy in any such opinion,
representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.
(d) All proceedings taken in connection with the sale of the Firm
Shares and the Additional 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 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
the Chief Executive Officer and 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 and the
Principal Selling Stockholders set forth in Section 1 hereof are accurate, (iii)
as of the Closing Date the obligations of the Company to be performed hereunder
on or prior thereto have been duly performed and (iv) subsequent to the
respective dates as of which information is given
19
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in the Registration Statement and the Prospectus, the Company and its
subsidiaries have not sustained any material loss or interference with their
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, except
in each case as described in or contemplated by the Prospectus.
(f) At the Closing Date you shall have received a written
certificate executed by Laurent Massa and John Harbottle on behalf of each
Selling Stockholder, dated as of such Closing Date, to the effect that:
(i) the representations, warranties and covenants of each
Selling Stockholder set forth in Section 1 of this Agreement are true and
correct with the same force and effect as though expressly made by such Selling
Stockholder on and as of such Closing Date; and
(ii) each Selling Stockholder has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to such Closing Date.
(g) At least three business days prior to the date hereof, the
Company and the Selling Stockholders shall have furnished for review by the
Representatives copies of the Powers of Attorney and Custody Agreements executed
by each of the Selling Stockholders and such further information, certificates
and documents as the Representatives may reasonably request.
(h) At the time this Agreement is executed and at the Closing
Date, you shall have received a letter, from Ernst & Young 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, and its subsidiaries, a reading of the
minutes of meetings and consents of the shareholders and boards of directors of
the Company and its subsidiaries and the committees of such boards subsequent to
December 31, 1998, inquiries of officers and other employees of the Company and
its subsidiaries who have responsibility for financial and accounting matters of
the Company and its subsidiaries with respect to transactions and events
subsequent to December 31, 1998 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
Registration Statement and the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act and the
applicable published rules and
20
<PAGE>
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 December 31, 1998, there were, as of the date of the most recent
available monthly consolidated financial statements of the Company and its
subsidiaries, 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 (C) that during the period from December 31, 1998
to the date of the most recent available monthly consolidated financial
statements of the Company and its subsidiaries, if any, 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 and its subsidiaries 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 and its subsidiaries 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. In addition, such letter shall
state that the pro forma financial information included in the Registration
Statement and the Prospectus complies as to form in all material respects with
the applicable accounting requirements of the Act, including Rule 11-02 of
Regulation S-X, and that the pro forma adjustments have been properly applied
to historical amounts in the compilation of such pro forma financial
information.
(i) Prior to the Closing Date the Company shall have furnished to
you such further information, certificates and documents as you may reasonably
request.
(j) [You shall have received from each person who is a director,
officer or stockholder of the Company an agreement in the form of Exhibit A
hereto, and such agreement shall be in full force and effect on the Closing
Date.]
(k) At the Closing Date, the Shares shall have been approved for
inclusion on the Nasdaq National Market.
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
21
<PAGE>
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, the
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) (i) Each of the Company and each of the Principal Selling
Stockholders, severally agree 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 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 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 and each Principal Selling Stockholders 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 behalf of any Underwriter 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.
(ii) Each of the Other Selling Stockholders severally 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 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 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
each Other Selling Stockholder will 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
22
<PAGE>
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company or such Underwriter
by such Other Selling Stockholder 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) Each Underwriter severally, and not jointly, agrees to
indemnify and hold harmless the Company, each Principal Selling Stockholder,
each Other Selling Stockholder, 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), 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 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 and each Principal Selling Stockholder acknowledges that
the statements set forth in the last paragraph of the cover page and 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) 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 satisfactory to
such indemnified party. Notwithstanding
23
<PAGE>
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.
8. Contribution. 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, each Selling Stockholder
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
proceeding or any claims asserted, but after deducting in the case of losses,
claims, damages, liabilities and expenses suffered by the Company and the
Selling Stockholders any contribution received by the Company and the Selling
Stockholders 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, each Selling Stockholder 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, each Selling Stockholder 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 offering (net of underwriting discounts and commissions but
before deducting expenses) received by the Company or each Selling Stockholder
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, each Selling Stockholder 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 any Selling Stockholder or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, each Selling
Stockholder and the
24
<PAGE>
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 to clauses (i) and
(ii) of this Section 8 The liability of each Selling Stockholder under the
indemnity and reimbursement agreements contained in the provisions of this
Section 8 and Section 17 hereof shall be limited to an amount equal to the net
proceeds of the Shares sold by such Selling Stockholder to the Underwriters.
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.
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, 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 and Schedule II hereto bear to the aggregate number of Firm Shares set forth
opposite the names of the non- defaulting Underwriters.
25
<PAGE>
(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
Additional Closing Date, as the case may be, for 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 initial public offering price 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
26
<PAGE>
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 the 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 reasonable 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 or American Stock
Exchanges or on 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, on the New York or American Stock Exchanges or on
Nasdaq by the New York or American Stock Exchanges or Nasdaq or by order of the
Commission or any other governmental authority having jurisdiction; or (C) if a
banking moratorium has been declared by a state or federal authority or if any
new restriction materially adversely affecting the distribution of the Firm
Shares or the Additional 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 or the Additional 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 by letter.
(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 telegraphed and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, N.Y. 10167, Attention: Equity Syndicate; if sent to the Company, shall
be mailed, delivered, or telegraphed and confirmed in writing to the Company,
300 Montgomery Street, Suite 300, San Francisco, California 94104, Attention:
John Harbottle.
13. Parties. This Agreement shall inure solely to the benefit of,
-------
and shall be binding upon, the Underwriters, each Selling Stockholder 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
27
<PAGE>
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.
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.
15. Counterparts. This Agreement may be signed in two or more
------------
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
16. Headings. The headings of the sections of this Agreement have
--------
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
17. Reimbursement of Underwriters' Expenses. If this Agreement is
---------------------------------------
terminated by the Representatives pursuant to Section 6, Section 9, Section
11, or Section 18, or if the sale to the Underwriters of the Shares on the
Closing Date is not consummated because of any refusal, inability or failure
on the part of the Company or the Selling Stockholders to perform any
agreement herein or to comply with any provision hereof, the Company agrees to
reimburse the Representatives and the other Underwriters (or such Underwriters
as have terminated this Agreement with respect to themselves), severally, upon
demand for all out-of-pocket expenses that shall have been reasonably incurred
by the Representatives and the Underwriters in connection with the proposed
purchase and the offering and sale of the Shares, including but not limited to
fees and disbursements of counsel, printing expenses, travel expenses,
postage, facsimile and telephone charges provided however, that (i) to the
extent such payment is ultimately held to be improper, the persons receiving
such payments shall promptly refund them and (ii) such persons shall provide
to the Company, upon request, reasonable assurances of their ability to effect
any refund, when and if due.
18. Failure of One or More of the Selling Stockholders to Sell and
--------------------------------------------------------------
Deliver Common Shares. If one or more of the Selling Stockholders shall fail
- ---------------------
to sell and deliver to the Underwriters the Shares to be sold and delivered by
such Selling Stockholders at the Closing Date pursuant to this Agreement, the
Company hereby agrees to sell and deliver to the Underwriters that number of
Shares equal to the number of Shares not sold and delivered by such Selling
Stockholders. Furthermore, if one or more of the Selling Stockholders shall fail
to sell and deliver to the Underwriters in the aggregate more than two hundred
thousand (200,000) of the Shares then the Underwriters may at their option, by
written notice from the Representatives to the Company and the Selling
Stockholders, terminate this Agreement without any liability on the part of any
Underwriter or, except as provided in Sections 5, 7 and 17 hereof, the Company
or the Selling Stockholders. If one or more of the Selling Stockholders shall
fail to sell and deliver to the Underwriters the Shares to be sold and delivered
by such Selling Stockholders pursuant to this Agreement at the Closing Date,
then the Underwriters shall have the right, by written notice from the
Representatives to the Company and the Selling Stockholders, to postpone the
Closing Date, but in no event for longer than seven days in order that the
required changes, if any, to the Registration Statement and the Prospectus or
any other documents or arrangements may be effected.
28
<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,
XOOM.COM, INC.
By:
--------------------------------------------
Laurent Massa
Chief Executive Officer and President
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST LLC
BANCBOSTON ROBERTSON STEPHENS
WIT CAPITAL CORPORATION
By Bear, Stearns & Co. Inc.
By:
--------------------------------
Authorized Signatory
On behalf of themselves and the other
U.S. Underwriters named in Schedule I hereto.
BEAR STEARNS INTERNATIONAL LIMITED
HAMBRECHT & QUIST LLC
BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL LTD
DEUTSCHE BANK AG LONDON
By Bear, Stearns International Limited
By:
--------------------------------
Authorized Signatory
On behalf of themselves and the other
U.S. Underwriters named in Schedule II hereto
SIGNATURE PAGE TO UNDERWRITING AGREEMENT
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
U.S. UNDERWRITERS
Name of Firm Number of Shares
- ------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc........................
Hambrecht & Quist LLC..........................
BancBoston Robertson Stephens..................
Wit Capital Corporation........................
Total.................................. 3,400,000
</TABLE>
<PAGE>
SCHEDULE II
INTERNATIONAL UNDERWRITERS
<TABLE>
<CAPTION>
Name of Firm Number of Shares
- ------------ ----------------
<S> <C>
Bear, Stearns International Limited.......................
Hambrecht & Quist LLC.....................................
BancBoston Robertson Stephens International Ltd...........
Deutsche Bank AG London...................................
Total.................................................. 600,000
</TABLE>
<PAGE>
SCHEDULE III
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Name Number of Shares
- ---- ----------------
<S> <C>
Total.................................................. 2,000,000
</TABLE>
<PAGE>
EXHIBIT A
March ___, 1999
Bear, Stearns & Co., Inc.
Hambrecht & Quist LLC
BancBoston Robertson Stephens
Wit Capital Corporation
As Representatives of the Several Underwriters
c/o Bear, Stearns & Co., Inc.
245 Park Avenue
New York, NY 10167
Re: XOOM.com, Inc. (the "Company")
------------------------------
Ladies and Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company (Common Stock) or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the Offering) for which you will act as the
representatives (the Representatives) of the underwriters. The undersigned
recognizes that the Offering will be of benefit to the undersigned and will
benefit the Company by, among other things, raising additional capital for its
operations. The undersigned acknowledges that you and the other underwriters
are relying on the representations and agreements of the undersigned contained
in this letter in carrying out the Offering and in entering into underwriting
arrangements with the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Bear, Stearns & Co.,
Inc. (which consent may be withheld in its sole discretion), directly or
indirectly, sell, offer, contract or grant any option to sell (including without
limitation any short sale) pledge, transfer, establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act
of 1934, as amended, or otherwise dispose of any shares of Common Stock, options
or warrants to acquire shares of Common Stock, or securities exchangeable or
exercisable for or convertible into shares of Common Stock currently or
hereafter owned either of record or beneficially (as defined in Rule 13d-3 under
Securities Exchange Act of 1934, as amended) by the undersigned, other than
shares purchased by the undersigned in the Offering, or publicly announce the
undersigned's intention to do any of the foregoing, for a period commencing on
December 9, 1998 and continuing to a date [180] days thereafter. The
undersigned also agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent and registrar against the transfer of shares
of
A-1
<PAGE>
Common Stock or securities convertible into or exchangeable or exercisable for
Common Stock held by the undersigned except in compliance with the foregoing
restrictions.
This agreement is irrevocable and will be binding on the undersigned and
the respective successors, heirs, personal representatives, and assigns of the
undersigned.
Dated:
------------------------------------
Signature
Printed Name of Holder
A-2
<PAGE>
Exhibit B
Matters to be Covered in the Opinion of Selling Stockholder Counsel
(i) The Agreement has been duly authorized, executed and
delivered by or on behalf of, and is a valid and binding agreement of, such
Selling Stockholder, enforceable in accordance with its terms, except as
rights to indemnification thereunder may be limited by applicable law and
except as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(ii) The execution and delivery by such Selling Stockholder of,
and the performance by such Selling Stockholder of its obligations under,
the Underwriting Agreement and its Custody Agreement and its Power of
Attorney will not contravene or conflict with result in a breach of, or
constitute a default under, the charter or by-laws, partnership agreement,
trust agreement or other organization documents, as the case may be, of
such Selling Stockholder, or, to the best of such counsel's knowledge,
violate, result in a breach of or constitute a default under the terms of
any other agreement or instrument to which such Selling Stockholder is a
party or by which it is bound, or any judgement, order or decree applicable
to such Selling Stockholder of any court, regulatory body, administrative
agency, governmental body or arbitrator having jurisdiction over such
Selling Stockholder.
(iii) Such Selling Stockholder has good and valid title to all
of the Shares which may be sold by such Selling Stockholder under the
Agreement and has the legal right and power, and all authorization and
approvals required [under its charter and by-laws,] [partnership
agreement,] [trust agreement] [or other organizational documents, as the
case may be,] to enter into the Agreement and its Custody Agreement and its
Power of Attorney, to sell, transfer and deliver all of the Shares which
may sold by such Selling Stockholder under the Agreement and to comply with
its other obligations under the Agreement, its Custody Agreement and its
Power of Attorney.
(iv) Each of the Custody Agreement and Power of Attorney of
such Selling Stockholder has been duly authorized, executed and delivered
by such Selling Stockholder and is a valid and binding agreement of such
Selling Stockholder, enforceable in accordance with its terms, except as
rights to indemnification thereunder may be limited by applicable law and
except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to
or affecting creditors' rights generally or by general equitable
principles.
(v) Assuming that the Underwriters purchase the Shares which
are sold by such Selling Stockholder pursuant to the Agreement for value,
in good faith and without notice of any adverse claims, the delivery of
such Shares pursuant to the
B-1
<PAGE>
Agreement will pass good and valid title to such Shares, free and clear
of any security interest, mortgage, pledge, lieu encumbrance or other
claim.
(vi) To the best of such counsel's knowledge, no consent,
approval, authorization or other order of, or registration or filing with,
any court or governmental authority or agency, is required for the
consummation by such Selling Stockholder of the transactions contemplated
in the Agreement, except as required under the Securities Act, applicable
state securities or blue sky laws, and from the National Association of
Securities Dealers, LLC.
B-2
<PAGE>
Exhibit 5.1
March 30, 1999
XOOM.com, Inc.
300 Montgomery Street
3rd Floor
San Francisco, CA 94104
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1
of XOOM.com, Inc., a Delaware corporation (the "Company"), filed with the
Securities and Exchange Commission (the "Registration Statement") on March 16,
1999, relating to the registration under the Securities Act of 1933, as amended,
of up to 4,600,000 shares of the Company's common stock, $.0001 par value (the
"Stock"), 2,600,000 of which are authorized but unissued stock to be offered and
sold by the Company (including up to 600,000 shares subject to the underwriters'
over-allotment option) and 2,000,000 of which are presently issued and
outstanding and will be sold by certain selling stockholders (the "Selling
Stockholders"). The Stock is to be sold to the underwriters named in the
Registration Statement for resale to the public.
As counsel to the Company, we have examined the proceedings taken by the
Company in connection with the issuance and sale of the Stock.
We are of the opinion that the up to 2,000,000 shares of Stock to be
sold by the Selling Stockholders pursuant to the Registration Statement are
validly issued, fully paid and non-assessable, and that the up to 2,600,000
shares of Stock to be offered and sold by the Company have been duly authorized
and, when issued and sold by the Company in the manner described in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of the Company, will be validly issued, fully paid and
nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us in the Registration
Statement, the prospectus constituting a part thereof and any amendments
thereto.
Very truly yours,
/s/ Morrison & Foerster LLP
Morrison & Foerster LLP
<PAGE>
================================================================================
AGREEMENT OF LEASE
between
ELEVEN PENN PLAZA LLC
Landlord
and
XOOM.COM, INC.
Tenant
Portion of the 4th Floor
11 Penn Plaza
New York, New York
================================================================================
PROSKAUER ROSE LLP
1585 Broadway
New York, New York 10036-8299
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
DEFINITIONS............................................................... 1
ARTICLE 1 - DEMISE, PREMISES, TERM, RENT................................. 8
ARTICLE 2 - USE AND OCCUPANCY............................................ 8
ARTICLE 3 - ALTERATIONS.................................................. 9
ARTICLE 4 - REPAIRS-FLOOR LOAD........................................... 12
ARTICLE 5 - WINDOW CLEANING.............................................. 14
ARTICLE 6 - REQUIREMENTS OF LAW.......................................... 14
ARTICLE 7 - SUBORDINATION................................................ 16
ARTICLE 8 - RULES AND REGULATIONS........................................ 19
ARTICLE 9 - INSURANCE, PROPERTY LOSS OR DAMAGE; REIMBURSEMENT............ 19
ARTICLE 10 - DESTRUCTION-FIRE OR OTHER CAUSE.............................. 21
ARTICLE 11 - EMINENT DOMAIN............................................... 25
ARTICLE 12 - ASSIGNMENT, SUBLETTING, MORTGAGE, ETC........................ 26
ARTICLE 13 - ELECTRICITY ................................................ 39
ARTICLE 14 - ACCESS TO PREMISES........................................... 44
ARTICLE 15 - CERTIFICATE OF OCCUPANCY..................................... 45
ARTICLE 16 - DEFAULT...................................................... 46
ARTICLE 17 - REMEDIES AND DAMAGES......................................... 49
ARTICLE 18 - LANDLORD FEES AND EXPENSES................................... 51
ARTICLE 19 - NO REPRESENTATIONS BY LANDLORD............................... 52
ARTICLE 20 - END OF TERM.................................................. 52
ARTICLE 21 - QUIET ENJOYMENT.............................................. 53
ARTICLE 22 - FAILURE TO GIVE POSSESSION................................... 53
ARTICLE 23 - NO WAIVER.................................................... 53
ARTICLE 24 - WAIVER OF TRIAL BY JURY...................................... 54
ARTICLE 25 - INABILITY TO PERFORM......................................... 55
ARTICLE 26 - BILLS AND NOTICES............................................ 55
ARTICLE 27 - ESCALATION................................................... 56
ARTICLE 28 - SERVICES..................................................... 61
ARTICLE 29 - PARTNERSHIP TENANT........................................... 64
ARTICLE 30 - VAULT SPACE.................................................. 65
ARTICLE 31 - INTENTIONALLY OMITTED PRIOR TO EXECUTION..................... 65
ARTICLE 32 - CAPTIONS..................................................... 65
ARTICLE 33 - PARTIES BOUND................................................ 65
ARTICLE 34 - BROKER....................................................... 65
ARTICLE 35 - INDEMNITY.................................................... 66
ARTICLE 36 - ADJACENT EXCAVATION-SHORING.................................. 67
ARTICLE 37 - MISCELLANEOUS................................................ 68
ARTICLE 38 - RENT CONTROL................................................. 71
</TABLE>
Schedule A - Rules and Regulations
Schedule B - Cleaning Specifications
EXHIBIT "A" - Floor Plan
<PAGE>
AGREEMENT OF LEASE, made as of the 16th day of March, 1999, between
Landlord and Tenant.
W I T N E S S E T H :
---------------------
The parties hereto, for themselves, their legal representatives, successors
and assigns, hereby covenant as follows.
DEFINITIONS
-----------
"Affiliate" shall mean a Person which shall (1) Control, (2) be under the
---------
Control of, or (3) be under common Control with the Person in question.
"Alteration Fee" shall have the meaning set forth in Section 3.2 hereof.
--------------
"Alterations" shall mean alterations, installations, improvements,
-----------
additions or other physical changes (other than decorations) in or about the
Premises.
"Applicable Rate" shall mean the lesser of (x) two (2) percentage points
---------------
above the then current Base Rate, and (y) the maximum rate permitted by
applicable law.
"Assessed Valuation" shall have the meaning set forth in Section 27.1
------------------
hereof.
"Assignment Proceeds" shall have the meaning set forth in Section 12.8
-------------------
hereof.
"Assignment Statement" shall have the meaning set forth in Section 12.8
--------------------
hereof.
"Bankruptcy Code" shall mean 11 U.S.C. Section 101 et seq., or any statute
---------------
of similar nature and purpose.
"Base Rate" shall mean the rate of interest publicly announced from time to
---------
time by The Chase Manhattan Bank, N.A., or its successor, as its "prime lending
rate" (or such other term as may be used by The Chase Manhattan Bank, N.A., from
time to time, for the rate presently referred to as its "prime lending rate"),
which rate was 7.75% on February 16, 1999.
"Base Taxes" shall have the meaning set forth in Section 27.1 hereof.
----------
"Broker" shall have the meaning set forth in Article 34 hereof.
------
1
<PAGE>
"Building" shall mean all the buildings, equipment and other improvements
--------
and appurtenances of every kind and description now located or hereafter
erected, constructed or placed upon the land and any and all alterations, and
replacements thereof, additions thereto and substitutions therefor, known by the
address of 11 Penn Plaza, New York, New York.
"Building Systems" shall mean the mechanical, gas, electrical, sanitary,
----------------
heating, air conditioning, ventilating, elevator, plumbing, life-safety and
other service systems of the Building.
"Business Days" shall mean all days, excluding Saturdays, Sundays and all
-------------
days observed by either the State of New York or the Federal Government and by
the labor unions servicing the Building as legal holidays.
"Commencement Date" shall have the meaning set forth in Section 1.1 hereof.
-----------------
"Comparison Year" shall have the meaning set forth in Section 27.1 hereof.
---------------
"Consumer Price Index" shall mean the Consumer Price Index for All Urban
--------------------
Consumers published by the Bureau of Labor Statistics of the United States
Department of Labor, New York, N.Y. - Northeastern N.J. Area, All Items (1982-84
= 100), or any successor index thereto, appropriately adjusted. In the event
that the Consumer Price Index is converted to a different standard reference
base or otherwise revised, the determination of adjustments provided for herein
shall be made with the use of such conversion factor, formula or table for
converting the Consumer Price Index as may be published by the Bureau of Labor
Statistics or, if said Bureau shall not publish the same, then with the use of
such conversion factor, formula or table as may be published by Prentice-Hall,
Inc., or any other nationally recognized publisher of similar statistical
information. If the Consumer Price Index ceases to be published, and there is
no successor thereto, such other index as Landlord and Tenant shall agree upon
in writing shall be substituted for the Consumer Price Index. If Landlord and
Tenant are unable to agree as to such substituted index, such matter shall be
submitted to the American Arbitration Association or any successor organization
for determination in accordance with the regulations and procedures thereof then
obtaining for commercial arbitration.
"Control" or "control" shall mean ownership of more than fifty percent
------- -------
(50%) of the outstanding voting stock of a corporation or other majority equity
and control interest if not a corporation and the possession of power to direct
or cause the direction of the management and policy of such corporation or other
entity, whether through the ownership of voting securities, by statute or
according to the provisions of a contract.
"Deficiency" shall have the meaning set forth in Section 17.2 hereof.
----------
"Electricity Additional Rent" shall have the meaning set forth in Section
---------------------------
13.3 hereof.
"Electricity Inclusion Factor" shall have the meaning set forth in Section
----------------------------
13.2 hereof.
2
<PAGE>
"Electricity Statement" shall have the meaning set forth in Section 13.2
---------------------
hereof.
"Escalation Rent" shall mean, individually or collectively, the Tax Payment
---------------
and the Porter's Wage Payment.
"Event of Default" shall have the meaning set forth in Section 16.1 hereof.
----------------
"Expiration Date" shall mean the Fixed Expiration Date or such earlier date
---------------
on which the Term shall sooner end pursuant to any of the terms, conditions or
covenants of this Lease or pursuant to law.
"Fixed Expiration Date" shall have the meaning set forth in Section 1.1
---------------------
hereof.
"Fixed Rent" shall have the meaning set forth in Section 1.1 hereof.
----------
"Full Value" shall have the meaning set forth in Section 13.2 hereof.
----------
"Governmental Authority (Authorities)" shall mean the United States of
------------------------------------
America, the State of New York, the City of New York, any political subdivision
thereof and any agency, department, commission, board, bureau or instrumentality
of any of the foregoing, or any quasi-governmental authority, now existing or
hereafter created, having jurisdiction over the Real Property or any portion
thereof.
"HVAC" shall mean heat, ventilation and air conditioning.
----
"HVAC Systems" shall mean the Building Systems providing HVAC.
------------
"Increase" shall have the meaning set forth in Section 27.4 hereof.
--------
"Indemnitees" shall mean Landlord, the members and partners comprising
-----------
Landlord and its and their members, partners, shareholders, officers, directors,
employees, agents and contractors, Lessors and Mortgagees.
"Initial Alterations" shall mean the Alterations to be made by Tenant to
-------------------
initially prepare the Premises for Tenant's occupancy.
"Landlord", on the date as of which this Lease is made, shall mean Eleven
--------
Penn Plaza LLC, a New York limited liability company, having an office c/o MRC
Management LLC, 330 Madison Avenue, New York, New York 10017, but thereafter,
"Landlord" shall mean only the fee owner of the Real Property or if there shall
exist a Superior Lease, the tenant thereunder.
"Landlord's Engineer" shall have the meaning set forth in Section 13.2
-------------------
hereof.
3
<PAGE>
"Landlord's Work" shall have the meaning set forth in Section 19.1 hereof.
---------------
"Lessor(s)" shall mean a lessor under a Superior Lease.
---------
"Letter of Credit" shall have the meaning set forth in Article 31 hereof.
----------------
"Local 32B" shall have the meaning set forth in Section 27.1 hereof.
---------
"Long Lead Work" shall mean any item which is not a stock item and must be
--------------
specially manufactured, fabricated or installed or is of such an unusual,
delicate or fragile nature that there is a substantial risk that
(i) there will be a delay in its manufacture, fabrication, delivery
or installation, or
(ii) after delivery, such item will need to be reshipped or
redelivered or repaired
so that in Landlord's reasonable judgment the item in question cannot be
completed when the standard items are completed even though the item of Long
Lead Work in question is (1) ordered together with the other items required and
(2) installed or performed (after the manufacture or fabrication thereof) in the
order and sequence that such Long Lead Work and other items are normally
installed or performed in accordance with good construction practice. In
addition, "Long Lead Work" shall include any standard item which in accordance
with good construction practice should be completed after the completion of any
item of work in the nature of the items described in the immediately preceding
sentence.
"Mortgage(s)" shall mean any trust indenture or mortgage which may now or
-----------
hereafter affect the Real Property, the Building or any Superior Lease and the
leasehold interest created thereby, and all renewals, extensions, supplements,
amendments, modifications, consolidations and replacements thereof or thereto,
substitutions therefor, and advances made thereunder.
