<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 7, 2000
REGISTRATION NO. 333-33812
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
FREEI NETWORKS, INC.
(Name of issuer in its charter)
--------------------------
<TABLE>
<S> <C> <C>
WASHINGTON 7370 91-1930473
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
</TABLE>
--------------------------
2505 S. 320(TH) STREET, SUITE 200
FEDERAL WAY, WASHINGTON 98003
(253) 796-6500
(Address and telephone number of principal executive offices and principal place
of business)
------------------------------
ROBERT MCCAUSLAND
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
2505 S. 320(TH) STREET, SUITE 200
FEDERAL WAY, WASHINGTON 98003
(253) 796-6500
(Name, address and telephone number of agent for service)
------------------------------
COPIES OF ALL COMMUNICATIONS TO BE SENT TO:
<TABLE>
<S> <C>
MICHAEL J. ERICKSON, ESQ. CARY K. HYDEN, ESQ.
LAURA A. BERTIN, ESQ. JONN R. BEESON, ESQ.
MARK F. WORTHINGTON, ESQ. LATHAM & WATKINS
SUMMIT LAW GROUP, PLLC 650 TOWN CENTER DRIVE
1505 WESTLAKE AVENUE NORTH, SUITE 300 TWENTIETH FLOOR
SEATTLE, WASHINGTON 98109 COSTA MESA, CALIFORNIA 92626
(206) 281-9881 (714) 540-1235
</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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 7, 2000
PROSPECTUS
SHARES
[LOGO]
FREEI NETWORKS, INC.
COMMON STOCK
This is an initial public offering of our common stock. We are selling all of
the shares offered under this prospectus.
There is currently no public market for the shares. We will apply to have our
common stock listed for quotation on the Nasdaq National Market under the symbol
"FREI."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------ ------------------------
<S> <C> <C>
Public offering price........................... $ $
Underwriting discounts and commissions.......... $ $
Proceeds, before expenses, to us................ $ $
</TABLE>
------------------------
The underwriters may purchase up to an additional shares from us at the
initial public offering price less the underwriting discount to cover
over-allotments.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares against payment in New York, New York
on , 2000.
------------------------
BEAR, STEARNS & CO. INC.
BANC OF AMERICA SECURITIES LLC
DAIN RAUSCHER WESSELS
WARBURG DILLON READ LLC
PACIFIC CREST
The date of this prospectus is , 2000.
<PAGE>
Inside Front Cover:
Four maps of the United States reflecting service availability, current POPs and
future POPs.
Text:
Freei internet.com - Logo
U.S. Market Coverage
Freeinternet.com offers dial up access in over 1,300 cities in North America.
Each city designated with a red dot below has free internet service available.
The green stars are our current freei owned POPs.
The yellow starts designate our projected year 2000 POPs.
These cities and others offer dial up access via a local phone number.
Inside gatefold:
Samples of promotion material for Subway private label program
Text:
FreeInternet.com Private Label Program and Co-Branded Service
Picture of Home Page
Text:
FreeInternet.com Home Page
Picture of the Company's "Baby Bob"
Text:
FreeInternet.com Logo
"I was made for this job!"
Read my lips!
Totally free internet service.
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY UNDER CIRCUMSTANCES AND IN JURISDICTIONS WHERE
OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS REGARDLESS OF THE TIME OF
DELIVERY OF THE PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
Forward-Looking Statements............ 19
Use of Proceeds....................... 19
Dividend Policy....................... 19
Capitalization........................ 20
Dilution.............................. 21
Selected Financial Data............... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Business.............................. 30
Management............................ 41
Related-Party Transactions............ 48
Principal Shareholders................ 50
Description of Capital Stock.......... 51
Shares Eligible for Future Sale....... 54
Underwriting.......................... 57
Legal Matters......................... 59
Experts............................... 59
Where to Find Additional Documents.... 59
Index to Financial Statements......... F-1
</TABLE>
------------------------
THROUGH AND INCLUDING , 2000 (THE 25(TH) DAY AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION THAT WE PRESENT MORE FULLY
ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY,
INCLUDING THE SECTION TITLED "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND THE
NOTES RELATING TO THOSE STATEMENTS. AS REFERRED TO IN THIS PROSPECTUS, THE TERMS
"WE," "US," "OUR," "FREEINTERNET.COM" AND SIMILAR TERMS REFER TO FREEI
NETWORKS, INC.
OUR BUSINESS
Freeinternet.com is a leading provider of free internet access to consumers
and also offers private label and co-branded free internet access solutions to
businesses and affinity groups, both domestically and internationally. We
provide access to the internet that is free, anonymous and reliable. We help
maximize the effectiveness of the online marketing efforts of our advertisers
and sponsors by enabling them to target specific demographic segments of our
large consumer audience on both a local and national basis. Since the launch of
our service in December 1998, the number of our registered users has grown to
approximately 2.2 million as of March 26, 2000. During the 30 days prior to
March 26, 2000, approximately 1.1 million of these registered users accessed our
service and over 1.3 billion advertising impressions were delivered to our
active users in the United States.
Our free internet access service is designed to be reliable, easy to use and
fun. We offer a content-rich website featuring a wide selection of channels,
such as business, entertainment and health; customizable homepages with
pre-selected user preferences and localized information; a fully enabled
e-commerce site; and comprehensive customer service and technical support. We
were ranked as the overall number one free internet service provider, or ISP, by
PC WORLD MAGAZINE in its April 2000 edition.
Our private label and co-branding programs offer our strategic partners a
wide range of turnkey internet solutions. Through these solutions, our partners
have the ability to offer free internet services to their customers, increasing
their website traffic, building brand loyalty and expanding their revenue
streams. We anticipate that these programs will allow us to rapidly increase the
number of consumers to whom our advertising offerings are delivered and expand
our revenue-sharing opportunities. We have entered into private label agreements
with companies such as AT&T Corp. and InfoSpace.com, Inc., and anticipate
launching these services in the near future. We have also recently entered into
a co-branding arrangement to provide free internet access to the customers of
Subway Restaurants. Moreover, in December 1999, our free service was launched in
Singapore, and we are currently in discussions to initiate service in several
other countries.
When users register for our service, they anonymously provide selected
demographic information, which allows advertisers and sponsors to customize
their marketing to specific online audiences. Our advertisers and sponsors are
able to reach their target audience through a variety of advertising options.
Our iSee Window(SM), a small advertising and navigational banner displayed on
the user's computer screen while online, provides our advertisers with a
continuous medium to reach our large user base. In addition, we offer
sponsorship and advertisements in content-specific channels, targeted emails and
placement within our online shopping channel, the FreeiMall. Since we do not
require a user's name, street address or phone number, registered users enjoy
complete anonymity. We also voluntarily adhere to the same decency standards
followed by the radio and television industries.
We believe a key competitive advantage is our national telecommunications
infrastructure. Unlike most other free ISPs, we maintain our own "points of
presence," or POPs, in major markets. POPs are telecommunications facilities
located in a particular market which allow users to access the internet through
a local telephone call. We established our first POP in December 1998 and
currently maintain 25 POPs in major markets. In addition, we supplement our POPs
and help ensure service redundancy by contracting with third-party
telecommunications service providers such as Cable & Wireless USA, Inc., PSINet,
Inc. and Splitrock Services, Inc. We believe this approach enhances the
reliability of our
1
<PAGE>
services and provides us with lower network costs compared to other free ISPs.
Users can access our services through a local telephone call in more than 1,300
cities throughout the United States.
OUR MARKET OPPORTUNITY
We believe we are well positioned to capitalize on the significant market
opportunity to provide free internet access, online services and targeted
advertising. The internet has become an increasingly significant medium for
communication, information and commerce. International Data Corporation, or IDC,
an industry research firm, estimates that as of 1999, there were over
80 million web users in the United States and over 106 million users outside of
the United States. IDC projects that by the end of 2003, these numbers will
increase to over 177 million web users in the United States and over
325 million users outside of the United States. There has also been a
substantial increase in online advertising expenditures and consumer e-commerce
revenues. Jupiter Communications, an industry research firm, has projected that
online advertising expenditures in the United States will grow from an estimated
$3.2 billion in 1999 to $11.5 billion in 2003. Furthermore, according to the
GartnerGroup, an industry research firm, worldwide consumer electronic commerce
revenues are expected to grow from $31.2 billion in 1999 to $380.5 billion in
2003.
OUR STRATEGY
Our goal is to become the dominant provider of access to the internet. We
intend to achieve this goal by:
- attracting users through brand promotion and appealing marketing programs;
- retaining users by offering reliable internet access while providing a
user-friendly and fun online experience;
- offering our advertisers and sponsors effective marketing solutions to
reach their target audiences;
- continuing to develop private label and other strategic relationships;
- building out a reliable and cost-effective telecommunications network;
- pursuing aggressive international expansion; and
- capitalizing on wireless, broadband and other emerging technologies.
We were incorporated in the State of Washington in September 1998. Our
principal executive offices are located at 2505 South 320(th) Street, Suite 200,
Federal Way, Washington 98003, and our telephone number is (253) 796-6500. Our
World Wide Web address is www.freeinternet.com. Information on our website does
not constitute a part of this prospectus.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by us................... shares
Common stock to be outstanding after this
offering................................... shares
Use of proceeds.............................. To operate and expand our network
infrastructure; to promote brand awareness
and other user acquisition activities; and
other general corporate purposes. See "Use of
Proceeds" on page 19.
Proposed Nasdaq National Market Symbol....... FREI
</TABLE>
UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS REFLECTS THE
NUMBER OF SHARES OUTSTANDING ON MARCH 26, 2000, ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION AND GIVES EFFECT, UPON THE CLOSING OF THIS
OFFERING, TO THE CONVERSION OF ALL CURRENTLY OUTSTANDING SHARES OF OUR
OUTSTANDING PREFERRED STOCK INTO SHARES OF COMMON STOCK. THE NUMBER OF SHARES OF
COMMON STOCK TO BE OUTSTANDING AFTER THIS OFFERING EXCLUDES 10,421,128 SHARES OF
COMMON STOCK RESERVED FOR ISSUANCE UNDER OUR STOCK OPTION PLAN, OF WHICH
4,749,003 SHARES ARE ISSUABLE UPON EXERCISE OF OUTSTANDING OPTIONS AS OF
MARCH 26, 2000, AND 2,000,000 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UNDER
OUR EMPLOYEE STOCK PURCHASE PLAN.
PLEASE SEE "CAPITALIZATION" ON PAGE 20 FOR A MORE COMPLETE DISCUSSION
REGARDING THE OUTSTANDING SHARES OF COMMON STOCK, OPTIONS TO PURCHASE COMMON
STOCK AND OTHER RELATED MATTERS.
SUMMARY FINANCIAL DATA
The following table sets forth our summary financial data. The summary
financial data as of and for the year ended December 31, 1999 have been derived
from and are qualified by reference to our audited financial statements. The
summary financial data for the quarterly periods ended March 31, 1999, June 30,
1999, September 30, 1999 and December 31, 1999 have been derived from our
unaudited financial statements. See Note 2 to our audited financial statements
for a description of how pro forma net loss per share is calculated. This table
does not present all of our financial information. You should read this
information together with our financial statements and the related notes
included elsewhere in this prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, YEAR ENDED
1999 1999 1999 1999 DEC. 31, 1999
--------- -------- --------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $ 17 $ 91 $ 213 $ 662 $ 983
Gross profit (loss)............................ (359) (705) (2,059) (4,586) (7,709)
Net loss....................................... (737) (1,249) (3,739) (13,020) (18,745)
Pro forma net loss per share................... $ (0.03) $ (0.05) $ (0.12) $ (0.34) $ (0.62)
Shares used to compute pro forma net loss per
share........................................ 24,704 26,879 32,061 38,175 30,477
</TABLE>
3
<PAGE>
The following table presents summary balance sheet data at December 31,
1999, on a pro forma basis adjusted to reflect the conversion of shares of
preferred stock then-outstanding as of December 31, 1999 into 12,729,458 shares
of common stock and on a pro forma as adjusted basis to reflect the sale of
shares of our common stock in this offering and the application of the
estimated proceeds, less estimated expenses. See "Use of Proceeds" and
"Capitalization."
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 20,342 $20,342 $
Working capital........................................... 10,649 10,649
Total assets.............................................. 50,429 50,429
Long-term obligations, net of current portion............. 20,137 20,137
Mandatorily redeemable preferred stock.................... 33,892 --
Shareholders' equity (deficit)............................ (15,779) 18,113
</TABLE>
4
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. ANY OF THE
FOLLOWING RISKS COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS, OPERATING
RESULTS, FINANCIAL CONDITION AND CASH FLOWS AND COULD RESULT IN A COMPLETE LOSS
OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE AN EXTREMELY LIMITED
OPERATING HISTORY AND OUR FREE INTERNET SERVICE PROVIDER BUSINESS MODEL IS
UNPROVEN.
We were incorporated in September 1998 and launched our internet operations
in December 1998. Accordingly, we have an extremely limited operating history.
An investor in our common stock must consider the risks, uncertainties, expenses
and difficulties frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets,
including the internet market. These risks and difficulties include our ability
to:
- generate revenues from sources other than user fees;
- control our costs;
- increase the number of registered and active users;
- attract a large number of advertisers and strategic partners who desire to
reach our users;
- build our brand;
- offer compelling online content, services and e-commerce opportunities;
- respond effectively to the offerings of competitive internet service
providers;
- address the risks associated with expanding our business internationally;
- update and enhance our technology to respond to changes in industry
standards;
- maintain a stable and scalable telecommunications network;
- implement adequate accounting and financial systems and controls; and
- attract, retain and motivate qualified personnel.
We also depend on the growing use of the internet for advertising, commerce and
communication. Our business model assumes that users will choose to access the
internet through our service and that advertisers and strategic partners will
enter into relationships with us. This business model is not yet proven. We
cannot assure you that our business model will be successful or that we will
successfully address these risks or difficulties. If we fail to address
adequately any of these risks or difficulties our business would likely suffer.
WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW AND EXPECT CONTINUED LOSSES
FOR THE FORESEEABLE FUTURE.
Since our inception, we have incurred significant losses and negative cash
flow and, as of December 31, 1999, had accumulated net losses of approximately
$19.0 million. We have not achieved profitability and expect to continue to
incur operating losses for the foreseeable future as we fund operating and
capital expenditures related to our user acquisition strategies and the
build-out of our infrastructure to meet the needs of a larger user base. We
cannot assure you that we will ever achieve or sustain profitability or that our
operating losses will not increase in the future. Our expansion efforts may
prove more expensive than we currently anticipate, and we may not succeed in
increasing our revenues sufficiently to offset these higher expenses. Even if we
do achieve profitability, we cannot be
5
<PAGE>
certain that we can sustain or increase profitability on a quarterly or annual
basis in the future. If we fail to do so, the market price for our common stock
could suffer.
WE MAY REQUIRE ADDITIONAL FUNDING TO SUCCESSFULLY OPERATE AND GROW OUR BUSINESS.
Although we believe that the proceeds from this offering and our cash
reserves will be adequate to fund our operations for at least the next
12 months, these resources may prove to be inadequate. Consequently, we may
require additional funds during this period and will likely require funds after
this period. Additional financing may not be available to us on favorable terms
or at all. If we raise additional funds by selling stock, the percentage
ownership of our then-current shareholders will be reduced. If we cannot raise
adequate funds to satisfy our capital requirements, we may have to limit our
operations significantly.
SINCE WE DO NOT CHARGE OUR USERS ANY FEES FOR OUR INTERNET ACCESS OR ONLINE
SERVICES, WE MUST GENERATE SUFFICIENT REVENUES FROM OTHER SOURCES TO BE ABLE TO
SUPPORT OUR OPERATIONS.
We do not charge our users any fees for our internet access and online
services. As a result, our success is dependent on our ability to generate
revenues from other sources, including from advertising and sponsorship fees,
private label and co-branded relationships, web referrals and content placement
payments. We have limited experience pricing, marketing and structuring these
types of arrangements and have limited experience with respect to their
performance. As such, we do not know if we are appropriately pricing, marketing
or structuring our arrangements or whether we will be able to generate
sufficient revenues from these sources to support our operations.
To date, we have been substantially dependent on advertising revenues and
expect to derive a significant amount of our revenues from advertising and
sponsorships in the future. The internet advertising market is rapidly evolving,
and we cannot predict its effectiveness as compared to traditional media
advertising such as television, radio, cable and print media. As a result,
demand for and market acceptance of internet advertising solutions are
uncertain. Most of our current or potential advertising customers have allocated
only a portion of their advertising budgets to internet advertising. The
adoption of internet advertising, particularly by those entities that have
historically relied upon traditional media for advertising, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Advertisers may find internet advertising to
be less effective for promoting their products and services relative to
traditional advertising media. If the market for internet advertising fails to
develop or develops more slowly than we expect, our business would suffer.
IF WE FAIL TO GROW AND RETAIN OUR USER BASE, OUR ABILITY TO GENERATE REVENUES
WILL BE ADVERSELY AFFECTED.
If we are unable to grow and retain our user base, we may not be able to
attract advertisers and other strategic partners, which would decrease our
ability to generate revenues or implement our business strategy. We intend to
increase our user base through aggressive user acquisition programs, including
building the freeinternet.com brand and engaging in national and local
advertising campaigns. These acquisition methods will require significant
expenditures and may prove more expensive or less effective than anticipated,
which could have a negative effect on our financial condition.
Our success also depends on our ability to retain a large active user base.
During the 30-day period prior to March 26, 2000, only approximately 50% of our
registered users had accessed our service. Over time, we anticipate that our
number of active users will decline as a percentage of our registered user base.
There are a variety of reasons why users might access our services less
frequently or discontinue using our service altogether, including:
- connectivity delays or interruptions, which we have experienced in the
past and could experience in the future, may cause user frustration and
dissatisfaction;
6
<PAGE>
- users may decide they do not like the always-present nature of the iSee
Window or the prevalence of our other advertising channels, including
"pop-up" commercials;
- our user support services may be insufficient to satisfy the needs of our
users who have difficulty using our service, especially as we increasingly
target first-time internet users;
- our content may not be compelling, relevant or engaging enough to retain
the interest of our users for extended periods of time;
- users may not like having to periodically provide demographic information;
or
- dial-up internet access may become obsolete as high speed or other
internet access technologies become more widely available at increasingly
attractive prices.
ADVERTISERS MAY BE RELUCTANT TO DEVOTE SIGNIFICANT RESOURCES TO ADVERTISING WITH
US IF THEY PERCEIVE OUR SERVICE TO BE A LIMITED OR INEFFECTIVE ADVERTISING
MEDIUM.
Our success depends on our ability to demonstrate to advertisers and
sponsors that we offer a cost-effective and results-generating advertising
alternative to that offered by traditional advertising channels or by our
competitors. We may be unable to persuade advertisers to advertise with us for a
number of reasons, including:
- IF WE ARE UNABLE TO OFFER RELIABLE TARGETED ADVERTISING DUE TO INACCURATE
OR INSUFFICIENT INFORMATION ABOUT OUR ACTIVE USERS. We believe our users have
in the past and may in the future provide false information when registering for
our service, which we do not corroborate. In addition, the enforcement of
current laws or promulgation of future regulations governing privacy may prevent
us from collecting information about our users. To the extent we are unable to
gather accurate and relevant information about our users, advertisers may no
longer value the targeted advertising opportunities we provide.
- IF PROGRAMS WHICH CAN DISABLE THE ISEE WINDOW OR FAILURES IN OUR
ADVERTISEMENT DELIVERY SOFTWARE BECOME PREVALENT. Various "filter" software
programs have been developed, and methods of accessing our internet service have
been utilized, that enable the user to blank out, or block, banner
advertisements on the iSee Window, completely delete the iSee Window from their
screens or disable the operation of "cookies." Cookies are a standard industry
technology consisting of files stored on a user's computer that allow us to
recognize the user so that we can provide targeted advertising. We believe that
a meaningful number of our active users may be using one or more of these
software programs and access methods. In addition, we may experience from time
to time failures in our advertisement delivery systems. These techniques and
failures impede our ability to deliver advertisements to a user and decrease the
efficacy of our advertisement opportunities.
- IF THE DEMAND FOR BANNER ADVERTISING DECREASES. Banner advertising, from
which we currently derive a significant portion of our revenue, may not be
perceived as an effective advertising method in the future. As a result,
advertisers may elect not to use banner advertising, which may cause our
advertising revenues to suffer.
Adoption of online direct marketing is an important part of our business model.
We may need to engage in intensive marketing and sales efforts to educate
advertisers regarding the uses and benefits of our products and services to
generate demand for our direct marketing services. Enterprises may be reluctant
or slow to adopt a new approach that may compete with their current direct
market systems. In order to encourage advertisers to use our services, we may be
required to increasingly offer performance-based pricing structures. If a
sufficient number of users do not click on advertisements or otherwise satisfy
the criteria mandated by these pricing plans, our advertising revenues would
suffer.
7
<PAGE>
WE ARE DEPENDENT ON PRIVATE LABEL AND CO-BRANDING AGREEMENTS AS A SOURCE OF
REVENUES, AND OUR BUSINESS COULD SUFFER IF ANY OF THESE AGREEMENTS ARE
TERMINATED.
We have agreements, or are in discussions, with a number of third parties
under which we provide private label and co-branded internet access. We believe
that revenues generated from these agreements may constitute a significant
portion of our revenues in the future. These parties could terminate their
agreements with us on short notice. If any of our agreements are terminated, we
cannot assure you that we will be able to replace the terminated agreement with
an equally beneficial arrangement. In addition, we expect that we will not be
able to renew all of our current agreements when they expire or, if we are, that
we will be able to do so on acceptable terms. Some of these agreements provide
that, upon termination, the users of that internet service will not remain
accessible to us. We also do not know whether we will be successful in entering
into additional agreements, or that any additional relationships, if entered
into, will be on terms favorable to us. In addition, our agreements with these
parties may be on a non-exclusive basis, and thus these parties may be, or may
become, our competitors. Our receipt of revenues from these agreements may also
be dependent on factors which are beyond our control, such as the quality of the
products or services offered by these parties.
WE MUST ESTABLISH, MAINTAIN AND STRENGTHEN OUR BRAND IN ORDER TO ATTRACT USERS,
ADVERTISERS AND STRATEGIC PARTNERS.