"Mortgagee(s)" shall mean any trustee, mortgagee or holder of a Mortgage.
------------
"Overtime Periods" shall have the meaning set forth in Section 28.3 hereof.
----------------
"Parties" shall have the meaning set forth in Section 37.2 hereof.
-------
"Partner" or "partner" shall mean any partner of Tenant, any employee of a
------- -------
professional corporation which is a partner comprising Tenant, and any
shareholder of Tenant if Tenant shall become a professional corporation.
"Partnership Tenant" shall have the meaning set forth in Article 29 hereof.
------------------
"Person(s) or person(s)" shall mean any natural person or persons, a
----------------------
partnership, a corporation and any other form of business or legal association
or entity.
4
<PAGE>
"Porters" shall have the meaning set forth in Section 27.1 hereof.
-------
"Porter's Wage Factor" shall have the meaning set forth in Section 27.1
--------------------
hereof.
"Porters' Wage Payment" shall have the meaning set forth in Section 27.1
---------------------
hereof.
"Premises" shall mean, subject to the provisions of Section 14.4 hereof,
--------
the portion of the fourth (4th) floor of the Building as set forth on the floor
plans attached hereto and made a part hereof as Exhibit "A".
-----------
"Prevailing Rate" shall have the meaning set forth in Section 12.6 hereof.
---------------
"RAB" shall have the meaning set forth in Section 27.1 hereof.
---
"Real Property" shall mean the Building, together with the plot of land
-------------
upon which it stands.
"Recapture Space" shall have the meaning set forth in Section 12.6 hereof.
---------------
"Recapture Sublease" shall have the meaning set forth in Section 12.6
------------------
hereof.
"Related Entity" shall have the meaning set forth in Section 12.4 hereof.
--------------
"Rental" shall mean and be deemed to include Fixed Rent, Escalation Rent,
------
all additional rent and any other sums payable by Tenant hereunder.
"Rent Commencement Date" shall mean the date which is four (4) months after
----------------------
the Commencement Date.
"Rent Per Square Foot" shall have the meaning set forth in Section 12.7
--------------------
hereof.
"Replaced Premises" shall have the meaning set forth in Section 37.12
-----------------
hereof.
"Requirement Period" shall have the meaning set forth in Section 27.4
------------------
hereof.
"Requirements" shall mean all present and future laws, rules, orders,
------------
ordinances, regulations, statutes, requirements, codes and executive orders,
extraordinary as well as ordinary, of all Governmental Authorities now existing
or hereafter created, and of any and all of their departments and bureaus, and
of any applicable fire rating bureau, or other body exercising similar
functions, affecting the Real Property or any portion thereof, or any street,
avenue or sidewalk comprising a part of or in front thereof or any vault in or
under the same, or requiring removal of any encroachment, or affecting the
maintenance, use or occupation of the Real Property or any portion thereof.
5
<PAGE>
"Rules and Regulations" shall mean the rules and regulations annexed hereto
---------------------
and made a part hereof as Schedule A, and such other and further rules and
----------
regulations which are non-discriminatory as to Tenant with respect to tenants
who are similarly situated to Tenant (i.e., rules or regulations with respect to
tenants on specific floors of the Building where such rules or regulations
affect specific floors of the Building or rules or regulations with respect to
tenants with a specific type of occupancy where such rules or regulations affect
specific types of occupancy) as Landlord or Landlord's agents may from time to
time adopt on such notice to be given as Landlord may elect, subject to Tenant's
right to dispute the reasonableness thereof as provided in Article 8 hereof.
"Space Factor" shall mean Six Thousand Five Hundred Thirty-One (6,531) as
------------
the same may be increased or decreased pursuant to the terms hereof.
"Specialty Alterations" shall mean Alterations consisting of kitchens,
---------------------
executive bathrooms, raised computer floors, computer installations, vaults,
libraries, internal staircases, dumbwaiters, pneumatic tubes, vertical and
horizontal transportation systems, and other Alterations of a similar character.
"Sublease Expenses" shall have the meaning set forth in Section 12.7
-----------------
hereof.
"Sublease Profit" shall have the meaning set forth in Section 12.7 hereof.
---------------
"Sublease Rent" shall have the meaning set forth in Section 12.7 hereof.
-------------
"Sublease Rent Per Square Foot" shall have the meaning set forth in Section
-----------------------------
12.7 hereof.
"Substitute Premises" shall have the meaning set forth in Section 37.12
-------------------
hereof.
"Substitution Date" shall have the meaning set forth in Section 37.8
-----------------
hereof.
"Superior Lease(s)" shall mean all ground or underlying leases of the Real
-----------------
Property or the Building and all renewals, extensions, supplements, amendments
and modifications thereof.
"Taxes" shall have the meaning set forth in Section 27.1 hereof.
-----
"Tax Payment" shall have the meaning set forth in Section 27.2 hereof.
-----------
"Tax Statement" shall have the meaning set forth in Section 27.1 hereof.
-------------
"Tax Year" shall have the meaning set forth in Section 27.1 hereof.
--------
"Tenant" on the date as of which this Lease is made, shall mean XOOM.com,
------
Inc. a Delaware corporation, having an office at 25 West 45th Street, New York,
New York 10017, but thereafter "Tenant" shall mean only the tenant under this
Lease at the time in question; provided,
6
<PAGE>
however, that the originally named tenant and any assignee of this Lease shall
not be released from liability hereunder in the event of any assignment of this
Lease.
"Tenant Statement" shall have the meaning set forth in Section 12.6 hereof.
----------------
"Tenant's Engineer" shall have the meaning set forth in Section 13.2
-----------------
hereof.
"Tenant's Property" shall mean Tenant's movable fixtures and movable
-----------------
partitions, telephone and other equipment, furniture, furnishings, decorations
and other items of personal property.
"Tenant's Tax Share" shall mean Six Thousand Six Hundred Eighty ten
------------------
thousandths percent (0.6680%) as the same may be increased or decreased pursuant
to the terms hereof.
"Term" shall mean a term which shall commence on the Commencement Date and
----
shall expire on the Expiration Date.
"Third Engineer" shall have the meaning set forth in Section 13.2 hereof.
--------------
"Unavoidable Delays" shall have the meaning set forth in Article 25 hereof.
------------------
"Wage Rate" shall have the meaning set forth in Section 27.1 hereof.
---------
7
<PAGE>
ARTICLE 1
DEMISE, PREMISES, TERM, RENT
----------------------------
Section 1.1. Landlord hereby leases to Tenant and Tenant hereby hires from
------------
Landlord the Premises for the Term to commence as of the date hereof (the
"Commencement Date") and to end on the date (the "Fixed Expiration Date") that
----------------- ---------------------
shall be the last day of the month in which the date immediately preceding the
fifth (5th) anniversary of the Rent Commencement Date occurs, at an annual rent
(the "Fixed Rent") of Two Hundred Fifteen Thousand Five Hundred Twenty-Three
----------
Dollars ($215, 523) per annum for the period commencing on the Rent Commencement
--- -----
Date and ending on the Fixed Expiration Date payable in equal monthly
installments in advance in the amount of Seventeen Thousand Nine Hundred Sixty
and 25/100 Dollars ($17,960.25) per month, which Tenant agrees to pay in lawful
money of the United States which shall be legal tender in payment of all debts
and dues, public and private, at the time of payment, on the first (1st) day of
each calendar month during the Term commencing on the Rent Commencement Date, at
the office of Landlord or such other place as Landlord may designate, without
any set-off, offset, abatement or deduction whatsoever, except that Tenant shall
pay the first full monthly installment on the execution hereof. At the request
of Landlord, Fixed Rent shall be payable when due by wire transfer of funds to
an account designated from time to time by Landlord.
Section 1.2. Tenant shall pay to Landlord, as additional rent, on account
------------
of electricity consumed at the Premises the sum of One Thousand Six Hundred
Thirty-Two and 75/100 Dollars ($1632.75) per month during the period commencing
on the Commencement Date and ending on the day immediately preceding the Rent
Commencement Date. If such period shall commence or end on a date other than
the first (1st) day of a calendar month, such monthly amount on account of
electricity shall be appropriately adjusted.
ARTICLE 2
USE AND OCCUPANCY
-----------------
Section 2.1. Tenant shall use and occupy the Premises as general,
------------
administrative and executive offices, uses incidental thereto and for no other
purpose.
Section 2.2. (A) Tenant shall not use the Premises or any part thereof,
------------
or permit the Premises or any part thereof to be used, (1) for the business of
photographic, multilith or multigraph reproductions or offset printing, except
in connection with, either directly or indirectly, Tenant's own business and/or
activities, (2) for a banking, trust company, depository, guarantee or safe
deposit business, (3) as a savings bank, a savings and loan association, or as a
loan company, (4) for the sale of travelers checks, money orders, drafts,
foreign exchange or letters of credit or for the receipt of money for
transmission, (5) as a stockbroker's or dealer's office or for the underwriting
or sale of securities, (6) by the United States government, the City
8
<PAGE>
or State of New York, any foreign government, the United Nations or any agency
or department of any of the foregoing or any other Person having sovereign or
diplomatic immunity, (7) as a restaurant or bar or for the sale of
confectionery, soda or other beverages, sandwiches, ice cream or baked goods or
for the preparation, dispensing or consumption of food or beverages in any
manner whatsoever, except for consumption by Tenant's officers, employees and
business guests, (8) as an employment agency, executive search firm or similar
enterprise, labor union, school, or vocational training center (except for the
training of employees of Tenant intended to be employed at the Premises), or (9)
as a barber shop or beauty salon.
(B) In connection with, and incidental to, Tenant's use of the
Premises for general, administrative and executive offices as provided in this
Article 2, Tenant, at its sole cost and expense and upon compliance with all
applicable Requirements, may install a "dwyer" or similar unit in the Premises
for the purpose of warming food for the officers, employees and business guests
of Tenant (but not for use as a public restaurant), provided that Tenant shall
obtain all permits required by any Governmental Authorities for the operation
thereof and such installation shall comply with the provisions of this Lease,
including, without limitation, Article 3 hereof. Tenant may also install, at
its sole cost and expense and subject to and in compliance with the provisions
of Articles 3 and 4 hereof, microwave ovens, vending machines for the exclusive
use of the officers, employees and business guests of Tenant, each of which
vending machines (if it dispenses any beverages or other liquids or
refrigerates) shall have a waterproof pan located thereunder, connected to a
drain.
ARTICLE 3
ALTERATIONS
-----------
Section 3.1. (A) Tenant shall not make any Alterations without Landlord's
------------
prior consent. Landlord shall not unreasonably withhold or delay its consent to
any proposed nonstructural Alterations, provided that such Alterations (i) are
not visible from the outside of the Building, (ii) do not affect (to more than a
de minimis extent) any part of the Building other than the Premises or require
- -- -------
any alterations, installations, improvements, additions or other physical
changes to be performed in or made to any portion of the Building or the Real
Property other than the Premises, (iii) do not affect (to more than a de minimis
-- -------
extent) any service required to be furnished by Landlord to Tenant or to any
other tenant or occupant of the Building, (iv) do not affect the proper
functioning of any Building System, (v) do not reduce the value or utility of
the Building, and (vi) do not affect the certificate of occupancy for the
Building or the Premises. Landlord shall not be deemed to be unreasonable with
respect to withholding its consent to any proposed nonstructural Alteration
which meets the criteria set forth in this Section 3.1(A) if the Lessor or
Mortgagee, as the case may be, shall withhold its consent.
(B) (1) Prior to making any Alterations, including, without
limitation, the Initial Alterations, Tenant shall (i) submit to Landlord
detailed plans and specifications (including layout, architectural, mechanical
and structural drawings) for each proposed Alteration
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and shall not commence any such Alteration without first obtaining Landlord's
approval of such plans and specifications, which, in the case of nonstructural
Alterations which meet the criteria set forth in Section 3.1(A) above, shall not
be unreasonably withheld or delayed, (ii) at Tenant's expense, obtain all
permits, approvals and certificates required by any Governmental Authorities, it
being agreed that all filings with Governmental Authorities to obtain such
permits, approvals and certificates shall be made, at Tenant's expense, by a
Person designated by Landlord, and (iii) furnish to Landlord duplicate original
policies or certificates thereof of worker's compensation (covering all persons
to be employed by Tenant, and Tenant's contractors and subcontractors in
connection with such Alteration) and comprehensive public liability (including
property damage coverage) insurance in such form, with such companies, for such
periods and in such amounts as Landlord may reasonably approve, naming Landlord
and its agents, any Lessor and any Mortgagee, as additional insureds. Upon
completion of such Alteration, Tenant, at Tenant's expense, shall obtain
certificates of final approval of such Alteration required by any Governmental
Authority and shall furnish Landlord with copies thereof, together with the "as-
built" plans and specifications for such Alterations, it being agreed that all
filings with Governmental Authorities to obtain such permits, approvals and
certificates shall be made, at Tenant's expense, by a Person designated by
Landlord. All Alterations shall be made and performed substantially in
accordance with the plans and specifications therefor as approved by Landlord,
all Requirements, the Rules and Regulations, and all rules and regulations
relating to Alterations promulgated by Landlord in its reasonable judgment;
provided further, such rules and regulations shall be consistent with those
imposed by Landlord on other office tenants of the Building under similar
circumstances. All materials and equipment to be incorporated in the Premises as
a result of any Alterations or a part thereof shall be first quality and no such
materials or equipment (other than Tenant's Property) shall be subject to any
lien, encumbrance, chattel mortgage or title retention or security agreement. In
addition, no Alteration shall be undertaken prior to Tenant's delivering to
Landlord either (i) a performance bond and labor and materials payment bond
(issued by a surety company and in form reasonably satisfactory to Landlord),
each in an amount equal to one hundred ten percent (110%) of the cost of such
Alteration (as reasonably estimated by Landlord's architect, engineer, or
contractor) or (ii) such other security as shall be reasonably satisfactory to
Landlord or required by any Mortgagee or Lessor. If, as a result of any
Alterations performed by Tenant, including, without limitation, the Initial
Alterations, any alterations, installations, improvements, additions or other
physical changes are required to be performed or made to any portion of the
Building or the Real Property other than the Premises in order to comply with
any Requirement(s), which alterations, installations, improvements, additions or
other physical changes would not otherwise have had to be performed or made
pursuant to applicable Requirement(s) at such time, Landlord, at Tenant's sole
cost and expense, may perform or make such alterations, installations,
improvements, additions or other physical changes and take such actions as
Landlord shall deem reasonably necessary and Tenant, within five (5) days after
demand therefor by Landlord, shall provide Landlord with such security as
Landlord shall reasonably require, in an amount equal to one hundred ten percent
(110%) of the cost of such alterations, installations, improvements, additions
or other physical changes, as reasonably estimated by Landlord's architect,
engineer or contractor. All Alteration(s) requiring the consent of Landlord
shall be performed only under the
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supervision of an independent licensed architect approved by Landlord, which
approval shall not be unreasonably withheld.
(2) Landlord reserves the right to disapprove any plans and
specifications in part, to reserve approval of items shown thereon pending its
review and approval of other plans and specifications, and to condition its
approval upon Tenant making revisions to the plans and specifications or
supplying additional information. Any review or approval by Landlord of any
plans and/or specifications or any preparation or design of any plans by
Landlord's architect or engineer (or any architect or engineer designated by
Landlord) with respect to any Alteration is solely for Landlord's benefit, and
without any representation or warranty whatsoever to Tenant or any other Person
with respect to the compliance thereof with any Requirements, the adequacy,
correctness or efficiency thereof or otherwise.
(C) Tenant shall be permitted to perform Alterations during the hours
of 8:00 A.M. to 6:00 P.M. on Business Days, provided that such work shall not
interfere with or interrupt the operation and maintenance of the Building or
unreasonably interfere with or interrupt the use and occupancy of the Building
by other tenants in the Building. Otherwise, Alterations shall be performed at
such times and in such manner as Landlord may from time to time reasonably
designate. All Tenant's Property installed by Tenant and all Alterations in and
to the Premises which may be made by Tenant at its own cost and expense prior to
and during the Term, shall remain the property of Tenant. Upon the Expiration
Date, Tenant shall remove Tenant's Property from the Premises and, at Tenant's
option, Tenant also may remove, at Tenant's cost and expense, all Alterations
made by Tenant to the Premises, provided, however, in any case, that Tenant
shall repair and restore in a good and workerlike manner to good condition any
damage to the Premises or the Building caused by such removal. Notwithstanding
the foregoing, however, Landlord, upon notice given at least thirty (30) days
prior to the Fixed Expiration Date or upon such shorter notice as is reasonable
under the circumstances upon the earlier expiration of the Term, may require
Tenant to remove any Specialty Alterations, and to repair and restore in a good
and workerlike manner to good condition any damage to the Premises or the
Building caused by such removal.
(D) (1) All Alterations shall be performed, at Tenant's sole cost
and expense, by Landlord's contractor(s) or by contractors, subcontractors or
mechanics approved by Landlord. Prior to making an Alteration, at Tenant's
request, Landlord shall furnish Tenant with a list of contractors who may
perform Alterations to the Premises on behalf of Tenant. If Tenant engages any
contractor set forth on the list, Tenant shall not be required to obtain
Landlord's consent for such contractor unless, prior to the earlier of (a)
entering into a contract with such contractor, and (b) the commencement of work
by such contractor, Landlord shall notify Tenant that such contractor has been
removed from the list.
(2) Notwithstanding the foregoing, with respect to any
Alteration affecting any Building System, (i) Tenant shall select a contractor
from a list of approved contractors furnished by Landlord to Tenant (containing
at least three (3) contractors) and (ii) the
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Alteration shall, at Tenant's cost and expense, be designed by Landlord's
engineer for the relevant Building System.
(E) Any mechanic's lien filed against the Premises or the Real
Property for work claimed to have been done for, or materials claimed to have
been furnished to, Tenant shall be discharged by Tenant within thirty (30) days
after Tenant shall have received notice thereof (or such shorter period if
required by the terms of any Superior Lease or Mortgage), at Tenant's expense,
by payment or filing the bond required by law. Tenant shall not, at any time
prior to or during the Term, directly or indirectly employ, or permit the
employment of, any contractor, mechanic or laborer in the Premises, whether in
connection with any Alteration or otherwise, if such employment would interfere
or cause any conflict with other contractors, mechanics or laborers engaged in
the construction, maintenance or operation of the Building by Landlord, Tenant
or others, or of any adjacent property owned by Landlord. In the event of any
such interference or conflict, Tenant, upon demand of Landlord, shall cause all
contractors, mechanics or laborers causing such interference or conflict to
leave the Building immediately.
Section 3.2. Tenant shall pay to Landlord or to Landlord's agent, as
------------
additional rent, all out-of-pocket costs and expenses incurred by Landlord or
Landlord's agent in connection with any Alterations, including, without
limitation, the Initial Alterations, (the "Alteration Fee"). The Alteration Fee
--------------
shall be paid by Tenant within ten (10) Business Days after demand therefor.
Tenant shall also pay any fee charged by any Lessor or Mortgagee in reviewing
the plans and specifications for such Alterations or inspecting the progress of
completing the same.
Section 3.3. Upon the request of Tenant, Landlord, at Tenant's cost and
------------
expense, shall join in any applications for any permits, approvals or
certificates required to be obtained by Tenant in connection with any permitted
Alteration (provided that the provisions of the applicable Requirement shall
require that Landlord join in such application) and shall otherwise cooperate
with Tenant in connection therewith, provided that Landlord shall not be
obligated to incur any cost or expense, including, without limitation,
attorneys' fees and disbursements, or suffer any liability in connection
therewith.
ARTICLE 4
REPAIRS-FLOOR LOAD
------------------
Section 4.1. Landlord shall operate, maintain and make all necessary
------------
repairs (both structural and nonstructural) to the part of Building Systems
which provide service to the Premises (but not to the distribution portions of
such Building Systems located within the Premises) and the public portions of
the Building, both exterior and interior, in conformance with standards
applicable to non-institutional first class office buildings in Manhattan.
Tenant, at Tenant's sole cost and expense, shall take good care of the Premises
and the fixtures, equipment and appurtenances therein and the distribution
systems and shall make all nonstructural repairs thereto as and when needed to
preserve them in good working order and condition, except for reasonable wear
and tear, obsolescence and damage for which Tenant is not responsible pursuant
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to the provisions of Article 10 hereof. Notwithstanding the foregoing, all
damage or injury to the Premises or to any other part of the Building and
Building Systems, or to its fixtures, equipment and appurtenances, whether
requiring structural or nonstructural repairs, caused by or resulting from
carelessness, omission, neglect or improper conduct of, or Alterations made by,
Tenant, Tenant's agents, employees, invitees or licensees, shall be repaired at
Tenant's sole cost and expense, by Tenant to the reasonable satisfaction of
Landlord (if the required repairs are nonstructural in nature and do not affect
any Building System), or by Landlord (if the required repairs are structural in
nature or affect any Building System). All of the aforesaid repairs shall be
of first quality and of a class consistent with non-institutional first class
office building work or construction and shall be made in accordance with the
provisions of Article 3 hereof. If Tenant fails after ten (10) days' notice (or
such shorter period as Landlord may be permitted pursuant to any Superior Lease
or Mortgage or such shorter period as may be required due to an emergency) to
commence and to proceed with due diligence to make repairs required to be made
by Tenant, the same may be made by Landlord at the expense of Tenant, and the
expenses thereof incurred by Landlord, with interest thereon at the Applicable
Rate, shall be forthwith paid to Landlord as additional rent after rendition of
a bill or statement therefor. Tenant shall give Landlord prompt notice of any
defective condition in the Building or in any Building System, located in,
servicing or passing through the Premises.
Section 4.2. Tenant shall not place a load upon any floor of the Premises
------------
exceeding one hundred twenty (120) pounds per square foot "live load". Tenant
shall not move any safe, heavy machinery, heavy equipment, business machines,
freight, bulky matter or fixtures into or out of the Building without Landlord's
prior consent as to the time and manner of such move, which consent shall not be
unreasonably withheld, and shall make payment to Landlord of Landlord's costs in
connection therewith. If such safe, machinery, equipment, freight, bulky matter
or fixtures requires special handling, Tenant shall employ only persons holding
a Master Rigger's license to do said work. All work in connection therewith
shall comply with all Requirements and the Rules and Regulations, and shall be
done during such hours as Landlord may reasonably designate. Business machines
and mechanical equipment shall be placed and maintained by Tenant at Tenant's
expense in settings sufficient in Landlord's reasonable judgment to absorb and
prevent vibration, noise and annoyance. Except as expressly provided in this
Lease, there shall be no allowance to Tenant for a diminution of rental value
and no liability on the part of Landlord by reason of inconvenience, annoyance
or injury to business arising from Landlord, Tenant or others making, or failing
to make, any repairs, alterations, additions or improvements in or to any
portion of the Building or the Premises, or in or to fixtures, appurtenances or
equipment thereof.
Section 4.3. Landlord shall use its reasonable efforts to minimize
------------
interference with Tenant's use and occupancy of the Premises in making any
repairs, alterations, additions or improvements; provided, however, that
Landlord shall have no obligation to employ contractors or labor at so-called
overtime or other premium pay rates or to incur any other overtime costs or
expenses whatsoever, except that Landlord, at its expense but subject to
recoupment pursuant to Article 27 hereof, shall employ contractors or labor at
so-called overtime or other premium pay rates if necessary to make any repair
required to be made by it hereunder to remedy any condition
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that either (i) results in a denial of access to the Premises, (ii) threatens
the health or safety of any occupant of the Premises, or (iii) except in the
case of a fire or other casualty, materially interferes with Tenant's ability to
conduct its business in the Premises. In all other cases, at Tenant's request,
Landlord shall employ contractors or labor at so-called overtime or other
premium pay rates and incur any other overtime costs or expenses in making any
repairs, alterations, additions or improvements, and Tenant shall pay to
Landlord, as additional rent, within ten (10) Business Days after demand, an
amount equal to the difference between the overtime or other premium pay rates
and the regular pay rates for such labor and any other overtime costs or
expenses so incurred.
ARTICLE 5
WINDOW CLEANING
---------------
Tenant shall not clean, nor require, permit, suffer or allow any window in
the Premises to be cleaned from the outside in violation of Section 202 of the
Labor Law, or any other Requirement, or of the rules of the Board of Standards
and Appeals, or of any other board or body having or asserting jurisdiction.
ARTICLE 6
REQUIREMENTS OF LAW
-------------------
Section 6.1. Tenant, at its sole cost and expense shall comply with all
------------
Requirements applicable to the Premises, including, without limitation, those
applicable to the making of any Alterations therein or the result of the making
thereof and those applicable by reason of the nature or type of business
operated by Tenant in the Premises. Tenant shall not do or permit to be done
any act or thing upon the Premises which will invalidate or be in conflict with
a standard "all-risk" insurance policy; and shall not do, or permit anything to
be done in or upon the Premises, or bring or keep anything therein, except as
now or hereafter permitted by the New York City Fire Department, New York Board
of Fire Underwriters, the Insurance Services Office or other authority having
jurisdiction and then only in such quantity and manner of storage as not to
increase the rate for fire insurance applicable to the Building, or use the
Premises in a manner (as opposed to mere use as general "offices") which shall
increase the rate of fire insurance on the Building or on property located
therein, over that in similar type buildings or in effect on the Commencement
Date. If by reason of Tenant's failure to comply with the provisions of this
Article, the fire insurance rate shall be higher than it otherwise would be,
then Tenant shall desist from doing or permitting to be done any such act or
thing and shall reimburse Landlord, as additional rent hereunder, for that part
of all fire insurance premiums thereafter paid by Landlord which shall have been
charged because of such failure by Tenant, and shall make such reimbursement
upon demand by Landlord. In any action or proceeding wherein Landlord and
Tenant are parties, a schedule or "make up" of rates for the Building or the
Premises issued by the Insurance Services Office, or other body fixing such fire
insurance rates, shall be conclusive
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evidence of the facts therein stated and of the several items and charges in the
fire insurance rates then applicable to the Building.