If we are unsuccessful in establishing or maintaining the freeinternet.com
brand, we may not be able to generate advertising and sponsorship revenues,
content placement fees and private label relationships. In addition, in this
very competitive market, we may also need to devote substantial resources beyond
our current expectations to further develop our distinctive brand. If we incur
excessive expenses in promoting our brand, our financial results could be
seriously harmed.
IN ORDER TO ATTRACT AND RETAIN AN ACTIVE USER BASE, WE MUST PROVIDE CONTENT,
TOOLS AND OTHER FEATURES THAT MEET THE CHANGING PREFERENCES AND NEEDS OF OUR
USERS.
We must provide online content, interactive tools and other features that
satisfy the changing preferences and needs of our users. Competition for high
quality and distinctive content will likely increase, and since a majority of
our content is provided to us on a non-exclusive basis, we may need to develop
other means of differentiating our offerings from those of our competitors. In
order to continue to attract and retain our audience of users, we will not only
have to expend significant funds and other resources to continue to improve our
website, but we must also properly anticipate and respond to consumer
preferences and demands. If we fail to expand the breadth of our offerings
quickly, or these offerings fail to achieve market acceptance, our business may
suffer significantly.
IF WE DO NOT MAINTAIN OUR RELATIONSHIP WITH INFOSPACE, WE MAY HAVE DIFFICULTY
OBTAINING CONTENT FOR OUR WEBSITE, AND OUR ADVERTISING REVENUES AND OPERATING
RESULTS MAY SUFFER.
We currently license a majority of our online content from InfoSpace on a
non-exclusive basis. If our relationship with InfoSpace were to deteriorate, we
may have difficulty obtaining on a timely basis comparable content for our
website. Any failure by us to continue to acquire appealing and relevant content
would adversely affect our efforts to grow our active user base, which in turn
would diminish our ability to attract advertisers and strategic partners and
generate revenues.
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OUR MARKET SHARE AND REVENUES WILL SUFFER IF WE ARE NOT ABLE TO COMPETE
EFFECTIVELY FOR INTERNET USERS, ADVERTISERS AND STRATEGIC PARTNERS.
The ISP industry is extremely competitive and highly fragmented. We
currently compete or expect to compete for users, advertisers and strategic
partners with a wide variety of companies, including:
- established online service and content providers, such as America Online
and The Microsoft Network;
- independent national ISPs, such as EarthLink, Inc. and Prodigy
Communications Corporation, and numerous regional and local commercial
internet service providers;
- other companies offering free internet access, such as NetZero Inc. and
Juno Online Services, Inc. in the United States and Freeserve plc in
Europe;
- private label ISPs, such as 1stUp.com Corporation and Spinway;
- national long-distance carriers, such as Sprint Corporation and MCI
WorldCom, Inc.;
- local telephone companies and regional Bell operating companies, such as
GTE Corporation;
- cable operators, online cable services and other broadband service
providers, such as Excite@Home; and
- internet portals and search engines, such as Yahoo!, Alta Vista and Lycos.
Our current and prospective competitors include many large companies that
have substantially greater market presence and financial, technical, marketing
and other resources than us. Some of these competitors may have their own
telecommunications networks and thus could offer their own internet access
services to subscribers at a much lower cost than we do. In addition, cable
television and other broadband service providers have begun to offer their own
internet access service or align themselves with competing ISPs. If broadband
internet access becomes the preferred means by which users access the internet
and we are unable to gain access to broadband networks on reasonable terms, our
ability to compete could be harmed.
We expect that competition for users, advertisers and strategic partners
will continue to intensify for the foreseeable future. Increased competition
could result in additional sales and marketing expenses and user-acquisition
costs and could also result in increased user turnover and decreased advertising
revenues. We may not be able to generate sufficient revenues to offset the
effects of these increased costs, and we may not have the resources to continue
to compete successfully. The ability of our competitors to acquire other ISPs or
to enter into strategic alliances or joint ventures could also put us at a
significant competitive disadvantage. We cannot assure you that we will be able
to compete successfully for users, advertisers and strategic partners against
current or future competitors, or that competitive pressures will not harm our
business.
Competition for advertising dollars is intense. We must compete with
television, radio, cable, print media and other websites providing opportunities
for online advertisements for a share of advertisers' total advertising budgets.
Advertisers may be reluctant to devote a significant portion of their
advertising budget to internet advertising, or to our services in particular, if
they perceive the internet or our services to be a limited or ineffective
advertising medium. Our inability to compete effectively for advertisers would
harm our business. See "Business--Competition" on page 36 for a discussion of
some of the factors that will affect our ability to successfully compete in our
industry.
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WE MUST ADAPT TO TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS, INCLUDING
THE INCREASING AVAILABILITY OF BROADBAND TECHNOLOGIES, TO REMAIN COMPETITIVE.
The internet market is characterized by rapid changes due to technological
innovation, evolving industry standards, changes in customer needs and frequent
new service and product introductions. Services and products based on emerging
technologies or new industry standards expose us to the risk that our
infrastructure or services will become obsolete. In particular, we are also at
risk due to fundamental changes in the way that internet access may be delivered
in the future. Our service is currently offered via dial-up modems which are
limited to access speeds of up to 56 kbps. Through broadband technologies,
subscribers can transmit and receive print, video, voice and data in digital
form at significantly faster access speeds ranging from two times to over 100
times the speed of dial-up modems. Even if we seek to offer broadband service in
the future, the telephone, cable and other companies that own broadband networks
may prevent us from offering broadband internet access through the wire and
cable networks that they own on reasonable terms or at all. If we are unable to
gain access to broadband networks in a timely manner on reasonable terms, or at
all, our ability to compete could be harmed.
In order to compete successfully in the internet access industry, we will
need to adapt rapidly to new technologies, continue to develop our technical
expertise and enhance our existing services. Our continued development and
implementation of these technological advances may require substantial time and
expense, and we cannot be certain that we will succeed in adapting our internet
access services to alternative access devices and conduits.
IF WE ARE UNABLE TO CONTINUE THE EXPANSION OF OUR NETWORK OF COMPANY-MAINTAINED
TELECOMMUNICATIONS FACILITIES, OUR OPERATING COSTS MAY INCREASE AND OUR
FINANCIAL RESULTS COULD SUFFER.
A key element of our business strategy is to reduce operating costs through
the build-out of our network of company-maintained POPs in major markets. This
network build-out may be more costly than we currently anticipate. Our failure
to maintain and expand our company-owned telecommunications network in a
cost-efficient manner could result in higher operating costs, which could have
an adverse effect on our financial results. Our POP network is composed of a
complex system of routers, switches, transmission lines and other hardware used
to provide internet access and other services. We currently acquire hardware
components used in our POP network system from a few primary sources. In
addition, we currently rely on several local telephone companies to lease to us
data communications capacity via local and long-distance telecommunications
lines. We also have relationships with competitive local exchange carriers. Our
suppliers and telecommunications carriers also sell or lease products and
services to our competitors and may be, or may become, our competitors. We
cannot assure you that our suppliers and telecommunications carriers will
continue to sell or lease their products and services to us at commercially
reasonable prices or at all.
IF OUR TELECOMMUNICATIONS EXPENSES INCREASE AT A GREATER RATE THAN OUR REVENUES,
OUR FINANCIAL CONDITION WOULD SUFFER.
Our business could be harmed if telecommunications costs increase. We cannot
assure you that our telecommunications providers will continue to provide their
services on commercially acceptable price terms, or that alternative services
will be available on similar terms. In addition, we run the risk of purchasing
excessive amounts of telecommunications products and services based on incorrect
projections regarding increased usage. In that event, we would be required to
bear the costs of excess telecommunications capacity. Any increases in
telecommunications costs without commensurate increases in revenues would have
an adverse effect on our profitability.
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IF WE ARE UNABLE TO MAINTAIN AN OPERATING TELECOMMUNICATIONS NETWORK AND PROVIDE
RELIABLE ACCESS TO THE INTERNET, OUR USERS, ADVERTISERS AND STRATEGIC PARTNERS
WILL BECOME DISSATISFIED AND OUR ABILITY TO GENERATE REVENUES WILL SUFFER.
Our ability to provide a reliable and operating telecommunications network
to ensure uninterrupted internet access for our users may be impeded by a number
of factors, including:
- IF WE FAIL TO OR ARE UNABLE TO SCALE OUR OPERATIONS IN A TIMELY MANNER TO
MEET INCREASED DEMAND FROM OUR USER BASE. We may from time to time experience
increases in our telecommunications usage from our current user base that exceed
our then-available telecommunications capacity. In addition, a key element of
our business strategy is to rapidly grow our user base. In connection with this
growth, we will need to accurately anticipate our future telecommunications
capacity needs within lead-time requirements. If we are unable to procure
sufficient quantities of telecommunications products and services, either
through the construction of additional POPs or the contracting for additional
services with third parties, we may be unable to provide our current and future
users with acceptable service levels on a timely basis and at a commercially
reasonable cost to us, or at all. Excessive demand could also result in system
failures of our internal server networks, which would prevent us from generating
advertising revenues.
- IF OUR THIRD-PARTY TELECOMMUNICATIONS PROVIDERS REFUSE TO OFFER US SERVICE
OR DELIVER UNACCEPTABLE SERVICE QUALITY. We rely on third parties to provide
telecommunications services to our users. Only a limited number of
telecommunications providers offer the network services we require. There has
been significant consolidation in the telecommunications industry, and there is
a significant risk that further consolidation could make us reliant on an even
smaller number of providers. Most of the telecommunications services we purchase
are provided to us under short-term agreements that the providers can terminate
or elect not to renew. If this occurs, we may not be able to replace these
services at attractive prices, or at all. In addition, each of our
telecommunications carriers provides network access to some of our competitors
and could choose to grant those competitors preferential network access,
potentially limiting our users' ability to access the internet or connect to our
central computers. Furthermore, several of our telecommunications providers
compete, or have announced an intention to compete, with us in the free internet
market. If our telecommunications service providers were to decrease the levels
of service or access provided to us, or if they were to terminate their
relationships with us for competitive or other reasons, our business and
financial results would suffer. Moreover, since we do not have direct control
over the network reliability and quality of the service provided by our
third-party telecommunications providers, we cannot assure you that we will be
able to offer consistently reliable internet access for our users.
- IF OUR SOFTWARE OR HARDWARE CONTAIN ERRORS OR DEFECTS. The software and
hardware used to operate and provide our services is complex and, accordingly,
may contain undetected errors or failures. We have in the past, and may in the
future, encounter errors or defects in the software or hardware used to operate
and provide our services, which may result in users being disconnected or unable
to access our service and a loss of data. Moreover, we intend to release a new
version of our software in the near future which is substantially different from
our current software and significantly increases the risk of errors or defects.
- IF WE SUFFER A COMPUTER VIRUS OR THERE IS INAPPROPRIATE USE OF OUR
INTERNET SERVICE. Computer viruses or problems caused by our users or other
third parties, such as excessive volumes of unsolicited bulk e-mail, or "spam,"
or the bombarding of our website with messages, could lead to interruptions,
delays or cessation in service to our users.
- THE OCCURRENCE OF A NATURAL DISASTER. A significant portion of our
computer equipment, including critical equipment dedicated to our internet
access services, is located at our facilities in Federal Way, Washington. Also,
a significant portion of our facilities are housed in locations that are outside
of our control. Despite precautions taken by us and our third-party network
providers, a natural disaster such as a fire or earthquake, or other
unanticipated problems at our facilities, or within a third-party network
provider's network, could cause interruptions in the services which we provide.
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Any prolonged or repeated disruption or inaccessibility of our services
would have a material adverse effect on our reputation and likely cause our
users to abandon their use of our service. Because our advertising revenues are
directly related to the number of advertisements we deliver to our users, system
interruptions or delays would reduce the number of impressions delivered and
reduce our revenues. We presently have limited redundant facilities and systems
and are in the process of implementing our formal disaster recovery plan. While
we have business interruption insurance to compensate for short-term financial
losses, any interruption to our business could harm our ability to attract or
retain users, advertisers and strategic partners.
IF WE FAIL TO ADEQUATELY UPGRADE AND SCALE OUR INFORMATION AND PROCESSING
SYSTEMS, OUR ABILITY TO OPERATE OUR BUSINESS WOULD BE IMPAIRED.
We believe that establishing sophisticated information and processing
systems is vital to our growth and our ability to achieve operating
efficiencies. If these systems fail or prove to be inadequate, our ability to
effectively conduct our business would be impaired. Systems we have identified
as being presently inadequate to meet the increased demands of our anticipated
growth include our accounting and financial systems. We are in the process of
replacing these systems with systems that we believe are capable of meeting our
planned future needs. We cannot assure you that this transition will not cause
delays or interruptions in our monitoring and billing activities. We may also be
unable to implement improvements that enhance our systems or integrate new
technology into our systems on a timely basis or at all, and these systems may
not perform as expected. Our inability to implement solutions in a timely or
cost-effective manner or to upgrade existing systems as necessary could harm our
business.
OUR ABILITY TO OPERATE OUR BUSINESS COULD BE SERIOUSLY HARMED IF WE LOSE, OR
FAIL TO ASSIMILATE, MEMBERS OF OUR SENIOR MANAGEMENT TEAM AND OTHER KEY
EMPLOYEES.
Most of our senior management team has joined us within the past six months.
We cannot assure you that we will successfully assimilate our recently hired
officers or that we can successfully locate, hire, assimilate and retain
qualified key management personnel. Our business is largely dependent on the
personal efforts and abilities of our senior management and other key personnel,
including Robert McCausland, our president, chief executive officer and chairman
of the board. Any of our officers or employees can terminate his or her
employment relationship at any time. The loss of these key employees or our
inability to attract or retain other qualified employees could seriously harm
our business and prospects.
WE MUST HIRE ADDITIONAL PERSONNEL TO EXPAND OUR OPERATIONS AND GENERATE
REVENUES.
Our future success depends on our ability to locate, hire, assimilate,
train, retain and motivate highly skilled executive, sales and marketing,
technical, business development, managerial and administrative personnel. We
intend to hire a significant number of personnel during the next year, including
a substantial number of sales, marketing and business development personnel, in
order to expand our advertiser and strategic partner acquisition efforts and
help generate revenues. Competition for qualified personnel is intense,
particularly in the technology and internet markets, and we may be required to
expend significant resources to hire our required personnel. If we fail to
successfully attract and retain a sufficient number of qualified personnel, or
integrate them with our current operations, our ability to manage and expand our
business or generate advertising revenues could suffer.
WE HAVE RECENTLY EXPERIENCED AND ARE CURRENTLY EXPERIENCING RAPID GROWTH IN OUR
BUSINESS, AND OUR INABILITY TO MANAGE THIS GROWTH COULD HARM OUR BUSINESS.
Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, technical, network, operational and
financial resources. To manage our growth, we must implement additional
management information systems, further develop our operational, administrative
and financial systems and expand, train and manage our work force. We will also
need to manage an
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increasing number of complex relationships with suppliers, marketing partners
and other third parties. We cannot guarantee that our systems, procedures or
controls will be adequate to support our current or future operations or that
our management will be able to effectively manage our expansion. Our failure to
do so could seriously harm our ability to deliver our services in a timely and
cost-effective fashion, fulfill existing commitments and attract and retain new
users, advertisers and other strategic partners.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS.
We regard our intellectual property rights as critical to our success, and
to protect our proprietary rights we rely on trademark and copyright law, trade
secret protection and confidentiality and license agreements with our employees,
customers and others. Despite our precautions, unauthorized third parties might
copy portions of our software or reverse engineer and use information that we
regard as proprietary. Any misappropriation of our proprietary information by
third parties could adversely affect our business by enabling third parties to
compete more effectively with us. In addition, as we expand our operations
internationally, we may be unable to obtain or enforce the intellectual property
rights necessary to promote our brand in these markets.
We do not currently own any issued patents, and we cannot assure you that
any future patent application will result in an issued patent, or that any
future patent will not be challenged, invalidated or circumvented, or that the
rights granted under any patent will provide us with a competitive advantage.
Moreover, it is possible that other companies with businesses similar to ours
may be issued "business model" or other patents that could prevent us from
continuing to execute our business plan. The laws of some countries do not
protect proprietary rights to the same extent as the laws of the United States,
and our means of protecting our proprietary rights abroad may not be adequate.
OUR BRAND AND BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO PROTECT
OUR DOMAIN NAMES OR ACQUIRE OTHER RELEVANT DOMAIN NAMES.
We have registered the domain name relating to our brand, freeinternet, as
well as numerous other related web domain names, both domestically and in some
international markets. We may be unable to acquire or maintain relevant domain
names in the countries in which we conduct, or plan to conduct, business.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. Therefore,
we may be unable to prevent third parties from acquiring domain names that are
similar to, infringe upon, dilute or otherwise decrease the value of our
trademarks and other proprietary rights.
WE MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
We have been, are currently, and may in the future be subject to legal
proceedings and claims from time to time in the ordinary course of our business,
including claims of alleged infringement of the trademarks and other
intellectual property rights of third parties. Intellectual property litigation
is expensive and time-consuming and could divert our management's attention away
from running our business. We cannot be certain that our technology does not
infringe issued patents or other intellectual property rights of others. In
addition, because patent applications in the United States are not publicly
disclosed until the patent is issued, applications may have been filed which
relate to our software.
WE MAY HAVE LIABILITY FOR INFORMATION LOCATED ON OUR WEBSITE OR WHICH IS
ACCESSED FROM OUR WEBSITE OR AS A RESULT OF THE INAPPROPRIATE USE OF OUR
INTERNET SERVICES BY THIRD PARTIES.
The law relating to the liability of ISPs for information carried on or
disseminated through their networks is unsettled. Because material may be posted
to our website by third parties or downloaded by our users and subsequently
distributed to others, there is a potential that claims will be made against us
for negligence, defamation, copyright or trademark infringement or other
theories based on the nature and content of this material. In addition, although
we believe we are in compliance with the safe
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harbor provisions required under the Digital Millineum Copyright Act, we could
also be sued for the content and services that are accessible from our website
through links to other websites or through content and materials that may be
posted by our users in chat rooms or bulletin boards. These types of claims have
been brought, sometimes successfully, against online services in the past.
Although we carry general liability insurance, our insurance may not cover
claims of these types, or may not be adequate to indemnify us against this type
of liability. Any imposition of liability, and in particular liability that is
not covered by our insurance or is in excess of our insurance coverage, could
harm our reputation and our operating results.
In addition, the sending of "spam" through our network could result in third
parties asserting claims against us. We cannot assure you that we would prevail
in such claims and our failure to do so could result in large judgments against
us. Our users or other parties could also potentially jeopardize the security of
confidential information stored in our computer systems or our users' computer
systems by inappropriate use of the internet, which could cause losses to us or
our users. Internet users or third parties may also potentially expose us to
liability by "identity theft," or posing as another freeinternet.com registered
user.
OUR INTERNATIONAL OPERATIONS WILL INVOLVE ADDITIONAL RISKS RELATED TO
GEOGRAPHIC, POLITICAL AND ECONOMIC CONDITIONS.
As we expand internationally, our international operations will expose us to
a number of risks, including the following:
- more stringent controls over internet services in foreign countries;
- greater difficulty in protecting intellectual property due to less
stringent foreign intellectual property laws and enforcement policies;
- our potential inability to obtain the necessary intellectual property
rights to protect our brand;
- greater difficulty in managing foreign operations due to the lack of
proximity between our home office and our foreign operations;
- increased burdens related to collecting accounts receivable;
- ability to implement and monitor foreign accounting and financial systems;
- unfavorable changes in regulatory practices, tariffs and other trade
barriers;
- adverse changes in tax laws;
- the effect of fluctuating exchange rates between the U.S. dollar and
foreign currencies or the imposition of foreign exchange controls; and
- general economic and political conditions in Asian and European markets.
These risks could substantially increase the financial and managerial resources
required to run our foreign operations and have a negative effect on our future
international revenues.
IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE FUTURE ACQUISITIONS INTO OUR
OPERATIONS, OUR BUSINESS AND FINANCIAL RESULTS MAY BE HARMED.
We may make acquisitions or undertake other business combinations that can
complement our current or planned business activities. Acquiring a business
involves many risks, including:
- disruption of our ongoing business and diversion of resources and
management time;
- unforeseen obligations or liabilities;
- difficulty assimilating the acquired operations and personnel;
- risks of entering markets in which we have little or no direct prior
experience;
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- potential impairment of relationships with employees or users as a result
of changes in management; and
- potential dilutive issuances of equity, large and immediate write-offs,
the incurrence of debt and amortization of goodwill or other intangible
assets.
We cannot assure you that we will make any acquisitions or that we will be able
to obtain additional financing for such acquisitions, if necessary. If any
acquisitions are made, we cannot assure you that we will be able to successfully
integrate the acquired business into our operations or that the acquired
business will perform as expected. To date, we have not made any acquisitions of
other businesses.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND ARE NOT RELIABLE
INDICATORS OF FUTURE PERFORMANCE.
Our quarterly operating results may fluctuate significantly because of a
variety of factors, many of which are outside of our control, including:
- overall usage levels of the internet and our services in particular;
- demand for internet advertising and the loss of advertising;
- seasonal trends in internet use and advertising;
- costs relating to the expansion of our operations and the amount and
timing of our capital expenditures; and
- costs relating to technical difficulties or service interruptions.
If a large number of advertisers do not advertise in a given quarter or if
advertising revenues are deferred, our revenues in that quarter could be
substantially reduced. This could have a negative effect on our operating
results. Our quarterly results of operations are not necessarily indicative of
our operating results for any future period, and you should not rely on them as
an indication of our future performance.
RISKS RELATED TO OUR INDUSTRY
IF INTERNET USAGE DOES NOT CONTINUE TO GROW, WE MAY NOT BE ABLE TO GROW OUR
BUSINESS AND INCREASE OUR REVENUES.
Widespread use of the internet is a relatively recent phenomenon. Our future
success depends on continued growth in the use of the internet and the continued
development of the internet as a viable commercial medium. We cannot be certain
that internet usage will continue to grow at or above its historical rates or
that extensive internet content will continue to be developed or accessible for
free or at nominal cost to users. If internet use does not continue to grow or
users do not accept our services, our ability to generate revenues will suffer.
THE LAWS RELATING TO THE INTERNET INDUSTRY ARE EVOLVING, AND INCREASED
GOVERNMENTAL REGULATION OF OUR SERVICES OR OPERATIONS OR NEW CASE LAW COULD
ADVERSELY AFFECT OUR ABILITY TO GENERATE REVENUE AND EXPOSE US TO LIABILITY.
The laws relating to our business and operations are evolving and few clear
legal precedents have been established. The adoption of new laws or the
application of existing laws may reduce the use of the internet, affect
telecommunications costs or increase the likelihood or scope of competition from
regional telephone companies. These results could decrease the demand for our
services or increase our cost of doing business, each of which would cause our
gross margins and revenues to decline. In particular, risks with respect to the
following could occur:
- REGULATION OF INTERNET CONTENT AND RESTRICTED ACCESS COULD LIMIT OUR
ABILITY TO GENERATE REVENUES AND EXPOSE US TO LIABILITY. A variety of
restrictions on internet content and access, primarily as they relate to
intellectual property infringement and childrens' access to the internet, have
been enacted or proposed,
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including laws which would require ISPs to employ mechanisms to remove
potentially infringing material or to supply filtering technologies to limit or
block the ability of minors to access unsuitable materials on the internet.
These content restrictions and the potential liability to us for materials
carried on or disseminated through our service may require us to implement
measures to reduce our exposure to liability. These measures may require the
expenditure of substantial resources or the interruption of our service.
Further, we could incur substantial costs in defending against any claims that
are brought against us, and we may be required to pay large judgments or
settlements or alter our business practices.
- OUR ABILITY TO SELL TARGETED ADVERTISING MAY BE ADVERSELY AFFECTED IF NEW
LAWS RELATING TO USER PRIVACY ARE ENACTED. Our ability to sell targeted
advertising depends on our ability to collect and analyze personal information
provided by our users. Application of existing laws or implementation of new
laws relating to the collection and use of personal information on the internet
may require us to change the way we conduct our business, make it
cost-prohibitive to operate our business and prevent us from pursuing our
business strategies, including the sale of targeted advertising.
- OUR MARGINS AND COSTS WOULD BE ADVERSELY AFFECTED IF INTERNET ACTIVITIES
BECOME SUBJECT TO TAXATION. The tax treatment of activities on or relating to
the internet is currently unsettled. A number of proposals have been made at the
federal, state and local levels and by foreign governments that could impose
taxes on the online sale of goods and services and other internet activities. We
cannot assure you that future laws imposing taxes or other regulations on
commerce over the internet would not substantially impair the growth of internet
commerce and, as a result, harm our margins or make it cost-prohibitive to
operate our business.
- TELECOMMUNICATIONS REGULATION COULD MAKE IT MORE EXPENSIVE FOR US TO DO
BUSINESS. As an internet service provider, we are not currently directly
regulated by the Federal Communications Commission or any other agency, other
than regulations applicable to businesses generally. Nevertheless, internet-
related regulatory policies are continuing to develop, and it is possible that
we could be exposed to regulation in the future. We could be adversely affected
if any regulatory change results in the application of access charges to
internet service providers because this would substantially increase the cost of
using the internet. Since a significant component of our operating costs is
comprised of telecommunications costs, any increase in such costs would harm our
gross margins. We could also be affected by any change in the ability of our
users to reach our network through a dial-up telephone call without any
additional charges.
SEASONAL TRENDS IN INTERNET USAGE AND ADVERTISING SALES MAY NEGATIVELY AFFECT
OUR BUSINESS.
We believe that our revenues may be subject to seasonal fluctuations because
advertisers generally place fewer advertisements in the first and third quarters
of each calendar year. In addition, to the extent that our advertising revenues
depend on the amount of usage by our users, seasonal fluctuations in internet
usage could affect our advertising revenues. Furthermore, the rate at which new
users sign up for our services may be lower during certain seasons and holiday
periods. Because our operating history is so limited, it is difficult for us to
accurately predict these trends and plan accordingly. Since our operating
expenses are based on our expectations of future revenues, it is possible that
seasonal fluctuations could negatively affect our revenues and our operating
results.
RISKS RELATED TO THIS OFFERING
THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK.
Before this offering, there has been no public market for our common stock.
We cannot assure you that an active trading market for the shares offered by
this prospectus will develop. If such a market does develop, we cannot assure
you that it will continue or how liquid that market might become following this
offering, nor can we assure you that purchasers in this offering will be able to
resell their shares at prices equal to or greater than the initial public
offering price. The initial public
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offering price was determined through negotiations between us and the
underwriters and may not be indicative of the market price for these shares
following this offering. You should read the section entitled "Underwriting"
beginning on page 57 for a discussion of the factors considered in determining
the initial public offering price.
THE MARKET FOR OUR SHARES OF COMMON STOCK MAY EXPERIENCE EXTREME PRICE AND
VOLUME FLUCTUATIONS.
The stock market has, from time to time, experienced extreme price and
volume fluctuations. Many factors may adversely affect the market price for our
common stock following this offering, including:
- the demand for our common stock;
- the number of market makers for our common stock;
- investor perception of the internet, the internet industry generally and
the internet service provider industry in particular;
- the operating and market performance of our direct competitors;
- general technology or economic trends;
- revenues and operating results failing to meet or surpass the expectations
of securities analysts or investors in any quarter; and
- changes in securities analysts' estimates or general market conditions.
In the past, companies that have experienced volatility in the market price
of their stock have been the subject of securities class action litigation. If
we become the object of securities class action litigation, it could result in
substantial costs and a diversion of our management's attention and resources
and harm our business.
A SMALL NUMBER OF OUR EXISTING SHAREHOLDERS CAN EXERT CONTROL OVER US.
After this offering, our executive officers, directors and principal
shareholders holding more than 5% of our common stock will together control
approximately % of our outstanding common stock. Accordingly, these
shareholders, if they act together, will be able to control our management and
affairs and all matters requiring shareholder approval, including the election
of directors and approval of significant corporate transactions. As a result,
purchasers of shares in this offering may not have any meaningful control over
us. In addition, this concentration of ownership may have the effect of delaying
or preventing a change in control of us and might adversely affect the market
price of our common stock.
IT MIGHT BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR SHAREHOLDERS.
Provisions of our amended articles of incorporation, bylaws and Washington
law may discourage, delay or prevent a change in the control of us or a change
in our management even if doing so would be beneficial to our shareholders. Our
board of directors has the authority under our amended articles of incorporation
to issue preferred stock with rights superior to the rights of the holders of
common stock. As a result, preferred stock could be issued quickly and easily
with terms calculated to delay or prevent a change in control of our company or
make removal of our management more difficult. In addition, as of the closing of
this offering, our board of directors will be divided into three classes. The
directors in each class will serve for three-year terms, one class being elected
each year by our shareholders. This system of electing and removing directors
may tend to discourage a third party from making a tender offer or otherwise
attempting to obtain control of our company because it generally makes it more
difficult for shareholders to replace a majority of our directors.
In addition, Chapter 19 of the Washington Business Corporation Act generally
prohibits a "target corporation" from engaging in significant business
transactions with a defined "acquiring person" for a
17
<PAGE>
period of five years after the acquisition, unless the transaction or
acquisition of shares is approved by a majority of the members of the target
corporation's board of directors prior to the time of acquisition. This
provision may have the effect of delaying, deterring or preventing a change in
control of our company. The existence of these antitakeover provisions could
limit the price that investors might be willing to pay in the future for shares
of our common stock.
THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE FUTURE
MAY ADVERSELY AFFECT THE MARKET PRICE FOR OUR COMMON STOCK.
Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect the market price for the
common stock. As additional shares of our common stock become available for
resale in the public market, the supply of our common stock will increase, which
could decrease the price. The number of shares of common stock available for
sale in the public market is limited by restrictions under the federal
securities laws and under agreements which our shareholders, directors and
employees have entered into with the underwriters. The following table shows the
timing of when shares outstanding on March 26, 2000, assuming conversion of all
currently outstanding shares of preferred stock, may be eligible for resale in
the public market after this offering:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- ------------------------------------------------------------
<S> <C>
..................... - Closing of this offering
39,818,458.................... - After 180 days from the date of this prospectus, subject,
in some cases, to limitations under Rule 144
2,290,886..................... - At March 7, 2001, subject, in some cases, to limitations
under Rule 144
412,869....................... - At March 31, 2001, subject, in some cases, to limitations
under Rule 144
</TABLE>
NEW INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
Investors in our common stock in this offering will experience immediate and
substantial dilution in the net tangible book value of their shares. At an
assumed initial public offering price of $ per share, dilution to new investors
will be $ per share. Additional dilution will occur upon the exercise of
outstanding stock options and warrants.
18
<PAGE>
FORWARD-LOOKING STATEMENTS
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 relate to future events or our
future financial performance. 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. These statements involve known and unknown risks, uncertainties and
other factors, including those listed under "Risk 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. 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.
USE OF PROCEEDS
We expect to receive approximately $ million in net proceeds from the sale
of the shares of common stock in this offering, or $ if the underwriters
exercise their over-allotment option in full, based upon an assumed initial
public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses paid and
payable by us.
We expect to use the net proceeds to operate and expand our network
infrastructure; to promote brand awareness and other user acquisition
activities; and other general corporate purposes. Pending such uses, we intend
to invest the net proceeds of this offering in investment grade,
interest-bearing securities. We may use a portion of the net proceeds to acquire
additional businesses, products and technologies that we believe will complement
our current or future business. However, we have no specific plans, agreements
or commitments to do so, and are not currently engaged in any negotiations for
any such acquisition.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends in
the foreseeable future.
19
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999 on
the following three bases:
- on an actual basis;
- on a pro forma basis after giving effect to the conversion of
then-outstanding shares of convertible preferred stock into 12,729,458
shares of common stock upon the closing of this offering and the filing of
amendments to our articles of incorporation to provide for authorized
capital stock of 400,000,000 shares of common stock and 20,000,000 shares
of preferred stock; and
- on a pro forma as adjusted basis after giving effect to our receipt of the
net proceeds from the sale of shares of common stock at an assumed
initial public offering price of $ per share in this offering, after
deducting underwriting discounts and commissions and estimated expenses.
The outstanding share information set forth in the table below excludes as
of December 31, 1999 4,171,560 shares of common stock that are reserved for
issuance upon exercise of outstanding stock options under our stock option plan
at a weighted-average exercise price of $0.78 per share and 3,518,524 shares of
common stock reserved for issuance upon exercise of outstanding warrants at a
weighted average exercise price of $0.52 per share.
The capitalization information set forth in the table below is qualified by
and should be read in conjunction with the more detailed financial statements
and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 20,342 $ 20,342 $
======== ======== =======
Long-term obligations, net of current portion............... $ 20,137 $ 20,137 $
-------- -------- -------
Mandatorily redeemable convertible preferred stock, no par
value: 10,000,000 shares authorized, 6,364,729 shares
issued and outstanding, actual; 20,000,000 shares
authorized, no shares issued and outstanding, pro forma
and pro forma as adjusted................................. 33,892 --
Shareholders' equity (deficit):
Common stock, no par value: 50,000,000 shares authorized,
26,879,000 shares issued and outstanding, actual;
400,000,000 shares authorized, 39,608,458 shares issued
and outstanding, pro forma; 400,000,000 shares
authorized, shares issued and outstanding, pro
forma as adjusted....................................... 11,086 44,978
Deferred compensation....................................... (7,848) (7,848)
Accumulated deficit......................................... (19,017) (19,017)
-------- -------- -------
Total shareholders' equity (deficit).................... (15,779) 18,113
-------- -------- -------
Total capitalization.................................. $ 38,250 $ 38,250 $
======== ======== =======
</TABLE>
20
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. We calculate net tangible book value per
share by dividing the net tangible book value, which equals total assets less
intangible assets and total liabilities, by the number of outstanding shares of
common stock.
At December 31, 1999, our pro forma net tangible book value, after giving
effect to the automatic conversion of all then-outstanding shares of convertible
preferred stock into 12,729,458 shares of common stock upon the closing of this
offering, was $18.1 million, or $0.46 per share of common stock. After giving
effect to the sale of the shares of common stock in this offering at an
assumed initial public offering price of $ per share, less estimated
underwriting discounts and commissions and estimated expenses we expect to pay
in connection with this offering, our pro forma as adjusted net tangible book
value at December 31, 1999 would have been $ million, or $ per share. This
represents an immediate increase in the pro forma as adjusted net tangible book
value of $ per share to existing shareholders and an immediate dilution of $
per share to new investors, or approximately % of the assumed offering price
of $ per share.
The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
-------
Pro forma net tangible book value per share at December 31,
1999...................................................... $0.46
Increase per share attributable to new investors............
-----
Pro forma as adjusted net tangible book value per share
after this offering.......................................
-------
Dilution per share to new investors......................... $
=======
</TABLE>
The following table shows on a pro forma as adjusted basis at December 31,
1999, after giving effect to the automatic conversion of all then-outstanding
shares of convertible preferred stock into shares of common stock upon the
closing of this offering, the number of shares of common stock purchased from
us, the total consideration paid to us and the average price paid per share by
existing shareholders and by new investors purchasing common stock in this
offering, before deducting underwriting discounts and commissions and estimated
offering expenses, at an assumed initial public offering price of $ per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders...................... 39,608,458 % $36,551,000 % $0.92
New investors.............................. $
Total.................................. % $ %
</TABLE>
The above computations assume no exercise of options or warrants after
December 31, 1999. The number of shares outstanding at December 31, 1999
excludes 4,171,560 and 3,518,524 shares of common stock issuable upon exercise
of outstanding options and warrants, respectively, having weighted-average
exercise prices of $0.78 and $0.52 per share, respectively. To the extent these
outstanding options or warrants are exercised, or we grant any options or
warrants in the future, there will be further dilution to new investors. For a
more detailed discussion of our stock plans and outstanding options and warrants
to purchase common stock, see Notes 9 and 10 to our financial statements
included elsewhere in this prospectus.
21
<PAGE>
SELECTED FINANCIAL DATA
The following statement of operations and balance sheet data should be read
in conjunction with our financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. The statement of operations data for the
period from July 1, 1998 (inception) through December 31, 1998 and for the
fiscal year ended December 31, 1999 and the balance sheet data at December 31,
1998 and December 31, 1999 are derived from audited financial statements
included elsewhere in this prospectus. Pro forma balance sheet data at
December 31, 1999 gives effect to the conversion of preferred stock outstanding
at December 31, 1999 into 12,729,458 shares of common stock. See Note 2 to our
financial statements for a description of how pro forma net loss per share is
calculated. The historical results are not necessarily indicative of the
operating results to be expected in the future.
<TABLE>
<CAPTION>
PERIOD FROM JULY 1, 1998 YEAR ENDED
(INCEPTION) TO DECEMBER 31, 1998 DECEMBER 31, 1999
-------------------------------- -----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ -- $ 983
Cost of revenues.................................. 78 8,692
------ --------
Gross profit (loss)............................... (78) (7,709)
------ --------
Operating expenses:
Sales and marketing............................. 52 8,175
Product development............................. 28 312
General and administrative...................... 115 1,362
Stock-based compensation........................ -- 876
------ --------
Total operating expenses...................... 195 10,725
------ --------
Loss from operations.............................. (273) (18,434)
Interest income................................... 1 156
Interest expense.................................. -- (429)
Other expense..................................... -- (38)
------ --------
Net loss.......................................... $ (272) $(18,745)
====== ========
Basic and diluted net loss per share.............. $(0.08) $ (2.16)
====== ========
Shares used to compute basic and diluted net loss
per share....................................... 3,279 8,696
====== ========
Pro forma net loss per share...................... $ (0.62)
========
Shares used to compute pro forma net loss per
share........................................... 30,477
========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
AT DECEMBER 31, ---------------------
1998 ACTUAL PRO FORMA
--------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $333 $ 20,342 $20,342
Working capital (deficit)................................. (47) 10,649 10,649
Total assets.............................................. 918 50,429 50,429
Long-term obligations, net of current portion............. 259 20,137 20,137
Mandatorily redeemable convertible preferred stock........ -- 33,892 --
Shareholders' equity (deficit)............................ 279 (15,779) 18,113
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are a leading provider of free internet access to consumers and also
offer private label and co-branded free internet access solutions to businesses
and affinity groups, both domestically and internationally. Our free internet
access service is designed to be reliable, easy to use and fun. Our private
label and co-branding programs offer our strategic partners a wide range of
turnkey internet solutions. Through these solutions, our partners have the
ability to offer free internet services to their customers, increasing their
website traffic, building brand loyalty and expanding their revenue streams. We
anticipate that these programs will allow us to rapidly increase the number of
consumers to whom our advertising offerings are delivered and expand our
revenue-sharing opportunities. When users register for our service, they
anonymously provide selected demographic information which allows advertisers
and sponsors to customize their marketing to specific online audiences. Since
the launch of our service in December 1998, the number of our registered users
has grown to approximately 2.2 million as of March 26, 2000. During the 30 days
prior to March 26, 2000, approximately 1.1 million of these registered users
accessed our service and we delivered over 1.3 billion advertising impressions
to our active users in the United States.
For the period from inception until the December 1998 launch of our service,
our operating activities related primarily to the development of our proprietary
software and network infrastructure. From January 1, 1999 to March 26, 2000, we:
- expanded our network infrastructure coverage from the Seattle metropolitan
area to nationwide coverage;
- activated 24 additional POPs;
- increased the number of employees from 17 to 242;
- expanded our product offering to include email, chat, instant messaging
and the FreeiMall;
- launched our portal, including our content channels, the customizable
MyFreei and My Neighborhood; and
- launched our nationwide television advertising campaign, including our
"Baby Bob" campaign.
To date, our revenues have been derived principally from the sale of
advertisements and sponsorship placements within our site. We sell a variety of
advertising packages to clients, including banner advertisements, website
sponsorships, referral arrangements, targeted advertisements and content
placements. Our advertising revenues are derived principally from short-term
advertising arrangements, which typically average one to three months.
Advertising revenues are recognized ratably over the period in which the
advertisement is displayed, if no significant company obligations remain and
collection of the resulting receivable is probable. Payments received from
advertisers before displaying their advertisements on our website are recorded
as deferred revenues and are recognized as revenue in the period over which the
advertisement is displayed. Significant obligations generally consist of
guaranteed minimum numbers of impressions or click-throughs. To the extent
minimum guaranteed impression and click-through levels are not met, we defer
recognition of the corresponding revenues until guaranteed levels are achieved.
In addition to advertising revenues, we derive revenues from electronic
commerce. A number of recent arrangements with our electronic commerce partners
provide us with a share of any sales resulting from direct links from our
website. Electronic commerce revenues have not been significant to date, but are
expected to increase as our existing electronic commerce arrangements grow and
new arrangements are entered into. We recognize revenues from our share of the
proceeds upon notification from our partners of sales attributable to our
website.
23
<PAGE>
In the future, we may derive revenues from other sources, including the
provision of internet access solutions under private and co-branding label
arrangements and performance-based arrangements. Under private and co-branding
label arrangements we expect to receive a combination of a monthly fee per user
and either a share or all of the advertising revenues related to the
arrangement. We will recognize revenues from monthly fees as we provide our
private or co-branded label services. We will recognize advertising revenues on
a basis consistent with advertising within our own site.
Performance-based arrangements, such as "pop-up" commercials and Freei
"intromercials," will be billed based on various performance criteria, such as
the number of advertisements delivered. Revenues will be recognized as the
related performance criteria are met.
COST OF REVENUES. Cost of revenues consists of telecommunications costs,
depreciation of our network equipment, co-location costs, personnel and related
expenses of providing customer service and maintaining our network. Generally,
telecommunications costs include costs for providing local telephone lines into
each company-managed POP, costs associated with leased lines connecting each POP
to our network operation center, costs for our connections from our network
operating center to the internet, and costs associated with the lease of ports
from telecommunications carriers. We intend to expand and improve our network to
support our increasing user base, which will result in increased
telecommunications costs and depreciation expense. Telecommunications costs are
expensed as incurred. Network equipment is capitalized and depreciated over its
estimated useful life.
SALES AND MARKETING. Sales expenses consist primarily of salaries, sales
commissions, travel and related expenses for our direct sales force. Marketing
expenses consist primarily of advertising, public relations, salaries and trade
shows. We intend to significantly increase spending on sales and marketing to
increase brand awareness and our user base. Sales and marketing costs are
expensed in the period incurred.
PRODUCT DEVELOPMENT. Product development costs consist primarily of costs
for salaries and benefits of software developers in connection with the
development of new or improved technologies designed to enhance the performance
of our service. Costs incurred in the development of core software for our
website infrastructure are capitalized and are amortized over the expected
useful life of the developed software. Costs incurred in the development of
content for the website are expensed as incurred. We believe that a significant
level of product development activity is necessary to improve and expand our
services and intend to increase significantly the amount of spending to fund
this activity.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, employee benefits and related expenses for our executive,
finance, legal, human resources and administrative personnel, third party
professional service fees and an allocation of our facilities expense. We expect
general and administrative expenses to increase in the future, reflecting
anticipated growth in our operations and the costs associated with being a
public company.
STOCK-BASED COMPENSATION. In 1999, we recorded total deferred stock-based
compensation of $8.7 million in connection with stock options granted during
1999 at prices subsequently deemed to be below the fair market value of common
stock on the date of grant. Options granted are typically subject to a four-year
vesting period. We are amortizing the deferred compensation over the vesting
periods of the applicable options. Amortization for the year ended December 31,
1999 was $876,000. The remaining balance of deferred compensation at
December 31, 1999 to be expensed in future years is $7.8 million. We expect to
record additional deferred stock-based compensation of approximately
$16 million in the quarter ending March 31, 2000 related to options granted
subsequent to December 31, 1999.
24
<PAGE>
INTEREST AND OTHER INCOME (EXPENSE). Interest income consists of earnings
on our cash and cash equivalents. Interest expense consists primarily of
interest expense on capital equipment leases.
INCOME TAXES. We initially elected to be taxed as an S-corporation. As a
result of the March 1999 financing, our tax status automatically changed to that
of a C-corporation. We have not recorded a provision for income taxes because we
have incurred net losses to date.
As of December 31, 1999, we had net operating loss carryforwards of
approximately $16.3 million available to offset future taxable income. These
carryforwards expire beginning in 2019. Utilization of the net operating losses
may be subject to a substantial annual limitation due to the ownership change
limitations contained in the Internal Revenue Code. There is sufficient
uncertainty regarding the recoverability of the deferred tax assets such that a
full valuation allowance has been recorded. The annual limitation may result in
the expiration of the net operating loss carryforwards before utilization. See
Note 6 of the notes to our audited financial statements included elsewhere in
this prospectus.