Section 6.2. Tenant, at its sole cost and expense and after notice to
------------
Landlord, may contest by appropriate proceedings prosecuted diligently and in
good faith, the legality or applicability of any Requirement affecting the
Premises, provided that (a) Landlord (or any Indemnitee) shall not be subject to
imprisonment or to prosecution for a crime, nor shall the Real Property or any
part thereof be subject to being condemned or vacated, nor shall the certificate
of occupancy for the Premises or the Building be suspended or threatened to be
suspended by reason of non-compliance or by reason of such contest; (b) before
the commencement of such contest, if Landlord or any Indemnitee may be subject
to any civil fines or penalties or other criminal penalties or if Landlord may
be liable to any independent third party as a result of such noncompliance,
Tenant shall furnish to Landlord either (i) a bond of a surety company
satisfactory to Landlord, in form and substance reasonably satisfactory to
Landlord, and in an amount equal to one hundred twenty percent (120%) of the sum
of (A) the cost of such compliance, (B) the criminal or civil penalties or fines
that may accrue by reason of such non-compliance (as reasonably estimated by
Landlord), and (C) the amount of such liability to independent third parties (as
reasonably estimated by Landlord), and shall indemnify Landlord (and any
Indemnitee) against the cost of such compliance and liability resulting from or
incurred in connection with such contest or non-compliance (except that Tenant
shall not be required to furnish such bond to Landlord if it has otherwise
furnished any similar bond required by law to the appropriate Governmental
Authority and has named Landlord as a beneficiary thereunder) or (ii) other
security reasonably satisfactory in all respects to Landlord; (c) such non-
compliance or contest shall not constitute or result in a violation (either with
the giving of notice or the passage of time or both) of the terms of any
Mortgage or Superior Lease, or if such Superior Lease or Mortgage shall
condition such non-compliance or contest upon the taking of action or furnishing
of security by Landlord, such action shall be taken or such security shall be
furnished at the expense of Tenant; and (d) Tenant shall keep Landlord regularly
advised as to the status of such proceedings. Without limiting the
applicability of the foregoing, Landlord (or any Indemnitee) shall be deemed
subject to prosecution for a crime if Landlord (or any Indemnitee), a Lessor, a
Mortgagee or any of their officers, directors, partners, shareholders, agents or
employees is charged with a crime of any kind whatsoever, unless such charges
are withdrawn ten (10) days before Landlord (or any Indemnitee), such Lessor or
such Mortgagee or such officer, director, partner, shareholder, agent or
employee, as the case may be, is required to plead or answer thereto.
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ARTICLE 7
SUBORDINATION
-------------
Section 7.1. This Lease shall be subject and subordinate to each and every
------------
Superior Lease and to each and every Mortgage. This clause shall be self-
operative and no further instrument of subordination shall be required from
Tenant to make the interest of any Lessor or Mortgagee superior to the interest
of Tenant hereunder; however, Tenant shall execute and deliver promptly any
instrument, in recordable form, that Landlord, any Mortgagee or Lessor may
reasonably request to evidence and confirm such subordination. If the date of
expiration of any Superior Lease shall be the same day as the Expiration Date,
the Term shall end and expire twelve (12) hours prior to the expiration of the
Superior Lease. If, in connection with the financing of the Real Property, the
Building or the interest of the lessee under any Superior Lease, or if in
connection with the entering into of a Superior Lease, any lending institution
or Lessor shall request reasonable modifications of this Lease that do not
increase Tenant's monetary obligations under this Lease, or materially adversely
affect or diminish the rights, or materially increase the other obligations of
Tenant under this Lease, Tenant shall make such modifications.
Section 7.2. If at any time prior to the expiration of the Term, any
------------
Superior Lease shall terminate or be terminated for any reason or any Mortgagee
comes into possession of the Real Property or the Building or the estate created
by any Superior Lease by receiver or otherwise, Tenant agrees, at the election
and upon demand of any owner of the Real Property or the Building, or of the
Lessor, or of any Mortgagee in possession of the Real Property or the Building,
to attorn, from time to time, to any such owner, Lessor or Mortgagee or any
person acquiring the interest of Landlord as a result of any such termination,
or as a result of a foreclosure of the Mortgage or the granting of a deed in
lieu of foreclosure, upon the then executory terms and conditions of this Lease,
subject to the provisions of Section 7.1 hereof and this Section 7.2, for the
remainder of the Term, provided that such owner, Lessor or Mortgagee, or
receiver caused to be appointed by any of the foregoing, as the case may be,
shall then be entitled to possession of the Premises and provided further that
such owner, Lessor or Mortgagee, as the case may be, or anyone claiming by,
through or under such owner, Lessor or Mortgagee, as the case may be, including
a purchaser at a foreclosure sale, shall not be:
(1) liable for any act or omission of any prior landlord
(including, without limitation, the then defaulting landlord), or
(2) subject to any defense or offsets which Tenant may have
against any prior landlord (including, without limitation, the then defaulting
landlord), or
(3) bound by any payment of Rental which Tenant may have made to
any prior landlord (including, without limitation, the then defaulting landlord)
more than thirty (30) days in advance of the date upon which such payment was
due, or
16
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(4) bound by any obligation to make any payment to or on behalf
of Tenant, or
(5) bound by any obligation to perform any work or to make
improvements to the Premises, except for (i) repairs and maintenance pursuant to
the provisions of Article 4, the need for which repairs and maintenance first
arises after the date upon which such owner, Lessor, or Mortgagee shall be
entitled to possession of the Premises, (ii) repairs to the Premises or any part
thereof as a result of damage by fire or other casualty pursuant to Article 10
hereof, but only to the extent that such repairs can be reasonably made from the
net proceeds of any insurance actually made available to such owner, Lessor or
Mortgagee, and (iii) repairs to the Premises as a result of a partial
condemnation pursuant to Article 11 hereof, but only to the extent that such
repairs can be reasonably made from the net proceeds of any award made available
to such owner, Lessor or Mortgagee, or
(6) bound by any amendment or modification of this Lease made
without its consent, or
(7) bound to return Tenant's security deposit, if any, until
such deposit has come into its actual possession and Tenant would be entitled to
such security deposit pursuant to the terms of this Lease.
The provisions of this Section 7.2 shall enure to the benefit of any such owner,
Lessor or Mortgagee, shall apply notwithstanding that, as a matter of law, this
Lease may terminate upon the termination of any Superior Lease, shall be self-
operative upon any such demand, and no further instrument shall be required to
give effect to said provisions. Tenant, however, upon demand of any such owner,
Lessor or Mortgagee, shall execute, at Tenant's expense, from time to time,
instruments, in recordable form, in confirmation of the foregoing provisions of
this Section 7.2, satisfactory to any such owner, Lessor or Mortgagee,
acknowledging such attornment and setting forth the terms and conditions of its
tenancy. Nothing contained in this Section 7.2 shall be construed to impair any
right otherwise exercisable by any such owner, Lessor or Mortgagee.
Notwithstanding the provisions of this Section 7.2, this Lease shall not
terminate by reason of the termination of any Superior Lease without the prior
written consent of the Mortgagee of the Mortgage which is a first mortgage on
Landlord's interest in the Real Property or the leasehold estate created by such
Superior Lease.
Section 7.3. From time to time, within ten (10) days next following
-----------
request by Landlord, any Mortgagee or any Lessor, Tenant shall deliver to
Landlord, such Mortgagee or such Lessor a written statement executed by Tenant,
in form reasonably satisfactory to Landlord, such Mortgagee or such Lessor, (1)
stating that this Lease is then in full force and effect and has not been
modified (or if modified, setting forth all modifications), (2) setting forth
the date to which the Fixed Rent, Escalation Rent and other items of Rental have
been paid, (3) stating whether or not, to the best knowledge of Tenant (but
without having made any investigation), Landlord is in default under this Lease,
and, if Landlord is in default, setting forth the specific nature of all such
defaults, and (4) as to any other matters reasonably requested by Landlord, such
Mortgagee or
17
<PAGE>
such Lessor. Tenant acknowledges that any statement delivered pursuant to this
Section 7.3 may be relied upon by any purchaser or owner of the Real Property or
the Building, or Landlord's interest in the Real Property or the Building or any
Superior Lease, or by any Mortgagee, or by an assignee of any Mortgagee, or by
any Lessor.
Section 7.4. From time to time, within ten (10) days next following
------------
request by Tenant but not more frequently than twice in any twelve (12) month
period, Landlord shall deliver to Tenant a written statement executed by
Landlord (i) stating that this Lease is then in full force and effect and has
not been modified (or if modified, setting forth all modifications), (ii)
setting forth the date to which the Fixed Rent, Escalation Rent and any other
items of Rental have been paid, (iii) stating whether or not, to the best
knowledge of Landlord (but without having made any investigation), Tenant is in
default under this Lease, and, if Tenant is in default, setting forth the
specific nature of all such defaults, and (iv) as to any other matters
reasonably requested by Tenant and related to this Lease.
Section 7.5. As long as any Superior Lease or Mortgage shall exist, Tenant
------------
shall not seek to terminate this Lease by reason of any act or omission of
Landlord until Tenant shall have given written notice of such act or omission to
all Lessors and Mortgagees at such addresses as shall have been furnished to
Tenant by such Lessors and Mortgagees and, if any such Lessor or Mortgagee, as
the case may be, shall have notified Tenant within ten (10) Business Days
following receipt of such notice of its intention to remedy such act or
omission, until a reasonable period of time shall have elapsed following the
giving of such notice, during which period such Lessors and Mortgagees shall
have the right, but not the obligation, to remedy such act or omission.
Section 7.6. Tenant hereby irrevocably waives any and all right(s) it may
------------
have in connection with any zoning lot merger or transfer of development rights
with respect to the Real Property including, without limitation, any rights it
may have to be a party to, to contest, or to execute, any Declaration of
Restrictions (as such term is defined in Section 12-10 of the Zoning Resolution
of The City of New York effective December 15, 1961, as amended) with respect to
the Real Property, which would cause the Premises to be merged with or unmerged
from any other zoning lot pursuant to such Zoning Resolution or to any document
of a similar nature and purpose, and Tenant agrees that this Lease shall be
subject and subordinate to any Declaration of Restrictions or any other document
of similar nature and purpose now or hereafter affecting the Real Property. In
confirmation of such subordination and waiver, Tenant shall execute and deliver
promptly any certificate or instrument that Landlord reasonably may request.
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ARTICLE 8
RULES AND REGULATIONS
---------------------
Tenant and Tenant's contractors, employees, agents, visitors, invitees and
licensees shall comply with the Rules and Regulations. Tenant shall have the
right to dispute the reasonableness of any additional Rule or Regulation
hereafter reasonably adopted by Landlord. If Tenant disputes the reasonableness
of any additional Rule or Regulation hereafter adopted by Landlord, the dispute
shall be determined by arbitration in the City of New York in accordance with
the rules and regulations then obtaining of the American Arbitration Association
or its successor. Any such determination shall be final and conclusive upon the
parties hereto. The right to dispute the reasonableness of any additional Rule
or Regulation upon Tenant's part shall be deemed waived unless the same shall be
asserted by service of a notice upon Landlord within thirty (30) days after
receipt by Tenant of notice of the adoption of any such additional Rule or
Regulation. Nothing in this Lease contained shall be construed to impose upon
Landlord any duty or obligation to enforce the Rules and Regulations or terms,
covenants or conditions in any other lease against any other tenant, and
Landlord shall not be liable to Tenant for violation of the same by any other
tenant, its employees, agents, visitors or licensees, except that Landlord shall
not enforce any Rule or Regulation against Tenant which Landlord shall not then
be enforcing against all other office tenants in the Building (other than
Landlord or its Affiliates). In the event of a conflict between the provisions
of this Lease and any such Rules and Regulations, the provisions of this Lease
shall control.
ARTICLE 9
INSURANCE, PROPERTY LOSS OR DAMAGE; REIMBURSEMENT
-------------------------------------------------
Section 9.1. (A) Any Building employee to whom any property shall be
------------
entrusted by or on behalf of Tenant shall be deemed to be acting as Tenant's
agent with respect to such property and neither Landlord nor its agents shall be
liable for any damage to property of Tenant or of others entrusted to employees
of the Building, nor for the loss of or damage to any property of Tenant by
theft or otherwise. Neither Landlord nor its agents shall be liable for any
injury (or death) to persons or damage to property, or interruption of Tenant's
business, resulting from fire or other casualty; nor shall Landlord or its
agents be liable for any such injury (or death) to persons or damage caused by
other tenants or persons in the Building or caused by construction of any
private, public or quasi-public work; nor shall Landlord be liable for any
injury (or death) to persons or damage to property or improvements, or
interruption of Tenant's business, resulting from any latent defect in the
Premises or in the Building (provided that the foregoing shall not relieve
Landlord from its obligations, if any, to repair such latent defect pursuant to
the provisions of Article 4 hereof).
(B) If at any time any windows of the Premises are temporarily
closed, darkened or bricked-up due to any Requirement or by reason of repairs,
maintenance, alterations, or improvements to the Building, or any of such
windows are permanently closed, darkened or bricked-up due to any Requirement,
Landlord shall not be liable for any damage Tenant may
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sustain thereby and Tenant shall not be entitled to any compensation therefor,
nor abatement or diminution of Fixed Rent or any other item of Rental, nor shall
the same release Tenant from its obligations hereunder, nor constitute an actual
or constructive eviction, in whole or in part, by reason of inconvenience or
annoyance to Tenant, or injury to or interruption of Tenant's business, or
otherwise, nor impose any liability upon Landlord or its agents. If at any time
the windows of the Premises are temporarily closed, darkened or bricked-up, as
aforesaid, then, unless Tenant is required pursuant to the Lease to perform the
repairs, maintenance, alterations, or improvements, or to comply with the
Requirements, which resulted in such windows being closed, darkened or bricked-
up, Landlord shall perform such repairs, maintenance, alterations or
improvements and comply with the applicable Requirements with reasonable
diligence and otherwise take such action as may be reasonably necessary to
minimize the period during which such windows are temporarily closed, darkened,
or bricked-up.
(C) Tenant shall immediately notify Landlord of any fire or accident
in the Premises.
Section 9.2. Tenant shall obtain and keep in full force and effect (i) an
------------
"all risk" insurance policy for Tenant's Specialty Alterations and Tenant's
Property at the Premises in an amount equal to one hundred percent (100%) of the
replacement value thereof, and (ii) a policy of commercial general liability and
property damage insurance on an occurrence basis, with a broad form contractual
liability endorsement. Such policies shall provide that Tenant is named as the
insured. Landlord, Landlord's managing agent, Landlord's agents and any Lessors
and any Mortgagees (whose names shall have been furnished to Tenant) shall be
added as additional insureds, as their respective interests may appear, with
respect to the insurance required to be carried pursuant to clauses (i) and (ii)
above. Such policy with respect to clause (ii) above shall include a provision
under which the insurer agrees to indemnify, defend and hold Landlord,
Landlord's managing agent, Landlord's agents and such Lessors and Mortgagees
harmless from and against, subject to the limits of liability set forth in this
Section 9.2, all cost, expense and liability arising out of, or based upon, any
and all claims, accidents, injuries and damages mentioned in Article 35. In
addition, the policy required to be carried pursuant to clause (ii) above shall
contain a provision that (a) no act or omission of Tenant shall affect or limit
the obligation of the insurer to pay the amount of any loss sustained and (b)
the policy shall be non-cancellable with respect to Landlord, Landlord's
managing agent, Landlord's agents and such Lessors and Mortgagees (whose names
and addresses shall have been furnished to Tenant) unless thirty (30) days'
prior written notice shall have been given to Landlord pursuant to the
provisions of Article 26 hereof, which notice shall contain the policy number
and the names of the insured and additional insureds. In addition, upon receipt
by Tenant of any notice of cancellation or any other notice from the insurance
carrier which may adversely affect the coverage of the insureds under such
policy of insurance, Tenant shall immediately deliver to Landlord and any other
additional insured hereunder a copy of such notice. The minimum amounts of
liability under the policy of insurance required to be carried pursuant to
clause (ii) above shall be a combined single limit with respect to each
occurrence in an amount of $5,000,000 for injury (or death) to persons and
damage to property, which amount shall be increased from time to time to that
amount of insurance which in Landlord's reasonable judgment is then being
customarily required by prudent
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landlords of non-institutional first class buildings in New York City. All
insurance required to be carried by Tenant pursuant to the terms of this Lease
shall be effected under valid and enforceable policies issued by reputable and
independent insurers permitted to do business in the State of New York, and
rated in Best's Insurance Guide, or any successor thereto (or if there be none,
an organization having a national reputation) as having a general policyholder
rating of "A" and a financial rating of at least "XIII".
- ----
Section 9.3. On or prior to the Commencement Date, Tenant shall deliver to
------------
Landlord appropriate certificates of insurance, including evidence of waivers of
subrogation required pursuant to Section 10.5 hereof, required to be carried by
Tenant pursuant to this Article 9. Evidence of each renewal or replacement of a
policy shall be delivered by Tenant to Landlord at least twenty (20) days prior
to the expiration of such policy.
Section 9.4. Tenant acknowledges that Landlord shall not carry insurance
------------
on, and shall not be responsible for damage to, Tenant's Property or Specialty
Alterations, and that Landlord shall not carry insurance against, or be
responsible for any loss suffered by Tenant due to, interruption of Tenant's
business.
Section 9.5. If notwithstanding the recovery of insurance proceeds by
------------
Tenant for loss, damage or destruction of its property (or rental value or
business interruptions) Landlord is liable to Tenant with respect thereto or is
obligated under this Lease to make replacement, repair or restoration, then, at
Landlord's option, either (i) the amount of the net proceeds of Tenant's
insurance against such loss, damage or destruction shall be offset against
Landlord's liability to Tenant therefor, or (ii) shall be made available to
Landlord to pay for replacement, repair or restoration.
ARTICLE 10
DESTRUCTION-FIRE OR OTHER CAUSE
-------------------------------
Section 10.1. (A) If the Premises (including Alterations other than
-------------
Specialty Alterations) shall be damaged by fire or other casualty, and if Tenant
shall give prompt notice thereof to Landlord, the damage, with such
modifications as shall be required in order to comply with Requirements shall be
diligently repaired by and at the expense of Landlord to substantially the
condition prior to the damage, and until such repairs which are required to be
performed by Landlord (excluding Long Lead Work) shall be substantially
completed (of which substantial completion Landlord shall promptly notify
Tenant) the Fixed Rent, Escalation Rent, all additional rental and Space Factor
shall be reduced in the proportion which the area of the part of the Premises
which is not usable by Tenant, as determined by Landlord in its reasonable
discretion, bears to the total area of the Premises immediately prior to such
casualty. Upon the substantial completion of such repairs (excluding Long Lead
Work), Landlord shall diligently prosecute to completion any items of Long Lead
Work remaining to be completed. Landlord shall have no obligation to repair any
damage to, or to replace, any Specialty Alterations or Tenant's Property, which
Tenant shall complete promptly after substantial completion of
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Landlord's repair obligations under this Article 10. In addition, Landlord shall
not be obligated to repair any damage to, or to replace, any Alterations unless
Tenant shall have notified Landlord of the completion of such Alterations and
the cost thereof, and shall have maintained adequate records with respect to
such Alterations. Tenant shall make all necessary repairs to the Specialty
Alterations and same shall be completed promptly after substantial completion of
Landlord's repair obligations under this Article 10. Landlord shall use its
reasonable efforts to minimize interference with Tenant's use and occupancy in
making any repairs pursuant to this Section. Anything contained herein to the
contrary notwithstanding, if the Premises (including any Alterations) are
damaged by fire or other casualty at any time prior to the completion of the
Initial Alterations, Landlord's obligation to repair the Premises (and any
Alterations) shall be limited to repair of the part of the Building Systems
serving the Premises on the Commencement Date, but not the distribution portions
of such Building Systems located within the Premises, the floor and ceiling
slabs of the Premises and the exterior walls of the Premises, all to
substantially the same condition which existed on the Commencement Date, with
such modifications as shall be required in order to comply with Requirements.
(B) Prior to the substantial completion of Landlord's repair
obligations set forth in Section 10.1 (A) hereof, Landlord shall provide Tenant
and Tenant's contractor, subcontractors and materialmen access to the Premises
to perform Specialty Alterations (or Alterations, if Landlord is not obligated
to repair same pursuant to the provisions hereof), on the following terms and
conditions (but not to occupy the same for the conduct of business):
(1) Tenant shall not commence work in any portion of the
Premises until the date specified in a notice from Landlord to Tenant stating
that the repairs required to be made by Landlord have been or will be completed
to the extent reasonably necessary, in Landlord's discretion, to permit the
commencement of the Specialty Alterations (or Alterations, if Landlord is not
obligated to repair same pursuant to the provisions hereof) then prudent to be
performed in accordance with good construction practice in the portion of the
Premises in question without interference with, and consistent with the
performance of, the repairs remaining to be performed.
(2) Such access by Tenant shall be deemed to be subject to all
of the applicable provisions of this Lease, including, without limitation,
Tenant's obligation to pay to Landlord, the Electricity Inclusion Factor or, if
applicable, the Electricity Additional Rent except that there shall be no
obligation on the part of Tenant solely because of such access to pay any Fixed
Rent or Escalation Rent with respect to the affected portion of the Premises for
any period prior to substantial completion of the repairs.
(3) It is expressly understood that if Landlord shall be delayed
from substantially completing the repairs due to any acts of Tenant, its agents,
servants, employees or contractors, including, without limitation, by reason of
the performance of any Specialty Alteration (or Alteration, if Landlord is not
obligated to repair same pursuant to the provisions hereof), by reason of
Tenant's failure or refusal to comply or to cause its architects, engineers,
designers and contractors to comply with any of Tenant's obligations described
or referred to in
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this Lease, or if such repairs are not completed because under good construction
scheduling practice such repairs should be performed after completion of any
Specialty Alteration (or Alteration, if Landlord is not obligated to repair same
pursuant to the provisions hereof), then such repairs shall be deemed
substantially complete on the date when the repairs would have been
substantially complete but for such delay and the expiration of the abatement of
the Tenant's obligations hereunder shall not be postponed by reason of such
delay. Any additional costs to Landlord to complete any repairs occasioned by
such delay shall be paid by Tenant to Landlord within ten (10) days after
demand, as additional rent.
Section 10.2. Anything contained in Section 10.1 hereof to the contrary
-------------
notwithstanding, if the Building shall be so damaged by fire or other casualty
that, in Landlord's opinion, substantial alteration, demolition, or
reconstruction of the Building shall be required (whether or not the Premises
shall have been damaged or rendered untenantable), then Landlord, at Landlord's
option, may, not later than ninety (90) days following the damage, give Tenant a
notice in writing terminating this Lease, provided that if the Premises are not
substantially damaged or rendered substantially untenantable, Landlord may not
terminate this Lease unless it shall elect to terminate leases (including this
Lease), affecting at least fifty percent (50%) of the rentable area of the
Building (excluding any rentable area occupied by Landlord or its Affiliates).
If Landlord elects to terminate this Lease, the Term shall expire upon a date
set by Landlord, but not sooner than the thirtieth (30th) day after such notice
is given, and Tenant shall vacate the Premises and surrender the same to
Landlord in accordance with the provisions of Article 20 hereof. Upon the
termination of this Lease under the conditions provided for in this Section
10.2, the Fixed Rent and Escalation Rent and additional rent shall be
apportioned and any prepaid portion of Fixed Rent and Escalation Rent for any
period after such date shall be refunded by Landlord to Tenant.
Section 10.3. (A) Within forty-five (45) days after notice to Landlord of
-------------
any damage described in Section 10.1 hereof, Landlord shall deliver to Tenant a
statement prepared by a reputable contractor setting forth such contractor's
estimate as to the time required to repair such damage, exclusive of time
required to repair any Specialty Alterations (which are Tenant's obligation to
repair) or to perform Long Lead Work. If the estimated time period exceeds
eighteen (18) months from the date of such statement, Tenant may elect to
terminate this Lease by notice to Landlord not later than thirty (30) days
following receipt of such statement. If Tenant makes such election, the Term
shall expire upon the thirtieth (30th) day after notice of such election is
given by Tenant, and Tenant shall vacate the Premises and surrender the same to
Landlord in accordance with the provisions of Article 20 hereof. If Tenant
shall not have elected to terminate this Lease pursuant to this Article 10 (or
is not entitled to terminate this Lease pursuant to this Article 10), the
damages shall be diligently repaired by and at the expense of Landlord as set
forth in Section 10.1 hereof.
(B) Notwithstanding the foregoing, if the Premises shall be
substantially damaged during the last year of the Term, Landlord may elect by
notice, given within thirty (30) days after the occurrence of such damage, to
terminate this Lease and if Landlord makes such election, the Term shall expire
upon the thirtieth (30th) day after notice of such election is given
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by Landlord and Tenant shall vacate the Premises and surrender the same to
Landlord in accordance with the provisions of Article 20 hereof.
(C) Except as expressly set forth in this Section 10.3, Tenant shall
have no other options to cancel this Lease under this Article 10.
Section 10.4. This Article 10 constitutes an express agreement governing
-------------
any 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, and any other law of like nature and purpose now or hereafter in
force shall have no application in any such case.
Section 10.5. The parties hereto shall procure an appropriate clause in,
-------------
or endorsement on, any fire or extended coverage insurance covering the
Premises, the Building and personal property, fixtures and equipment located
thereon or therein, pursuant to which the insurance companies waive subrogation
or consent to a waiver of right of recovery and having obtained such clauses or
endorsements of waiver of subrogation or consent to a waiver of right of
recovery, will not make any claim against or seek to recover from the other for
any loss or damage to its property or the property of others resulting from fire
or other hazards covered by such fire and extended coverage insurance, provided,
however, that the release, discharge, exoneration and covenant not to sue herein
contained shall be limited by and be coextensive with the terms and provisions
of the waiver of subrogation clause or endorsements or clauses or endorsements
consenting to a waiver of right of recovery. If the payment of an additional
premium is required for the inclusion of such waiver of subrogation provision,
each party shall advise the other of the amount of any such additional premiums
and the other party at its own election may, but shall not be obligated to, pay
the same. If such other party shall not elect to pay such additional premium,
the first party shall not be required to obtain such waiver of subrogation
provision. If either party shall be unable to obtain the inclusion of such
clause even with the payment of an additional premium, then such party shall
attempt to name the other party as an additional insured (but not a loss payee)
under the policy. If the payment of an additional premium is required for
naming the other party as an additional insured (but not a loss payee), each
party shall advise the other of the amount of any such additional premium and
the other party at its own election may, but shall not be obligated to, pay the
same. If such other party shall not elect to pay such additional premium or if
it shall not be possible to have the other party named as an additional insured
(but not loss payee), even with the payment of an additional premium, then (in
either event) such party shall so notify the first party and the first party
shall not have the obligation to name the other party as an additional insured.
Tenant acknowledges that Landlord shall not carry insurance on and shall not be
responsible for damage to, Tenant's Property or Specialty Alterations or any
other Alteration prior to the completion of the Initial Alterations, and that
Landlord shall not carry insurance against, or be responsible for any loss
suffered by Tenant due to, interruption of Tenant's business.