Our historical operating results should not be relied upon as indicative of
future performance. Our prospects should be considered in light of the risks,
expenses and difficulties encountered by companies in the early stages of
development, particularly companies in the rapidly evolving internet market.
Although we have experienced revenue growth in recent periods, we anticipate
that we will incur operating losses for the foreseeable future due to a high
level of planned operating and capital expenditures. In particular, we expect to
increase our operating expenses and capital expenditures in order to continue to
expand our sales and marketing organization and network infrastructure.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our unaudited quarterly statement of
operations data for the four quarters ended December 31, 1999. In the opinion of
our management, this information was prepared on substantially the same basis as
our audited financial statements included in this prospectus.
In the opinion of our management, all necessary adjustments (consisting of
only normal recurring adjustments) have been included in the amounts stated
below to present fairly the unaudited quarterly results. You should read this
quarterly data in conjunction with our audited financial statements and
accompanying notes included in this prospectus. Our operating results for any
quarter are not necessarily indicative of the operating results for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999
--------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues............................................... $ 17 $ 91 $ 213 $ 662
Cost of revenues....................................... 376 796 2,272 5,248
----- ------- ------- --------
Gross profit (loss).................................... (359) (705) (2,059) (4,586)
----- ------- ------- --------
Operating expenses:
Sales and marketing.................................. 224 277 987 6,687
Product development.................................. 24 46 96 146
General and administrative........................... 116 148 353 745
Stock-based compensation............................. -- -- 15 861
----- ------- ------- --------
Total operating expenses........................... 364 471 1,451 8,439
----- ------- ------- --------
Loss from operations................................... (723) (1,176) (3,510) (13,025)
Interest and other income (expense), net............... (14) (73) (229) 5
----- ------- ------- --------
Net loss............................................... $(737) $(1,249) $(3,739) $(13,020)
===== ======= ======= ========
</TABLE>
25
<PAGE>
REVENUES. Revenues grew in each quarter presented primarily due to the
increase in the sale of advertisements by our sales force.
COST OF REVENUES. Cost of revenues increased in each quarter presented
primarily due to increased spending on our network infrastructure and the hiring
of additional customer support representatives to support our growing user base.
SALES AND MARKETING. Sales and marketing expenses increased in each quarter
presented. These increases were primarily due to the hiring of additional sales
personnel, the payment to sales representatives of increased commissions
resulting from increased sales, and additional marketing expenses. The increase
in sales and marketing expenses during the fourth quarter of 1999 was due to
increased spending on television advertising and other brand awareness
initiatives.
PRODUCT DEVELOPMENT. Product development costs have increased steadily in
each quarter presented as result of increased personnel costs related to the
continued enhancement of our client software applications and our internal
systems.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
in each quarter presented. These increases were primarily due to the hiring of
additional executive and administrative personnel.
STOCK-BASED COMPENSATION. Amortization of stock-based compensation
increased during the third and fourth quarters of 1999 due to the increase in
the issuance of options to new employees and directors and the increase in the
deemed value of the Company's common stock as compared to the exercise price of
the options granted, as well as the amortization of deferred compensation on
prior grants.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE PERIOD FROM INCEPTION THROUGH
DECEMBER 31, 1998
We began business operations in July 1998 and, as a result, operating
results for the period from inception through December 31, 1998, include no
revenues and limited cost of revenues and operating expenses. Accordingly, the
results for this period are not meaningful or material in comparison to the
operating results for the year ended December 31, 1999.
REVENUES. Revenues for the year ended December 31, 1999 were $983,000
compared to no revenue for the period ended December 31, 1998. The increase was
primarily attributable to sales of banner advertisements by our sales force.
COST OF REVENUES. Cost of revenues for the year ended December 31, 1999 was
$8.7 million compared to $78,000 for the period ended December 31, 1998. The
increase was primarily attributable to telecommunications expenses related to
the growth in our user base and depreciation related to our network
infrastructure costs.
SALES AND MARKETING. Sales and marketing expenses for the year ended
December 31, 1999 were $8.2 million compared to $52,000 for the period ended
December 31, 1998. The increase was primarily due to an increase in advertising
and the hiring of additional direct sales force and marketing personnel.
PRODUCT DEVELOPMENT. Product development expenses for the year ended
December 31, 1999 were $312,000 compared to $28,000 for the period ended
December 31, 1998. The increase was primarily due to the hiring of additional
software engineers.
26
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
year ended December 31, 1999 were $1.4 million compared to $115,000 for the
period ended December 31, 1998. The increase was primarily due to the hiring of
additional executive and administrative personnel, increased facilities costs
and an increase in professional fees.
STOCK-BASED COMPENSATION. In the year ended December 31, 1999, we recorded
total deferred compensation of $8.7 million in connection with stock option
grants. We are amortizing this amount over the vesting periods of the applicable
options, resulting in an expense of $876,000 for the year ended December 31,
1999.
INTEREST AND OTHER INCOME (EXPENSE). Interest income for the year ended
December 31, 1999 was $156,000 compared to $1,000 for the period ended
December 31, 1998. The increase was primarily attributable to interest earned on
the $35.8 million in net proceeds from our common and preferred stock financings
in 1999.
Interest expense for the year ended December 31, 1999 was $429,000 compared
to no interest expense for the year ended December 31, 1998. This increase was
primarily attributable to an increase in capital equipment leases.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
private placement of equity securities, raising approximately $36.5 million
through December 31, 1999, prior to expenses. In March 2000 we raised an
additional $53 million, prior to expenses, through the sale of a new series of
preferred stock. At December 31, 1999, we had $20.3 million in cash and cash
equivalents and $10.6 million in working capital, compared to $333,000 in cash
and cash equivalents and negative working capital of $47,000 at December 31,
1998.
Net cash used for our operating activities was $13.5 million for the year
ended December 31, 1999. Net cash used for operating activities consisted
primarily of net operating losses and increases in accounts receivable and
prepaid expenses, which were partially offset by increases in depreciation,
stock-based compensation, accounts payable and accrued liabilities. For the
period ended December 31, 1998, no cash was used in or provided by operating
activities.
Net cash used for our investing activities was $66,000 and $2.3 million for
the periods ended December 31, 1998 and 1999, respectively. Net cash used for
investing activities in 1998 and 1999 consisted primarily of capital
expenditures for network and computer equipment, purchased software, office
equipment and leasehold improvements. As our operations expand, we anticipate
that our planned purchases of capital equipment will require significant
additional expenditures over the next 12 months.
Net cash provided by our financing activities was $399,000 and
$35.8 million for the periods ended December 31, 1998 and 1999, respectively.
Net cash provided by financing activities in 1999 was principally attributable
to the private sale of convertible preferred stock, which was partially offset
by principal payments made on capital leases.
As of December 31, 1999, our principal commitments consisted of office and
equipment leases. Future minimum cash payments under these non-cancelable
commitments are $48.1 million through the year 2003. In addition, we have a
commitment to MP3.com to spend up to $4.0 million in online advertising,
marketing and promotions before December 31, 2000.
We expect to continue to incur significant capital expenditures and
operating expenses in the future, including improvements to our network
infrastructure and other computer and telecommunications equipment, enhancement
and expansion of our services, and increases in our sales and marketing
activities. Our actual capital expenditures and operating expenses will depend
on the
27
<PAGE>
growth rate of our user base, which is difficult to predict and which could
change dramatically over time. We believe that our existing cash and cash
equivalents and the net proceeds from this offering will be sufficient to fund
our operating activities, capital expenditures and other obligations through at
least the next 12 months and do not currently anticipate the need to raise
additional capital within that period of time. If we do seek to raise additional
capital, we cannot assure you that additional financing will be available on
acceptable terms, if at all.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS
No. 133. SFAS No. 133 is effective for our fiscal year ending December 31, 2001.
We do not use derivative instruments, and therefore do not expect that the
adoption of this statement will have any effect on our results of operations,
financial position or cash flows.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This pronouncement summarizes certain of the SEC staff's views on
applying generally accepted accounting principles to revenue recognition. We are
required to adopt SAB No. 101 for our fiscal year ending December 31, 2000. We
do not expect the adoption of SAB No. 101 to have an effect on our results of
operations, financial position or cash flows.
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BUSINESS
FREEINTERNET.COM
We are a leading provider of free internet access to consumers and also
offer private label and co-branded free internet access solutions to businesses
and affinity groups, both domestically and internationally. Our free internet
access service is designed to be reliable, easy to use and fun. Our private
label and co-branding programs offer our strategic partners a wide range of
turnkey internet solutions. Through these solutions, our partners have the
ability to offer free internet services to their customers, increasing their
website traffic, building brand loyalty and expanding their revenue streams. We
anticipate that these programs will allow us to rapidly increase the number of
consumers to whom our advertising offerings are delivered and expand our
revenue-sharing opportunities. When users register for our service, they
anonymously provide selected demographic information which allows advertisers
and sponsors to customize their marketing to specific online audiences.
We launched our services in December 1998 in the Seattle metropolitan area,
acquiring approximately 32,000 registered users by April 30, 1999. In May 1999,
we expanded our service to five major metropolitan areas, including Los Angeles,
Chicago and Washington D.C., acquiring approximately 322,000 registered users by
October 1, 1999, at which time we launched our service nationally. Since October
1999, we have added approximately 1.7 million registered users in the United
States. Since the December 1999 launch of our service in Singapore, we have
acquired 150,000 users in southeast Asia. During the 30 days prior to March 26,
2000, over 1.3 billion advertising impressions were delivered to our active
users in the United States.
We believe a key competitive advantage is our national telecommunications
infrastructure. Unlike most other free internet service providers, or ISPs, we
maintain our own POPs in major markets, which we supplement by contracting with
third-party telecommunications service providers. We established our first POP
in December 1998 and currently maintain 25 POPs in major markets. We believe
this approach enhances the reliability of our services and provides us with
lower network costs compared to other free ISPs. Users can access our services
through a local telephone call in more than 1,300 cities throughout the United
States.
INDUSTRY BACKGROUND
The internet has become an increasingly significant medium for
communication, information and commerce. According to International Data
Corporation, or IDC, an industry research firm, the number of worldwide web
users is expected to grow from 186 million in 1999 to 502 million in 2003. We
believe that continued growth in internet usage is expected to be fueled by a
number of factors, including advances in the performance and speed of personal
computers and internet access generally, the decline in computer prices and
increased consumer awareness of the internet's potential for commercial and
personal use.
The rapid growth of internet usage has resulted in the proliferation of
regional and local ISPs in the United States. According to Jupiter
Communications, an industry research firm, ISPs vary widely in the quality and
reliability of internet access they provide, the level of customer service they
maintain and the selection of subscriber services they offer. ISPs generally
offer access to the internet through dial-up modem and various forms of
broadband technologies. Jupiter Communications predicts that in 2003, 77% of
U.S. online households will access the internet via dial-up modem, while the
remainder will access via broadband and other technologies.
ISPs have historically charged internet users monthly access fees. We
believe that increasing numbers of new and existing internet users will demand
reduced access fees and, if given comparable quality, will migrate to free ISPs.
As this migration occurs, ISPs will need to increasingly rely on
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revenue from advertising services. Total worldwide ISP revenue from advertising
services is expected to grow from $3.2 billion in 1999 to $11.5 billion in 2003
according to Jupiter Communications.
Businesses and consumers are increasingly using the internet for e-commerce
transactions. According to Forrester Research, an industry research firm,
worldwide business-to-business electronic commerce revenues are expected to grow
from $131 billion in 1999 to $1.52 trillion in 2003, and, according to the
GartnerGroup, an industry research firm, worldwide consumer electronic commerce
revenues are expected to grow from $31.2 billion in 1999 to $380.5 billion in
2003. The internet serves as a powerful direct marketing and sales channel for
conducting commercial transactions and providing a real-time platform from which
users can access dynamic content and interactive communications features. Online
merchants can use the internet to reach a broader customer base with a larger
selection of products at lower costs, and merchants advertising their goods can
target specific demographic groups, evaluate the effectiveness of their
advertising campaigns and modify them in direct response to consumer feedback.
In order to maintain an active user base to which advertisers can market
their goods and services, ISPs must provide "sticky" features. Forrester
Research states that the top four reasons users cited for continuing to visit
their favorite sites are high quality content (75%), ease of use (66%), quick
download time (58%) and frequent updates (54%).
THE FREEINTERNET.COM STRATEGY
Our goal is to become the dominant provider of access to the internet. We
intend to achieve this goal by:
ATTRACTING USERS THROUGH BRAND PROMOTION AND APPEALING MARKETING
PROGRAMS. Our strategy is to promote freeinternet.com as a brand that consumers
associate with a fun and user-friendly experience and that advertisers and
sponsors associate with a highly effective means to target potential customers.
We believe the freeinternet.com name is easy for consumers to understand and
remember. We will continue to build and reinforce the freeinternet.com brand
through a variety of media, including national and local television and radio
campaigns, outdoor advertising and online promotions on third-party websites. We
recently commenced our critically acclaimed "Baby Bob" marketing campaign. In
addition, Shaquille O'Neal and Claudia Schiffer have agreed to promote our
brand.
RETAINING USERS BY OFFERING RELIABLE ACCESS WHILE PROVIDING A USER-FRIENDLY
AND FUN ONLINE EXPERIENCE. Currently, we offer our users content-specific
channels, customizable features, localized information, e-commerce and other
value-added features. We plan to frequently enhance this comprehensive portal
with additional channels, features and local and national content. In addition,
we will continue to invest in our network to provide our users with a reliable
and high quality internet connection, and are committed to providing a high
level of responsive and effective customer service.
OFFERING OUR ADVERTISERS AND SPONSORS EFFECTIVE MARKETING SOLUTIONS TO REACH
THEIR TARGET AUDIENCES. To be successful, we must continue to increase our
advertising and sponsorship revenues. We offer advertisers and sponsors the
ability to maximize the effectiveness of their online marketing by targeting
specific demographic audiences on a local and national basis. Our advertisers
and sponsors are able to reach their target audience through a variety of
advertising options, including banner advertisements, sponsorship and
"intromercials." Moreover, we are continuing to develop a network of local sales
representatives to promote and increase our local advertising offerings.
CONTINUING TO DEVELOP PRIVATE LABEL AND OTHER STRATEGIC RELATIONSHIPS. We
plan to rapidly expand our private label and co-branding programs. These
programs allow our strategic partners to provide branded internet access and
online services to their customers. We anticipate that these programs will allow
us to rapidly increase the number of consumers to whom our advertising offerings
are delivered and expand our revenue-sharing opportunities.
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BUILDING OUT A RELIABLE AND COST-EFFECTIVE TELECOMMUNICATIONS NETWORK. We
plan to continue building and maintaining our own POPs in major markets in order
to provide a reliable network, reduce our cost per user and accommodate user
growth. We have augmented our network with additional telecommunications
services from third-party providers in order to strategically provide service in
smaller markets and to provide system redundancy.
PURSUING AGGRESSIVE INTERNATIONAL EXPANSION. We believe that international
expansion represents a significant growth opportunity for us. We have entered
into agreements to provide co-branded services in Singapore and Australia. In
December 1999, our free service was launched in Singapore and we anticipate
launching our service in Australia later this year. We are currently in
discussions to initiate service in several other countries.
CAPITALIZE ON WIRELESS, BROADBAND AND OTHER EMERGING TECHNOLOGIES. We
continuously monitor emerging technologies and are committed to developing new
services to leverage these evolving platforms and enhance our service offerings.
For example, we are currently exploring opportunities to offer internet services
via wireless and broadband technologies. We have recently entered into an
agreement with InfoSpace to jointly offer our services on wireless devices.
FREEINTERNET.COM SERVICES
THE FREEINTERNET.COM USER EXPERIENCE
We offer consumers free internet access designed to be reliable, easy to use
and fun. We were ranked as the overall number one free ISP by PC WORLD MAGAZINE
in its April 2000 edition.
FREE AND ANONYMOUS INTERNET ACCESS. We offer users free, unlimited access
to the internet. To use our services, users download our proprietary internet
access software from our website or install it from a CD-ROM. Our software is
compatible with both Windows and Macintosh operating systems. Upon completion of
a brief online questionnaire, registered users can immediately begin accessing
the internet through our freeinternet.com services. Since we do not require a
user's name, street address or phone number, registered users enjoy complete
anonymity.
COMPREHENSIVE PORTAL. Our goal is to provide a content- and feature-rich
online destination for our users.
- FULL CONTENT. We offer a full content site with headline news, weather,
stock reports, white and yellow pages, along with over 30 content-specific
channels, such as business, finance, entertainment, health and
classifieds.
- CUSTOMIZABLE HOMEPAGE. Our users have the ability to create "myfreei," a
personalized home page that contains information specifically customized
by that registered user. These pre-selected preferences can include
personal stocks, horoscopes, specific news or sports information.
- LOCALIZED INFORMATION. Our "my neighborhood" section provides localized
information such as weather reports, entertainment information, local
government resources and restaurant locations based on a user's zip code.
- VALUE-ADD FEATURES. We provide each user with free email and other
valuable online services, including free online storage space, chat rooms
and instant messaging.
- ONLINE SHOPPING. We have entered into an agreement with Inktomi, a leader
in shopping engines, to provide our users with one of the broadest
selections of merchandise available in online shopping through the
FreeiMall, our shopping channel. The FreeiMall currently hosts
approximately 350 merchants and a wide selection of products, allowing
users to do comparative shopping.
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- USER AND TECHNICAL SUPPORT. We provide telephone, email and online
assistance to our users. In addition, we continuously monitor our
nationwide telecommunications network service to help maintain high
availability and throughput for our users and ensure virtually
uninterrupted access to the internet.
ADVERTISING AND MARKETING SERVICES
We offer advertisers and sponsors an attractive online advertising medium by
providing an opportunity for uninterrupted exposure to our large user base
during online sessions. We also provide advertisers and sponsors with the
ability to target their advertising messages and receive feedback regarding the
effectiveness of their marketing programs. To date, companies that have
purchased national advertisements from us include Amazon.com, Inc., eBay Inc.,
Egghead.com, Inc., Gateway 2000, Inc. and PETsMART.com, Inc. Advertisers who
have purchased local advertisements from us include the Seattle Mariners and
Lomas Eye Care Center.
CONTINUOUS ADVERTISING CHANNEL. Our iSee Window is designed to remain in
view throughout a user's session, including while pages download and while the
user navigates the internet or engages in non-browsing activities such as
sending or receiving e-mail.
TARGETED AND INNOVATIVE ADVERTISING OPPORTUNITIES. While advertisers can
purchase untargeted banner advertising from us, we also enable them to target
their marketing efforts based on user demographics and channel content. We
collect this demographic information from our users when they register for our
services and from time to time thereafter.
- ISEE WINDOW. We have the ability to deliver targeted advertising to users
who meet the profile criteria specified by our advertisers, including
gender, interests, age, income and zip code. Moreover, the iSee Window
contains a number of fixed features available for sponsorship by
advertisers, including website link buttons and a scrolling marquee.
- FREEI PORTAL. Companies can purchase sponsorships or advertisements
throughout our content-rich Freei portal. As a result, advertisers can
place their message alongside content typically viewed by users with the
advertisers' preferred demographic characteristics. Advertisers can also
customize their message to the projected demographics of the channel in
which it is placed.
- "POP-UP" COMMERCIALS AND FREEI "INTROMERCIALS." Advertisers can also
purchase pop-up commercials and full motion intromercials. Pop-up
commercials are small windows displaying advertisements which are launched
periodically while a user is online. Intromercials use Macromedia Flash
technology to provide full color, full motion advertisements and are
displayed while our home page downloads to a user's computer, while a user
clicks on another channel, or while a user logs off our service.
CAPACITY TO PROVIDE DETAILED FEEDBACK TO OUR ADVERTISERS. Using our
proprietary technology, we are able to provide advertisers with direct feedback
as to the effectiveness of their online marketing campaigns. For example,
advertisers can access our server on a 24-hour basis through the use of a
password to obtain information about their advertisements, including the number
of impressions or page views delivered and the number of "clicks" on their
advertisements.
PRIVATE LABEL AND CO-BRANDED SOLUTIONS
BENEFITS TO US. We anticipate that our private label and co-branded
solutions will provide us with:
- a rapid increase in the number of consumers to whom our advertising
offerings are delivered;
- diverse revenue-sharing opportunities, including banner ads, button and
tile sponsorships, email advertisements and e-commerce; and
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- greater name recognition and promotion of the freeinternet.com brand.
PRIVATE LABEL SOLUTIONS. We offer a range of turnkey private label
solutions that allow our strategic partners to use our proprietary online
services to offer free internet access to their customers and members. At the
strategic partner's option, our internet services can be branded completely with
the partner's name, look and feel, including a partner-specific CD-ROM, user
interface, dialog box and default start page. Each start page contains our
tagline "powered by freeinternet.com." In constructing their private label
program, our strategic partners have a variety of revenue-sharing options,
including having us place all of the advertisements on their site, having their
own sales force be responsible for advertisement acquisition, or a combination
of both. Through our private label program, our strategic partners can:
- provide their customers with feature-rich content and various internet
services, including personalized email, instant messaging and chat rooms;
- instantly increase traffic to their own website;
- benefit from an increase in e-commerce business;
- build strong customer loyalty and brand awareness;
- begin targeting their products and services more effectively to their
customer base;
- receive more detailed user information so they can better serve their
customers.
We have entered into private label agreements with companies such as AT&T and
InfoSpace, and anticipate launching these services in the near future.
CO-BRANDED PROMOTIONS. For partners who want to leverage the
freeinternet.com brand name, our co-branded program offers the ability to
quickly go to market with free internet access for their customers, branded
together with the freeinternet.com name, reputation and services. Under this
model, our co-brand partners have the ability to provide their customers with
customized CD-ROMs that contain our software and look and feel, but also include
partner-specific advertisements and instant messaging services. We have recently
entered into a co-branding arrangement to provide free internet access to the
customers of Subway Restaurants.
We provide our free co-branded internet services to customers of Singapore
Telecommunications. Since the launch of our service in Singapore in December
1999, we have acquired approximately 150,000 users in this market. Although to
date we have received limited revenue under this arrangement, we believe that as
we grow this user base, we will begin to generate advertising and
content-placement revenues. These services are provided through a licensee who
is in the process of formalizing its relationship with Singapore
Telecommunications.