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ARTICLE 11
EMINENT DOMAIN
--------------
Section 11.1. If the whole of the Real Property, the Building or the
-------------
Premises shall be acquired or condemned for any public or quasi-public use or
purpose, this Lease and the Term shall end as of the date of the vesting of
title with the same effect as if said date were the Expiration Date. If only a
part of the Real Property and not the entire Premises shall be so acquired or
condemned then, (1) except as hereinafter provided in this Section 11.1, this
Lease and the Term shall continue in force and effect, but, if a part of the
Premises is included in the part of the Real Property so acquired or condemned,
from and after the date of the vesting of title, the Fixed Rent and the Space
Factor shall be reduced in the proportion which the area of the part of the
Premises so acquired or condemned bears to the total area of the Premises
immediately prior to such acquisition or condemnation and Tenant's Tax Share
shall be redetermined based upon the proportion in which the ratio between the
rentable area of the Premises remaining after such acquisition or condemnation
bears to the rentable area of the Building remaining after such acquisition or
condemnation; (2) whether or not the Premises shall be affected thereby,
Landlord, at Landlord's option, may give to Tenant, within sixty (60) days next
following the date upon which Landlord shall have received notice of vesting of
title, a thirty (30) days' notice of termination of this Lease if Landlord
shall elect to terminate leases (including this Lease), affecting at least fifty
percent (50%) of the rentable area of the Building (excluding any rentable area
leased by Landlord or its Affiliates); and (3) if the part of the Real Property
so acquired or condemned shall contain more than fifteen percent (15%) of the
total area of the Premises immediately prior to such acquisition or
condemnation, or if, by reason of such acquisition or condemnation, Tenant no
longer has reasonable means of access to the Premises, Tenant, at Tenant's
option, may give to Landlord, within sixty (60) days next following the date
upon which Tenant shall have received notice of vesting of title, a thirty (30)
days' notice of termination of this Lease. If any such thirty (30) days' notice
of termination is given by Landlord or Tenant, this Lease and the Term shall
come to an end and expire upon the expiration of said thirty (30) days with the
same effect as if the date of expiration of said thirty (30) days were the
Expiration Date. If a part of the Premises shall be so acquired or condemned
and this Lease and the Term shall not be terminated pursuant to the foregoing
provisions of this Section 11.1, Landlord, at Landlord's expense, shall restore
that part of the Premises not so acquired or condemned to a self-contained
rental unit inclusive of Tenant's Alterations (other than Specialty
Alterations), except that if such acquisition or condemnation occurs prior to
completion of the Initial Alterations, Landlord shall only be required to
restore that part of the Premises not so acquired or condemned to a self-
contained rental unit exclusive of Tenant's Alterations. Upon the termination
of this Lease and the Term pursuant to the provisions of this Section 11.1, the
Fixed Rent and Escalation Rent shall be apportioned and any prepaid portion of
Fixed Rent and Escalation Rent for any period after such date shall be refunded
by Landlord to Tenant.
Section 11.2. In the event of any such acquisition or condemnation of all
-------------
or any part of the Real Property, Landlord shall be entitled to receive the
entire award for any such acquisition or condemnation, Tenant shall have no
claim against Landlord or the condemning authority for the value of any
unexpired portion of the Term and Tenant hereby expressly assigns to Landlord
all of its right in and to any such award. Nothing contained in this Section
11.2 shall be deemed
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to prevent Tenant from making a separate claim in any condemnation proceedings
for the then value of any Tenant's Property included in such taking, and for any
moving expenses.
Section 11.3. If the whole or any part of the Premises shall be acquired
-------------
or condemned temporarily during the Term for any public or quasi-public use or
purpose, Tenant shall give prompt notice thereof to Landlord and the Term shall
not be reduced or affected in any way and Tenant shall continue to pay in full
all items of Rental payable by Tenant hereunder without reduction or abatement,
and Tenant shall be entitled to receive for itself any award or payments for
such use, provided, however, that:
(i) if the acquisition or condemnation is for a period
not extending beyond the Term and if such award or payment is made
less frequently than in monthly installments, the same shall be paid
to and held by Landlord as a fund which Landlord shall apply from time
to time to the Rental payable by Tenant hereunder, except that, if by
reason of such acquisition or condemnation changes or alterations are
required to be made to the Premises which would necessitate an
expenditure to restore the Premises, then a portion of such award or
payment considered by Landlord as appropriate to cover the expenses of
the restoration shall be retained by Landlord, without application as
aforesaid, and applied toward the restoration of the Premises as
provided in Section 11.1 hereof; or
(ii) if the acquisition or condemnation is for a period
extending beyond the Term, such award or payment shall be apportioned
between Landlord and Tenant as of the Expiration Date; Tenant's share
thereof, if paid less frequently than in monthly installments, shall
be paid to Landlord and applied in accordance with the provisions of
clause (i) above, provided, however, that the amount of any award or
payment allowed or retained for restoration of the Premises shall
remain the property of Landlord if this Lease shall expire prior to
the restoration of the Premises.
ARTICLE 12
ASSIGNMENT, SUBLETTING, MORTGAGE, ETC.
--------------------------------------
Section 12.1. (A) Except as expressly permitted herein, Tenant, without
-------------
the prior consent of Landlord in each instance, shall not (a) assign its rights
or delegate its duties under this Lease (whether by operation of law, transfers
of interests in Tenant or otherwise), mortgage or encumber its interest in this
Lease, in whole or in part, (b) sublet, or permit the subletting of, the
Premises or any part thereof, or (c) permit the Premises or any part thereof to
be occupied or used for desk space, mailing privileges or otherwise, by any
Person other than Tenant.
(B) If this Lease is assigned to any person or entity pursuant to the
provisions of the Bankruptcy Code, any and all monies or other consideration
payable or otherwise to be
26
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delivered in connection with such assignment shall be paid or delivered to
Landlord, shall be and remain the exclusive property of Landlord and shall not
constitute property of Tenant or of the estate of Tenant within the meaning of
the Bankruptcy Code. Any and all monies or other consideration constituting
Landlord's property under the preceding sentence not paid or delivered to
Landlord shall be held in trust for the benefit of Landlord and shall be
promptly paid to or turned over to Landlord.
Section 12.2. (A) If Tenant's interest in this Lease is assigned in
-------------
violation of the provisions of this Article 12, such assignment shall be void
and of no force and effect against Landlord; provided, however, that Landlord
may collect an amount equal to the then Fixed Rent plus any other item of Rental
from the assignee as a fee for its use and occupancy, and shall apply the net
amount collected to the Fixed Rent and other items of Rental reserved in this
Lease. If the Premises or any part thereof are sublet to, or occupied by, or
used by, any Person other than Tenant, whether or not in violation of this
Article 12, Landlord, after default by Tenant under this Lease, including,
without limitation, a subletting or occupancy in violation of this Article 12,
may collect any item of Rental or other sums paid by the subtenant, user or
occupant as a fee for its use and occupancy, and shall apply the net amount
collected to the Fixed Rent and other items of Rental reserved in this Lease.
No such assignment, subletting, occupancy or use, whether with or without
Landlord's prior consent, nor any such collection or application of Rental or
fee for use and occupancy, shall be deemed a waiver by Landlord of any term,
covenant or condition of this Lease or the acceptance by Landlord of such
assignee, subtenant, occupant or user as tenant hereunder. The consent by
Landlord to any assignment, subletting, occupancy or use shall not relieve
Tenant from its obligation to obtain the express prior consent of Landlord to
any further assignment, subletting, occupancy or use.
(B) Tenant shall reimburse Landlord on demand for any costs that may
be reasonably incurred by Landlord in connection with any proposed assignment of
Tenant's interest in this Lease or any proposed subletting of the Premises or
any part thereof, including, without limitation, any reasonable processing fee,
reasonable attorneys' fees and disbursements and the reasonable costs of making
investigations as to the acceptability of the proposed subtenant or the proposed
assignee.
(C) Neither any assignment of Tenant's interest in this Lease nor any
subletting, occupancy or use of the Premises or any part thereof by any Person
other than Tenant, nor any collection of Rental by Landlord from any Person
other than Tenant as provided in this Section 12.2, nor any application of any
such Rental as provided in this Section 12.2 shall, in any circumstances,
relieve Tenant of its obligations under this Lease on Tenant's part to be
observed and performed.
(D) Any Person to which this Lease is assigned pursuant to the
provisions of the Bankruptcy Code shall be deemed without further act or deed to
have assumed all of the obligations arising under this Lease on and after the
date of such assignment. Any such assignee shall execute and deliver to
Landlord upon demand an instrument confirming such assumption. No assignment of
this Lease shall relieve Tenant of its obligations hereunder and, subsequent to
27
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any assignment, Tenant's liability hereunder shall continue notwithstanding any
subsequent modification or amendment hereof or the release of any subsequent
tenant hereunder from any liability, to all of which Tenant hereby consents in
advance.
Section 12.3. (A) If Tenant assumes this Lease and proposes to assign
-------------
the same pursuant to the provisions of the Bankruptcy Code to any Person who
shall have made a bona fide offer to accept an assignment of this Lease on terms
---------
acceptable to Tenant, then notice of such proposed assignment shall be given to
Landlord by Tenant no later than twenty (20) days after receipt by Tenant, but
in any event no later than ten (10) days prior to the date that Tenant shall
make application to a court of competent jurisdiction for authority and approval
to enter into such assignment and assumption. Such notice shall set forth (a)
the name and address of such Person, (b) all of the terms and conditions of such
offer, and (c) adequate assurance of future performance by such Person under the
Lease as set forth in Paragraph (B) below, including, without limitation, the
assurance referred to in Section 365(b)(3) of the Bankruptcy Code. Landlord
shall have the prior right and option, to be exercised by notice to Tenant given
at any time prior to the effective date of such proposed assignment, to accept
an assignment of this Lease upon the same terms and conditions and for the same
consideration, if any, as the bona fide offer made by such Person, less any
---------
brokerage commissions which would otherwise be payable by Tenant out of the
consideration to be paid by such Person in connection with the assignment of
this Lease.
(B) The term "adequate assurance of future performance" as used in
this Lease shall mean that any proposed assignee shall, among other things, (a)
deposit with Landlord on the assumption of this Lease the sum of the then Fixed
Rent as security for the faithful performance and observance by such assignee of
the terms and obligations of this Lease, which sum shall be held by Landlord in
accordance with the provisions of Article 31 hereof, (b) furnish Landlord with
financial statements of such assignee for the prior three (3) fiscal years, as
finally determined after an audit and certified as correct by a certified public
accountant, which financial statements shall show a net worth of at least six
(6) times the then Fixed Rent for each of such three (3) years, (c) grant to
Landlord a security interest in such property of the proposed assignee as
Landlord shall deem necessary to secure such assignee's future performance under
this Lease, and (d) provide such other information or take such action as
Landlord, in its reasonable judgment shall determine is necessary to provide
adequate assurance of the performance by such assignee of its obligations under
the Lease.
Section 12.4. (A) As long as XOOM.com, Inc. is Tenant, Tenant shall have
-------------
the privilege, subject to the terms and conditions hereinafter set forth,
without the consent of Landlord but subject to Tenant's satisfaction of
conditions set forth in clauses (1), (4) and (5) of Section 12.8(A) hereof, and
without Landlord having the right granted in Section 12.8(B) hereof to
recapture, to assign its interest in this Lease (i) to any corporation which is
a successor to Tenant either by merger or consolidation, (ii) to a purchaser of
all or substantially all of Tenant's assets (provided such purchaser shall have
also assumed substantially all of Tenant's liabilities) or (iii) to a Person
which shall (1) Control, (2) be under the Control of, or (3) be under common
Control with Tenant (any such Person referred to in this clause (iii) being a
"Related Entity"). As
--------------
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long as XOOM.com, Inc. is Tenant, Tenant also shall have the privilege, subject
to the terms and conditions hereinafter set forth, without the consent of
Landlord but subject to Tenant's satisfaction of conditions set forth in clauses
(3), (6) through (8) and (10) of Section 12.6(A) and without Landlord having the
right granted in Section 12.6(B) hereof to recapture, to sublease all or any
portion of the Premises to a Related Entity. Any assignment or subletting
described above may only be made upon the condition that (a) any such assignee
or subtenant shall continue to use the Premises for general, administrative and
executive offices, (b) the principal purpose of such assignment or sublease is
not the acquisition of Tenant's interest in this Lease or to circumvent the
provisions of Section 12.1 of this Article (except if such assignment or
sublease is made to a Related Entity and is made for a valid intracorporate
business purpose and is not made to circumvent the provisions of Section 12.1 of
this Article), and (c) in the case of an assignment, any such assignee shall
have a net worth and annual income and cash flow, determined in accordance with
generally accepted accounting principles, consistently applied, after giving
effect to such assignment, equal to the greater of Tenant's net worth and annual
income and cash flow, as so determined, on (i) the date immediately preceding
the date of such assignment, and (ii) the Commencement Date. Tenant shall,
within ten (10) Business Days after execution thereof, deliver to Landlord
either (x) a duplicate original instrument of assignment in form and substance
reasonably satisfactory to Landlord, duly executed by Tenant, together with an
instrument in form and substance reasonably satisfactory to Landlord, duly
executed by the assignee, in which such assignee shall assume observance and
performance of, and agree to be personally bound by, all of the terms, covenants
and conditions of this Lease on Tenant's part to be observed and performed, or
(y) a duplicate original sublease in form and substance reasonably satisfactory
to Landlord, duly executed by Tenant and the subtenant.
(B) If Tenant is a partnership, the admission of new Partners, the
withdrawal, retirement, death, incompetency or bankruptcy of any Partner, or the
reallocation of partnership interests among the Partners shall not constitute an
assignment of this Lease, provided the principal purpose of any of the foregoing
is not to circumvent the restrictions on assignment set forth in the provisions
of this Article 12. The reorganization of Tenant from a professional corporation
into a partnership or the reorganization of a Tenant from a partnership into a
professional corporation, shall not constitute an assignment of this Lease,
provided that immediately following such reorganization the Partners of Tenant
shall be the same as the shareholders of Tenant existing immediately prior to
such reorganization, or the shareholders of Tenant shall be the same as the
Partners of Tenant existing immediately prior to such reorganization, as the
case may be. If Tenant shall become a professional corporation, each individual
shareholder in Tenant and each employee of a professional corporation which is a
shareholder in Tenant shall have the same personal liability as such individual
or employee would have under this Lease if Tenant were a partnership and such
individual or employee were a Partner in Tenant. If any individual Partner in
Tenant is or becomes an employee of a professional corporation, such individual
shall have the same personal liability under this Lease as such individual would
have if he and not the professional corporation were a Partner of Tenant.
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(C) Except as set forth above, either a transfer (including the
issuance of treasury stock or the creation and issuance of new stock or a new
class of stock) of a more than fifty percent (50%) interest in the shares of
Tenant (if Tenant is a corporation or trust) or a transfer of a majority of the
total interest in Tenant (if Tenant is a partnership or other entity) at any one
time or over a period of time through a series of transfers, shall be deemed an
assignment of this Lease and shall be subject to all of the provisions of this
Article 12, including, without limitation, the requirement that Tenant obtain
Landlord's prior consent thereto. The transfer of shares of Tenant (if Tenant
is a corporation or trust) for purposes of this Section 12.4 shall not include
the sale of shares by persons other than those deemed "insiders" within the
meaning of the Securities Exchange Act of 1934, as amended, which sale is
effected through the "over-the-counter market" or through any recognized stock
exchange.
Section 12.5. If, at any time after the originally named Tenant herein may
-------------
have assigned Tenant's interest in this Lease, this Lease shall be disaffirmed
or rejected in any proceeding of the types described in paragraph (E) of Section
16.1 hereof, or in any similar proceeding, or in the event of termination of
this Lease by reason of any such proceeding or by reason of lapse of time
following notice of termination given pursuant to said Article 16 based upon any
of the Events of Default set forth in such paragraph, any prior Tenant,
including, without limitation, the originally named Tenant, upon request of
Landlord given within thirty (30) days next following any such disaffirmance,
rejection or termination (and actual notice thereof to Landlord in the event of
a disaffirmance or rejection or in the event of termination other than by act of
Landlord), shall (1) pay to Landlord all Fixed Rent, Escalation Rent and other
items of Rental due and owing by the assignee to Landlord under this Lease to
and including the date of such disaffirmance, rejection or termination, and (2)
as "tenant", enter into a new lease with Landlord of the Premises for a term
commencing on the effective date of such disaffirmance, rejection or termination
and ending on the Expiration Date, unless sooner terminated as in such lease
provided, at the same Fixed Rent and upon the then executory terms, covenants
and conditions as are contained in this Lease, except that (a) Tenant's rights
under the new lease shall be subject to the possessory rights of the assignee
under this Lease and the possessory rights of any person claiming through or
under such assignee or by virtue of any statute or of any order of any court,
(b) such new lease shall require all defaults existing under this Lease to be
cured by Tenant with due diligence, and (c) such new lease shall require Tenant
to pay all Escalation Rent reserved in this Lease which, had this Lease not been
so disaffirmed, rejected or terminated, would have accrued under the provisions
of Article 27 hereof after the date of such disaffirmance, rejection or
termination with respect to any period prior thereto. If any such prior Tenant
shall default in its obligation to enter into said new lease for a period of ten
(10) days next following Landlord's request therefor, then, in addition to all
other rights and remedies by reason of such default, either at law or in equity,
Landlord shall have the same rights and remedies against such Tenant as if such
Tenant had entered into such new lease and such new lease had thereafter been
terminated as of the commencement date thereof by reason of such Tenant's
default thereunder.
Section 12.6. (A) Notwithstanding the provisions of Section 12.1 hereof,
-------------
if Landlord shall not exercise its rights pursuant to paragraph (B) of this
Section 12.6, Landlord shall not unreasonably withhold its consent to any
subletting of the Premises, provided that:
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(1) The Premises shall not, without Landlord's prior consent,
have been listed or otherwise publicly advertised for subletting at a rental
rate less than the greater of (i) the sum of the Fixed Rent, Electricity
Additional Rent, and Escalation Rent then payable hereunder, and (ii) the
prevailing rental rate set by Landlord for comparable space in the Building or
if there is no comparable space, the prevailing rental rate reasonably
determined by Landlord (the "Prevailing Rate"), nor shall Tenant advise any
---------------
broker, agent, finder or prospective subtenant that Tenant intends to sublet the
Premises at a rate less than the Prevailing Rate;
(2) Intentionally Omitted Prior to Execution;
(3) no Event of Default shall have occurred and be continuing;
(4) upon the date Tenant delivers the Tenant Statement to
Landlord and upon the date immediately preceding the commencement date of any
sublease approved by Landlord, the proposed subtenant shall have a financial
standing (taking into consideration the obligations of the proposed subtenant
under the sublease) reasonably satisfactory to Landlord, be of a character, be
engaged in a business, and propose to use the Premises in a manner in keeping
with the standards in such respects of the other tenancies in the Building;
(5) the proposed subtenant (or any Person who directly or
indirectly, Controls, is Controlled by or is under common Control with the
proposed subtenant) shall not be a tenant or subtenant of any space in the
Building, nor shall the proposed subtenant (or any Person who directly or
indirectly, Controls, is Controlled by or is under common Control with the
proposed subtenant) be a Person with whom Landlord is negotiating or discussing
to lease space in the Building; if Tenant shall propose to sublease space and is
about to commence negotiations with a tenant, subtenant or prospective
subtenant, Tenant shall advise Landlord of the identity of such prospective
subtenant and Landlord shall promptly advise Tenant if the execution of a
sublease with such tenant, subtenant or prospective subtenant would violate the
provisions of this clause (5);
(6) the character of the business to be conducted or the
proposed use of the Premises by the proposed subtenant shall not (a) be likely
to increase Landlord's operating expenses beyond that which would be incurred
for use by Tenant or for use in accordance with the standards of use of other
tenancies in the Building; (b) increase the burden on existing cleaning services
or elevators over the burden prior to such proposed subletting; (c) violate any
provision or restrictions herein relating to the use or occupancy of the
Premises; (d) require any alterations, installations, improvements, additions or
other physical changes to be performed in or made to any portion of the Building
or the Real Property other than the Premises; or (e) violate any provision or
restrictions in any other lease for space in the Building or in any Superior
Lease or Mortgage; if Landlord shall have consented to a sublease and, as a
result of the use and occupancy of the subleased portion of the Premises by the
subtenant, operating expenses are increased, then Tenant shall pay to Landlord,
within ten (10) days after demand, as additional rent, all resulting increases
in operating expenses;
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(7) the subletting shall be expressly subject to all of the
terms, covenants, conditions and obligations on Tenant's part to be observed and
performed under this Lease and the further condition and restriction that the
sublease shall not be modified without the prior written consent of Landlord,
which consent shall not be unreasonably withheld, or assigned (by operation of
law or otherwise; for purposes of this clause (7), the transfer of a majority of
the issued and outstanding capital stock of any corporate subtenant or the
transfer of a majority of the total interest in a subtenant (if a partnership or
other entity), however accomplished, whether in a single transaction or in a
series of related or unrelated transactions, shall be deemed an assignment of
the sublease, except that the transfer of the outstanding capital stock of a
corporate subtenant shall be deemed not to include the sale of such stock by
persons other than those deemed "insiders" within the meaning of the Securities
Exchange Act of 1934, as amended, which sale is effected through the "over-the-
counter market" or through any recognized stock exchange) encumbered or
otherwise transferred or the subleased premises further sublet by the subtenant
in whole or in part, or any part thereof suffered or permitted by the subtenant
to be used or occupied by others, without the prior written consent of Landlord
in each instance;
(8) the subletting shall end no later than one (1) day before
the Expiration Date and shall not be for a term of less than two (2) years
unless it commences less than two (2) years before the Expiration Date;
(9) no subletting shall be for less than Three Thousand Two
Hundred Sixty-Five (3,265) contiguous rentable square feet and at no time shall
there be more than two (2) occupants, including Tenant, in the Premises; and
(10) such sublease shall expressly provide that in the event of
termination, re-entry or dispossess of Tenant by Landlord under this Lease,
Landlord may, at its option, take over all of the right, title and interest of
Tenant, as sublessor under such sublease, and such subtenant, at Landlord's
option, shall attorn to Landlord pursuant to the then executory provisions of
such sublease, except that Landlord shall not be:
(i) liable for any act or omission of Tenant under such
sublease, or
(ii) subject to any defense or offsets which such
subtenant may have against Tenant, or
(iii) bound by any previous payment which such subtenant
may have made to Tenant more than thirty (30) days in advance of the date upon
which such payment was due, unless previously approved by Landlord, or
(iv) bound by any obligation to make any payment to or on
behalf of such subtenant, or
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(v) bound by any obligation to perform any work or to
make improvements to the Premises, or
(vi) bound by any amendment or modification of such
sublease made without its consent, or
(vii) bound to return such subtenant's security deposit, if
any, until such deposit has come into its actual possession and such subtenant
would be entitled to such security deposit pursuant to the terms of such
sublease.
(B) At least fifteen (15) Business Days prior to any proposed
subletting of the Premises for which Landlord's consent is required, Tenant
shall submit a statement to Landlord (a "Tenant Statement") containing the
----------------
following information: (a) the name and address of the proposed subtenant, (b)
a description of the portion of the Premises to be sublet, (c) the terms and
conditions of the proposed subletting, including, without limitation, the rent
payable and the value (including cost, overhead and supervision) of any
improvements (including any demolition to be performed) to the Premises for
occupancy by such subtenant, (d) the nature and character of the business of the
proposed subtenant, and (e) any other information that Landlord may reasonably
request, together with a statement specifically directing Landlord's attention
to the provisions of this Section 12.6(B) requiring Landlord to respond to
Tenant's request within fifteen (15) Business Days after Landlord's receipt of
the Tenant Statement. Landlord shall have the right, exercisable by notice to
Tenant within fifteen (15) Business Days after Landlord's receipt of the Tenant
Statement, to sublet (in its own name or that of its designee) such portion of
the Premises ("Recapture Space") from Tenant on the terms and conditions set
---------------
forth in the Tenant Statement, subject to the further provisions of paragraph
(C) of this Section 12.6. If Landlord shall fail to notify Tenant within said
fifteen (15) Business Day period of Landlord's intention to exercise its rights
pursuant to this Section 12.6(B) hereof or of Landlord's consent to or
disapproval of the proposed subletting pursuant to the Tenant Statement as
contemplated by Section 12.6(A) hereof, or if Landlord shall have consented to
such subletting as provided in Section 12.6(A) hereof, Tenant shall have the
right to sublease such portion of the Premises to such proposed subtenant on the
same terms and conditions set forth in the Tenant Statement, subject to the
terms and conditions of this Lease, including, without limitation, paragraph (A)
of this Section 12.6. If Tenant shall not enter into such sublease within sixty
(60) days after the delivery of the Tenant Statement to Landlord, then the
provisions of Section 12.1 hereof and this Section 12.6 shall again be
applicable to any other proposed subletting. If Tenant shall enter into such
sublease within sixty (60) days as aforesaid, Tenant shall deliver a true,
complete and fully executed counterpart of such sublease to Landlord within five
(5) days after execution thereof.
(C) If Landlord exercises its option to sublet the Recapture Space,
such sublease to Landlord or its designee as subtenant (each, a "Recapture
---------
Sublease") shall:
- --------
(1) be at a rental equal to the lesser of (x) the sum of the
Rent Per Square Foot multiplied by the number of rentable square feet of the
Recapture Space, and (y) the sublease rent set forth in the Tenant Statement,
and otherwise be upon the same terms and
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conditions as those contained in this Lease (as modified by the Tenant
Statement, except such as are irrelevant or inapplicable and except as otherwise
expressly set forth to the contrary in this paragraph (C);
(2) give the subtenant the unqualified and unrestricted right,
without Tenant's permission, to assign such sublease and to further sublet the
Recapture Space or any part thereof and to make any and all changes,
alterations, and improvements in the Recapture Space;
(3) provide in substance that any such changes, alterations, and
improvements made in the Recapture Space may be removed, in whole or in part,
prior to or upon the expiration or other termination of the Recapture Sublease
provided that any material damage and injury caused thereby shall be repaired;
(4) provide that (i) the parties to such Sublease expressly
negate any intention that any estate created under such Sublease be merged with
any other estate held by either of said parties, (ii) prior to the commencement
of the term of the Recapture Sublease, Tenant, at its sole cost and expense
(unless the Tenant Statement provides otherwise), shall make such alterations as
may be required or reasonably deemed necessary by the subtenant to physically
separate the Recapture Space, if such Space constitutes a portion of the
Premises, from the balance of the Premises and to provide appropriate means of
ingress to and egress thereto and to the public portions of the balance of the
floor such as toilets, janitor's closets, telephone and electrical closets, fire
stairs, elevator lobbies, etc., and (iii) at the expiration of the term of such
Sublease, Tenant shall accept the Recapture Space in its then existing
condition, broom clean; and
(5) provide that the subtenant or occupant may use and occupy
the Recapture Space for any lawful purpose (without regard to any limitation set
forth in the Tenant Statement).