MARKETING AND SALES
MARKETING--USER ACQUISITION
We attract new users through aggressive marketing and brand awareness
campaigns. Our marketing strategy is to promote the freeinternet.com brand as
user friendly and fun through national and local television, radio, print and
trade advertising. We have recently commenced a critically acclaimed national
television and radio advertising campaign featuring "Baby Bob," a talking infant
with a high I.Q. whose mission is to spread the word about freeinternet.com. In
addition, Shaquille O'Neal and Claudia Schiffer have agreed to promote the
freeinternet.com brand. Users can access our service by downloading our software
from our website or can call our toll-free number to request a free CD-ROM
containing our software. We also distribute CD-ROMs through targeted promotions
and strategic partnerships. To date, we have experienced a strong
"word-of-mouth" referral rate from our current users.
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We intend to continue to enter into private label and co-branding
arrangements with strategic partners in order to expand our user base, both
domestically and internationally. We have also entered into arrangements to have
our software installed on or with various hardware and software computer
products. For example, our software was incorporated in MacAddict magazine's
bundled software distributed with its February 2000 issue and is incorporated in
CD-ROMs distributed by MP3.com, Inc. It is also installed on personal computers
manufactured by Aopen America Incorporated, a wholly owned subsidiary of Acer
America Computer.
We were recently invited to participate in an exclusive university
information center marketing program by CampusLink, a network of on-campus,
multi-media centers with exposure to over 600,000 students in 17 major
universities across the United States, including Arizona State University,
University of California at Los Angeles, Michigan State University and Ohio
State University.
SALES--ADVERTISER ACQUISITION
We have divided our sales efforts into distinct channels, each with its own
specialization.
DIRECT SALES. Our direct sales representatives focus their efforts on
advertising agencies and major customer accounts through direct client contact.
These representatives have primary responsibility for selling our higher-value
targeted advertising. We currently have direct sales staff in New York, San
Francisco, Los Angeles, Seattle, Chicago and Phoenix, and are hiring staff in
Boston, Philadelphia, Atlanta and Dallas.
INSIDE SALES. Our inside sales force, which concentrates on smaller
national accounts and regional businesses, generates sales through telephone
interaction with potential advertisers. These representatives are responsible
for our less expensive traditional banner advertising, including run-of-site,
cost-per-click and cost-per-acquisition sales. Our inside sales force is based
in our Seattle-area headquarters.
ADVERTISING FIRMS. We have established relationships with multiple internet
advertising firms to sell, on a wholesale basis, any remaining advertising
inventory on our site. In addition, we are currently in discussions with local
advertising firms to create advertising partnerships that will assist us in our
efforts to sell local targeted advertising.
CONTENT PROVIDERS. We have revenue sharing agreements with content
providers. Under these agreements, we benefit from the selling efforts of our
content providers whose own internal sales forces sell advertisements that
appear on our site.
USER SUPPORT
We are dedicated to building long-term relationships with our users by
providing high quality customer service. To this end, we offer live telephone
support, a telephone-based self-help system, an online information database and
email assistance.
Telephone support is available seven days a week, 24 hours a day. While we
currently handle all telephone inquiries in-house, we have entered into an
agreement with Stream International Services Corp., a third-party call center,
who will handle our basic customer care questions. Complex questions will be
routed back to our internal technical support department. We also provide an
interactive voice response unit that allows callers to obtain automated,
first-tier customer support or the option to talk to a user support
representative. Freei Help, a self-help database developed by our internal
technical support staff, is available on our website and contains solutions to a
variety of common access and usage problems. It also has an extensive
"frequently asked questions," or FAQ, section. Additionally, users can email
questions directly to our user support representatives. Our email support
software provides an auto-response to commonly asked questions. If the user's
question is more complex, a user support representative will provide a
customized response via email.
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COMMUNICATIONS NETWORK
To access our network, users initiate telephone connections between their
personal computers and computer hardware in local or regional POPs. While most
major free internet access providers contract for these POPs from wholesale
providers, we maintain our own POPs in major markets to provide dependable user
connectivity to our network. We believe that maintaining our POPs in major
markets will also lead to lower operating costs. These POPs, which currently
serve 25 major markets, are housed in carrier-class communication facilities
provided by vendors such as AT&T and MCI WorldCom. We plan to maintain our own
POPs in all major markets where we believe it is economically viable to do so.
To augment our network of company-maintained POPs and provide a national
footprint, we have contracted for additional telecommunications services from
providers such as Cable & Wireless, PSINet and Splitrock. With the combination
of company-maintained and contracted POPs, we provide local dial-up access in
over 1,300 cities in all 50 states, offering our users access to our network at
no cost, other than the cost of a local or regional phone call. We are seeking
to develop comparable technology worldwide as we expand internationally. We
support point-to-point access to the internet using the v.90 modem standard for
56 kpbs connections. We continuously monitor our network service to help
maintain high availability and throughput for our users. Our servers and data
center reside in Federal Way, Washington at our corporate headquarters and are
equipped with uninterrupted power supplies and generator power backup systems to
prevent service failures due to power outages. We presently have limited
redundant facilities or systems, and are in the process of implementing our
disaster recovery plan.
SOFTWARE AND OTHER TECHNOLOGY
We have developed and continue to enhance a suite of proprietary software
systems that, together with our telecommunications infrastructure, enable us to
provide our users with high quality internet access while delivering
demographically targeted advertising to their computer desktops. The major
components of our software systems include the following:
CLIENT SOFTWARE APPLICATION. Our client software application is used by our
users to connect to our network. One of the distinguishing characteristics of
our client application is the iSee Window, a component that is always visible
during the user's online session. Major functions performed by our client
software application include:
- establishing a connection to our network;
- displaying current news, weather and other featured content, with links to
our other services such as email, chat and shopping;
- downloading and displaying demographically targeted advertising;
- reporting advertisement impressions and click-throughs;
- offering instant messaging and chat;
- offering one-button, instant internet search capabilities;
- providing security and control functions to confirm that the iSee Window
and the advertisements in the iSee Window are being displayed to our
users.
Our client software is available on both Microsoft Windows and Apple
Macintosh platforms. Additional versions of the software are planned for
wireless and other devices on platforms such as Linux, Palm OS and Windows CE.
The Windows platforms are programmed in Win32 MFC to provide optimal performance
within Windows 95, Windows 98 and Windows NT 4.0. The Apple Macintosh version of
our client software is programmed in RealBasic and is functionally identical to
the Windows
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version. Because our software is written using software languages native to each
platform, we believe that it is faster and more reliable for the user. We
regularly release new versions of our client software to provide improved and
enhanced features and functionality. In addition, further modifications to the
client software are required from time to time in order to facilitate the rapid
deployment of private label partnerships.
FREEI NETWORK. Our network is comprised of a group of software applications
running on multiple computers that manage both the user's online experience, as
well as provide for the delivery and management of advertising and rich media
content. This network consists of the following components:
- ADVERTISEMENT MANAGEMENT SYSTEM. Our proprietary advertisement management
system houses the distribution parameters of our advertising campaigns and
is integrated with our client software to manage the delivery of
advertisements to our users during their online sessions. Intelligence
built into this system allows focused targeting based on a variety of user
demographics, which are captured from periodic user surveys. A
custom-developed interface allows new advertisements to be placed into
rotation on a real-time basis. A reporting module provides information on
numbers of impressions and click-throughs. Planned enhancements to this
system will allow for targeting based on individual user preferences, as
determined from an analysis of historical and current-session traffic
patterns.
- CONTENT SYSTEM. This system houses and delivers the content provided to
our user base, including our own content as well as the content of
advertisers and other third-party providers.
- AUTHENTICATION AND VERIFICATION SYSTEMS. These systems authenticate our
users when they initially connect to our service and also monitor user
sessions to help determine whether the iSee Window is being properly
displayed.
- DATA COLLECTION SYSTEM. Reporting from this system includes information on
registered and active users, geographical usage and session length.
Planned enhancements include the capture and reporting of our users'
online experience, including historical traffic patterns.
- EMAIL. We provide free email access on two common email
platforms--web-based and POP3. Web-based email provides our users access
from platforms or accounts that provide web access. POP3 allows our users
to access their email account using their preferred POP3 email application
such as Microsoft's Outlook Express or Netscape's Communicator. We have
developed and integrated a number of custom anti-spamming measures
designed to protect against misuse of our free email service. This
includes security applications to prevent the unauthorized access of
information provided by our users.
Underlying all of these software applications is a load-balancing,
high-availability architecture designed to enhance scalability as our user base
continues to grow. The modular design of this architecture allows us to add
incremental capacity to the system in response to the growth of our user base.
The applications above are built on a technology suite including Sun and Intel
processors, the Oracle relational database management system, Network Appliance
disk arrays, Cisco routers, Radius servers and Lucent/Ascend remote access
servers.
Our research and development team is responsible for the design, development
and release of our software and services. Members of our research and
development staff work closely with our sales and marketing department, as well
as with our business development team, to better understand the market needs and
requirements of our users, advertisers and partners.
COMPETITION
The market for internet services is intensely competitive, subject to rapid
technological change and significantly affected by new product and service
offerings. We compete against a number of companies
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with significantly greater financial, technical, marketing and other resources
than us, including America Online, Microsoft and EarthLink. Our ability to
compete depends upon many factors, many of which are outside of our control. We
compete for users, and advertisers and strategic partners.
COMPETITION FOR USERS. We believe that the key factors to our success in
competing for users include compelling content, the reliability and quality of
our service, effective user support, geographic coverage of our service and
overall user satisfaction. While we believe that we compete favorably with
respect to these factors, many of our competitors may have an advantage over us
with respect to these and other factors. Competition may also intensify as a
result of industry consolidation and the ability of some of our competitors to
bundle internet services with other products and services.
We currently compete with the following:
- established online service and content providers, such as America Online
and The Microsoft Network;
- independent national ISPs, such as EarthLink and Prodigy and numerous
regional and local ISPs;
- other companies offering free internet access, such as NetZero and Juno in
the United States and Freeserve in Europe;
- private label ISPs, such as 1stUp.com and Spinway;
- national long-distance carriers, such as Sprint and MCI WorldCom;
- local telephone companies and regional Bell operating companies, such as
GTE;
- cable operators, online cable services and other broadband service
providers, such as Excite@Home; and
- internet portals and search engines, such as Yahoo!, Alta Vista and Lycos.
COMPETITION FOR ADVERTISERS. We face intense competition from both
traditional and online advertising and direct marketing businesses. We compete
with traditional television, radio, cable and print media for a share of
advertisers' total advertising budget. In addition, we expect that online
competition will increase due to the lack of significant barriers to entry in
the online advertising market. Our ability to compete effectively for
advertisers depends upon many factors, including the:
- size and demographic profile of our user base;
- frequency and duration of use of our service by our user base;
- ability to target users based on demographic information;
- advertising and sponsorship costs;
- capacity of our technology infrastructure to meet the needs of our users,
advertisers and strategic partners;
- ability to increase awareness of the freeinternet.com brand; and
- effectiveness of our sales and marketing efforts and those of our
competitors.
COMPETITION FOR STRATEGIC PARTNERS. We believe the market for private label
and co-branding opportunities is rapidly expanding. Currently, these services
are offered by a limited number of service providers, including 1stUp.com and
Spinway. The key factors to our success in this market include the quality of
service, time-to-market, numbers of users delivered, ability to provide diverse
distribution channels and the capacity to offer attractive revenue-sharing
arrangements.
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INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of copyright, trade secret and trademark law. We have not claimed
any patents or filed any patent applications.
We generally enter into confidentiality or noncompete agreements with our
employees, consultants and corporate partners and generally control access to
and distribution of our technologies, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
our processes or technologies. We cannot be certain that the steps we have taken
will prevent misappropriation of our processes or technologies, particularly in
foreign countries where the laws or law enforcement may not protect our
proprietary rights as fully as in the United States. We have licensed, and may
license in the future, elements of our trademarks, trade dress and similar
proprietary right to third parties. While we attempt to ensure that the quality
of our brand is maintained by these third parties, they may take actions that
could materially and adversely affect the value of our proprietary rights or
reputation.
We have been, are currently, and may be in the future subject to legal
proceedings and claims from time to time in the ordinary course of our business,
including claims of alleged infringement of the trademarks and other
intellectual property rights of third parties. We are currently subject to two
intellectual property infringement claims. See "--Legal Proceedings" on page 40
for a discussion of these claims.
GOVERNMENTAL REGULATION
Our business is or could be in the future subject to different types of
government regulation as the law relating to our business evolves.
REGULATION OF CONTENT AND ACCESS
A variety of restrictions on content and access, primarily as they relate to
children, have been enacted or proposed. The Children's Online Privacy
Protection Act of 1998 prohibits and imposes criminal penalties and civil
liability on anyone engaged in the business of selling or transferring, by means
of the World Wide Web, material that is harmful to minors, unless access to this
material is blocked to persons under 17 years of age. In addition, the Federal
Telecommunications Act of 1996 imposes fines on any entity that knowingly
permits any telecommunications facility under such entity's control to be used
to make obscene or indecent material available to minors via an interactive
computer service. Numerous states have adopted or are currently considering
similar types of legislation. In addition, laws have been proposed which would
require internet service providers to supply, at cost, filtering technologies to
limit or block the ability of minors to access unsuitable materials on the
internet.
Although the sections of the Communications Decency Act of 1996 that
proposed to impose criminal penalties on anyone distributing indecent material
to minors over the internet were held to be unconstitutional by the U.S. Supreme
Court, similar laws may be proposed, adopted and upheld. The nature of future
legislation and the manner in which it may be interpreted and enforced cannot be
fully determined and, therefore, legislation similar to the Communications
Decency Act could subject us and/or our customers to potential liability, which
in turn could harm our business. The adoption of any of these types of laws or
regulations might decrease the growth of the internet, which in turn could
decrease the demand for our services or increase our cost of doing business or
in some other manner harm our business.
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USER PRIVACY ISSUES
Regulations regarding internet user privacy have been enacted or proposed to
limit the use of personal information by website operators. For example, the
Children's Online Privacy Protection Act of 1998 requires, among other things,
that online operators obtain verifiable parental consent for the collection, use
or disclosure of personal information from children. The Act further mandates
that the Federal Trade Commission publish regulations for the collection of data
from children by commercial website operators.
TELECOMMUNICATIONS REGULATION
Although we are not currently regulated by the Federal Communications
Commission as a "telecommunications provider," advances in voice and data
telephony technology could subject us to state or federal governmental
regulation in the future. In addition, we could also be affected by any change
in the ability of our users to reach our network through a dial-up telephone
call without any additional charges. The FCC has ruled that connections linking
end users to their internet service providers are jurisdictionally interstate
rather than local, but the FCC did not subject such calling to the access
charges that apply to traditional telecommunications companies. Local telephone
companies assess access charges to long distance companies for the use of the
local telephone network to originate and terminate long distance calls,
generally on a per-minute basis. We could be adversely affected by any
regulatory change that would result in the application of access charges to
internet service providers because this would substantially increase the cost of
using the internet.
DIGITAL MILLENNIUM COPYRIGHT ACT
A variety of restrictions on internet content, primarily as it relates to
potential intellectual property infringement, have been enacted with the passage
of the Digital Millenium Copyright Act. The Digital Millennium Copyright Act
provides immediate relief from monetary damages for certain common internet
activities through a number of safe harbor provisions. These activities include
intermediate and transient storage of materials (such as web pages or chat room
discussions) in the course of transmitting, rating or providing connections;
system caching; placing information on a system or network at the direction of
users; and the use of information location tools, such as directories, indexes
and hypertext links. For each covered activity, ISPs must meet certain
conditions to qualify for protection, including, but not limited to, not
receiving any financial benefit directly attributable to the infringing
activity, not having the requisite level of knowledge of the infringing
activity, and not modifying any of the transmitted material. In addition, the
safe harbor provisions require ISPs to designate an agent to receive copyright
infringement notices and file this information with the Copyright Office;
provide information to its users regarding ongoing compliance with copyright
law; prepare a policy and guidelines manual warning its users about the
consequences of repeat infringement; and complying with certain notice and
takedown procedures.
PRIVACY POLICY AND DECENCY STANDARDS
We believe that issues relating to the privacy of internet users and the use
of information about these users are critically important as the internet and
its commercial use grow. We have adopted and disclosed to our users a detailed
policy outlining the permissible uses of information about users and the extent
to which such information may be shared with others. Our users must acknowledge
and agree to this policy before registering to use our service. Although we
request certain demographic information, we do not require a user's name, street
address or phone number and therefore we cannot trace the information back to an
individual user. We do not sell or license to third parties any personally
identifiable information about users. In some cases, users may be required to
provide additional personal information when entering third-party websites
accessed through links on our site. We are a member of the TRUSTe program, an
independent non-profit organization that audits the
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privacy statements of Web-sites and their adherence to those privacy statements.
In addition, we voluntarily adhere to the same decency standards followed by the
radio and television industries.
EMPLOYEES
As of March 26, 2000, we had 242 employees. None of our employees is
represented by a labor union, and we believe we have good relations with our
employees.
FACILITIES
We lease approximately 106,000 square feet of space in three buildings in
Federal Way, Washington under three separate leases. One lease expires as of
December 31, 2002, the second lease expires as of February 1, 2005 and the third
is on a month-to-month basis. We believe that our facilities will be adequate to
meet our needs for at least the next twelve months.
LEGAL PROCEEDINGS
Juno Online Services, Inc., registrant of the federally registered mark
E-MAIL WAS MEANT TO BE FREE, recently filed an action against us in the Federal
District Court for the Southern District of New York, Civil Action No. 00 CIV.
2080, for trademark infringement, unfair competition and misrepresentation and
dilution under federal, state and common law arising from our use of the mark
BECAUSE THE INTERNET WAS MEANT TO BE FREE. In its complaint, Juno is seeking an
injunction against us and punitive damages. In addition, WebPower, Inc.,
applicant for federal registration of the mark IFRIENDS, has asserted that our
use of the mark FREEIFRIENDS infringes WebPower's mark.
Any such claims, and any resultant litigation, could subject us to
significant liability for damages and could result in the invalidation of our
proprietary rights. These or other claims or litigation may also result in
limitations on our ability to use such trademarks, patents and other
intellectual property unless we enter into arrangements with such third parties,
which may be unavailable on commercially reasonable terms. We do not believe
that the result of these claims will have a material adverse effect on our
business. We are not a party to any other material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- -----------------------------------------------------
<S> <C> <C>
Robert McCausland...................... 39 Chairman of the Board, President and Chief Executive
Officer
Ned Menninger.......................... 37 Chief Financial Officer
Steve Bourg............................ 23 Chief Technical Officer
Robert Pack............................ 44 Vice President, Sales
Laura Stutsman......................... 39 Vice President, Marketing
Rod Hamlin............................. 34 Vice President, Business Development
Ron Erickson(1)........................ 56 Director
Mark Stevens(1)........................ 40 Director
William Owens(1)....................... 59 Director
Naveen Jain............................ 40 Director
</TABLE>
- ------------------------
(1) Member of audit and compensation committees
ROBERT MCCAUSLAND, PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE
BOARD. Mr. McCausland is our founder and has been our president, chief
executive officer and chairman of the board since our incorporation in
September 1998. Prior to that, Mr. McCausland founded Home Mortgage USA, a
commercial and residential lender, in February 1993. Mr. McCausland was the sole
owner and served as chief executive officer of Home Mortgage USA through January
1999. At the time Mr. McCausland sold Home Mortgage USA in August 1999, it had
approximately 135 employees and operated in 46 states. Mr. McCausland graduated
cum laude with a bachelor's degree in business management and marketing from
Southern Oregon State College and graduated cum laude from City University with
a master's degree in business administration.
NED MENNINGER, CHIEF FINANCIAL OFFICER. Mr. Menninger has been our chief
financial officer since October 1999. Prior to joining our company,
Mr. Menninger was co-founder, vice president and chief financial officer of
Puresource, a biomedical technology company, from March 1998 to August 1999.
From August 1995 to March 1998, Mr. Menninger worked at Microsoft Corporation as
a manager in the strategic business decisions group, and from January 1993 to
August 1995 Mr. Menninger was the co-founder and chief financial officer of Dare
to Dream Intertainment, which was acquired by Microsoft in August 1995. Prior to
that, Mr. Menninger served as chief financial officer at Sequoia Capital, a
venture capital firm, for three years. Mr. Menninger is a certified public
accountant and holds a bachelor's degree in business administration from the
University of Southern California.
STEVE BOURG, CHIEF TECHNICAL OFFICER. Mr. Bourg has been our chief
technical officer since our incorporation in September 1998. Before joining our
company, Mr. Bourg served as the director of technology at Home Mortgage USA
from July 1995 to October 1998.
ROBERT PACK, VICE PRESIDENT, SALES. Mr. Pack has been our vice president,
sales since October 1999. Mr. Pack was the vice president of sales at NetZero
from July 1998 to August 1999. Prior to that,
from February 1997 to July 1998 Mr. Pack served as an independent consultant to
several Internet companies, and from May 1996 to January 1997 he served as
director of worldwide sales at
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Cybergold Inc. From May 1994 to May 1996, Mr. Pack was the director of sales for
AOL. Mr. Pack holds a bachelor's degree in business from the University of
Southern California.
LAURA STUTSMAN, VICE PRESIDENT, MARKETING. Ms. Stutsman has been our vice
president, marketing since October 1999. Prior to her employment with us,
Ms. Stutsman worked at PACCAR Automotive, Inc., a subsidiary of PACCAR Inc.,
from June 1988 to October 1999 where she held various positions, most recently
as vice president of marketing and pricing. At PACCAR, Ms. Stutsman supervised
all aspects of marketing for a 200-store retail chain including advertising,
promotions, merchandising/store design, e-commerce, customer service programs
and corporate communications. Prior to her employment at PACCAR, Ms. Stutsman
held senior positions in national and international advertising agencies,
including media director at Ferguson-Propp & Associates from December 1986 to
June 1988, providing strategic guidance to clients such as Computerland, Apple
Computer, NEC and Toshiba. Ms. Stutsman earned a bachelor's degree in
communications from the University of California at Santa Barbara.
ROD HAMLIN, VICE PRESIDENT, BUSINESS DEVELOPMENT. Mr. Hamlin has been our
vice president, business development since September 1999. Prior to that,
Mr. Hamlin worked at Onyx Software, Inc., a provider of web-based customer
relationship management solutions, where he served as vice president of
worldwide channel sales from December 1998 to September 1999 and director of
international sales from May 1997 to December 1998. During his employment at
Onyx, Mr. Hamlin oversaw the establishment of subsidiaries and strategic
partnerships in over 22 countries. Prior to his employment at Onyx, Mr. Hamlin
served as director of business development for Saros Corporation, a software
development company, from December 1992 to May 1997, building and managing
relationships with major internet service and product providers. After Saros was
acquired by FileNET Corporation in December 1995, Mr. Hamlin was appointed
director of business development and international sales for FileNET's Saros
business unit. Mr. Hamlin earned bachelor's degrees in journalism and computer
science from Pacific Lutheran University and completed graduate studies in
business at Seattle University.
MARK A. STEVENS, DIRECTOR. Mr. Stevens has been a director of our company
since August 1999. Mr. Stevens joined Sequoia Capital, a venture capital firm,
in 1989 and has been a general partner of Sequoia Capital since 1993.
Mr. Stevens serves on the boards of directors of MP3.com, an online music
internet company, NVidia Corporation, a supplier of graphics processors and
software, Medicalogic, Inc., an online health records company, and Terayon
Communications, Inc., a broadband equipment supplier, and several privately held
companies. Mr. Stevens received bachelor's and master's degrees in computer
engineering from the University of Southern California and a master's degree in
business administration from Harvard University.
RON ERICKSON, DIRECTOR. Mr. Erickson has been a director of our company
since December 1999. Mr. Erickson is currently the chairman of the board of
eCharge Corporation, an online payment company, a position he has held since
November 1999, and from September 1998 to November 1999 he served as the chief
executive officer of eCharge. Prior to his employment at eCharge, Mr. Erickson
served as chairman of the board, president, chief executive officer and a
director of GlobalTel Resources, Inc., a provider of telecommunications services
and messaging and intranet solutions, from January 1995 to August 1998. From
August 1994 to January 1995, he was managing director of Globalvision L.L.C., an
international strategic consulting firm, and from September 1992 to
August 1994, he served variously as chairman and vice chairman of the board,
president and chief executive officer of Egghead Software, Inc., a retailer of
software and computer peripheral products. Currently, Mr. Erickson is also a
director of Upgrade International, a publicly traded storage technology company,
and Intrinsyc Software, Inc., a developer of software tools and components.
Mr. Erickson holds a degree from Central Washington University, a master's
degree from the University of Wyoming and a juris doctorate from the University
of California at Davis School of Law.
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WILLIAM OWENS, DIRECTOR. Mr. Owens has been a director of our company since
February 2000. Mr. Owens is currently the co-chief executive officer and vice
chairman of Teledesic Corporation, a developer of a global satellite
communications network, a position he has held since August 1998. Previously,
Mr. Owens was president, chief operating officer and vice chairman of Science
Applications International, a systems integrator telecommunications company,
from March 1996 to August 1998. From February 1994 to February 1996, Mr. Owens
was vice chairman of the Joint Chiefs of Staff. Mr. Owens has also served as the
deputy chief of Naval Operations of Resources, Warfare Requirements and
Assessments, commander of the U.S. Sixth Fleet, senior military assistant to
Secretaries of Defense Frank Carlucci and Dick Cheney, and director of the
Office of Program Appraisal for the Secretary of the Navy. Mr. Owens currently
serves on the boards of directors of ViaSat, Inc., a broadband digital satellite
communications company, Microvision, Inc., a retinal imaging technology company,
Polycom, Inc., an audioconferencing technology company, and BioLase
Technology, Inc., a biomedical laser technology company. Mr. Owens is a graduate
of the U.S. Naval Academy with a bachelor's degree in mathematics. He has
bachelor's and master's degrees in politics, philosophy and economics from
Oxford University and a master's in management from George Washington
University.
NAVEEN JAIN, DIRECTOR. Mr. Jain has been a director of our company since
March 2000. Mr. Jain has served as chief executive officer of InfoSpace, an
internet portal, since its inception in March 1996, as its president since its
inception to November 1998, and as its sole director from its inception to
June 1998, when he was appointed chairman of the board. From June 1989 to
March 1996, Mr. Jain held various positions at Microsoft Corporation, including
group manager for MSN, Microsoft's online service. Mr. Jain holds a degree from
the University of Roorkee and a master's degree in business administration from
St. Xavier's School of Management.
BOARD OF DIRECTORS
We have five directors. Currently all directors hold office until the next
annual meeting of shareholders or until their successors are duly elected, and
will continue to do so following the closing of this offering. However, our
amended and restated articles of incorporation will provide that as of the
closing of this offering, our board of directors will be divided into three
classes, each with staggered three-year terms. As a result, only one class of
directors will be elected at each annual meeting of our shareholders, with the
other classes continuing for the remainder of their respective three-year terms.
COMMITTEES
Our board of directors currently has an audit committee and a compensation
committee. The audit committee consists of Mr. Owens, Mr. Erickson and
Mr. Stevens. The audit committee makes recommendations to our board of directors
regarding the selection of independent auditors, reviews the scope of audit and
other services by our independent auditors, reviews the accounting principles
and auditing practices and procedures to be used for our financial statements
and reviews the results of our audits. The compensation committee consists of
Mr. Erickson and Mr. Stevens. The compensation committee reviews and approves
the compensation and benefits for our executive officers, grants stock options
under our stock option plan and makes recommendations to our board of directors
on compensation matters.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between any member of our board of
directors or compensation committee and any member of the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.
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In August 1999, we sold 9,624,148 shares of Series A Preferred Stock to
Sequoia Capital and its affiliates for aggregate consideration of $10 million.
Mark Stevens, a managing director of Sequoia, became a director of our company
in connection with this investment.
In November 1999, we sold 1,242,124 shares of Series B Preferred Stock to
MP3.com, Inc. for aggregate consideration of $10 million. Mr. Stevens is a
director of MP3.com.
Upon closing of this offering, each outstanding share of preferred stock
will convert into one share of common stock.
In addition, each of Messrs. Stevens, Erickson and Owens have been granted
options to purchase shares of common stock under our stock option plan. See
"--Compensation."
COMPENSATION
Our directors are reimbursed for expenses incurred in connection with
attending board and committee meetings but are not otherwise compensated for
their services as board members. In addition, we granted to:
- Mark Stevens, effective as of August 12, 1999, an option to purchase up to
160,000 shares of common stock at an exercise price of $0.50 per share,
which option vests over four years;
- Ron Erickson, effective as of December 3, 1999, an option to purchase up
to 160,000 shares of common stock at an exercise price of $1.00 per share,
which option vests over four years; and
- William Owens, effective as of March 24, 2000, an option to purchase up to
160,000 shares of common stock at an exercise price of $5.00 per share,
which option vests over four years.
EXECUTIVE OFFICERS
Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors and
officers.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation for services rendered
to us in all capacities during the fiscal year ended December 31, 1999 by our
chief executive officer. No other executive officer received salary and/or bonus
from us for fiscal 1999 in excess of $100,000.
<TABLE>
<CAPTION>
ANNUAL LONG-TERM ALL OTHER
COMPENSATION COMPENSATION COMPENSATION
------------------- ----------------------- ---------------------
SECURITIES HEALTH LIFE AND
UNDERLYING INSURANCE DISABILITY MOVING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(#S) PREMIUMS PREMIUMS EXPENSES
- --------------------------- -------- -------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert McCausland
PRESIDENT AND CHIEF EXECUTIVE OFFICER......... $74,000 $ -- -- $ -- $ -- $ --
</TABLE>
OPTION GRANTS IN FISCAL YEAR 1999
We did not grant to our chief executive officer any stock options during the
fiscal year ended December 31, 1999.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1999 AND FISCAL YEAR-END OPTION VALUES
Our chief executive officer did not exercise any options during the fiscal
year ended December 31, 1999.
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EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
Our board of directors adopted and our shareholders approved our stock
option plan on March 31, 1999. As of December 31, 1999, we had reserved a total
of 8,421,128 shares of common stock for issuance under the stock option plan.
The stock option plan provides for the granting to our employees, including
officers and directors, of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986 and for the granting to
employees, consultants and non-employee directors of nonstatutory stock options.
If an optionee would have the right in any calendar year to exercise for the
first time incentive stock options for shares having an aggregate fair market
value (determined for each share as of the date the option to purchase the
shares was granted) in excess of $100,000, any such excess options shall be
treated as nonstatutory stock options. Unless terminated earlier by our board of
directors, the plan will terminate on April 9, 2009. As of December 31, 1999,
options to purchase 4,171,560 shares of common stock were outstanding under this
plan and no shares had been issued upon exercise of options.
The stock option plan may be administered by our board of directors or a
committee of our board. Our board of directors determines the terms of each
option granted under the stock option plan, including the number of shares
subject to an option, exercise price, vesting schedule and duration. The
exercise price of all incentive stock options granted under the stock option
plan cannot be less than the fair market value of the common stock on the date
of grant and, in the case of incentive stock options granted to holders of more
than 10% of our voting power, not less than 110% of the fair market value.
Generally, options granted under the stock option plan have a term of ten years,
vest annually over a four-year period and are nontransferable. Payment of the
exercise price of options may be made in cash or other consideration as
determined by our board of directors.
Our board of directors has the authority to amend or terminate the stock
option plan as long as such action does not adversely affect any outstanding
option and provided that shareholder approval for any amendments to the stock
option plan shall be obtained to the extent required by applicable law.
EMPLOYEE STOCK PURCHASE PLAN
Our board of directors and shareholders adopted an employee stock purchase
plan in March 2000. We will implement the employee stock purchase plan effective
as of the date of this prospectus. The employee stock purchase plan provides a
convenient and practical means by which employees may participate in stock
ownership. Our board of directors believes that the opportunity to acquire a
proprietary interest in our success through the acquisition of shares of common
stock pursuant to the employee stock purchase plan is an important aspect of our
ability to attract and retain highly qualified and motivated employees. The
employee stock purchase plan is intended to qualify as an "employee stock
purchase plan" within the meaning of Section 423 of the Internal Revenue Code.
The employee stock purchase plan may be administered by our board of directors
or by a committee appointed by our board of directors. The plan administrator
has the power to make and interpret all rules and regulations it deems necessary
to administer the employee stock purchase plan. Our board of directors has broad
authority to amend the employee stock purchase plan, subject in some instances
to shareholder approval. All of our employees who customarily work more than
20 hours per week, including our officers, are eligible to participate in the
employee stock purchase plan. Eligible employees may elect to contribute from 1%
to 10% of the compensation paid to them during each pay period towards stock
purchases under the plan. Other than the first offering, which will have a
duration of approximately 17 months, each participant may enroll in an 18-month
offering in which shares of common stock are purchased on the last day of each
six-month period during the offering. The first offering will commence on the
date of this prospectus and will terminate on November 14, 2001. Thereafter, a
separate offering will commence on November 15 and May 15 of each year. The
purchase
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price for shares purchased under the employee stock purchase plan will be equal
to 85% of the lower of:
- the fair market value of our common stock on the enrollment date of the
offering; or
- the fair market value on the date of purchase.
Neither payroll deductions credited to an employee's account nor any rights with
regard to the purchase of shares under the employee stock purchase plan may be
assigned, transferred, pledged or otherwise disposed of in any way by a
participant, except that a participant may designate a beneficiary in the event
of his or her death.
Upon termination of employment due to death, retirement or disability, the
payroll deductions credited to an employee's account will be used to purchase
shares on the next purchase date. Any remaining balance will be returned to the
participant or his or her beneficiary. Upon termination of employment for any
other reason, any payroll deductions credited to an employee's account will be
returned to the participant. We have authorized the issuance of up to 2,000,000
shares of common stock under the employee stock purchase plan. In the event of a
merger, consolidation or acquisition by another corporation of all or
substantially all of our assets, each outstanding right to purchase shares under
the employee stock purchase plan shall be assumed or an equivalent stock
purchase right substituted by the successor corporation. If the successor
corporation refuses to assume or substitute for the stock purchase right, the
offering period during which a participant may purchase stock will be shortened
to a specified date before the proposed merger or sale. Similarly, in the event
of our liquidation or dissolution, the offering period during which a
participant may purchase stock will be shortened to a specified date before the
date of the liquidation or dissolution.
401(K) PLAN
Effective as of February 1, 1999, our board of directors adopted a
tax-qualified employee savings and retirement plan for eligible U.S. employees.
Eligible employees may elect to defer a percentage of their eligible
compensation in the 401(k) plan, subject to the statutorily prescribed annual
limit. Our board has the discretion to make matching contributions on behalf of
all participants in the 401(k) plan in such amounts as it determines, provided
that the matching contributions must apply uniformally across all plan
participants. We intend the 401(k) plan to qualify under Sections 401(k) and 501
of the Internal Revenue Code so that contributions by employees or us to the
401(k) plan, and income earned, if any, on plan contributions, are not taxable
to employees until withdrawn from the 401(k) plan, and so that we will be able
to deduct our contributions when made. The trustee of the 401(k) plan, at the
direction of each participant, invests the assets of the 401(k) plan in any of a
number of investment options.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
On November 11, 1999, Robert McCausland entered into a three-year employment
agreement with us as our president and chief executive officer. The agreement
provides for an annual salary of $120,000 per year. The annual salary is
reviewed on a yearly basis and any increase is at the discretion of our board of
directors. Mr. McCausland receives employee benefits that include three weeks
annual vacation leave and reimbursement for all reasonable business and travel
expenses incurred in connection with the performance of services under the
agreement, and he is entitled to participate in our medical and dental plans,
life and disability insurance plans and retirement plans pursuant to their terms
and conditions consistent with our policies for senior executives.
Mr. McCausland initially owned 22,800,000 shares of common stock. This stock
was restricted under the terms of Mr. McCausland's employment agreement. Of
these shares, 5,700,000 vested on August 13, 1999 when we entered into a stock
purchase agreement with Sequoia Capital and its
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affiliates. The remaining 17,100,000 shares fully vest upon an initial public
offering, Mr. McCausland's termination with us, the sale of substantially all of
our assets or the merger of us into another entity. In the absence of one of
these events, the 17,100,000 shares will vest in equal amounts of 475,000 per
month.
On November 11, 1999, Steve Bourg entered into a three-year employment
agreement with us as our chief technical officer. The agreement provides for an
annual salary of $100,000 per year. The annual salary is reviewed on a yearly
basis and any increase is at the discretion of our board of directors.
Mr. Bourg receives employee benefits that include three weeks annual vacation
leave, reimbursement for all reasonable business and travel expenses incurred in
connection with the performance of services under the agreement, and he is
entitled to participate in our medical and dental plans, life and disability
insurance plans and retirement plans pursuant to their terms and conditions
consistent with our policies for senior executives.
Mr. Bourg initially owned 800,000 shares of common stock. This stock was
restricted under the terms of Mr. Bourg's employment agreement. Of these shares,
200,000 vested on August 13, 1999 when we entered into a stock purchase
agreement with Sequoia Capital and its affiliates. The remaining 600,000 shares
fully vest upon an initial public offering, Mr. Bourg's termination with us, the
sale of substantially all of our assets or the merger of us into another entity.
In the absence of one of these events, the 600,000 shares will vest in equal
amounts of 16,666.6 shares per month.
Our stock option plan provides that in the event a third party acquires us
through the purchase of all or substantially all of our assets, a merger or
other business combination, unless the options are assumed by the acquiring
company, the unexercised portion of outstanding options will vest and become
immediately exercisable.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
Our articles of incorporation limit the liability of directors and officers
to the fullest extent currently permitted by the Washington Business Corporation
Act or as it may be amended in the future. Consequently, subject to the WBCA, no
director will be personally liable to us or our shareholders for monetary
damages resulting from his conduct as our director, except liability for:
- acts or omissions involving intentional misconduct or knowing violations
of law;
- unlawful distributions; or
- transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally entitled.
Our articles of incorporation also provide that we shall indemnify any
individual made a party to a proceeding because that individual is or was one of
our directors or officers and shall advance or reimburse reasonable expenses
incurred by such individual in advance of the final disposition of the
proceeding to the fullest extent permitted by applicable law. Any repeal of or
modification to our articles of incorporation may not adversely affect any right
of any of our directors who is or was a director at the time of such repeal or
modification. To the extent the provisions of our articles of incorporation
provide for indemnification of directors for liabilities arising under the
Securities Act, those provisions are, in the opinion of the Securities and
Exchange Commission, against public policy as expressed in the Securities Act
and are therefore unenforceable.
Finally, we intend to purchase and maintain a liability insurance policy,
pursuant to which our directors and officers will be indemnified against
liability they may incur for serving in their capacities as our directors and
officers. We believe that the limitation of liability provisions in our articles
of incorporation and the liability insurance policy will facilitate our ability
to continue to attract and retain qualified individuals to serve as our
directors and officers.
47
<PAGE>
RELATED-PARTY TRANSACTIONS
In August 1999, we sold 9,624,148 shares of Series A Preferred Stock for an
aggregate purchase price of $10 million. Purchasers of our Series A Preferred
Stock were Sequoia Capital and its affiliates, who collectively hold more than
5% of our outstanding common stock on an as-converted basis, and of which one of
our directors, Mark Stevens, is a managing director. Mr. Stevens was elected to
our board of directors under the terms of the stock purchase agreement pursuant
to which the investors purchased the Series A Preferred Stock.
In November 1999, we sold 3,105,310 shares of Series B Preferred Stock for
an aggregate purchase price of $25 million. One of the purchasers of our
Series B Preferred Stock was MP3.com, Inc., which holds 1,242,124 shares of
common stock on an as-converted basis, and of which one of our directors, Mark
Stevens, is a director.
In March 2000, we sold 2,703,755 shares of Series C Preferred Stock for an
aggregate purchase price of $53 million. Purchasers of our Series C Preferred
Stock included InfoSpace, which purchased 254,543 shares, and Internet Ventures
LLC, which purchased 152,726 shares. Mr. Jain, one of our directors, is the
chief executive officer and a director of InfoSpace and is a member of Internet
Ventures.
Upon the closing of this offering, each outstanding share of preferred stock
will convert into one share of common stock. In connection with the sale of the
preferred stock, the investors were granted registration rights, and we may
therefore become obligated to effect registrations under the Securities Act of
shares of common stock held by these investors upon the conversion of their
preferred stock.
In June 1999, we entered into a master equipment lease agreement with
Partners Capital Group which was guaranteed by Home Mortgage USA, a company
wholly owned by Robert McCausland, our president and chief executive officer. No
consideration was given by us in exchange for this guarantee.
In addition, in November 1998 we entered into a master equipment lease
agreement with Ascend Credit Corporation on which Home Mortgage USA served as
our co-lessee, and in each of May and August 1999 we entered into purchase and
sale leaseback agreements with Ascend on which Home Mortgage USA served as our
co-seller. No consideration was given by us in exchange for the agreement of
Home Mortgage USA to serve as co-lessee.
During 1999, Home Mortgage USA paid expenses on our behalf including rent,
office supplies and utilities. These expenses totalled $205,000.
In November 1999, we entered into an advertising, promotion and marketing
agreement with MP3.com, Inc. Under the agreement, we will purchase from MP3.com
advertising, promotion and marketing services in the amount of $4,000,000.
In November 1999, we entered into an internet content agreement with
InfoSpace whereby we license from InfoSpace content for placement on our
website. In March 2000, we entered into an agreement with InfoSpace whereby we
provide certain private label services to InfoSpace. In addition, in
March 2000, we entered into a phone site service agreement with InfoSpace
whereby we agreed to jointly offer our services on wireless devices. InfoSpace
currently holds 254,432 shares of our common stock on an as-converted basis and
Mr. Jain, one of our directors, is the chief executive officer and a director of
InfoSpace.
All transactions between us and our officers, directors and principal
shareholders and their affiliates were subject to approval by a majority of our
independent directors and we believe were on terms no less favorable to us than
we could obtain from unaffiliated third parties. Our board has adopted a policy
that all such future transactions will be subject to similar criteria.
48
<PAGE>
We granted options to purchase shares of common stock to the following
officers and directors on the date, for the number of shares and with an
exercise price indicated opposite each person's name:
<TABLE>
<CAPTION>
EFFECTIVE NUMBER OF SHARES
NAME GRANT DATE UNDERLYING OPTIONS EXERCISE PRICE
- ---- ---------- ------------------ --------------
<S> <C> <C> <C>
Ned Menninger........................................ 10/11/99 360,000 $1.00
Steve Bourg.......................................... 04/01/99 254,540 0.50
Rod Hamlin........................................... 11/22/99 360,000 1.00
03/24/00 240,000 5.00
Robert Pack.......................................... 10/11/99 600,000 1.00
Laura Stutsman....................................... 10/25/99 250,000 1.00
03/24/00 150,000 5.00
Mark Stevens......................................... 08/12/99 160,000 0.50
Ron Erickson......................................... 12/03/99 160,000 1.00
William Owens........................................ 03/24/00 160,000 5.00
</TABLE>
49
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 26, 2000, and as adjusted to reflect
the sale of the common stock offered hereby, by:
- each shareholder known by us to own beneficially more than 5% of our
outstanding common stock;
- each of our directors;
- each of our named executive officers; and
- all current executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. For purposes of calculating the number of
shares beneficially owned by a shareholder and the percentage ownership of that
shareholder, shares of common stock subject to options that are currently
exercisable or exercisable within 60 days of March 26, 2000 by that shareholder
are deemed outstanding. These options are listed below under the heading "Number
of Shares Underlying Options" and are not treated as outstanding for the purpose
of computing the percentage ownership of any other shareholder. Percentage
ownership is based on 42,522,213 shares of common stock outstanding on
March 26, 2000, assuming conversion of all currently outstanding shares of
preferred stock, and shares outstanding upon completion of this
offering.