(D) Performance by Landlord, or its designee, under a Recapture
Sublease shall be deemed performance by Tenant of any similar obligation under
this Lease and Tenant shall not be liable for any default under this Lease or
deemed to be in default hereunder if such default is occasioned by or arises
from any act or omission of the subtenant under the Recapture Sublease or is
occasioned by or arises from any act or omission of any occupant under the
Recapture Sublease.
(E) If Landlord is unable to give Tenant possession of the Recapture
Space at the expiration of the term of the Recapture Sublease by reason of the
holding over or retention of possession of any tenant or other occupant, then
(w) Landlord shall continue to pay all charges previously payable, and comply
with all other obligations, under the Recapture Sublease until the date upon
which Landlord shall give Tenant possession of the Recapture Space free of
occupancies, (x) neither the Expiration Date nor the validity of this Lease
shall be affected, (y) Tenant waives any rights under Section 223-a of the Real
Property Law of New York, or any successor statute of similar import, to rescind
this Lease and further waives the right to recover
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any damages from Landlord which may result from the failure of Landlord to
deliver possession of the Recapture Space at the end of the term of the
Recapture Sublease, and (z) Landlord, at Landlord's expense, shall use its
reasonable efforts to deliver possession of the Recapture Space to Tenant and in
connection therewith, if necessary, shall institute and diligently and in good
faith prosecute holdover and any other appropriate proceedings against the
occupant of such Space; if Landlord fails to prosecute such proceedings in such
manner and such failure continues after reasonable notice thereof by Tenant,
Tenant may prosecute such proceedings in Landlord's name and at Landlord's
expense.
(F) The failure by Landlord to exercise its option under Section
12.6(B) with respect to any subletting shall not be deemed a waiver of such
option with respect to any extension of such subletting or any subsequent
subletting of the Premises affected thereby.
Section 12.7. (A) In connection with any subletting of all or a portion
-------------
of the Premises, Tenant shall pay to Landlord an amount equal to fifty percent
(50%) of any Sublease Profit derived therefrom. Anything contained herein to
the contrary notwithstanding Tenant shall not be entitled to any proceeds
derived from or relating to (directly or indirectly) any subletting of the
Recapture Space by Landlord or its designee to a subtenant. All sums payable
hereunder by Tenant shall be calculated on an annualized basis, but shall be
paid to Landlord, as additional rent, within ten (10) days after receipt thereof
by Tenant.
(B) For purposes of this Lease:
(1) "Rent Per Square Foot" shall mean the sum of the then Fixed
Rent, Escalation Rent, and, if applicable, Electricity Additional Rent divided
by the Space Factor.
(2) "Sublease Profit" shall mean the product of (x) the Sublease
---------------
Rent Per Square Foot less the Rent Per Square Foot, and (y) the number of
rentable square feet constituting the portion of the Premises sublet by Tenant.
(3) "Sublease Rent" shall mean any rent or other consideration
-------------
paid to Tenant directly or indirectly by any subtenant or any other amount
received by Tenant from or in connection with any subletting (including, but not
limited to, sums paid for the sale or rental, or consideration received on
account of any contribution, of Tenant's Property or sums paid in connection
with the supply of electricity or HVAC) less the Sublease Expenses.
(4) "Sublease Expenses" shall mean: (i) in the event of a sale
-----------------
of Tenant's Property, the then unamortized or undepreciated cost thereof
determined on the basis of Tenant's federal income tax returns, (ii) the
reasonable out-of-pocket costs and expenses of Tenant in making such sublease,
such as brokers' fees, attorneys' fees, and advertising fees paid to unrelated
third parties, (iii) any sums paid to Landlord pursuant to Section 12.2(B)
hereof, (iv) the cost of improvements or alterations made by Tenant expressly
and solely for the purpose of preparing that portion of the Premises for such
subtenancy if not used by Tenant subsequent to the expiration of the term of the
sublease, and (v) the unamortized or undepreciated cost of any
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Tenant's Property leased to and used by such subtenant. In determining Sublease
Rent, the costs set forth in clauses (ii), (iii) and (iv) shall be amortized on
a straight-line basis over the term of such sublease and the costs set forth in
clause (v) shall be amortized on a straight line basis over the greater of the
longest useful life of such improvements, alterations or Property (as permitted
pursuant to the Internal Revenue Code of 1986, as amended) and the term of such
sublease.
(5) "Sublease Rent Per Square Foot" shall mean the Sublease Rent
-----------------------------
divided by the rentable square feet of the space demised under the sublease in
question.
(6) Sublease Profit shall be recalculated from time to time to
reflect any corrections in the prior calculation thereof due to (i) subsequent
payments received or made by Tenant, (ii) the final adjustment of payments to be
made by or to Tenant, and (iii) mistake. Promptly after receipt or final
adjustment of any such payments or discovery of any such mistake, Tenant shall
submit to Landlord a recalculation of the Sublease Profit, and an adjustment
shall be made between Landlord and Tenant, on account of prior payments made or
credits received pursuant to this Section 12.7. In addition, if Sublease
Expenses utilized for the purpose of calculating Sublease Profit included an
amount attributable to the cost of the improvements made by Tenant expressly and
solely for the purpose of preparing the Premises or a portion thereof for the
occupancy of the subtenant and subsequent to the expiration of the sublease such
improvements and/or alterations were not demolished and/or removed, Sublease
Profits shall be recalculated as if the cost of such improvements and/or
alterations were not incurred by Tenant and Tenant promptly shall pay to
Landlord fifty percent (50%) of the additional amount of such Sublease Profit
resulting from such recalculation.
Section 12.8. (A) Notwithstanding the provisions of Section 12.1 hereof,
-------------
if Landlord shall not exercise its rights pursuant to paragraph (B)(2) of this
Section 12.8, Landlord shall not unreasonably withhold its consent to an
assignment of this Lease in its entirety provided that:
(1) no Event of Default shall have occurred and be continuing;
(2) upon the date Tenant delivers the Assignment Statement to
Landlord and upon the date immediately preceding the date of any assignment
approved by Landlord, the proposed assignee shall have a financial standing
(taking into consideration the obligations of the proposed assignee under this
Lease) reasonably satisfactory to Landlord, be of a character, be engaged in a
business, and propose to use the Premises in a manner in keeping with the
standards in such respects of the other tenancies in the Building;
(3) the proposed assignee (or any Person who directly or
indirectly, Controls, is Controlled by or is under common Control with the
proposed assignee) shall not be a person or entity with whom Landlord is
negotiating to lease space in the Building at the time of receipt of an
Assignment Statement;
(4) the character of the business to be conducted or the
proposed use of the Premises by the proposed assignee shall not (a) be likely to
increase Landlord's operating
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expenses beyond that which would be incurred for use by Tenant or for use in
accordance with the standards of use of other tenancies in the Building; (b)
increase the burden on existing cleaning services or elevators over the burden
prior to such proposed assignment; (c) violate any provision or restrictions
herein relating to the use or occupancy of the Premises; (d) require any
alterations, installations, improvements, additions or other physical changes to
be performed in or made to any portion of the Building or the Real Property
other than the Premises; or (e) violate any provision or restrictions in any
other lease for space in the Building or in any Superior Lease or Mortgage; if
Landlord shall have consented to an assignment and, as a result of the use and
occupancy of the Premises by Tenant/assignee, operating expenses are increased,
then Tenant shall pay to Landlord, within ten (10) days after demand, as
additional rent, all resulting increases in operating expenses; and
(5) the assignee shall agree to assume all of the obligations of
Tenant under this Lease from and after the date of the assignment.
(B) (1) At least fifteen (15) Business Days prior to any proposed
assignment, Tenant shall submit a statement to Landlord (the "Assignment
----------
Statement") containing the following information: (i) the name and address of
- ---------
the proposed assignee, (ii) the essential terms and conditions of the proposed
assignment, including, without limitation, the consideration payable for such
assignment and the value (including cost, overhead and supervision) of any
improvements (including any demolition to be performed) to the Premises proposed
to be made by Tenant to prepare the Premises for occupancy by such assignee,
(iii) the nature and character of the business of the proposed assignee, and
(iv) any other information that Landlord may reasonably request, together with a
statement specifically directing Landlord's attention to the provisions of this
Section 12.8(B) requiring Landlord to respond to Tenant's request within fifteen
(15) Business Days after Landlord's receipt of the Assignment Statement. The
Assignment Statement shall be executed by Tenant and the proposed assignee and
shall indicate both parties' intent (but not necessarily binding obligation) to
enter into an assignment agreement conforming to the terms and conditions of the
Assignment Statement and on such other terms and conditions to which the parties
may agree which are not inconsistent with the essential terms set forth in the
Assignment Statement.
(2) Landlord shall have the right, exercisable within fifteen
(15) Business Days after Landlord's receipt of the Assignment Statement, to take
an assignment of this Lease (in its own name or that of its designee) for the
same consideration payable to Tenant pursuant to the terms of the Assignment
Statement (less the amount of any brokerage commission which would have been
payable on account of the assignment pursuant to the Assignment Statement),
provided Landlord shall take possession of the Premises "as is" in its condition
as of the date of such assignment and shall be entitled to a credit against the
consideration otherwise payable in the amount, if any, of the value of any
improvements, work or demolition proposed to be provided or performed by Tenant
pursuant to the Assignment Statement.
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(3) If Landlord shall fail to notify Tenant within said fifteen
(15) Business Day period of Landlord's intention to exercise its rights pursuant
to paragraph (B)(2) of this Section 12.8 or of Landlord's consent to or
disapproval of the proposed assignment pursuant to the Assignment Statement, or
if Landlord shall have consented to such assignment as provided in Section
12.8(A) hereof, Tenant shall be free to assign the Premises to such proposed
assignee on the same terms and conditions set forth in the Assignment Statement.
If Tenant shall not enter into such assignment within sixty (60) days after the
delivery of the Assignment Statement to Landlord, then the provisions of this
Section 12.8 shall again be applicable in their entirety to any proposed
assignment.
(4) If Tenant shall propose to assign this Lease and is about to
commence negotiations with a prospective assignee, Tenant shall advise Landlord
of the identity of such prospective assignee and Landlord shall, within five (5)
Business Days, advise Tenant if the execution of an assignment agreement with
such prospective assignee would violate the provisions of paragraph (A)(3) of
this Section 12.8.
(C) If Tenant shall assign this Lease, Tenant shall deliver to
Landlord, within five (5) days after execution thereof, (x) a duplicate original
instrument of assignment in form and substance reasonably satisfactory to
Landlord, duly executed by Tenant, and (y) an instrument in form and substance
reasonably satisfactory to Landlord, duly executed by the assignee, in which
such assignee shall assume observance and performance of, and agree to be
personally bound by, all of the terms, covenants and conditions of this Lease on
Tenant's part to be observed and performed.
(D) Tenant shall pay to Landlord, upon receipt thereof, an
amount equal to fifty percent (50%) of all Assignment Proceeds. For purposes of
this paragraph (D), "Assignment Proceeds" shall mean all consideration payable
-------------------
to Tenant, directly or indirectly, by any assignee, including Landlord pursuant
to paragraph (B) of this Section 12.8, or any other amount received by Tenant
from or in connection with any assignment (including, but not limited to, sums
paid for the sale or rental, or consideration received on account of any
contribution, of Tenant's Property) after deducting therefrom: (i) in the event
of a sale (or contribution) of Tenant's Property, the then unamortized or
undepreciated cost thereof determined on the basis of Tenant's federal income
tax returns, (ii) the reasonable out-of-pocket costs and expenses of Tenant in
making such assignment, such as brokers' fees, attorneys' fees, and advertising
fees paid to unrelated third parties, (iii) any payments required to be made by
Tenant in connection with the assignment of its interest in this Lease pursuant
to Article 31-B of the Tax law of the State of New York or any real property
transfer tax of the United States or the City or State of New York (other than
any income tax), (iv) any sums paid by Tenant to Landlord pursuant to Section
12.2(B) hereof, (v) the cost of improvements or alterations made by Tenant
expressly and solely for the purpose of preparing the Premises for such
assignment, as determined by Tenant's federal income tax returns, (vi) the
unamortized or undepreciated cost of any Tenant's Property leased to and used by
such assignee, and (vii) the then unamortized or undepreciated cost of the
Alterations determined on the basis of Tenant's federal income tax returns. If
the consideration paid to Tenant for any assignment shall be paid in
installments, then the expenses specified in this paragraph (D) shall be
amortized over the period during which such installments shall be
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payable. If Landlord exercises its right to take an assignment of this Lease
pursuant to the provisions of Section 12.8(B) hereof, in no event shall Tenant
be entitled to any proceeds derived from or relating to (directly or indirectly)
any lease or sublease of the Premises by Landlord or further assignment of the
Lease.
Section 12.9. Notwithstanding any other provision of this Lease, neither
-------------
Tenant nor any direct or indirect assignee or subtenant of Tenant may enter into
any lease, sublease, license, concession or other agreement for use, occupancy
or utilization of space in the Premises which provides for a rental or other
payment for such use, occupancy or utilization based in whole or in part on the
net income or profits derived by any person from the property leased, occupied
or utilized, or which would require the payment of any consideration which would
not fall within the definition of "rents from real property", as that term is
defined in Section 856(d) of the Internal Revenue Code of 1986, as amended.
ARTICLE 13
ELECTRICITY
-----------
Section 13.1. Tenant shall at all times comply with the rules,
-------------
regulations, terms and conditions applicable to service, equipment, wiring and
requirements of the public utility supplying electricity to the Building.
Tenant shall not use any electrical equipment which, in Landlord's reasonable
judgment, would exceed the capacity of existing feeders to the Building or the
risers or wiring installations therein or which will overload such installations
or interfere with the electrical service to other tenants of the Building. In
the event that, in Landlord's sole judgment, Tenant's electrical requirements
necessitate installation of an additional riser, risers or other proper and
necessary equipment, Landlord shall so notify Tenant of same. Within five (5)
Business Days after receipt of such notice, Tenant shall either cease such use
of such additional electricity or shall request that additional electrical
capacity (specifying the amount requested) be made available to Tenant.
Landlord, in Landlord's reasonable judgment shall determine whether to make
available such additional electrical capacity to Tenant and the amount of such
additional electrical capacity to be made available. If Landlord shall agree to
make available additional electrical capacity and the same necessitates
installation of an additional riser, risers or other proper and necessary
equipment, including, without limitation, any switchgear, the same shall be
installed by Landlord. Any such installation shall be made at Tenant's sole
cost and expense, and shall be chargeable and collectible as additional rent and
paid within ten (10) days after the rendition of a bill to Tenant therefor.
Landlord shall not be liable in any way to Tenant for any failure or defect in
the supply or character of electric service furnished to the Premises by reason
of any requirement, act or omission of the utility serving the Building or for
any other reason not attributable to the gross negligence of Landlord, whether
electricity is provided by public or private utility or by any electricity
generation system owned and operated by Landlord.
Section 13.2. (A) Unless Landlord elects to supply electricity to the
-------------
Premises pursuant to Section 13.3 or Landlord elects to have Tenant obtain
electricity from the public utility furnishing electricity to the Building
pursuant to the provisions of Section 13.4 hereof, Landlord
39
<PAGE>
shall furnish electric current to the Premises for the use of Tenant for the
operation of the lighting fixtures and the electrical receptacles for ordinary
office equipment in the Premises on a "rent inclusion" basis, that is, there
shall be no separate charge to Tenant for such electric current by way of
measuring such electricity service on any meter. The Fixed Rent set forth in
this Lease includes an annual charge for electricity service of Nineteen
Thousand Five Hundred Ninety-Three Dollars ($19,593) (such amount, as it may be
increased pursuant to the provisions of this Lease, being referred to as the
"Electricity Inclusion Factor"). The parties agree that although the charge for
---------------------------
furnishing electrical energy is included in the Fixed Rent on a so-called "rent
inclusion" basis, the value to Tenant of such service may not be fully reflected
in the Fixed Rent. Accordingly, Tenant agrees that Landlord, in the event that
Landlord, in its reasonable discretion determines that Tenant is consuming
electrical energy in an amount which exceeds the consumption level consistent
with companies conducting businesses comparable to that of Tenant, may cause a
reputable and independent electrical engineer or electrical consulting firm,
selected by Landlord (such engineer or consulting firm being hereinafter
referred to as "Landlord's Engineer"), to make a determination, following the
-------------------
commencement of Tenant's normal business activities in the Premises, of the Full
Value of such service to Tenant. As used herein, the "Full Value" to Tenant of
----------
such service shall mean the product obtained by multiplying the demand and
consumption of electric energy at the Premises by the Electric Rate. Landlord's
Engineer shall certify such determination in writing to Landlord and Tenant. If
the Full Value to Tenant is in excess of the Electricity Inclusion Factor, the
Electricity Inclusion Factor and the Fixed Rent shall be increased by such
excess. However, if it shall be so determined that the Full Value to Tenant of
such service does not exceed the Electricity Inclusion Factor, there shall
nevertheless be no decrease in the Electricity Inclusion Factor or in the Fixed
Rent.
(B) If during the Term the Electric Rate shall increase over the Base
Electric Rate, the Electricity Inclusion Factor (and therefore the Fixed Rent)
shall be proportionately increased.
(C) (i) Landlord, from time to time during the Term, may cause
Landlord's Engineer to survey the demand and consumption of electrical energy at
the Premises. If the then Full Value shall exceed the then Electricity
Inclusion Factor, the Electricity Inclusion Factor (and therefore the Fixed
Rent), shall be proportionately increased, based on the increased demand and
consumption and the then prevailing Electric Rate.
(ii) Landlord shall furnish to Tenant a written statement (an
"Electricity Statement") setting forth Landlord's determination of any increase
---------------------
which has occurred in the Full Value and the Electricity Inclusion Factor (and
therefore the Fixed Rent) pursuant to the provisions of either Sections 13.2(A),
(B), or (C)(i). Any such increase in the Electricity Inclusion Factor and the
Fixed Rent shall be effective as of the date of such increase in the Electric
Rate or the consumption and demand of electric energy by Tenant and shall be
retroactive to such dates if necessary. Any retroactive increase shall be paid
by Tenant within ten (10) days after demand and such amount shall be collectible
by Landlord as Fixed Rent hereunder.
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<PAGE>
(iii) Each such Electricity Statement given by Landlord
pursuant to Section 13.2(C)(ii) above, shall be conclusive and binding upon
Tenant, unless within ninety (90) days after the receipt of such Electricity
Statement, Tenant shall notify Landlord that it disputes the correctness of the
Electricity Statement. If such dispute is based on Tenant's demand and
consumption of electric current, Tenant shall submit a survey and determination
of such adjustment, made at its sole cost and expense, by a reputable and
independent electrical engineer or electrical consulting firm ("Tenant's
--------
Engineer"), within ninety (90) days after receipt of such Electricity Statement.
- --------
If Landlord and Tenant are unable to resolve the dispute differences between
them within thirty (30) days after receipt by Landlord of a copy of the
determination of Tenant's Engineer, the dispute shall be decided by a third
reputable and independent electrical engineer or electrical consulting firm
("Third Engineer"). If the parties shall fail to agree upon the designation of
--------------
the Third Engineer within forty (40) days after the receipt by Landlord of the
determination of Tenant's Engineer, then either party may apply to the American
Arbitration Association or any successor thereto for the designation of the
Third Engineer. The Third Engineer shall conduct such hearings as he deems
appropriate. The Third Engineer, within thirty (30) days after his designation,
shall select the determination of either Landlord's Engineer or Tenant's
Engineer and such determination shall be conclusive and binding upon the parties
whether or not a judgment shall be entered in any court. The fees of the Third
Engineer and the costs of arbitration shall be paid equally by the parties,
except that each party shall pay its own counsel fees and expenses, if any, in
connection with the arbitration. Pending the resolution of such dispute by
agreement or arbitration as aforesaid, Tenant shall pay the increase in the
Electricity Inclusion Factor in accordance with the Electricity Statement,
without prejudice to Tenant's position, as herein provided. If the dispute shall
be resolved in Tenant's favor, Landlord, at its option, shall either credit the
amount of such overpayment against subsequent monthly installments of Fixed Rent
hereunder or pay to Tenant the amount of such overpayment.
(D) Landlord's failure during the Term to prepare and deliver any
Electricity Statement, or bills, or Landlord's failure to make a demand, under
this Article or any other provisions of this Lease, shall not in any way be
deemed to be a waiver of, or cause Landlord to forfeit or surrender, its rights
to collect any portion of the increase in the Electricity Inclusion Factor (and
therefore the Fixed Rent) which may have become due pursuant to this Article 13
during the Term. Tenant's liability for the amounts due under this Article 13
shall survive the expiration or sooner termination of this Lease and Landlord's
obligation, if any, to refund any payments by Tenant in excess of the amounts
required to be paid by Tenant to Landlord pursuant to this Article 13 shall
survive the expiration or sooner termination of this Lease. The preceding
sentence shall not, however, be construed as limiting or restricting, in any
manner whatsoever, Landlord's right pursuant to this Lease or pursuant to law to
offset any such overpayments by Tenant against any amounts which may be due and
payable as provided in this Lease.
(E) In no event shall any adjustment of the payments made or to be
made hereunder result in a decrease in Fixed Rent or additional rent payable
pursuant to any other provision of this Lease, or in the amount paid for
electricity for the prior year.
41
<PAGE>
(F) The Electricity Inclusion Factor shall be collectible by Landlord
in the same manner as Fixed Rent.
(G) For the purposes of this Section 13.2, Landlord and Tenant agree
that the term "Electric Rate" (including all applicable surcharges, demand
-------------
charges, energy charges, fuel adjustment charges, time of day charges, taxes and
other sums payable in respect thereof) shall mean the greater of:
(i) the service classification pursuant to which
Landlord purchases electricity from the utility company servicing the Building,
and
(ii) the service classification pursuant to which
Tenant would purchase electricity directly from the utility company servicing
the Building.
(H) If Landlord discontinues furnishing electricity to Tenant
pursuant to this Section 13.2, the Fixed Rent shall be decreased by the
Electricity Inclusion Factor effective as of the date Landlord discontinues the
provision of electricity in such manner
Section 13.3. (A) If Landlord shall no longer elect to have electricity
-------------
furnished to the Premises pursuant to Section 13.2 hereof then, unless Landlord
elects to have Tenant obtain electricity from the public utility company
furnishing electricity to the Building pursuant to the provisions of Section
13.4 hereof, electricity shall be furnished by Landlord to the Premises and
Tenant shall pay to Landlord, as additional rent for such service, during the
Term, an amount (the "Electricity Additional Rent") equal to (i) the amount
---------------------------
Landlord actually pays to the utility company to provide electricity to the
Premises, including all applicable surcharges, demand charges, time-of-day
charges, energy charges, fuel adjustment charges, rate adjustment charges, taxes
and other sums payable in respect thereof, based on Tenant's demand and/or
consumption of electricity (and/or any other method of quantifying Tenant's use
of or demand for electricity as set forth in the utility company's tariff) as
registered on a meter or submeter (installed by Landlord at Landlord's sole cost
and expense) for purposes of measuring such demand, consumption and/or other
method of quantifying Tenant's use of or demand for electricity (it being agreed
that such meter or submeter shall measure demand and consumption, and off-peak
and on-peak use, in either case to the extent such factors are relevant in
making the determination of Landlord's cost) plus (ii) an amount equal to the
out-of-pocket costs and expenses incurred by Landlord in connection with reading
such meters and preparing bills therefor. Tenant, from time to time, shall have
the right to review Landlord's meter readings, and Landlord's calculation of the
Electricity Additional Rent, at reasonable times and on reasonable prior notice,
by giving notice thereof to Landlord on or prior to the ninetieth (90th) day
after the date when Landlord gives Tenant a bill or statement for the
Electricity Additional Rent.
(B) Where more than one meter measures the electricity supplied to
Tenant, the electricity rendered through each meter may be computed and billed
separately in accordance with the provisions hereinabove set forth. Bills for
the Electricity Additional Rent shall be rendered to Tenant at such time as
Landlord may elect, and Tenant shall pay the amount shown
42
<PAGE>
thereon to Landlord within ten (10) days after receipt of such bill. Tenant
expressly acknowledges that in connection with the installation of the meters or
submeters, the electricity being supplied to the Premises shall be temporarily
interrupted. Landlord shall use reasonable efforts to minimize interference with
the conduct of Tenant's business in connection with such installation; provided,
however, that Landlord shall have no obligation to employ contractors or labor
at so-called overtime or other premium pay rates or to incur any other overtime
costs or expenses whatsoever.
Section 13.4. If Landlord shall be required by Requirements or the public
-------------
utility serving the Premises to discontinue furnishing electricity to Tenant
this Lease shall continue in full force and effect and shall be unaffected
thereby, except only that from and after the effective date of such
discontinuance, Landlord shall not be obligated to furnish electricity to Tenant
and Tenant shall not be obligated to pay the Electricity Additional Rent. If
Landlord so discontinues furnishing electricity to Tenant, Tenant shall use
diligent efforts to obtain electric energy directly from the public utility
furnishing electric service to the Building. The costs of such service shall be
paid by Tenant directly to such public utility. Such electricity may be
furnished to Tenant by means of the existing electrical facilities serving the
Premises, at no charge, to the extent the same are available, suitable and safe
for such purposes as reasonably determined by Landlord. All meters and all
additional panel boards, feeders, risers, wiring and other conductors and
equipment which may be required to obtain electricity shall be installed by
Landlord at Tenant's expense. Provided Tenant shall use and continue to use
diligent efforts to obtain electric energy directly from the public utility,
Landlord, to the extent permitted by applicable Requirements, shall not
discontinue furnishing electricity to the Premises until such installations have
been made and Tenant shall be able to obtain electricity directly from the
public utility.
43
<PAGE>
ARTICLE 14
ACCESS TO PREMISES
------------------
Section 14.1. (A) Tenant shall permit Landlord, Landlord's agents,
-------------
representatives, contractors and employees and public utilities servicing the
Building to erect, use and maintain, concealed ducts, pipes and conduits in and
through the Premises. Landlord, Landlord's agents, representatives,
contractors, and employees and the agents, representatives, contractors, and
employees of public utilities servicing the Building shall have the right to
enter the Premises at all reasonable times upon reasonable prior notice (except
in the case of an emergency in which event Landlord and Landlord's agents,
representatives, contractors, and employees may enter without prior notice to
Tenant), which notice may be oral, to examine the same, to show them to
prospective purchasers, or prospective or existing Mortgagees or Lessors, and to
make such repairs, alterations, improvements, additions or restorations (i) as
Landlord may deem necessary or desirable to the Premises or to any other portion
of the Building, or (ii) which Landlord may elect to perform following ten (10)
days after notice, except in the case of an emergency (in which event Landlord
and Landlord's agents, representatives, contractors, and employees may enter
without prior notice to Tenant), following Tenant's failure to make repairs or
perform any work which Tenant is obligated to make or perform under this Lease,
or (iii) for the purpose of complying with any Requirements, a Superior Lease or
a Mortgage, and Landlord shall be allowed to take all material into and upon the
Premises that may be required therefor without the same constituting an eviction
or constructive eviction of Tenant in whole or in part and the Fixed Rent (and
any other item of Rental) shall in no wise abate while said repairs,
alterations, improvements, additions or restorations are being made, by reason
of loss or interruption of business of Tenant, or otherwise.
(B) Any work performed or installations made pursuant to this Article
14 shall be made with reasonable diligence and otherwise pursuant to the
provisions of Section 4.3 hereof.
(C) Except as hereinafter provided, any pipes, ducts, or conduits
installed in or through the Premises pursuant to this Article 14 shall be
concealed behind, beneath or within partitioning, columns, ceilings or floors
located or to be located in the Premises. Notwithstanding the foregoing, any
such pipes, ducts, or conduits may be furred at points immediately adjacent to
partitioning columns or ceilings located or to be located in the Premises,
provided that the same are completely furred and that the installation of such
pipes, ducts, or conduits, when completed, shall not reduce the usable area of
the Premises beyond a de minimis amount.
----------
Section 14.2. During the eighteen (18) month period prior to the
-------------
Expiration Date, Landlord may exhibit the Premises to prospective tenants
thereof.
Section 14.3. If Tenant shall not be present when for any reason entry
-------------
into the Premises shall be necessary or permissible, Landlord or Landlord's
agents, representatives, contractors or employees may enter the same without
rendering Landlord or such agents liable therefor if during
44
<PAGE>
such entry Landlord or Landlord's agents shall accord reasonable care under the
circumstances to Tenant's Property, and without in any manner affecting this
Lease. Nothing herein contained, however, shall be deemed or construed to impose
upon Landlord any obligation, responsibility or liability whatsoever, for the
care, supervision or repair of the Building or any part thereof, other than as
herein provided.
Section 14.4. Landlord also shall have the right at any time, without the
-------------
same constituting an actual or constructive eviction and without incurring any
liability to Tenant therefor, to change the arrangement or location of entrances
or passageways, doors and doorways, and corridors, elevators, stairs, toilets,
or other public parts of the Building and to change the name, number or
designation by which the Building is commonly known, provided any such change
does not (a) unreasonably reduce, interfere with or deprive Tenant of access to
the Building or the Premises or (b) reduce the rentable area (except by a de
--
minimis amount) of the Premises. All parts (except surfaces facing the interior
- -------
of the Premises) of all walls, windows and doors bounding the Premises
(including exterior Building walls, exterior core corridor walls, exterior doors
and entrances), all balconies, terraces and roofs adjacent to the Premises, all
space in or adjacent to the Premises used for shafts, stacks, stairways, chutes,
pipes, conduits, ducts, fan rooms, heating, air cooling, plumbing and other
mechanical facilities, service closets and other Building facilities are not
part of the Premises, and Landlord shall have the use thereof, as well as access
thereto through the Premises for the purposes of operation, maintenance,
alteration and repair.
ARTICLE 15
CERTIFICATE OF OCCUPANCY
------------------------
Tenant shall not at any time use or occupy the Premises in violation of the
certificate of occupancy at such time issued for the Premises or for the
Building and in the event that any department of the City or State of New York
shall hereafter contend or declare by notice, violation, order or in any other
manner whatsoever that the Premises are used for a purpose which is a violation
of such certificate of occupancy, Tenant, upon written notice from Landlord or
any Governmental Authority, shall immediately discontinue such use of the
Premises. On the Commencement Date and throughout the Term, a temporary or
permanent certificate of occupancy covering the Premises will be in force
permitting the Premises to be used as offices, provided, however, neither such
certificate, nor any provision of this Lease, nor any act or omission of
Landlord, shall be deemed to constitute a representation or warranty that the
Premises, or any part thereof, lawfully may be used or occupied for any
particular purpose or in any particular manner, in contradistinction to mere
"office" use.
ARTICLE 16
DEFAULT
-------
Section 16.1. Each of the following events shall be an "Event of Default"
------------- ----------------
hereunder:
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<PAGE>
(A) If Tenant shall default in the payment when due of any
installment of Fixed Rent and such default shall continue for five (5) Business
Days after notice of such default is given to Tenant, or in the payment when due
of any other item of Rental and such default shall continue for five (5)
Business Days after notice of such default is given to Tenant, except that if
Landlord shall have given two (2) such notices in any twelve (12) month period,
Tenant shall not be entitled to any further notice of its delinquency in the
payment of Rental until such time as twelve (12) consecutive months shall have
elapsed without Tenant having defaulted in any such payment; or
(B) if Tenant shall default in the observance or performance of any
term, covenant or condition on Tenant's part to be observed or performed under
any other lease with Landlord or Landlord's predecessor in interest of space in
the Building and such default shall continue beyond any grace period set forth
in such other lease for the remedying of such default; or
(C) if the Premises shall become vacant, deserted or abandoned; or
(D) if Tenant's interest or any portion thereof in this Lease shall
devolve upon or pass to any person, whether by operation of law or otherwise,
except as expressly permitted under Article 12 hereof; or
(E) (1) if Tenant shall generally not, or shall be unable to, or
shall admit in writing its inability to, pay its debts as they become due; or
(2) if Tenant shall commence or institute any case, proceeding
or other action (A) 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 existing or future law of any jurisdiction,
domestic or foreign, relating to bankruptcy, insolvency, reorganization or
relief of debtors, or (B) seeking appointment of a receiver, trustee, custodian
or other similar official for it or for all or any substantial part of its
property; or
(3) if Tenant shall make a general assignment for the benefit of
creditors; or
(4) if any case, proceeding or other action shall be commenced
or instituted against Tenant (A) seeking to have an order for relief entered
against it 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 existing
or future law of any jurisdiction, domestic or foreign, relating to bankruptcy,
insolvency, reorganization or relief of debtors, or (B) seeking appointment of a
receiver, trustee, custodian or other similar official for it or for all or any
substantial part of its property, which in either of such cases (i) results in
any such entry of an order for relief, adjudication of bankruptcy
46
<PAGE>
or insolvency or such an appointment or the issuance or entry of any other order
having a similar effect or (ii) remains undismissed for a period of sixty (60)
days; or
(5) if any case, proceeding or other action shall be commenced
or instituted against Tenant seeking issuance of a warrant of attachment,
execution, distraint or similar process against all or any substantial part of
its property which results in the entry of an order for any such relief which
shall not have been vacated, discharged, or stayed or bonded pending appeal
within sixty (60) days from the entry thereof; or
(6) if Tenant shall take any action in furtherance of, or
indicating its consent to, approval of, or acquiescence in, any of the acts set
forth in clauses (2), (3), (4) or (5) above; or
(7) if a trustee, receiver or other custodian is appointed for
any substantial part of the assets of Tenant which appointment is not vacated or
stayed within seven (7) Business Days; or
(F) if Tenant shall fail more than five (5) times during any twelve
(12) month period to pay any installment of Fixed Rent or any item of Rental
when due, after receipt of the notice and the expiration of the applicable grace
period pursuant to the provisions of paragraph (A) above, if such notice and
grace period are then required; or
(G) if Tenant shall fail to pay any installments of Fixed Rent or
items of Rental when due as required by this Lease, and Landlord shall bring
more than one (1) summary dispossess proceeding during any twelve (12) month
period; or
(H) if this Lease is assigned (or all or a portion of the Premises
are subleased) to a Related Entity and such Related Entity shall no longer (i)
Control, (ii) be under common Control with, or (iii) be under the Control of
Tenant (or any permitted successor by merger, consolidation or purchase as
provided herein); or
(I) if Tenant shall default in the observance or performance of any
other term, covenant or condition of this Lease on Tenant's part to be observed
or performed and Tenant shall fail to remedy such default within twenty (20)
days after notice by Landlord to Tenant of such default, or if such default is
of such a nature that it cannot with due diligence be completely remedied within
said period of twenty (20) days and Tenant shall not commence within said period
of twenty (20) days, or shall not thereafter diligently prosecute to completion,
all steps necessary to remedy such default.
Section 16.2. (A) If an Event of Default (i) described in Section 16.1(E)
-------------
hereof shall occur, or (ii) described in Sections 16.1(A), (B), (C), (D), (F),
(G), (H) or (I) shall occur and Landlord, at any time thereafter, at its option
gives written notice to Tenant stating that this Lease and the Term shall expire
and terminate five (5) days after the date Landlord shall give Tenant such
notice, then this Lease and the Term and all rights of Tenant under this Lease
shall expire
47
<PAGE>
and terminate as if the date on which the Event of Default described in clause
(i) above occurred or the date of such notice, pursuant to clause (ii) above, as
the case may be, were the Fixed Expiration Date and Tenant immediately shall
quit and surrender the Premises, but Tenant shall nonetheless be liable for all
of its obligations hereunder, as provided for in Articles 17 and 18 hereof.
Anything contained herein to the contrary notwithstanding, if such termination
shall be stayed by order of any court having jurisdiction over any proceeding
described in Section 16.1(E) hereof, or by federal or state statute, then,
following the expiration of any such stay, or if the trustee appointed in any
such proceeding, Tenant or Tenant as debtor-in-possession shall fail to assume
Tenant's obligations under this Lease within the period prescribed therefor by
law or within one hundred twenty (120) days after entry of the order for relief
or as may be allowed by the court, or if said trustee, 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 or adequate assurance of the
complete and continuous future performance of Tenant's obligations under this
Lease as provided in Section 12.3(B), Landlord, to the extent permitted by law
or by leave of the court having jurisdiction over such proceeding, shall have
the right, at its election, to terminate this Lease on five (5) days' notice to
Tenant, Tenant as debtor-in-possession or said trustee and upon the expiration
of said five (5) day period this Lease shall cease and expire as aforesaid and
Tenant, Tenant as debtor-in-possession or said trustee shall immediately quit
and surrender the Premises as aforesaid.
(B) If an Event of Default described in Section 16.1(A) hereof shall
occur, or this Lease shall be terminated as provided in Section 16.2(A) hereof,
Landlord, without notice, may reenter and repossess the Premises using such
force for that purpose as may be necessary without being liable to indictment,
prosecution or damages therefor and may dispossess Tenant by summary proceedings
or otherwise.
Section 16.3. If at any time, (i) Tenant shall be comprised of two (2) or
-------------
more persons, or (ii) Tenant's obligations under this Lease shall have been
guaranteed by any person other than Tenant, or (iii) Tenant's interest in this
Lease shall have been assigned, the word "Tenant", as used in Section 16.1(E),
shall be deemed to mean any one or more of the persons primarily or secondarily
liable for Tenant's obligations under this Lease. Any monies received by
Landlord from or on behalf of Tenant during the pendency of any proceeding of
the types referred to in Section 16.1(E) 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 Rental or a waiver
on the part of Landlord of any rights under Section 16.2.
ARTICLE 17
REMEDIES AND DAMAGES
--------------------
Section 17.1. (A) If there shall occur any Event of Default, and this
-------------
Lease and the Term shall expire and come to an end as provided in Article 16
hereof:
48
<PAGE>
(1) Tenant shall 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 Term shall expire and
come to an end, re-enter the Premises or any part thereof, without notice,
either by summary proceedings, or by any other applicable action or proceeding,
or by force or otherwise (without being liable to indictment, prosecution or
damages therefor), and may repossess the Premises and dispossess Tenant and any
other persons from the Premises and remove any and all of their property and
effects from the Premises; and
(2) Landlord, at Landlord's option, may relet the whole or any
portion or portions of 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 or any part thereof and
shall in no event be liable for refusal or failure to relet the Premises or any
part thereof, or, in the event of any such reletting, for refusal or failure to
collect any rent due upon any such reletting, and no such refusal or failure
shall operate to relieve Tenant of any liability under this Lease or otherwise
affect any such liability, and Landlord, at Landlord's option, 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.
(B) Tenant hereby waives the service of any notice of intention to
re-enter or to institute legal proceedings to that end which may otherwise be
required to be given under any present or future law. Tenant, on its own
behalf and on behalf of all persons claiming through or under Tenant, including
all creditors, does further hereby waive any and all rights which Tenant and all
such persons might otherwise have under any present or future law to redeem the
Premises, or to re-enter or repossess the Premises, or to restore the operation
of this Lease, after (a) Tenant shall have been dispossessed by a judgment or by
warrant of any court or judge, or (b) any re-entry by Landlord, or (c) any
expiration or termination of this Lease and the Term, whether such dispossess,
re-entry, expiration or termination shall be by operation of law or pursuant to
the provisions of this Lease. The words "re-enter," "re-entry" and "re-entered"
as used in this Lease shall not be deemed to be restricted to their technical
legal meanings. In the event of a breach or threatened breach by Tenant, or any
persons claiming through or under Tenant, of any term, covenant or condition of
this Lease, Landlord shall have the right to enjoin such breach and the right to
invoke any other remedy allowed by law or in equity as if re-entry, summary
proceedings and other special remedies were not provided in this Lease for such
breach. The right to invoke the remedies hereinbefore set forth are cumulative
and shall not preclude Landlord from invoking any other remedy allowed at law or
in equity.
Section 17.2. (A) If this Lease and the Term shall expire and come to an
-------------
end as provided in Article 16 hereof, or by or under any summary proceeding or
any other action or proceeding,
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or if Landlord shall re-enter the Premises as provided in Section 17.1, or by or
under any summary proceeding or any other action or proceeding, then, in any of
said events:
(1) Tenant shall pay to Landlord all Fixed Rent, Escalation Rent
and other items of Rental payable under this Lease by Tenant to Landlord to the
date upon which this Lease and the Term shall have expired and come to an end or
to the date of re-entry upon the Premises by Landlord, as the case may be;
(2) Tenant also shall be liable for and shall pay to Landlord,
as damages, any deficiency (referred to as "Deficiency") between the Rental for
----------
the period which otherwise would have constituted the unexpired portion of the
Term and the net amount, if any, of rents collected under any reletting effected
pursuant to the provisions of clause (2) of Section 17.1 (A) 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 with such reletting, including, but
not limited to, all repossession costs, brokerage commissions, legal expenses,
attorneys' fees and disbursements, alteration costs, contribution to work and
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 Fixed Rent; 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
(3) 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, on demand, in lieu of any further Deficiency as
and for liquidated and agreed final damages, a sum equal to the amount by which
the Rental for the period which otherwise would have constituted the unexpired
portion of the Term (commencing on the date immediately succeeding the last date
with respect to which a Deficiency, if any, was collected) exceeds the then fair
and reasonable rental value of the Premises for the same period, both discounted
to present worth at the Base Rate; if, before presentation of proof of such
liquidated damages to any court, commission 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 Term, or any part thereof,
the amount of rent reserved upon such reletting shall be deemed, prima facie, to
-----------
be the fair and reasonable rental value for the part or the whole of the
Premises so relet during the term of the reletting.
(B) If the Premises, or any part thereof, shall be relet together
with other space in the Building, the rents collected or reserved under any such
reletting and the expenses of any such reletting shall be equitably apportioned
for the purposes of this Section 17.2. Tenant shall in no event be entitled to
any rents collected or payable under any reletting, whether or not such rents
shall exceed the Fixed Rent reserved in this Lease. Solely for the purposes of
this Article 17, the term "Escalation Rent" as used in Section 17.2(A) shall
mean the Escalation Rent in effect immediately prior to the Expiration Date, or
the date of re-entry upon the Premises by
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Landlord, as the case may be, adjusted to reflect any increase pursuant to the
provisions of Article 27 hereof for the Comparison Year immediately preceding
such event. Nothing contained in Article 16 hereof or this Article 17 shall be
deemed to limit or preclude the recovery by Landlord from Tenant of the maximum
amount allowed to be obtained as damages by any statute or rule of law, or of
any sums or damages to which Landlord may be entitled in addition to the damages
set forth in this Section 17.2.
ARTICLE 18
LANDLORD FEES AND EXPENSES
--------------------------
Section 18.1. If an Event of Default shall have occurred and be continuing
-------------
or if Tenant shall do or permit to be done any act or thing upon the Premises
which would cause Landlord to be in default under any Superior Lease or
Mortgage, Landlord may (1) as provided in Section 14.1 hereof, perform the same
for the account of Tenant, or (2) make any expenditure or incur any obligation
for the payment of money, including, without limitation, reasonable attorneys'
fees and disbursements in instituting, prosecuting or defending any action or
proceeding, and the cost thereof, with interest thereon at the Applicable Rate,
shall be deemed to be additional rent hereunder and shall be paid by Tenant to
Landlord within ten (10) days of rendition of any bill or statement to Tenant
therefor and if the term of this Lease shall have expired at the time of making
of such expenditures or incurring of such obligations, such sums shall be
recoverable by Landlord as damages.
Section 18.2. If Tenant shall fail to pay any installment of Fixed Rent,
-------------
Escalation Rent or any other item of Rental when due, Tenant shall pay to
Landlord, in addition to such installment of Fixed Rent, Escalation Rent or
other item of Rental, as the case may be, as a late charge and as additional
rent, a sum equal to interest at the Applicable Rate on the amount unpaid,
computed from the date such payment was due to and including the date of
payment.
ARTICLE 19
NO REPRESENTATIONS BY LANDLORD
------------------------------
Section 19.1. Landlord and Landlord's agents and representatives have made
-------------
no representations or promises with respect to the Building, the Real Property
or the Premises except as herein expressly set forth, and no rights, easements
or licenses are acquired by Tenant by implication or otherwise except as
expressly set forth herein. Tenant shall accept possession of the Premises in
the condition which shall exist on the Commencement Date "as is" (subject to the
provisions of Section 4.1 hereof), and Landlord shall have no obligation to
perform any work or make any installations in order to prepare the Premises for
Tenant's occupancy, except that Landlord, at its expense, shall (i) construct a
demising wall in the Premises, and (ii) touch up and repair paint and wall
coverings in the Premises where damaged ("Landlord's Work").
---------------
Section 19.2. Landlord has made and makes no representation as to the date
-------------
on which it will complete Landlord's Work. No delay in completing Landlord's
Work shall in any way affect the validity of this Lease or the obligations of
Tenant hereunder or give rise to a claim for
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damages by Tenant or a claim for rescission of this Lease, nor shall the same be
construed in any wise to extend the Term hereof. Landlord agrees that, subject
to Unavoidable Delay, each item of Landlord's Work shall be prosecuted with due
diligence; provided, however, that nothing contained in this Article 19 shall be
deemed to impose upon Landlord any obligations to employ contractors or labor at
so-called overtime or other premium pay rates or to incur any other overtime
costs or expenses whatsoever. Landlord shall have the right to enter the
Premises subsequent to the Commencement Date to complete Landlord's Work and the
payment of Fixed Rent and Escalation Rent shall not be affected thereby.
Landlord and Tenant agree to cooperate with each other in accordance with good
construction practice and scheduling to permit Landlord's Work to be performed
simultaneously with the Initial Alterations.
ARTICLE 20
END OF TERM
-----------
Upon the expiration or other termination of this Lease, Tenant shall quit
and surrender to Landlord the Premises, vacant, broom clean, in good order and
condition, ordinary wear and tear and damage for which Tenant is not responsible
under the terms of this Lease excepted, and otherwise in compliance with the
provisions of Article 3 hereof. If the last day of the Term or any renewal
thereof falls on Saturday or Sunday, this Lease shall expire on the Business Day
immediately preceding. Tenant expressly waives, for itself and for any person
claiming through or under Tenant, any rights which Tenant or any such person may
have under the provisions of Section 2201 of the New York Civil Practice Law and
Rules and of any successor law of like import then in force in connection with
any holdover summary proceedings which Landlord may institute to enforce the
foregoing provisions of this Article 20. Tenant acknowledges that possession of
the Premises must be surrendered to Landlord on the Expiration Date. Tenant
agrees to indemnify and save Landlord harmless from and against all claims,
losses, damages, liabilities, costs and expenses (including, without limitation,
attorneys' fees and disbursements) resulting from delay by Tenant in so
surrendering the Premises, including, without limitation, any claims made by any
succeeding tenant founded on such delay. The parties recognize and agree that
the damage to Landlord resulting from any failure by Tenant to timely surrender
possession of the Premises as aforesaid will be extremely substantial, will
exceed the amount of the monthly installments of the Fixed Rent and Rental
theretofore payable hereunder, and will be impossible to accurately measure.
Tenant therefore agrees that if possession of the Premises is not surrendered to
Landlord within twenty-four (24) hours after the Expiration Date, in addition to
any other rights or remedies Landlord may have hereunder or at law, and without
in any manner limiting Landlord's right to demonstrate and collect any damages
suffered by Landlord and arising from Tenant's failure to surrender the Premises
as provided herein, Tenant shall pay to Landlord on account of use and occupancy
of the Premises for each month and for each portion of any month during which
Tenant holds over in the Premises after the Expiration Date, a sum equal to the
greater of (i) two (2) times the aggregate of that portion of the Fixed Rent,
Escalation Rent and Rental which was payable under this Lease during the last
month of the Term, and (ii) the then fair market rental value for the Premises.
Nothing herein contained shall be deemed to permit Tenant to retain possession
of the Premises after the Expiration Date or to limit in any
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manner Landlord's right to regain possession of the Premises through summary
proceedings, or otherwise, and no acceptance by Landlord of payments from Tenant
after the Expiration Date shall be deemed to be other than on account of the
amount to be paid by Tenant in accordance with the provisions of this Article
20. The provisions of this Article 20 shall survive the Expiration Date.
ARTICLE 21
QUIET ENJOYMENT
---------------
Provided no Event of Default has occurred and is continuing, Tenant may
peaceably and quietly enjoy the Premises subject, nevertheless, to the terms and
conditions of this Lease.
ARTICLE 22
FAILURE TO GIVE POSSESSION
--------------------------
Landlord shall deliver possession of the Premises on the Commencement Date.
ARTICLE 23
NO WAIVER
---------
Section 23.1. No act or thing done by Landlord or Landlord's agents during
-------------
the Term shall be deemed an acceptance of a surrender of the Premises, and no
agreement to accept such surrender shall be valid unless in writing signed by
Landlord. No employee of Landlord or of Landlord's agents shall have any power
to accept the keys of the Premises prior to the termination of this Lease. The
delivery of keys to any employee of Landlord or of Landlord's agents shall not
operate as a termination of this Lease or a surrender of the Premises. In the
event Tenant at any time desires to have Landlord sublet the Premises for
Tenant's account, Landlord or Landlord's agents are authorized to receive said
keys for such purpose without releasing Tenant from any of the obligations under
this Lease, and Tenant hereby relieves Landlord of any liability for loss of or
damage to any of Tenant's effects in connection with such subletting.
Section 23.2. The failure of Landlord to seek redress for violation of, or
-------------
to insist upon the strict performance of, any covenant or condition of this
Lease, or any of the Rules and Regulations set forth or hereafter adopted by
Landlord, shall not prevent a subsequent act, which would have originally
constituted a violation of the provisions of this Lease, from having all of the
force and effect of an original violation of the provisions of this Lease. The
receipt by Landlord of Fixed Rent, Escalation Rent or any other item of Rental
with knowledge of the breach of any covenant of this Lease shall not be deemed a
waiver of such breach. The failure of Landlord to enforce any of the Rules and
Regulations set forth, or hereafter adopted, against Tenant or any other tenant
in the Building shall not be deemed a waiver of any such Rules and Regulations.
No provision of this Lease shall be deemed to have been waived by Landlord,
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<PAGE>
unless such waiver be in writing signed by Landlord. No payment by Tenant or
receipt by Landlord of a lesser amount than the monthly Fixed Rent or other item
of Rental herein stipulated shall be deemed to be other than on account of the
earliest stipulated Fixed Rent or other item of Rental, or as Landlord may elect
to apply same, nor shall any endorsement or statement on any check or any letter
accompanying any check or payment as Fixed Rent or other item of Rental be
deemed an accord and satisfaction, and Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance of such Fixed Rent
or other item of Rental or to pursue any other remedy provided in this Lease.
This Lease contains the entire agreement between the parties and all prior
negotiations and agreements are merged herein. Any executory agreement hereafter
made shall be ineffective to change, modify, discharge or effect an abandonment
of this Lease in whole or in part unless such executory agreement is in writing
and signed by the party against whom enforcement of the change, modification,
discharge or abandonment is sought.
ARTICLE 24
WAIVER OF TRIAL BY JURY
-----------------------
The respective parties hereto shall and they hereby do waive trial by jury
in any action, proceeding or counterclaim brought by either of the parties
hereto against the other (except for personal injury or property damage) on any
matters whatsoever arising out of or in any way connected with this Lease, the
relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises,
or for the enforcement of any remedy under any statute, emergency or otherwise.
If Landlord commences any summary proceeding against Tenant, Tenant will not
interpose any counterclaim of whatever nature or description in any such
proceeding (unless failure to impose such counterclaim would preclude Tenant
from asserting in a separate action the claim which is the subject of such
counterclaim), and will not seek to consolidate such proceeding with any other
action which may have been or will be brought in any other court by Tenant.
ARTICLE 25
INABILITY TO PERFORM
--------------------
This Lease and the obligation of Tenant to pay Rental hereunder and perform
all of the other covenants and agreements hereunder on the part of Tenant to be
performed shall in no wise be affected, impaired or excused because Landlord is
unable to fulfill any of its obligations under this Lease expressly or impliedly
to be performed by Landlord or because Landlord is unable to make, or is delayed
in making any repairs, additions, alterations, improvements or decorations or is
unable to supply or is delayed in supplying any equipment or fixtures, if
Landlord is prevented or delayed from so doing by reason of strikes or labor
troubles or by accident, or by any cause whatsoever beyond Landlord's control,
including, but not limited to, laws, governmental preemption in connection with
a national emergency or by reason of any Requirements of any Governmental
Authority or by reason of failure of the HVAC, electrical, plumbing, or other
Building Systems in the Building, or by reason of the conditions of supply and
demand which
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have been or are affected by war or other emergency ("Unavoidable Delays")
------------------
(except that Landlord's financial inability to perform shall not be considered
an Unavoidable Delay)..