Unless otherwise noted below, the address for each shareholder below is: c/o
Freei Networks, Inc., 2505 South 320(th) Street, Federal Way, WA 98003. Unless
otherwise noted, we believe that each of the shareholders has sole investment
and voting power with respect to the common stock indicated, except to the
extent shared by spouses under applicable law.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OUTSTANDING
OF SHARES ---------------------
NUMBER OF UNDERLYING BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OPTIONS OFFERING OFFERING
- ------------------------------------ ---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Robert McCausland(1).................................. 22,800,000 -- 53.6% %
Entities affiliated with Sequoia Capital(2)........... 9,624,148 -- 22.6
c/o Sequoia Capital
3000 Sand Hill Road, Suite 280
Menlo Park, California 94025
Mark Stevens(3)....................................... 9,624,148 -- 22.6
Naveen Jain(4)........................................ 407,269 -- 1.0
William Owens......................................... -- -- --
Ron Erickson.......................................... -- -- --
All executive officers and directors as a group
(10 persons)(5)..................................... 33,707,780 63,635 79.3% %
</TABLE>
- --------------------------
* Less than 1%
(1) Includes 800,000 shares of common stock subject to a pledge agreement for
which Mr. McCausland retains voting and investment power.
(2) Includes 7,190,200 shares held by Sequoia Capital IX, 1,106,778 shares held
by Sequoia Capital Angel Fund and 1,327,170 shares held by Sequoia Capital
IX Principals Fund.
(3) Includes 7,190,200 shares held by Sequoia Capital IX, 1,106,778 shares held
by Sequoi Capital Angel Fund and 1,327,170 shares held by Sequoia Capital IX
Principals Fund, all of which are funds managed by Sequoia Capital.
Mr. Stevens is a managing director of Sequoia Capital. Mr. Stevens directly
or indirectly shares voting and investment power with respect to such shares
but disclaims beneficial ownership.
(4) Represents 254,542.93 shares held by InfoSpace, of which Mr. Jain is the
chief executive officer and a director, and 152,725.76 shares held by
Internet Ventures LLC, of which Mr. Jain is a member. Mr. Jain disclaims
beneficial ownership of the shares owned by InfoSpace.
(5) See footnotes 1 through 4 above. Includes 800,000 shares held by Steve Bourg
directly, 63,635 shares that are issuable upon the exercise of an option
held by Mr. Bourg and 76,362.88 shares held by Robert Pack.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, we will be authorized to issue up to
400,000,000 shares of common stock, no par value, and 20,000,000 shares of
preferred stock, no par value. The following is a summary of the material
provisions of our common stock and preferred stock. We encourage you to read the
provisions of our articles of incorporation and bylaws which are included as
exhibits to the registration statement of which this prospectus is a part, and
the applicable provisions of Washington law, before investing in the common
stock.
COMMON STOCK
As of March 26, 2000, assuming conversion of all currently outstanding
shares of preferred stock, there were 42,522,213 shares of common stock
outstanding that were held of record by 89 shareholders. After giving effect to
the sale of common stock offered in this offering, there will be shares of
common stock outstanding, assuming no exercise of outstanding options. As of
December 31, 1999, there were outstanding options to purchase a total of
4,171,560 shares of common stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the shareholders. Subject to preferences that may be
granted to any outstanding shares of preferred stock, the holders of common
stock are entitled to receive ratably only those dividends our board of
directors declares out of funds legally available for the payment of dividends
as well as any other distributions to the shareholders.
If we are liquidated, dissolved or wound-up, the holders of common stock are
entitled to share pro rata all of our assets remaining after payment of our
liabilities and liquidation preferences of any then-outstanding shares of
preferred stock. Holders of common stock have no preemptive rights or rights to
convert their common stock into any other securities. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and non-assessable, and the shares of common
stock to be issued in this offering will be fully paid and non-assessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred stock
will be converted into 15,433,213 shares of common stock. Thereafter, pursuant
to our amended and restated articles of incorporation, our board of directors
will have the authority, without further action by the shareholders, to issue up
to 20,000,000 shares of preferred stock in one or more series and to fix the
relative designations, powers, preferences and privileges of the preferred
stock, any or all of which may be greater than the rights of the common stock.
Our board of directors, without shareholder approval, can issue preferred stock
with voting, conversion or other rights that could adversely affect the voting
power and other rights of the holders of common stock. Preferred stock could
thus be issued quickly with terms that could delay or prevent a change in
control of us or make removal of our management more difficult. Additionally,
the issuance of preferred stock may decrease the market price of the common
stock and may adversely affect the voting and other rights of the holders of
common stock. We have no present plans to issue any preferred stock.
REGISTRATION RIGHTS
CONVERTIBLE PREFERRED STOCK
After this offering, the holders of 15,764,763 shares of common stock,
including 331,550 shares issuable upon the exercise of an outstanding warrant,
will be entitled to rights with respect to the registration of such shares under
the Securities Act pursuant to an investor rights agreement among such holders
and us dated August 12, 1999, as amended, and the warrant agreement. Under the
terms
51
<PAGE>
of these agreements, if we propose to register any of our securities under the
Securities Act, either for our own account or for the account of other security
holders exercising registration rights, such holders are entitled to notice of
the registration and to include their shares of common stock in the registration
at our expense. Additionally, such holders are entitled to demand registration
rights pursuant to which they may require us to file registration statements
under the Securities Act at our expense with respect to their shares of common
stock. All of these registration rights are subject to the right of the
underwriters of an offering to limit the number of shares included in such
registration. The holders of these registration rights have agreed to enter into
lock-up agreements and to waive their registration rights until 180 days
following the closing of this offering.
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION,
BYLAWS AND WASHINGTON LAW
Our board of directors, without shareholder approval, has the authority
under our articles of incorporation to issue preferred stock with rights
superior to the rights of the holders of common stock. As a result, preferred
stock could be issued quickly and easily, could adversely affect the rights of
holders of common stock and could be issued with terms calculated to delay or
prevent a change in control of us or make removal of our management more
difficult. In addition, as of the closing of this offering, our board of
directors will be divided into three classes. The directors in each class will
serve for three-year terms, one class being elected each year by our
shareholders, and directors can only be removed for cause. This system of
electing and removing directors may tend to discourage a third party from making
a tender offer or otherwise attempting to obtain control of our company because
it generally makes it more difficult for shareholders to replace a majority of
the directors.
Chapter 19 of the Washington Business Corporation Act generally prohibits a
"target corporation" from engaging in certain significant business transactions
with an "acquiring person," which is defined as a person or group of persons
that beneficially owns 10% or more of the voting securities of the target
corporation, for a period of five years after the acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members of
the target corporation's board of directors prior to the time of acquisition.
Prohibited significant business transactions include, among other things:
- a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
- termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the shares;
or
- allowing the acquiring person to receive any disproportionate benefits as
a shareholder.
After the five-year period, a "significant business transaction" may occur
as long as it complies with certain "fair price" provisions of the statute. A
corporation may not "opt out" of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of our company.
Upon the completion of this offering, a member of our board of directors may
be removed from the board only for an action by the director involving willful
malfeasance having a material adverse effect on us, or if that director is
convicted of a felony. A director may not, however, be removed from the board of
directors if the director believed such action was not opposed to the best
interests of our company or is entitled to be indemnified for such action by us
under our articles of incorporation. As a result, our shareholders will not be
able to remove a member of the board of directors without cause, except by
taking action at a meeting of shareholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C. The transfer agent's address is 520 Pike Street,
Suite 1220, Seattle, Washington 98101, and its telephone number is
(206) 292-3795.
52
<PAGE>
NATIONAL MARKET LISTING
We intend to apply to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "FREI."
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of shares of our common stock in the
public market could adversely affect prevailing market prices. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of contractual and legal restrictions on resale, as
described below, sales of substantial amounts of common stock in the public
market after the restrictions lapse could adversely affect the prevailing market
price.
Upon completion of this offering, we will have shares ( shares if
the underwriters' over-allotment option is exercised in full) of common stock
outstanding, including the 9,624,148 shares of common stock issuable upon the
automatic conversion of our series A preferred stock, 3,105,310 shares of common
stock issuable upon the automatic conversion of our series B preferred stock and
2,703,755 shares of common stock issuable upon the automatic conversion of our
series C preferred stock, each upon the closing of this offering, and also
assuming no exercise of options or warrants after March 26, 2000.
The shares ( shares if the underwriters' over-allotment option is
exercised in full) sold in this offering will be freely tradable in the public
market without restriction under the Securities Act, unless such shares are held
by our "affiliates," as that term is defined in Rule 144 under the Securities
Act.
The remaining shares of common stock that will be outstanding
after this offering will be restricted shares because they were sold in private
transactions in reliance on exemptions from registration under the Securities
Act. Substantially all of these restricted securities are entitled to demand and
piggy-back registration rights as described below.
The following table shows the timing of when shares outstanding on
March 26, 2000, assuming conversion of all currently outstanding shares of
preferred stock, may be eligible for resale in the public market after
effectiveness of this offering assuming no exercise of options or warrants after
December 31, 1999, and excluding:
- 4,171,560 shares of common stock that are reserved for issuance upon
exercise of stock options outstanding as of December 31, 1999; and
- 3,518,524 shares of common stock reserved for issuance upon exercise of
warrants outstanding as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ------------------------------ ------------------------------------------------------------
<S> <C>
..................... - Closing of this offering
39,818,458.................... - After 180 days from the date of this prospectus, subject,
in some cases, to limitations under Rule 144
2,290,886..................... - At March 7, 2001, subject, in some cases, to limitations
under Rule 144
412,869....................... - At March 31, 2001, subject, in some cases, to limitations
under Rule 144
</TABLE>
S-8 REGISTRATION STATEMENTS
As of December 31, 1999, there were a total of 4,171,560 shares of common
stock subject to outstanding options under our stock option plan, none of which
were vested. Within 90 days after effectiveness of this offering, we intend to
file a registration statement on Form S-8 under the Securities Act to register
shares of common stock issued or reserved for future issuance under our stock
option plan and our employee stock purchase plan. After the effective dates of
the registration
54
<PAGE>
statement on Form S-8, shares purchased upon the exercise of options granted
pursuant to our stock option plan and employee stock purchase plan generally
would be available for resale in the public market without restriction.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares (as that term is defined in Rule 144) for at least one year from the
later of the date such shares were acquired from us or, if applicable, the date
they were acquired from an affiliate would be entitled to sell in any
three-month period up to the greater of:
- 1% of the then-outstanding shares of common stock, or approximately
shares immediately after this offering; and
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to requirements concerning the manner
of sale and notice requirements and to the availability of current public
information about us.
RULE 701
Subject to limitations on the aggregate offering price of a transaction, our
employees, directors, officers, consultants or advisors who purchased shares
from us in connection with a written stock or option plan before the effective
date of this offering are entitled to rely on the resale provisions of
Rule 701, subject to the lock-up agreements described above. In general,
Rule 701 permits non-affiliates to sell their Rule 701 shares 90 days after the
effectiveness of a registration statement relating to a company's initial public
offering without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the holding period of
Rule 144.
RULE 144(K)
Under Rule 144(k), a person who has not been one of our affiliates during
the preceding 90 days and who has beneficially owned the restricted shares for
at least two years from the later of the date restricted securities were
acquired from us or, if applicable, the date they were acquired from an
affiliate of ours, is entitled to sell them without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
LOCK-UP AGREEMENTS
All of our officers, directors and significant shareholders have agreed to
enter into lock-up agreements providing that they will not offer, sell, contract
to sell, grant any option to purchase, pledge or otherwise dispose of, or, in
any manner, transfer all or a portion of the economic consequences associated
with the ownership of any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock beneficially owned by them
during the 180-day period following the date of this prospectus without the
prior written consent of Bear, Stearns & Co. Inc. Transfers may be made earlier:
- as a bona fide gift or gifts, provided the donee or donees agree in
writing to be bound by this restriction;
- as a transfer to members of the transferor's immediate family or to trusts
for the benefit of members of the transferor's immediate family, provided
that the transferees agree in writing to be bound by the terms of this
restriction; or
55
<PAGE>
- as a distribution to partners, shareholders or beneficiaries of the
transferor, provided that the distributees agree in writing to be bound by
the terms of this restriction.
In addition, Mr. McCausland has been granted an exemption in his lock up
agreement which provides that he will be permitted to pledge such number of
shares as are necessary to secure the repayment of a $10 million loan from a
financial institution in the event he desires to obtain such a loan. Bear,
Stearns & Co. Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements. When
determining whether or not to release shares from the lock-up agreements, Bear,
Stearns & Co. Inc. will consider, among other factors, the shareholder's reasons
for requesting the release, the number of shares for which the release is being
requested and market conditions at the time.
56
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the underwriters and freeinternet.com, each of the underwriters named
below, through their representatives Bear, Stearns & Co. Inc., Banc of America
Securities LLC, Dain Rauscher Incorporated, Warburg Dillon Read LLC, and Pacific
Crest Securities Inc., has severally agreed to purchase from freeinternet.com
the aggregate number of shares of common stock set forth opposite its name
below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Bear, Stearns & Co. Inc.....................................
Banc of America Securities LLC..............................
Dain Rauscher Incorporated..................................
Warburg Dillon Read LLC.....................................
Pacific Crest Securities Inc................................
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of legal matters by counsel and to various
other customary conditions, including the effectiveness of the registration
statement of which this prospectus forms a part, the continuing accuracy of our
representations to them, their receipt of an opinion of our counsel and a
comfort letter from our accountants, the listing of the stock to be sold in this
offering on the Nasdaq National Market and the absence of an occurrence that
would have a material adverse effect on our business. The nature of the
underwriters' obligations is such that they are committed to purchase and pay
for all of the above shares of common stock, other than those shares covered by
the over-allotment option described below, if any are purchased. The
underwriting agreement also provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the Securities
Act, or will contribute to payments that the underwriters may be required to
make in respect of such liabilities.
The underwriters propose to offer the shares of common stock directly to the
public at the "price to public" set forth on the cover page of this prospectus
and at such price less a concession not in excess of $ per share of
common stock to other dealers who are members of the National Association of
Securities Dealers, Inc. The underwriters may allow, and such dealers may
reallow, concessions not in excess of $ per share of common stock to
other dealers. After the initial public offering, the offering price,
concessions and other selling terms may be changed by the underwriters. The
common stock is offered subject to receipt and acceptance by the underwriters
and to other conditions, including the right to reject orders in whole or in
part.
We have granted a 30-day over-allotment option to the underwriters to
purchase up to an aggregate of additional shares of our common stock
exercisable at the "price to public" less the "underwriting discounts and
commissions," each as set forth on the cover page of this prospectus. If the
underwriters exercise such option in whole or in part, then each of the
underwriters will be severally committed, subject to various customary
conditions, including those described above with respect to the initial purchase
by the underwriters, to purchase the additional shares of common stock in
proportion to their respective purchase commitments as indicated in the
preceding table.
The following table summarizes the compensation and expenses we will pay in
connection with this offering, assuming an initial public offering price of $
per share. The compensation we will pay to the underwriters will consist
solely of the "underwriting discounts and commissions" as set forth on the cover
page to this prospectus. The underwriters have not received and will not receive
from us any other item of compensation or expense in connection with this
offering considered by the National Association of Securities Dealers, Inc. to
be underwriting compensation under its rules of fair practice.
57
<PAGE>
The underwriting discount per share of common stock is % of the initial public
offering price per share of common stock.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions
paid by us............................
Expenses payable by us..................
Deemed compensation paid by us..........
</TABLE>
The principal components of the offering expenses payable by us will include
the fees and expenses of our accountants and attorneys, the fees of our
registrar and transfer agent, the cost of printing this prospectus, The Nasdaq
Stock Market listing fees, and filing fees paid to the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.
The underwriters, at our request, have reserved for sale at the initial
public offering price up to shares of common stock to be sold in this
offering to our employees. The number of shares available for sale to the
general public will be reduced to the extent that any reserved shares are
purchased. Any reserved shares not so purchased will be offered by the
underwriters on the same basis as the other shares offered hereby.
All of our directors, officers and significant shareholders have agreed to
enter into lock-up agreements under which they will not dispose of their shares
of our common stock for a period of 180 days from the date of this prospectus.
See "Shares Eligible for Future Sale--Lock-up Agreements."
In addition, we have agreed that for a period of 180 days after the date of
this prospectus we will not, without the prior written consent of Bear,
Stearns & Co. Inc., offer, sell or otherwise dispose of any shares of common
stock except for the shares of common stock offered hereby and the shares of
common stock issuable upon exercise of currently outstanding options and
warrants.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial offering price for the common stock will be
determined by negotiations between us and the underwriters and will not reflect
the market price of the common stock following the offering. Among the factors
to be considered in such negotiations are:
- our results of operations in recent periods and the information in this
prospectus and otherwise available to the underwriters;
- estimates of our future prospects and the prospects of the industry in
which we compete;
- an assessment of our management;
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies;
- the general state of the securities markets at the time of this offering;
and
- the prices of similar securities of generally comparable companies.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "FREI." We cannot assure you, however, that an active or orderly
trading market will develop for our common stock or that our common stock will
trade in the public markets subsequent to this offering at or above the initial
offering price. Please see "Risk Factors--There has been no prior public market
for our common stock."
In order to facilitate this offering, the representatives and others
participating in this offering may engage in transactions that stabilize,
maintain or otherwise affect the price of the common stock during and after this
offering. Specifically, the underwriters may over-allot or otherwise create a
short position
58
<PAGE>
in the common stock for their own account by selling more shares of common stock
than we have sold to them. The underwriters may elect to cover any such short
position by purchasing shares of common stock in the open market or by
exercising the over-allotment option granted to the underwriters. In addition,
the underwriters may stabilize or maintain the price of the common stock by
bidding for or purchasing shares of common stock in the open market and may
impose penalty bids in accordance with Regulation M under the Securities
Exchange Act, under which selling concessions allowed to syndicate members or
other broker-dealers participating in this offering are reclaimed if shares of
common stock previously distributed in this offering are repurchased in
connection with stabilization transactions or otherwise. The effect of these
transactions may be to stabilize or maintain the market price at a level above
that which might otherwise prevail in the open market. The imposition of a
penalty bid may also affect the price of the common stock to the extent that it
discourages resales thereof. The underwriters have not made any representation
as to the magnitude or effect of any such stabilization or other transactions.
Such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Freei Networks, Inc. by Summit Law Group, PLLC, Seattle, Washington. Some
members of Rainier Investors II, which owns 4,073 shares of our common stock,
are affiliated with Summit Law Group, PLLC. Legal matters in connection with
this offering will be passed upon for the underwriters by Latham & Watkins,
Costa Mesa, California.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for the period
from July 1, 1998 (inception) through December 31, 1998 and for the year ended
December 31, 1999 included in this prospectus have been included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
WHERE TO FIND ADDITIONAL DOCUMENTS
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1. This prospectus, which forms a part of the registration
statement, does not contain all the information included in the registration
statement. Some information is omitted and you should refer to the registration
statement and its exhibits. With respect to references made in this prospectus
to any of our contracts or other documents, such references may not contain all
of the information that is important to you, and you should refer to the
exhibits attached to the registration statement for copies of the actual
contract or document. You may read and copy the registration statement,
including exhibits and schedules filed with it, at the Securities and Exchange
Commission's public reference facilities in Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the Securities and Exchange Commission's public reference
facilities by calling the Securities and Exchange Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains a website (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants, such as us, that file electronically with the Securities
and Exchange Commission.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements under the Exchange Act and, in accordance
with this law, will file periodic reports, proxy statements and other
information with the Securities and Exchange Commission. These periodic reports,
proxy statements and other information will be available for inspection and
copying at the Securities and Exchange Commission's public reference facilities
and the website of the Securities and Exchange Commission referred to above.
59
<PAGE>
FREEI NETWORKS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----------------
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Shareholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7-F-18
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Freei Networks, Inc.
The preferred stock split and the increases in the authorized capital stock
described in paragraphs 2 and 4 of Note 13 to the financial statements have not
been consummated at March 29, 2000. When they have been consummated, we will be
in a position to furnish the following report.
"In our opinion, the accompanying balance sheets and the related
statements of operations, of shareholders' equity (deficit) and of cash
flows present fairly, in all material respects, the financial position of
Freei Networks, Inc. at December 31, 1998 and 1999 and the results of its
operations and its cash flows for the period from July 1, 1998 (inception)
to December 31, 1998 and for the year ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. 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 audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audit provides
a reasonable basis for the opinion expressed above."
PricewaterhouseCoopers LLP
Seattle, Washington
March 29, 2000
F-2
<PAGE>
FREEI NETWORKS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------- DECEMBER 31,
1998 1999 1999 (NOTE 2)
-------- -------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 333 $ 20,342
Accounts receivable, net of allowances of $0 and $52...... -- 358
Prepaid expenses and other current assets................. -- 2,128
----- --------
Total current assets.................................. 333 22,828
Restricted cash............................................. -- 100
Property and equipment, net................................. 585 27,307
Other assets................................................ -- 194
----- --------
Total assets.......................................... $ 918 $ 50,429
===== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.......................................... $ 38 $ 2,663
Accrued liabilities....................................... 7 1,833
Obligations under capital leases.......................... 74 6,461
Note payable.............................................. -- 306
Payable to related party.................................. 261 365
Deferred revenue.......................................... -- 551
----- --------
Total current liabilities............................. 380 12,179
Obligations under capital leases............................ 259 19,943
Note payable................................................ -- 194
----- --------
Total liabilities..................................... 639 32,316
----- --------
Commitments and contingencies
Mandatorily redeemable Series A and B convertible preferred
stock, no par value; 20,000,000 shares authorized; 0 and
12,729,458 issued and outstanding actual, 0 issued and
outstanding pro forma (unaudited)......................... -- 33,892 $ --
----- -------- --------
Shareholders' equity (deficit)
Common stock, no par value; 400,000,000 shares authorized;
24,000,000 and 26,879,000 shares issued and outstanding
actual, 39,608,458 issued and outstanding pro forma
(unaudited)............................................. 551 11,086 44,978
Deferred compensation..................................... -- (7,848) (7,848)
Accumulated deficit....................................... (272) (19,017) (19,017)
----- -------- --------
Total shareholders' equity (deficit).................. 279 (15,779) $ 18,113
----- -------- ========
Total liabilities, mandatorily redeemable convertible
preferred stock and shareholders' equity
(deficit)........................................... $ 918 $ 50,429
===== ========
</TABLE>
The accompanying notes are integral part of these financial statements.