ARTICLE 26
BILLS AND NOTICES
-----------------
Except as otherwise expressly provided in this Lease, any bills,
statements, consents, notices, demands, requests or other communications given
or required to be given under this Lease shall be in writing and shall be deemed
sufficiently given or rendered if delivered by hand (against a signed receipt)
or if sent by registered or certified mail (return receipt requested) addressed
if to Tenant (a) at XOOM.com, Inc., 300 Montgomery Street,
------------
Suite 300, San Francisco, California 94104, Attn.:
Controller, or (b) at the Building, Attn.: Patricia Whalen,
if mailed subsequent to Tenant's taking possession of the
Premises, or (c) at any place where Tenant or any agent or
employee of Tenant may be found if mailed subsequent to
Tenant's vacating, deserting, abandoning or surrendering the
Premises, in each case with a copy to Morrison & Foerster
LLP, 1290 Avenue of the Americas, New York, New York _____,
Attn.: C.E. Ryan, Esq., or
if to Landlord at Landlord's address set forth in this
--------------
Lease, Attn.: Mr. Kevin R. Wang and with copies to (y)
Proskauer Rose LLP, 1585 Broadway, New York, New York 10036,
Attn.: Lawrence J. Lipson, Esq., and (z) each Mortgagee and
Lessor which shall have requested same, by notice given in
accordance with the provisions of this Article 26 at the
address designated by such Mortgagee or Lessor, or
to such other address(es) as Landlord, Tenant or any Mortgagee or Lessor may
designate as its new address(es) for such purpose by notice given to the other
in accordance with the provisions of this Article 26. Any such bill, statement,
consent, notice, demand, request or other communication shall be deemed to have
been rendered or given on the date when it shall have been hand delivered or
three (3) Business Days from when it shall have been mailed as provided in this
Article 26. Anything contained herein to the contrary notwithstanding, any
Operating Statement, Tax Statement or any other bill, statement, consent,
notice, demand, request or other communication from Landlord to Tenant with
respect to any item of Rental (other than any "default notice" if required
hereunder) may be sent to Tenant by regular United States mail.
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ARTICLE 27
ESCALATION
----------
Section 27.1. For the purposes of this Article 27, the following terms
-------------
shall have the meanings set forth below.
(A) "Assessed Valuation" shall mean the amount for which the Real
------------------
Property is assessed pursuant to applicable provisions of the New York City
Charter and of the Administrative Code of the City of New York for the purpose
of calculating all or any portion of the Taxes payable with respect to the Real
Property.
(B) "Base Taxes" shall mean fifty percent (50%) of the sum of (i) the
----------
Taxes payable for the Tax Year commencing July 1, 1998 and ending June 30, 1999,
and (ii) the Taxes payable for the Tax Year commencing July 1, 1999 and ending
June 30, 2000.
(C) "Taxes" shall mean the aggregate amount of real estate taxes and
-----
any general or special assessments (exclusive of penalties and interest thereon)
imposed upon the Real Property (including, without limitation, (i) assessments
made upon or with respect to any "air" and "development" rights now or hereafter
appurtenant to or affecting the Real Property, (ii) any fee, tax or charge
imposed by any Governmental Authority for any vaults, vault space or other space
within or outside the boundaries of the Real Property, and (iii) any taxes or
assessments levied after the date of this Lease in whole or in part for public
benefits to the Real Property or the Building, including, without limitation,
any Business Improvement District taxes and assessments) without taking into
account any discount that Landlord may receive by virtue of any early payment of
Taxes; provided, that if because of any change in the taxation of real estate,
any other tax or assessment, however denominated (including, without limitation,
any franchise, income, profit, sales, use, occupancy, gross receipts or rental
tax) is imposed upon Landlord or the owner of the Real Property or the Building,
or the occupancy, rents or income therefrom, in substitution for any of the
foregoing Taxes, such other tax or assessment shall be deemed part of Taxes
computed as if Landlord's sole asset were the Real Property. With respect to
any Tax Year, all expenses, including reasonable and customary attorneys' fees
and disbursements, experts' and other witnesses' fees, incurred in contesting
the validity or amount of any Taxes or in obtaining a refund of Taxes shall be
considered as part of the Taxes for such Tax Year. Anything contained herein to
the contrary notwithstanding, Taxes shall not be deemed to include (w) any taxes
on Landlord's income, (x) franchise taxes, (y) estate or inheritance taxes or
(z) any similar taxes imposed on Landlord, unless such taxes are levied,
assessed or imposed in lieu of or as a substitute for the whole or any part of
the taxes, assessments, levies, impositions which now constitute Taxes.
(D) "Tax Statement" shall mean a statement in reasonable detail
-------------
setting forth a comparison of the Taxes for a Tax Year with the Base Taxes.
(E) "Tax Year" shall mean the period July 1 through June 30 (or such
--------
other period as hereinafter may be duly adopted by the Governmental Authority
then imposing taxes as its fiscal year for real estate tax purposes), any
portion of which occurs during the Term.
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(F) "Comparison Year" shall mean each calendar year subsequent to the
---------------
calendar year 1999.
(G) "Local 32B" shall mean Local 32B-32J of the Building Service
---------
Employees International Union, AFL-CIO, or its successor, or if there shall be
no successor, then any other union representing employees employed at the
Building and performing similar services.
(H) "Porters" shall mean that classification of employee engaged in
-------
the general maintenance and operation of Class A office buildings most nearly
comparable to the classification now applicable to porters in the current
agreement between R.A.B. and Local 32B (which classification is currently termed
"others" in said agreement).
(I) "Porters' Wage Factor" shall mean Six Thousand Five Hundred
--------------------
Thirty-One (6,531).
(J) "Porters' Wage Payment" shall mean the amount obtained by
---------------------
multiplying the Porters' Wage Factor by the amount by which the Wage Rate in
effect on January 1 of a Comparison Year exceeds the Base Wage Rate.
(K) "R.A.B." shall mean the Realty Advisory Board on Labor Relations,
------
Incorporated, or its successor.
(L) "Wage Rate" shall mean the composite hourly wage rate, including
---------
the regular hourly wage rate required to be paid to Porters pursuant to any
agreement between R.A.B. and Local 32B in effect during the year in question,
exclusive of fringe benefits, which Wage Rate shall be based upon the minimum
effective number of hours in a calendar week which Porters are required to work
pursuant to such agreement, provided that if any such agreement shall require
Porters to be regularly employed on days or during hours when overtime or other
premium pay rates are in effect, then the term "regular hourly wage rate" shall
mean the regular average hourly wage rate for the hours in a calendar week which
Porters are required to be regularly employed (whether or not actually at work
in the Building), e.g., if as of November 1, 1986, an agreement between R.A.B.
and Local 32B would require the regular employment of Porters for thirty-five
(35) hours during a calendar week at a regular hourly wage of $4.00 for the
first thirty (30) hours and at an overtime hourly average wage of $5.00 for the
remaining five (5) hours, then the regular hourly wage rate hereunder, as of
November 1, 1986, would be the sum arrived at by dividing the total weekly
average wages of $145.00 by the minimum effective number of required hours of
employment per week. The computation of the regular hourly wage rate shall be
on the same basis whether based on an hourly or other pay scale but predicated
on the minimum effective number of hours during such calendar week which Porters
are required to work under such agreement whether paid by Landlord or any
independent contractor. If there is no such agreement in effect from which such
regular hourly rate is determinable, the computations shall be made on the basis
of the regular hourly wage rate, calculated as provided above, being paid by
Landlord or by the contractor performing porter or cleaning services for
Landlord as of the date any adjustment provided herein shall be made and an
appropriate retroactive adjustment shall be made when the regular hourly wage
rate is finally determined. If
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length of service shall be a factor in determining any element of wages, it
shall be conclusively presumed that all employees have two (2) years of service.
(M) "Wage Statement" shall mean the written statement furnished by
--------------
Landlord to Tenant setting forth the Porters' Wage Payment.
Section 27.2. (A) If the Taxes payable for any Tax Year (any part or all
-------------
of which falls within the Term) shall represent an increase above the Base
Taxes, then Tenant shall pay as additional rent for such Tax Year and continuing
thereafter until a new Tax Statement is rendered to Tenant, Tenant's Tax Share
of such increase (the "Tax Payment") as shown on the Tax Statement with respect
-----------
to such Tax Year. Tenant shall be obliged to pay the Tax Payment regardless of
whether Tenant is exempt in whole or part, from the payment of any Taxes by
reason of Tenant's diplomatic status or for any other reason whatsoever. The
Taxes shall be computed initially on the basis of the Assessed Valuation in
effect at the time the Tax Statement is rendered (as the Taxes may have been
settled or finally adjudicated prior to such time) regardless of any then
pending application, proceeding or appeal respecting the reduction of any such
Assessed Valuation, but shall be subject to subsequent adjustment as provided in
Section 27.3 hereof.
(B) At any time during or after the Term, Landlord may render to
Tenant a Tax Statement or Statements showing (i) a comparison of the Taxes for
the Tax Year with the Base Taxes and (ii) the amount of the Tax Payment
resulting from such comparison. On the first day of the month following the
furnishing to Tenant of a Tax Statement, Tenant shall pay to Landlord a sum
equal to 1/12th of the Tax Payment shown thereon to be due for such Tax Year
multiplied by the number of months of the Term then elapsed since the
commencement of such Tax Year. Tenant shall continue to pay to Landlord a sum
equal to one-twelfth (1/12th) of the Tax Payment shown on such Tax Statement on
the first day of each succeeding month until the first day of the month
following the month in which Landlord shall deliver to Tenant a new Tax
Statement. If Landlord furnishes a Tax Statement for a new Tax Year subsequent
to the commencement thereof, promptly after the new Tax Statement is furnished
to Tenant, Landlord shall give notice to Tenant stating whether the amount
previously paid by Tenant to Landlord for the current Tax Year was greater or
less than the installments of the Tax Payment for the current tax year in
accordance with the Tax Statement, and (a) if there shall be a deficiency,
Tenant shall pay the amount thereof within ten (10) days after demand therefor,
or (b) if there shall have been an overpayment, Landlord shall credit the amount
thereof against the next monthly installments of the Fixed Rent payable under
this Lease. Tax Payments shall be collectible by Landlord in the same manner as
Fixed Rent. Landlord's failure to render a Tax Statement shall not prejudice
Landlord's right to render a Tax Statement during or with respect to any
subsequent Tax Year, and shall not eliminate or reduce Tenant's obligation to
make Tax Payments for such Tax Year.
Section 27.3. (A) Only Landlord shall be eligible to institute tax
-------------
reduction or other proceedings to reduce the Assessed Valuation. In the event
that, after a Tax Statement has been sent to Tenant, an Assessed Valuation which
had been utilized in computing the Taxes for a Tax Year is reduced (as a result
of settlement, final determination of legal proceedings or otherwise),
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and as a result thereof a refund of Taxes is actually received by or on behalf
of Landlord, then, promptly after receipt of such refund, Landlord shall send
Tenant a Tax Statement adjusting the Taxes for such Tax Year (taking into
account the expenses mentioned in Section 27.1(C) hereof) and setting forth
Tenant's Tax Share of such refund and Tenant shall be entitled to receive such
Share, at Landlord's option, either by way of a credit against the Fixed Rent
next becoming due after the sending of such Tax Statement or by a refund to the
extent no further Fixed Rent is due; provided, however, that Tenant's Tax Share
of such refund shall be limited to the portion of the Tax Payment, if any, which
Tenant had theretofore paid to Landlord attributable to increases in Taxes for
the Tax Year to which the refund is applicable on the basis of the Assessed
Valuation before it had been reduced.
(B) In the event that, after a Tax Statement has been sent to Tenant,
the Assessed Valuation which had been utilized in computing the Base Taxes is
reduced (as a result of settlement, final determination of legal proceedings or
otherwise) then, and in such event: (i) the Base Taxes shall be retroactively
adjusted to reflect such reduction, and (ii) all retroactive Tax Payments
resulting from such retroactive adjustment shall be due and payable when billed
by Landlord. Landlord promptly shall send to Tenant a statement setting forth
the basis for such retroactive adjustment and Tax Payments.
Section 27.4. (A) If the Wage Rate in effect for any Comparison Year (or
-------------
portion thereof, any part or all of which falls within the Term) shall be
greater than the Base Wage Rate, then for such Comparison Year, and continuing
thereafter until a new Wage Statement is rendered to Tenant, Tenant shall pay to
Landlord, as additional rent, an amount equal to the Porters' Wage Payment shown
thereon as provided in paragraph (B) below. Landlord shall render a Wage
Statement to Tenant at any time during or after the Term. The Porters' Wage
Payment shall be prorated for any partial calendar year in which the term of
this Lease shall commence or expire. Notwithstanding the foregoing, if, by
reason of any Requirement, an increase in the Wage Rate is reduced or does not
take effect, or increases in the Wage Rate are limited or prohibited, then for
the period covered by such Requirement ("Requirement Period"), the applicable
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increase (the "Increase") in the Wage Rate for purposes of this Article shall be
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the maximum increase or increases in the Wage Rate permitted during the
Requirement Period, and, upon the expiration thereof, Tenant shall pay to
Landlord, on demand, to the extent permitted by applicable Requirements, the
amount by which the aggregate Porters' Wage Payments applicable to the
Requirement Period exceeds the aggregate Increase paid for such period by Tenant
pursuant to such Requirement, together with interest thereon at the lesser of
(i) the Base Rate or (ii) the maximum rate permitted by law.
(B) At any time during or after each Comparison Year, Landlord shall
render to Tenant a Wage Statement setting forth the Porters' Wage Payment for
such Comparison Year. On the first day of the month following the furnishing to
Tenant of a Wage Statement, Tenant shall pay to Landlord an amount equal to one-
twelfth (1/12th) of the Porters' Wage Payment shown thereon to be due for such
Comparison Year. If Landlord furnishes a Wage Statement for a Comparison Year
subsequent to the commencement thereof, then (i) until the first day of the
month following the month in which the Porters' Wage Statement is furnished to
Tenant, Tenant shall continue to pay to Landlord on the first day of each month
an amount equal to the monthly
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sum payable by Tenant to Landlord with respect to the next previous Comparison
Year; (ii) promptly after the Wage Statement is furnished to Tenant, Landlord
shall give notice to Tenant stating whether the amount previously paid by Tenant
to Landlord for the current Comparison Year was greater or less than the
installments of the Porters' Wage Payment to be paid for the current Comparison
Year in accordance with the Wage Statement, and (a) if there shall be a
deficiency, Tenant shall pay the amount thereof within ten (10) days after
demand therefor, or (b) if there shall have been an overpayment, Landlord shall
credit the amount thereof against the next monthly installments of the Fixed
Rent payable under this Lease; and (iii) on the first day of the month following
the month in which the Wage Statement is furnished to Tenant, and monthly
thereafter throughout the remainder of the current Comparison Year, Tenant shall
pay to Landlord an amount equal to one-twelfth (1/12th) of the Porters' Wage
Payment shown on the Wage Statement. Porter's Wage Payments shall be collectible
by Landlord in the same manner as Fixed Rent. Landlord's failure to render a
Wage Statement shall not prejudice Landlord's right to render a Wage Statement
during or with respect to any subsequent Comparison Year, and shall not
eliminate or reduce Tenant's obligation to make Porter's Wage Payments for such
Comparison Year.
Section 27.5. The expiration or termination of this Lease during any
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Comparison Year or Tax Year shall not affect the rights or obligations of the
parties hereto respecting any payments of Porters' Wage Payments for such
Comparison Year and any payments of Tax Payments for such Tax Year, and any Wage
Statement relating to such Porters' Wage Payment and any Tax Statement relating
to such Tax Payment, may be sent to Tenant subsequent to, and all such rights
and obligations shall survive, any such expiration or termination. In
determining the amount of the Porters' Wage Payment for the Comparison Year or
the Tax Payment for the Tax Year in which the Term shall expire, the payment of
the Porters' Wage Payment for such Comparison Year or the Tax Payment for the
Tax Year shall be prorated based on the number of days of the Term which fall
within such Comparison Year or Tax Year, as the case may be. Any payments due
under such Porters' Wage Statement or Tax Statement shall be payable within
twenty (20) days after such Statement is sent to Tenant.
ARTICLE 28
SERVICES
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Section 28.1. (A) Landlord shall provide passenger elevator service to the
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Premises on Business Days from 8:00 A.M. to 6:00 P.M. and have an elevator
subject to call at all other times.
(B) Commencing on the date Tenant shall occupy the Premises for the
conduct of its business, there shall be one (1) freight elevator serving the
Premises and the entire Building on call on a "first come, first served" basis
on Business Days from 8:00 A.M. to 5:00 P.M., and on a reservation, "first come,
first served" basis from 5:00 P.M. to 8:00 A.M. on Business Days and at any time
on days other than Business Days. If Tenant shall use the freight elevators
serving the Premises between 5:00 P.M. and 8:00 A.M. on Business Days or at any
time on any
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other days, Tenant shall pay Landlord, as additional rent for such use, the
standard rates then fixed by Landlord for the Building, or if no such rates are
then fixed, at reasonable rates. The current rate for overtime freight elevator
use, which rate is subject to change by Landlord during the Term, is listed on
Exhibit "B" attached hereto and made a part hereof.
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(C) Landlord shall not be required to furnish any freight elevator
services during the hours from 5:00 P.M. to 8:00 A.M. on Business Days and at
any time on days other than Business Days unless Landlord has received advance
notice from Tenant requesting such services prior to 2:00 P.M. of the day upon
which such service is requested or by 2:00 P.M. of the last preceding Business
Day if such periods are to occur on a day other than a Business Day.
Section 28.2. Landlord, at Landlord's expense (but subject to recoupment
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pursuant to Article 27 hereof), shall furnish to the perimeter of the Premises
(for distribution by Tenant within the Premises) through the HVAC System, when
required for the comfortable occupancy of the Premises, HVAC on a year round
basis from 8:00 A.M. to 6:00 P.M. on Business Days. Landlord, throughout the
Term, shall have free access to any and all mechanical installations of
Landlord, including, but not limited to, air-cooling, fan, ventilating and
machine rooms and electrical closets; Tenant shall not construct partitions or
other obstructions which may interfere with Landlord's free access thereto, or
interfere with the moving of Landlord's equipment to and from the enclosures
containing said installations. Neither Tenant, nor its agents, employees or
contractors shall at any time enter the said enclosures or tamper with, adjust
or touch or otherwise in any manner affect said mechanical installations.
Tenant shall draw and close the draperies or blinds for the windows of the
Premises whenever the HVAC System is in operation and the position of the sun so
requires and shall at all times cooperate fully with Landlord and abide by all
of the regulations and requirements which Landlord may prescribe for the proper
functioning and protection of the HVAC System.
Section 28.3. The Fixed Rent does not reflect or include any charge to
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Tenant for the furnishing of any necessary HVAC to the Premises during periods
other than the hours and days set forth above ("Overtime Periods").
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Accordingly, if Landlord shall furnish such HVAC to the Premises at the request
of Tenant during Overtime Periods, Tenant shall pay Landlord additional rent for
such services at the standard rates then fixed by Landlord for the Building, or
if no such rates are then fixed, at reasonable rates. The current rate for HVAC
during Overtime Periods, which rate is subject to change by Landlord during the
Term, is listed on Exhibit "B" attached hereto and made a part hereof. Landlord
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shall not be required to furnish any such services during any Overtime Periods
unless Landlord has received advance notice from Tenant requesting such services
prior to 2:00 P.M. of the day upon which such services are requested or by 2:00
P.M. of the last preceding Business Day if such Overtime Periods are to occur on
a day other than a Business Day. If Tenant fails to give Landlord such advance
notice, then, failure by Landlord to furnish or distribute any such services
during such Overtime Periods shall not constitute an actual or constructive
eviction, in whole or in part, or entitle Tenant to any abatement or diminution
of Rental, or relieve Tenant from any of its obligations under this Lease, or
impose any liability upon Landlord or its agents by reason of inconvenience or
annoyance to Tenant, or injury to or interruption of Tenant's business or
otherwise. If more than one tenant utilizing the same system
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as Tenant requests the same services as Tenant for any of the same hours during
the Overtime Periods, the charge to Tenant shall be adjusted pro rata, based
upon the ratio which the rentable area of the Premises bears to the rentable
area of the premises demised to such other tenants.
Section 28.4. Provided Tenant shall keep the Premises in order, Landlord,
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at Landlord's expense, subject to recoupment pursuant to Article 27 hereof,
shall cause the Premises, excluding any portions thereof used for the storage,
preparation, service or consumption of food or beverages, to be cleaned,
substantially in accordance with the standards set forth in Schedule B annexed
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hereto and made a part hereof. Tenant shall pay to Landlord the cost of removal
of any of Tenant's refuse and rubbish from the Premises and the Building to the
extent that the same exceeds the refuse and rubbish usually attendant upon the
use of such Premises as offices. Bills for the same shall be rendered by
Landlord to Tenant at such time as Landlord may elect and shall be due and
payable when rendered as additional rent. Tenant, at Tenant's sole cost and
expense, shall cause all portions of the Premises used for the storage,
preparation, service or consumption of food or beverages to be cleaned daily in
a manner satisfactory to Landlord, and to be exterminated against infestation by
vermin, rodents or roaches regularly and, in addition, whenever there shall be
evidence of any infestation. Any such exterminating shall be done at Tenant's
sole cost and expense, in a manner satisfactory to Landlord, and by Persons
approved by Landlord. If Tenant shall perform any cleaning services in addition
to the services provided by Landlord as aforesaid, Tenant shall employ the
cleaning contractor providing cleaning services to the Building on behalf of
Landlord or such other cleaning contractor as shall be approved by Landlord.
Tenant shall comply with any recycling program and/or refuse disposal program
(including, without limitation, any program related to the recycling, separation
or other disposal of paper, glass or metals) which Landlord shall impose or
which shall be required pursuant to any Requirements.
Section 28.5. If the New York Board of Fire Underwriters or the Insurance
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Services Office or any Governmental Authority, department or official of the
state or city government shall require or recommend that any changes,
modifications, alterations or additional sprinkler heads or other equipment be
made or supplied by reason of Tenant's business, or the location of the
partitions, trade fixtures, or other contents of the Premises, Landlord, at
Tenant's cost and expense, shall promptly make and supply such changes,
modifications, alterations, additional sprinkler heads or other equipment.
Section 28.6. Landlord reserves the right to stop service of the HVAC
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System or the elevator, electrical, plumbing or other Building Systems when
necessary, by reason of accident or emergency, or for repairs, additions,
alterations, replacements or improvements in the judgment of Landlord desirable
or necessary to be made, until said repairs, alterations, replacements or
improvements shall have been completed (which repairs, additions, alterations,
replacements and improvements shall be performed in accordance with Section 4.3
hereof). Landlord shall have no responsibility or liability for interruption,
curtailment or failure to supply HVAC, elevator, electrical, plumbing or other
Building Systems when prevented by Unavoidable Delays or by any Requirement of
any Governmental Authority or due to the exercise of its right to stop service
as provided in this Article 28. The exercise of such right or such failure by
Landlord shall not
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constitute an actual or constructive eviction, in whole or in part, or entitle
Tenant to any compensation or to any abatement or diminution of Rental, or
relieve Tenant from any of its obligations under this Lease, or impose any
liability upon Landlord or its agents by reason of inconvenience or annoyance to
Tenant, or injury to or interruption of Tenant's business, or otherwise.
Section 28.7. Landlord shall make available to Tenant the computerized
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directory in the lobby of the Building for up to thirty-five (35) listings. The
initial programming shall be without charge to Tenant. From time to time, but
not more frequently than once every three (3) months, Landlord shall reprogram
the computerized directory to reflect such changes in the listings therein as
Tenant shall request, and Tenant promptly after request shall pay to Landlord a
reasonable reprogramming charge for each reprogramming Tenant requests. If
Landlord replaces the computerized directory with a standard directory in the
lobby of the Building, Tenant shall be entitled to Tenant's Tax Share of such
listings on such directory.
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ARTICLE 29
PARTNERSHIP TENANT
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If Tenant is a partnership (including, without limitation, a limited
liability partnership) or a limited liability company or a professional
corporation (or is comprised of two (2) or more Persons, individually or as co-
partners of a partnership (including, without limitation a limited liability
partnership), as members of a limited liability company or as shareholders of a
professional corporation) or if Tenant's interest in this Lease shall be
assigned to a partnership (including, without limitation, a limited liability
partnership) a limited liability company or a professional corporation (or to
two (2) or more Persons, individually or as co-partners of a partnership, as
members of a limited liability company or shareholders of a professional
corporation) pursuant to Article 12 hereof (any such partnership, professional
corporation and such Persons are referred to in this Article 29 as "Partnership
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Tenant"), the following provisions shall apply to such Partnership Tenant: (a)
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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 (x) any written instrument
which may hereafter be executed by Partnership Tenant or any successor entity,
changing, modifying, extending or discharging this Lease, in whole or in part,
or surrendering all or any part of the Premises to Landlord, and (y) any
notices, demands, requests or other communications which may hereafter be given
by Partnership Tenant or by any of the parties comprising Partnership Tenant;
(c) any bills, statements, notices, demands, requests or other communications
given or rendered to Partnership Tenant or to any of such parties shall be
binding upon Partnership Tenant and all such parties; (d) if Partnership Tenant
shall admit new partners, shareholders or members, as the case may be,
Partnership Tenant shall give Landlord notice of such event not later than ten
(10) Business Days prior to the admission of such partner(s), shareholder(s) or
member(s) together with an assumption agreement in form and substance
satisfactory to Landlord pursuant to which each of such new partners,
shareholders or members, as the case may be, shall, by their admission to
Partnership Tenant, agree to assume joint and several liability for the
performance of all of the terms, covenants and conditions of this Lease (as the
same may have been or thereafter be amended) on Tenant's part to be observed and
performed; it being expressly understood and agreed that each such new partner,
shareholder or member (as the case may be) shall be deemed to have assumed joint
and several liability for the performance of all of the terms, covenants and
conditions of this Lease (as the same may have been or thereafter be amended),
whether or not such new partner, shareholder or member shall have executed such
assumption agreement, and that neither Tenant's failure to deliver such
assumption agreement nor the failure of any such new partner or shareholder, as
the case may be, to execute or deliver any such agreement to Landlord shall
vitiate the provisions of this clause (d) of this Article 29).
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ARTICLE 30
VAULT SPACE
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Notwithstanding anything contained in this Lease or indicated on any
sketch, blueprint or plan, any vaults, vault space or other space outside the
boundaries of the Real Property are not included in the Premises. Landlord
makes no representation as to the location of the boundaries of the Real
Property. All vaults and vault space and all other space outside the boundaries
of the Real Property which Tenant may be permitted to use or occupy are to be
used or occupied under a revocable license, and if any such license shall be
revoked, or if the amount of such space shall be diminished or required by any
Governmental Authority or by any public utility company, such revocation,
diminution or requisition shall not constitute an actual or constructive
eviction, in whole or in part, or entitle Tenant to any abatement or diminution
of Rental, or relieve Tenant from any of its obligations under this Lease, or
impose any liability upon Landlord. Any fee, tax or charge imposed by any
Governmental Authority for any such vaults, vault space or other space occupied
by Tenant shall be paid by Tenant.
ARTICLE 31
INTENTIONALLY OMITTED PRIOR TO EXECUTION
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ARTICLE 32
CAPTIONS
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The captions are inserted only as a matter of convenience and for reference
and in no way define, limit or describe the scope of this Lease nor the intent
of any provision thereof.
ARTICLE 33
PARTIES BOUND
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The covenants, conditions and agreements contained in this Lease shall bind
and inure to the benefit of Landlord and Tenant and their respective legal
representatives, successors, and, except as otherwise provided in this Lease,
their assigns.
ARTICLE 34
BROKER
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Each party represents and warrants to the other that it has not dealt with
any broker or Person in connection with this Lease other than Wharton Property
Advisors, Inc. ("Broker"). The execution and delivery of this Lease by each
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party shall be conclusive evidence that such party has relied upon the foregoing
representation and warranty. Tenant shall indemnify and hold Landlord harmless
from and against any and all claims for commission, fee or other compensation by
any Person (other than Broker) who shall claim to have dealt with Tenant in
connection with this Lease and for any and all costs incurred by Landlord in
connection with such claims, including, without limitation, reasonable
attorneys' fees and disbursements. Landlord shall indemnify and hold Tenant
harmless from and against any and all claims for commission, fee or other
compensation by any Person (including Broker) who shall claim to have dealt with
Landlord in connection with this Lease and for any and all costs incurred by
Tenant in connection with such claims, including, without limitation, reasonable
attorneys' fees and disbursements. Landlord agrees that it shall pay to Broker
all commission, compensation and other fees in connection with this Lease
pursuant to a separate agreement between Landlord and Broker. The provisions of
this Article 34 shall survive the Expiration Date.
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ARTICLE 35
INDEMNITY
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Section 35.1. (A) Tenant shall not do or permit any act or thing to be
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done upon the Premises which may subject Landlord to any liability or
responsibility for injury, damages to persons or property or to any liability by
reason of any violation of any Requirement, and shall exercise such control over
the Premises as to fully protect Landlord against any such liability. Tenant
shall indemnify and save the Indemnitees harmless from and against (a) all
claims of whatever nature against the Indemnitees arising from any act, omission
or negligence of Tenant, its contractors, licensees, agents, servants,
employees, invitees or visitors (except to the extent the same are due to the
negligence or willful misconduct of Landlord, Landlord's employees, agents or
licensees), (b) all claims against the Indemnitees arising from any accident,
injury or damage whatsoever caused to any person or to the property of any
person and occurring during the Term in or about the Premises, (c) all claims
against the Indemnitees arising from any accident, injury or damage occurring
outside of the Premises but anywhere within or about the Real Property, where
such accident, injury or damage results or is claimed to have resulted from a
wrongful act, omission or negligence of Tenant or Tenant's contractors,
licensees, agents, servants, employees, invitees or visitors, and (d) any
breach, violation or non-performance of any covenant, condition or agreement in
this Lease set forth and contained on the part of Tenant to be fulfilled, kept,
observed and performed. This indemnity and hold harmless agreement shall
include indemnity from and against any and all liability, fines, suits, demands,
costs and expenses of any kind or nature (including, without limitation,
attorneys' fees and disbursements) incurred in or in connection with any such
claim or proceeding brought thereon, and the defense thereof but except with
respect to claims with respect to bodily injury or death, shall be limited to
the extent any insurance proceeds collectible by Landlord under policies owned
by Landlord or such injured party with respect to such damage or injury are
insufficient to satisfy same. Tenant shall have no liability for any
consequential damages suffered either by Landlord or by any party claiming
through Landlord.
(B) Except as provided in Articles 4, 9, 10, 13, 28, 36 and 37 hereof and
otherwise as expressly provided herein, Landlord shall indemnify and save Tenant
its shareholders, directors, officers, Partners, employees and agents harmless
from and against all claims against Tenant arising from any direct damage to the
Premises and any bodily injury to Tenant's employees, agents or invitees
resulting from the acts, omissions or negligence of Landlord or its agents.
This indemnity and hold harmless agreement shall include indemnity from and
against any and all liability, fines, suits, demands, costs and expenses of any
kind or nature (including, without limitation, reasonable attorneys' fees and
disbursements) incurred in or in connection with any such claim or proceeding
brought thereon, but shall be limited to the extent any insurance proceeds
collectible by Tenant or such injured party with respect to such damage or
injury are insufficient to satisfy same. Landlord shall have no liability for
any consequential damages suffered either by Tenant or by any party claiming
through Tenant.
Section 35.2. If any claim, action or proceeding is made or brought
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against either party, which claim, action or proceeding the other party shall be
obligated to indemnify such first party
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against pursuant to the terms of this Lease, then, upon demand by the
indemnified party, the indemnifying party, at its sole cost and expense, shall
resist or defend such claim, action or proceeding in the indemnified party's
name, if necessary, by such attorneys as the indemnified party shall approve,
which approval shall not be unreasonably withheld. Attorneys for the
indemnifying party's insurer are hereby deemed approved for purposes of this
Section 35.2. Notwithstanding the foregoing, an indemnified party may retain its
own attorneys to defend or assist in defending any claim, action or proceeding
involving potential liability of Five Million Dollars ($5,000,000) or more, and
the indemnifying party shall pay the reasonable fees and disbursements of such
attorneys. The provisions of this Article 35 shall survive the expiration or
earlier termination of this Lease.
ARTICLE 36
ADJACENT EXCAVATION-SHORING
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If an excavation shall be made upon land adjacent to the Premises, or shall
be authorized to be made, Tenant, upon reasonable advance notice, shall afford
to the person causing or authorized to cause such excavation, a license to enter
upon the Premises for the purpose of doing such work as said person shall deem
necessary to preserve the wall or the Building from injury or damage and to
support the same by proper foundations, without any claim for damages or
indemnity against Landlord, or diminution or abatement of Rental, provided that
Tenant shall continue to have access to the Premises and the Building.
ARTICLE 37
MISCELLANEOUS
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Section 37.1. This Lease is offered for signature by Tenant and it is
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understood that this Lease shall not be binding upon Landlord or Tenant unless
and until Landlord and Tenant shall have executed and unconditionally delivered
a fully executed copy of this Lease to each other.
Section 37.2. The obligations of Landlord under this Lease shall not be
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binding upon Landlord named herein after the sale, conveyance, assignment or
transfer by such Landlord (or upon any subsequent landlord after the sale,
conveyance, assignment or transfer by such subsequent landlord) of its interest
in the Building or the Real Property, as the case may be, and in the event of
any such sale, conveyance, assignment or transfer, Landlord shall be and hereby
is entirely freed and relieved of all covenants and obligations of Landlord
hereunder. The partners, shareholders, directors, officers and principals,
direct and indirect, comprising Landlord (collectively, the "Parties") shall not
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be liable for the performance of Landlord's obligations under this Lease.
Tenant shall look solely to Landlord to enforce Landlord's obligations hereunder
and shall not seek any damages against any of the Parties. The liability of
Landlord for Landlord's obligations under this Lease shall be limited to
Landlord's interest in the Real Property and Tenant shall not look to any other
property or assets of Landlord or the property or
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assets of any of the Parties in seeking either to enforce Landlord's obligations
under this Lease or to satisfy a judgment for Landlord's failure to perform such
obligations.
Section 37.3. Notwithstanding anything contained in this Lease to the
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contrary, all amounts payable by Tenant to or on behalf of Landlord under this
Lease, whether or not expressly denominated Fixed Rent, Escalation Rent,
additional rent or Rental, shall constitute rent for the purposes of Section
502(b)(7) of the Bankruptcy Code.
Section 37.4. Tenant's liability for all items of Rental shall survive the
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Expiration Date.
Section 37.5. Tenant shall reimburse Landlord as additional rent, within
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ten (10) days after rendition of a statement, for all expenditures made by, or
damages or fines sustained or incurred by, Landlord, due to any default by
Tenant under this Lease, with interest thereon at the Applicable Rate.
Section 37.6. This Lease shall not be recorded.
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Section 37.7. Tenant hereby waives any claim against Landlord which Tenant
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may have based upon any assertion that Landlord has unreasonably withheld or
unreasonably delayed any consent or approval requested by Tenant, and Tenant
agrees that its sole remedy shall be an action or proceeding to enforce any
related provision or for specific performance, injunction or declaratory
judgment. In the event of a determination that such consent or approval has
been unreasonably withheld or delayed, the requested consent or approval shall
be deemed to have been granted; however, Landlord shall have no liability to
Tenant for its refusal or failure to give such consent or approval. Tenant's
sole remedy for Landlord's unreasonably withholding or delaying consent or
approval shall be as provided in this Section 37.7.
Section 37.8. This Lease contains the entire agreement between the parties
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and supersedes all prior understandings, if any, with respect thereto. This
Lease shall not be modified, changed, or supplemented, except by a written
instrument executed by both parties.
Section 37.9. Tenant hereby (a) irrevocably consents and submits to the
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jurisdiction of any Federal, state, county or municipal court sitting in the
State of New York in respect to any action or proceeding brought therein by
Landlord against Tenant concerning any matters arising out of or in any way
relating to this Lease; (b) irrevocably waives personal service of any summons
and complaint and consents to the service upon it of process in any such action
or proceeding by mailing of such process to Tenant at the address set forth
herein and hereby irrevocably designates Morrison & Foerster LLP or other law
firm located in Manhattan if disclosed to Landlord in writing (or if not so
located, then upon any member of the law firm of Morrison & Foerster LLP, or
their successor, if so located in Manhattan), to accept service of any process
on Tenant's behalf and hereby agrees that such service shall be deemed
sufficient; (c) irrevocably waives all objections as to venue and any and all
rights it may have to seek a change of venue with respect to any such action or
proceedings; (d) agrees that the laws of the State of New York shall govern in
any such action or proceeding and waives any defense to any action or
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proceeding granted by the laws of any other country or jurisdiction unless such
defense is also allowed by the laws of the State of New York; and (e) agrees
that any final judgment rendered against it in any such action or proceeding
shall be conclusive and may be enforced in any other jurisdiction by suit on the
judgment or in any other manner provided by law. Tenant further agrees that any
action or proceeding by Tenant against Landlord in respect to any matters
arising out of or in any way relating to this Lease shall be brought only in the
State of New York, county of New York. In furtherance of the foregoing, Tenant
hereby agrees that its address for notices given by Landlord and service of
process under this Lease shall be the Premises. Notwithstanding the foregoing
provisions of this Section 37.9, Tenant may, by written notice to Landlord,
change the designated agent for acceptance of service of process to any other
law firm located in the City, county and State of New York.
Section 37.10. Unless Landlord shall render written notice to Tenant to
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the contrary in accordance with the provisions of Article 26 hereof, MRC
Management LLC is authorized to act as Landlord's agent in connection with the
performance of this Lease, including, without limitation, the receipt and
delivery of any and all notices and consents in accordance with Article 26.
Tenant shall direct all correspondence and requests to, and shall be entitled to
rely upon correspondence received from, MRC Management LLC, as agent for the
Landlord in accordance with Article 26. Tenant acknowledges that MRC Management
LLC is acting solely as agent for Landlord in connection with the foregoing, and
neither MRC Management LLC nor any of its direct or indirect partners, officers,
shareholders, directors or employees shall have any liability to Tenant in
connection with the performance of Landlord's obligations under this Lease and
Tenant waives any and all claims against any such party arising out of, or in
any way connected with, this Lease or the Real Property.
Section 37.11. (A) All of the Schedules and Exhibits attached hereto are
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incorporated in and made a part of this Lease, but, in the event of any
inconsistency between the terms and provisions of this Lease and the terms and
provisions of the Schedules and Exhibits hereto, the terms and provisions of
this Lease shall control. Wherever appropriate in this Lease, personal pronouns
shall be deemed to include the other genders and the singular to include the
plural. All Article and Section references set forth herein shall, unless the
context otherwise specifically requires, be deemed references to the Articles
and Sections of this Lease.
(B) If any term, covenant, condition or provision of this
Lease, or the application thereof to any person or circumstance, shall ever be
held to be invalid or unenforceable, then in each such event the remainder of
this Lease or the application of such term, covenant, condition or provision to
any other Person or any other circumstance (other than those as to which it
shall be invalid or unenforceable) shall not be thereby affected, and each term,
covenant, condition and provision hereof shall remain valid and enforceable to
the fullest extent permitted by law.
(C) 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
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of Landlord shall be effective for any purpose unless such consent or approval
is set forth in a written instrument executed by Landlord.
Section 37.12. At any time and from time to time during the term of this
--------------
Lease, Landlord shall have the right to substitute for the Premises (for the
purposes of this Article only, the Premises are referred to as the "Replaced
--------
Premises") other space in the Building (such other space being referred to as
- --------
the "Substitute Premises") by written notice given to Tenant not later than
-------------------
sixty (60) days prior to the date set forth in said notice as the effective date
(the "Substitution Date") for such substitution. Landlord's notice shall
-----------------
include a floor plan identifying the Substitute Premises, which Substitute
Premises shall have a rentable area equal to or greater than the Replaced
Premises and shall be similar thereto in configuration. Tenant shall vacate the
Replaced Premises and surrender the same to Landlord on or before the
Substitution Date. Promptly after Tenant enters into occupancy of the
Substitute Premises and provided Tenant is not then in default under the terms
or conditions of this Lease, Landlord shall reimburse Tenant for any reasonable
moving expenses and for any other reasonable costs and expenses incurred by
Tenant in duplicating in the Substitute Premises the Alterations previously made
by Tenant in the Replaced Premises, including the costs of duplicating cabling
and panel systems, and of reconfiguring furniture, in each case as they existed
immediately prior to Tenant's relocation to the Substitute Premises. From and
after the Substitution Date, the term "Premises" shall mean the Substitute
Premises for all purposes hereunder.
ARTICLE 38
RENT CONTROL
------------
If at the commencement of, or at any time or times during the Term of this
Lease, the Rental reserved in this Lease shall not be fully collectible by
reason of any Requirement, Tenant shall enter into such agreements and take such
other steps (without additional expense to Tenant) as Landlord may request and
as may be legally permissible to permit Landlord to collect the maximum rents
which may from time to time during the continuance of such legal rent
restriction be legally permissible (and not in excess of the amounts reserved
therefor under this Lease). Upon the termination of such legal rent restriction
prior to the expiration of the Term, (a) the Rental shall become and thereafter
be payable hereunder in accordance with the amounts reserved in this Lease for
the periods following such termination, and (b) Tenant shall pay to
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Landlord, if legally permissible, an amount equal to (i) the items of Rental
which would have been paid pursuant to this Lease but for such legal rent
restriction less (ii) the rents paid by Tenant to Landlord during the period or
periods such legal rent restriction was in effect.
IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this
Lease as of the day and year first above written.
ELEVEN PENN PLAZA LLC
By: Vornado M 393 L.L.C., member
By: Vornado Realty Trust, authorized signatory
By: /s/ Irwin Goldberg
---------------------
Irwin Goldberg
Vice President and Chief Financial Officer
By: M 393 Associates LLC, member
By: Vornado M 393 L.L.C.
By: Vornado Realty Trust, authorized signatory
By: /s/ Irwin Goldberg
---------------------
Irwin Goldberg
Vice President and Chief Financial Officer
XOOM.COM, INC., Tenant
By: /s/ Laurent Massa
------------------------
Name: Laurent Massa
Title: CEO
Fed. Id. No. 88-0361336
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STATE OF CALIFORNIA )
) ss.:
COUNTY OF SAN FRANCISCO )
On the 5th day of March, 1999, before me personally came Laurent Massa,
to me known, who, being by me duly sworn, did depose and say that he resides at
No. 27 Oak Valley Drive, Novato, CA 94947; that he is the CEO of XOOM.COM,
INC., the corporation described and which executed the foregoing instrument;
that he signed his name thereto by order of the board of directors of said
corporation.
/s/ Dewi Tjandra
------------------------
Notary Public
DEWI TJANDRA
Comm# 1145723
Notary Public - California
City & County of San Francisco
My Commission Expires July 4, 2001
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Schedule A
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RULES AND REGULATIONS
---------------------
(1) The sidewalks, entrances, passages, courts, elevators, vestibules,
stairways, corridors, or halls shall not be obstructed or encumbered by Tenant
or used for any purpose other than ingress and egress to and from the Premises
and for delivery of merchandise and equipment in prompt and efficient manner,
using elevators and passageways designated for such delivery by Landlord.
(2) No awnings, air-conditioning units, fans or other projections shall be
attached to the outside walls of the Building. No curtains, blinds, shades, or
screens, other than those which conform to Building standards as established by
Landlord from time to time, shall be attached to or hung in, or used in
connection with, any window or door of the Premises, without the prior written
consent of Landlord which shall not be unreasonably withheld or delayed. Such
awnings, projections, curtains, blinds, shades, screens or other fixtures must
be of a quality, type, design and color, and attached in the manner reasonably
approved by Landlord. All electrical fixtures hung in offices or spaces along
the perimeter of the Premises must be of a quality, type, design and bulb color
approved by Landlord, which consent shall not be withheld or delayed
unreasonably unless the prior consent of Landlord has been obtained for other
lamping.
(3) No sign, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by Tenant on any part of the outside of the
Premises or Building or on the inside of the Premises if the same can be seen
from the outside of the Premises without the prior written consent of Landlord
except that the name of Tenant may appear on the entrance door of the Premises.
In the event of the violation of the foregoing by Tenant, if Tenant has refused
to remove same after reasonable notice from Landlord, Landlord may remove same
without any liability, and may charge the expense incurred by such removal to
Tenant. Interior signs on doors and directory tablet shall be of a size, color
and style reasonably acceptable to Landlord.
(4) The exterior windows and doors that reflect or admit light and air
into the Premises or the halls, passageways or other public places in the
Building, shall not be covered or obstructed by Tenant.
(5) No showcases or other articles shall be put in front of or affixed to
any part of the exterior of the Building, nor placed in the halls, corridors or
vestibules, nor shall any article obstruct any air-conditioning supply or
exhaust without the prior written consent of Landlord.
(6) The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were constructed, and no
sweepings, rubbish, rags, acids or other substances shall be deposited therein.
All damages resulting from any misuse of the fixtures shall be borne by Tenant.
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(7) Subject to the provisions of Article 3 of this Lease, Tenant shall not
mark, paint, drill into, or in any way deface any part of the Premises or the
Building. No boring, cutting or stringing of wires shall be permitted, except
with the prior written consent of Landlord, which consent shall not be
unreasonably withheld or delayed, and as Landlord may direct.
(8) No space in the Building shall be used for manufacturing, for the
storage of merchandise, or for the sale of merchandise, goods or property of any
kind at auction or otherwise.
(9) Tenant shall not make, or permit to be made, any unseemly or
disturbing noises or disturb or interfere with occupants of this or neighboring
buildings or premises or those having business with them whether by the use of
any musical instrument, radio, television set, talking machine, unmusical noise,
whistling, singing, or in any other way.
(10) Tenant, or any of Tenant's employees, agents, visitors or licensees,
shall not at any time bring or keep upon the Premises any inflammable,
combustible or explosive fluid, chemical or substance except such as are
incidental to usual office occupancy.
(11) No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by Tenant, nor shall any changes be made in existing locks
or the mechanism thereof, unless Tenant promptly provides Landlord with the key
or combination thereto. Tenant must, upon the termination of its tenancy,
return to Landlord all keys of stores, offices and toilet rooms, and in the
event of the loss of any keys furnished at Landlord's expense, Tenant shall pay
to Landlord the cost thereof.
(12) No bicycles, vehicles or animals of any kind except for seeing eye
dogs shall be brought into or kept by Tenant in or about the Premises or the
Building.
(13) All removals, or the carrying in or out of any safes, freight,
furniture or bulky matter of any description must take place in the manner and
during the hours which Landlord or its agent reasonably may determine from time
to time. Landlord reserves the right to inspect all safes, freight or other
bulky articles to be brought into the Building and to exclude from the Building
all safes, freight or other bulky articles which violate any of these Rules and
Regulations or the Lease of which these Rules and Regulations are a part.
(14) Tenant shall not occupy or permit any portion of the Premises demised
to it to be occupied as an office for a public stenographer or typist, or for
the possession, storage, manufacture, or sale of liquor, narcotics, dope, or as
a barber or manicure shop, or as an employment bureau. Tenant shall not engage
or pay any employees on the Premises, except those actually working for Tenant
at the Premises, nor advertise for labor giving an address at the Premises.
(15) Tenant shall not purchase spring water, ice, towels or other like
service, or accept barbering or bootblacking services in the Premises, from any
company or persons not approved
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by Landlord, which approval shall not be withheld or delayed unreasonably and at
hours and under regulations other than as reasonably fixed by Landlord.
(16) Landlord shall have the right to prohibit any advertising by Tenant
which, in Landlord's reasonable opinion, tends to impair the reputation of the
Building or its desirability as a building for offices, and upon written notice
from Landlord, Tenant shall refrain from or discontinue such advertising.
(17) Landlord reserves the right to exclude from the Building between the
hours of 6 P.M. and 8 A.M. and at all hours on days other than Business Days all
persons who do not present a pass to the Building signed or approved by
Landlord. Tenant shall be responsible for all persons for whom a pass shall be
issued at the request of Tenant and shall be liable to Landlord for all acts of
such persons.
(18) Tenant shall, at its expense, provide artificial light for the
employees of Landlord while doing janitor service or other cleaning, and in
making repairs or alterations in the Premises.
(19) The requirements of Tenant will be attended to only upon written
application at the office of the Building. Building employees shall not perform
any work or do anything outside of the regular duties, unless under special
instructions from the office of Landlord.
(20) Canvassing, soliciting and peddling in the Building is prohibited and
Tenant shall cooperate to prevent the same.
(21) There shall not be used in any space, or in the public halls of the
Building, either by Tenant or by jobbers or others, in the delivery or receipt
of merchandise, any hand trucks, except those equipped with rubber tires and
side guards.
(22) Except as specifically provided in Section 2.2 of this Lease, Tenant
shall not do any cooking, conduct any restaurant, luncheonette or cafeteria for
the sale or service of food or beverages to its employees or to others, or cause
or permit any odors of cooking or other processes or any unusual or
objectionable odors to emanate from the Premises. Tenant shall not permit the
delivery of any food or beverage to the Premises, except by such persons
delivering the same as shall be approved by Landlord, which approval shall not
be unreasonably withheld or delayed.
(23) Tenant shall keep the entrance door to the Premises closed at all
times.
(24) Landlord shall have the right to require that all messengers and other
Persons delivering packages, papers and other materials to Tenant (i) be
directed to deliver such packages, papers and other materials to a Person
designated by Landlord who will distribute the same to Tenant or (ii) be
escorted by a person designated by Landlord to deliver the same to Tenant
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(25) Landlord and its agents reserve the right to inspect all packages,
boxes, bags, handbags, attache cases, suitcases, and other items carried into
the Building, and to refuse entry into the Building to any person who either
refuses to cooperate with such inspection or who is carrying any object which
may be dangerous to persons or property. In addition, Landlord reserves the
right to implement such further measures designed to ensure safety of the
Building and the persons and property located therein as Landlord shall deem
necessary or desirable.
A-4
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Schedule B
----------
CLEANING SPECIFICATIONS
-----------------------
GENERAL CLEANING:
- ----------------
NIGHTLY
- -------
General Offices:
---------------
1. All hardsurfaced flooring to be swept using approved dustdown
preparation.
2. Carpet sweep all carpets, moving only light furniture (desks, file
cabinets, etc. not to be moved).
3. Hand dust and wipe clean all furniture, fixtures and window sills.
4. Empty and clean all ash trays and screen all sand urns.
5. Empty and clean all waste disposal cans and baskets.
6. Dust interiors of all waste disposal cans and baskets.
7. Wash clean all water fountains and coolers.
Public Lavatories (Base Building):
---------------------------------
1. Sweep and wash all floors, using proper disinfectants.
2. Wash and polish all mirrors, shelves, bright work and enameled
surfaces.
3. Wash and disinfect all basins, bowls and urinals.
4. Wash all toilet seats.
5. Hand dust and clean all partitions, tile walls, dispensers and
receptacles in lavatories and restrooms.
6. Empty paper receptacles and remove wastepaper.
7. Fill and clean all soap, towel and toilet tissue dispensers as needed,
supplies therefore to be furnished by Landlord at a reasonable charge
to Tenant. If the
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Premises consists of a part of a rentable floor, said charge to Tenant
shall be that portion of a reasonable charge for such supplies that is
reasonably allocable to Tenant.
8. Empty and clean sanitary disposal receptacles.
WEEKLY:
- ------
1. Vacuum clean all carpeting and rugs.
2. Dust all door louvres and other ventilating louvres within a person's
reach.
3. Wipe clean all brass and other bright work.
QUARTERLY:
- ---------
High dust the Premises complete, including the following:
1. Dust all pictures, frames, charts, graphs and similar wall hangings
not reached in nightly cleaning.
2. Dust clean all vertical surfaces, such as walls, partitions, doors and
door bucks and other surfaces not reached in nightly cleaning.
3. Dust all pipes, ventilating and air-conditioning louvres, ducts, high
mouldings and other high areas not reached in nightly cleaning.
4. Dust all venetian blinds.
Wash exterior and interior of windows periodically, subject to weather
conditions and requirements of law.
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EXHIBIT "A"
-----------
FLOOR PLAN
This floor plan is annexed to and made a part of this Lease solely to indicate
the Premises by outlining and diagonal marking. All areas, conditions,
dimensions and locations are approximate.
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
January 25, 1999, in Amendment No. 1 to the Registration Statement (Form S-1,
No. 333-74441) and related Prospectus of Xoom.com, Inc. for the registration
of 4,600,000 shares of its common stock.
Palo Alto, California
March 25, 1999