F-3
<PAGE>
FREEI NETWORKS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998
(INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
-------------- ------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Net revenues................................................ $ -- $ 983
Cost of revenues............................................ 78 8,692
------ --------
Gross profit (loss)..................................... (78) (7,709)
------ --------
Operating expenses
Sales and marketing....................................... 52 8,175
Product development....................................... 28 312
General and administrative................................ 115 1,362
Stock-based compensation.................................. -- 876
------ --------
Total operating expenses.................................... 195 10,725
------ --------
Loss from operations.................................... (273) (18,434)
Interest income............................................. 1 156
Interest expense............................................ -- (429)
Other expense............................................... -- (38)
------ --------
Net loss................................................ $ (272) $(18,745)
====== ========
Basic and diluted net loss per share........................ $(0.08) $ (2.16)
====== ========
Shares used to calculate basic and diluted net loss per
share..................................................... 3,279 8,696
====== ========
Pro forma net loss per share (unaudited)
Basic and net diluted loss per share...................... $ (0.62)
========
Shares used to calculate basic and diluted net loss per
share................................................... 30,477
========
</TABLE>
The accompanying notes are integral part of these financial statements.
F-4
<PAGE>
FREEI NETWORKS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- DEFERRED ACCUMULATED
SHARES AMOUNT COMPENSATION DEFICIT TOTAL
---------- -------- ------------ ----------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1998 (inception)........... -- $ -- $ -- $ -- $ --
Issuance of founders' shares.............. 24,000,000 551 551
Net loss.................................. (272) (272)
---------- ------- ------- -------- --------
Balance, December 31, 1998.................. 24,000,000 551 -- (272) 279
Issuance of common stock and warrants..... 2,879,000 1,431 1,431
Issuance of warrants as Series A preferred
stock issue costs....................... 272 272
Warrant issued in conjunction with loan
agreement............................... 108 108
Deferred compensation..................... 8,724 (8,724) --
Amortization of deferred compensation..... 876 876
Net loss.................................. (18,745) (18,745)
---------- ------- ------- -------- --------
$(19,017)
Balance, December 31, 1999.................. 26,879,000 $11,086 $(7,848) $(15,779)
========== ======= ======= ======== ========
</TABLE>
The accompanying notes are integral part of these financial statements.
F-5
<PAGE>
FREEI NETWORKS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998
(INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
-------------- ------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(272) $(18,745)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation and amortization......................... 26 1,857
Non-cash interest expense for warrants................ -- 18
Stock-based compensation.............................. -- 876
Non-cash contribution from founding shareholder....... 152 --
Changes in operating assets and liabilities
Accounts receivable................................. -- (358)
Prepaid expenses and other current assets........... -- (2,059)
Accounts payable.................................... 38 2,625
Accrued liabilities and payable to related party.... 56 1,930
Deferred revenue.................................... -- 551
Other assets........................................ -- (194)
----- --------
Net cash provided by (used in) operating
activities.................................... -- (13,499)
----- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................ (66) (2,169)
Restricted cash........................................... -- (100)
----- --------
Net cash used in investing activities........... (66) (2,269)
----- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Contributions from founding shareholders.................. 399 --
Proceeds from issuance of common stock and warrants....... -- 1,431
Proceeds from issuance of Series A preferred stock, net... -- 9,484
Proceeds from issuance of Series B preferred stock, net... -- 24,680
Principal payments on capital leases...................... -- (318)
Proceeds from issuance of note payable.................... -- 500
----- --------
Net cash provided by financing activities....... 399 35,777
----- --------
Net increase in cash and cash equivalents................... 333 20,009
Cash and cash equivalents
Beginning of period....................................... -- 333
----- --------
End of period............................................. $ 333 $ 20,342
===== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest...................................... $ -- $ 429
===== ========
NON-CASH TRANSACTIONS
Property and equipment acquired under capital lease......... $ 333 $ 26,389
===== ========
Value ascribed to common stock warrants issued in
conjunction with the sale of Series A preferred stock..... $ -- $ 272
===== ========
Value ascribed to common stock warrants issued in
conjunction with note payable............................. $ -- $ 108
===== ========
</TABLE>
The accompanying notes are integral part of these financial statements.
F-6
<PAGE>
FREEI NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
The Company is a leading provider of free internet access and online
services. The Company's internet service offerings are designed to attract and
retain subscribers, provide online advertisers with access to a large consumer
audience and the ability to target its marketing efforts more effectively, and
furnish strategic partners with a wide range of internet solutions. The Company
began development of its service in July 1998, was incorporated in
September 1998 and launched its service in December 1998. The Company currently
provides internet access and online service to subscribers throughout the United
States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses. Actual results could differ from those
estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist of deposits in money market funds and certificates of deposit.
CONCENTRATION OF RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with financial institutions.
At times, such balances with any one financial institution may be in excess of
FDIC insurance limits. The Company's accounts receivable are derived primarily
from revenue earned from customers located in the United States. The Company
extends credit based upon an evaluation of the customer's financial condition
and generally collateral is not required. The Company maintains an allowance for
doubtful accounts based upon the expected collectibility of accounts receivable.
To date such losses have been within management's expectations.
One customer comprised 17% of the accounts receivable balance at
December 31, 1999. No customers comprised greater than 10% of revenues for the
year ended December 31, 1999.
SOURCES OF SUPPLIES
The Company relies on third party networks, local telephone companies and
other companies to provide data communications capacity. Although management
believes that alternate telecommunications facilities could be found in a timely
manner, any disruption of these services could have an adverse effect on the
Company's financial position, results of operations and cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, notes payable and lease obligations are
carried at historical cost, which approximates
F-7
<PAGE>
FREEI NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
their fair value because of the short-term maturity of these instruments or
because interest rates approximate current market rates.
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost. Depreciation and
amortization is computed using the straight-line method over the estimated
useful lives of the assets, generally three to five years, or the shorter of the
lease term or the estimated useful lives of the assets, if applicable.
LONG-LIVED ASSETS
When conditions warrant, the Company evaluates the recoverability of its
long-lived assets based on expected undiscounted cash flows and recognizes
impairment of the carrying value of long-lived assets, if any, based on the fair
value of such assets.
REVENUE RECOGNITION
The Company's revenues have been derived primarily from the sale and
delivery of short-term advertising and sponsorships and from referrals of users
to sponsors' websites. These arrangements average one to three months.
Banner advertising and sponsorship revenues are recognized ratably over the
period in which the advertising or sponsorship is displayed, provided that no
significant obligations for the Company remain and collection of the related
receivable is probable. To the extent that minimum guaranteed number of
impressions or click-throughs are not met, the Company defers recognition of the
corresponding revenues until guaranteed impressions or click-throughs are
achieved. Revenues from performance based arrangements, which include website
referral arrangements, are recognized as the performance criteria are met.
Revenues from the Company's share of proceeds from electronic commerce
partners' sales are recognized upon notification by the electronic commerce
partner. Revenues from electronic commerce were not significant in 1999.
WEBSITE DEVELOPMENT COSTS
Costs incurred in the development of core software for the Company's website
infrastructure are capitalized in accordance with Statement of Position 98-1
"Accounting for the Costs of Software Developed or Obtained for Internal Use"
and are amortized over the expected useful life of the developed software
ranging from 1-3 years. Costs incurred in the development of content for the
Company's website and maintenance costs are expensed as incurred.
ADVERTISING EXPENSE
Advertising costs are expensed the first time the advertising takes place.
Advertising costs totaled $20,000 and $5.8 million for the period from July 1,
1998 (inception) to December 31, 1998 and for the year ended December 31, 1999,
respectively. Advertising costs incurred for which the advertising had not yet
taken place totaled $1.1 million at December 31, 1999, and are included in
prepaid expenses.
F-8
<PAGE>
FREEI NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees" and related interpretations,
and complies with the disclosure provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force Issue 96-18.
INCOME TAXES
The Company accounts for income taxes under the liability method, which
requires, among other things, that deferred income taxes be provided for
temporary differences between the tax bases of the Company's assets and
liabilities and their financial statement reported amounts. In addition,
deferred tax assets are recorded for the future benefit of utilizing net
operating losses and research and development credit carryforwards. A valuation
allowance is provided against net deferred tax assets unless it is more likely
than not that they will be realized.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic net loss per share is computed
by dividing the net loss for the period by the weighted-average number of common
shares outstanding during the period. Weighted-average shares exclude common
shares subject to repurchase ("restricted shares"). Diluted net loss per share
is computed by dividing the net loss for the period by the weighted-average
number of common and potential common shares outstanding during the period, if
dilutive. Potential common shares are composed of unvested restricted shares,
incremental common shares issuable upon the exercise of stock options and
warrants and, upon conversion, of Series A convertible preferred stock and
Series B convertible preferred stock.
The following table sets forth the computation of basic and diluted net loss
per share for the period from July 1, 1998 (inception) to December 31, 1998 and
for the year ended December 31, 1999:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1998 YEAR ENDED
(INCEPTION) TO DECEMBER 31,
DECEMBER 31, 1998 1999
------------------ ------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Numerator--net loss............................. $ (272) $(18,745)
======== ========
Denominator
Weighted-average common shares outstanding.... 24,000 26,343
Weighted-average unvested common shares
subject to repurchase....................... (20,721) (17,647)
-------- --------
Denominator for basic and diluted
calculations................................ 3,279 8,696
======== ========
Basic and diluted net loss per share............ $ (0.08) $ (2.16)
======== ========
</TABLE>
F-9
<PAGE>
FREEI NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Unvested restricted shares, preferred shares convertible into 12,729,458
shares of common stock, options to purchase 4,171,560 shares of common stock at
an average exercise price of $0.78 per share and warrants to purchase 3,518,524
shares of common stock at an average exercise price of $0.52 per share, have not
been included in the computation of diluted net loss per share for the year
ended December 31, 1999, as their effect would have been anti-dilutive.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended December 31, 1999 is
computed by dividing the net loss by the weighted-average number of common
shares outstanding, including the pro forma effects of the automatic conversion
of the Company's convertible preferred stock into shares of the Company's common
stock and the removal of the right of repurchase on founders' stock effective
upon the closing of the Company's initial public offering as if such conversion
occurred on January 1, 1999 or at the date of original issuance, if later. The
resulting pro forma adjustment includes an increase in weighted-average shares
used to compute basic and diluted net loss per share of 21,781,000 for the year
ended December 31, 1999.
PRO FORMA SHAREHOLDERS' EQUITY (UNAUDITED)
Effective upon the closing of the Company's planned initial public offering,
the outstanding shares of Series A convertible preferred stock and Series B
convertible preferred stock, will automatically convert into 9,624,148 and
3,105,310 shares, respectively, of common stock. The pro forma effects of these
transactions are unaudited and have been reflected in the accompanying pro forma
shareholders' equity at December 31, 1999.
COMPREHENSIVE INCOME/LOSS
To date, the Company has not had any transactions that are required to be
reported in comprehensive income/loss and net loss is the same as comprehensive
loss for all periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS
No. 133. SFAS No. 133 is effective for the Company's fiscal year ending December
31, 2001. The Company does not have derivative instruments, and therefore does
not expect that the adoption of this statement will have any effect on the
Company's results of operations, financial position or cash flows.
F-10
<PAGE>
FREEI NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. BALANCE SHEET COMPONENTS
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Network and computer equipment.............................. $523 $28,354
Furniture and fixtures...................................... 48 60
Capitalized software........................................ 40 631
Leasehold improvements...................................... -- 124
---- -------
611 29,169
Accumulated depreciation and amortization................... (26) (1,862)
---- -------
$585 $27,307
==== =======
</TABLE>
Assets held under capital leases of $333,000 and $26.7 million are included
in network and computer equipment at December 31, 1998 and 1999, respectively.
Accumulated amortization on capital leases is $11,000 and $1.6 million at
December 31, 1998 and 1999, respectively.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<S> <C> <C>
Prepaid advertising......................................... $ -- $1,117
Prepaid network access costs................................ -- 600
Other....................................................... -- 411
------ ------
$ -- $2,128
====== ======
</TABLE>
ACCRUED LIABILITIES
<TABLE>
<S> <C> <C>
Accrued network access costs................................ $ -- $ 795
Accrued advertising......................................... -- 400
Other....................................................... 7 638
------ ------
$ 7 $1,833
====== ======
</TABLE>
4. RELATED-PARTY TRANSACTIONS
In 1998, the Company issued a total of 23,200,000 shares of common stock to
a founder in consideration for a cash contribution of $399,000 and payment of
expenses of $152,000, and a further 800,000 shares of common stock to two other
co-founders in consideration for intellectual property contributed to the
Company, which was recorded at their book value of $0.
During 1998 and 1999 certain expenses of the Company were paid by a related
company, wholly owned by the founder of the Company. These expenses included
1) expenses specifically incurred on behalf of the Company and 2) certain shared
expenses for rent, office supplies and utilities which were allocated based on
respective headcounts of the two companies. These expenses totaled $203,000 and
$205,000 in 1998 and 1999, respectively. The Company believes that the allocated
costs are indicative of the costs that would have been incurred by the Company
as a stand-alone entity. Amounts not
F-11
<PAGE>
FREEI NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RELATED-PARTY TRANSACTIONS (CONTINUED)
reimbursed by the Company or contributed as capital by the founder are recorded
in amounts payable to related party at December 31, 1998 and 1999.
In 1998, the Company also acquired property and equipment with a net book
value of $212,000 from the related company. This amount was included in the
amounts payable to the related party at December 31, 1998 and 1999.
The related company served as a co-lessee on an equipment capital lease
agreement, under which purchases of $6.8 million were made in 1999. In
April 1999 the related company also guaranteed equipment capital leases totaling
$646,000.
5. BORROWINGS
In June 1999, the Company entered into a loan and stock purchase warrant
agreement with a lender providing for maximum borrowings of $2,000,000 until
December 31, 1999. The original $500,000 loan provided under this agreement was
contingent upon the Company ordering $8,000,000 in equipment from the lender;
any additional loans were contingent upon the Company ordering additional
equipment. No further advances have been made under this loan agreement. The
loan bears interest at 11.75% per annum and is collateralized by substantially
all of the Company's assets.
The loan is repayable in 18 equal monthly payments ending on August 1, 2001.
The principal and all accrued but unpaid interest will become immediately
payable, on i) the effective date of the IPO or ii) the date of a change of
control. The agreement with the lender includes various covenants which, among
other things, require the Company to maintain insurance which covers the
collateral. In connection with this loan, the Company issued to the lender a
warrant to purchase 331,550 shares of common stock at $1.20645 per share (see
Note 9).
Principal payments under the loan are due as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
2000........................................................ $306
2001........................................................ 194
----
$500
====
</TABLE>
6. INCOME TAXES
The Company was originally incorporated as an S-Corporation and accordingly
did not record any provision for income taxes. In March 1999 as a result of the
sale of common stock to outside investors, the Company's status was changed to a
C-Corporation. No provision for income taxes has been recorded since
March 1999, as the Company has incurred net losses from that date.
At December 31, 1999, the Company had approximately $16.3 million of federal
net operating loss carryforwards available to offset future taxable income, if
any, which expire in varying amounts beginning in 2019. Under the Tax Reform Act
of 1986, the amounts of and benefits from net operating loss carryforwards may
be limited in certain circumstances. Events which cause limitations in the
amount of net operating losses that the Company may utilize in any one year
include, but are not limited to, a cumulative ownership change of more than 50%
as defined, over a three year period.
F-12
<PAGE>
FREEI NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
As of December 31, 1999, the Company had gross deferred tax assets of
approximately $6.1 million, related primarily to net operating loss
carryforwards, stock-based compensation and certain allowances that are not
currently deductible for tax purposes. Management believes that, based on a
number of factors, the available objective evidence creates sufficient
uncertainty regarding the realizability of the deferred tax assets that a full
valuation allowance is required.
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Convertible preferred stock at December 31, 1999 consists of the following:
<TABLE>
<CAPTION>
SHARES AMOUNT, NET OF
------------------------ LIQUIDATION ISSUANCE
SERIES DESIGNATED OUTSTANDING AMOUNT COSTS
- ------ ---------- ----------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
A............................ 9,624,148 9,624,148 $10,000 $ 9,212
B............................ 3,105,310 3,105,310 25,000 24,680
---------- ---------- ------- -------
12,729,458 12,729,458 $35,000 $33,892
========== ========== ======= =======
</TABLE>
The holders of the convertible preferred stock have various rights and
preferences as follows:
VOTING
Each share of Series A and B convertible preferred stock has voting rights
equal to an equivalent number of shares of common stock into which it is
convertible and votes together as one class with the common stock.
As long as at least 1,000,000 shares of convertible preferred stock remain
outstanding, the Company must obtain approval from a majority of the holders of
convertible preferred stock in order to alter the articles of incorporation as
related to the rights, preferences or privileges of the convertible preferred
stock. As long as any shares of convertible preferred stock remain outstanding,
the Company must obtain approval from a majority of the holders of convertible
preferred stock in order to change the authorized number of shares of
convertible preferred stock, change the authorized number of Directors,
authorize a dividend for any class or series other than convertible preferred
stock, create a new class of stock or effect a merger, consolidation or sale of
assets where the existing stockholders retain less than 50% of the voting stock
of the surviving entity.
DIVIDENDS
Holders of Series A and B convertible preferred stock are entitled to
receive noncumulative dividends at the per annum rate of $0.083 and $0.614 per
share, respectively, when and if declared by the Board of Directors. After the
dividend preference of the preferred stock has been paid in full for a given
calendar year, the preferred stock will participate pro rata with the common
stock in the receipt of any additional dividends on an as-converted basis. No
dividends on convertible preferred stock or common stock have been declared from
inception through December 31, 1999.
F-13
<PAGE>
FREEI NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners of
the common stock and convertible preferred stock own less than 50% of the
resulting voting power of the surviving entity, the holders of Series A and B
convertible preferred stock are entitled to receive an amount of $1.03905 and
$8.05073 per share, respectively, plus any declared but unpaid dividends prior
to and in preference to any distribution to the holders of common stock. Any
remaining funds and assets of the Company legally available for distribution to
shareholders will be distributed pro rata among the holders of the common stock.
If the Company has insufficient assets to permit payment of the preference
amount in full to all preferred shareholders, then the assets of the Company
will be distributed ratably to the holders of the preferred stock in proportion
to the preference amount each such holder would otherwise be entitled to
receive.
CONVERSION
Each share of Series A and B convertible preferred stock is convertible, at
the option of the holder, according to a conversion ratio which is subject to
adjustment for dilution. In addition, each share of Series A and B convertible
preferred stock automatically converts into the number of shares of common stock
into which such shares are convertible, at the then effective conversion ratio,
upon: (1) the closing of a public offering of common stock at a per share price
of at least $10.00 per share for a total public offering price of not less than
$20,000,000 or (2) the consent of the holders of the majority of convertible
preferred stock.
MANDATORY REDEMPTION
The convertible preferred stock contains a provision which, in the event of
a change in the control of the Company (as defined), could be construed to give
the holders of the convertible preferred stock the right to receive a cash
distribution equal to the liquidation preference on the convertible preferred
stock. In accordance with the rules of the Securities and Exchange Commission
the convertible preferred stock has not been included in shareholders' equity
and is presented as mandatorily redeemable convertible preferred stock at
December 31, 1999.
At December 31, 1999, the Company has reserved 9,624,148 and 3,105,310
shares of common stock for the conversion of Series A and B convertible
preferred stock, respectively.
8. COMMON STOCK
During 1999, the Company entered into stock restriction agreements with the
three founders of the Company. The stock restriction agreements give the Company
the right to repurchase the founders' common shares at the original purchase
price in the event that the founders' service with the Company terminates for
any reason. The Company's repurchase right generally lapses as the founders'
perform services over a four-year period. The right of repurchase on one-quarter
of the shares was removed on the completion of the Series A preferred stock
financing and will lapse on the remaining shares at the rate of 1/48 of the
shares after each additional month of service thereafter. The right of
repurchase lapses on the initial public offering of the Company or in the event
of a change in control. At December 31, 1999, there were 16,000,000 common
shares subject to repurchase.
F-14
<PAGE>
FREEI NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. WARRANTS
In March 1999, in connection with the sale of common stock to initial
investors, the Company issued warrants to purchase 2,879,000 shares of the
common stock at $0.50 per share. These warrants expire in March 2002. These
warrants were considered an issue cost of the common stock. Warrants to purchase
210,000 shares of common stock were exercised in March 2000.
In June 1999, the Company issued a warrant to purchase 331,550 shares of the
common stock at an exercise price of $1.20645 per share to a lender in
connection with the borrowings described in Note 6. The warrant expires in
June 2004. The Company determined the fair value of the warrants to be $108,000
using the Black-Scholes option pricing model. The fair value of the warrants was
recorded as loan issuance costs and is amortized as interest expense over the
life of the borrowings.
In connection with the sale of Series A convertible preferred stock in
August 1999, the Company issued warrants to purchase 307,974 shares of common
stock at an exercise price of $0.001 per share as a placement fee. These
warrants expire through 2009. Using the Black-Scholes pricing model, the Company
estimated the fair value of the warrants at the date of grant was $272,000 which
was recorded as a stock issuance cost.
10. STOCK OPTIONS
On April 12, 1999, the Company adopted the Stock Option Plan (the "Plan").
The Plan provides for the granting of stock options to employees, consultants
and non-employee Directors of the Company. Options granted under the Plan may be
either incentive stock options or nonqualified stock options. Incentive stock
options ("ISO") may be granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO") may be
granted to Company employees, consultants and non-employee Directors. The
Company has reserved 8,421,128 shares of common stock for issuance under the
Plan.
Options under the Plan may be granted for periods of up to ten years. The
exercise price of an ISO cannot be less than 100% of the estimated fair value of
the common stock on the date of grant, and the exercise price of an ISO granted
to a 10% shareholder cannot be less than 110% of the estimated fair value of the
shares on the date of grant. To date, options granted generally vest over four
years.
The following table presents activity under the Plan:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------
WEIGHTED-
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE
FOR GRANT OF SHARES PRICE
----------- ---------- ---------
<S> <C> <C> <C>
Shares reserved............................ 8,421,128
Options granted............................ (4,225,560) 4,225,560 $0.78
Options forfeited.......................... 54,000 (54,000) 0.96
----------- ----------
Balance, December 31, 1999................. 4,249,568 4,171,560 0.78
=========== ==========
</TABLE>
No options were exercisable at December 31, 1999.
F-15
<PAGE>
FREEI NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS (CONTINUED)
OPTIONS OUTSTANDING AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
REMAINING
EXERCISE PRICE NUMBER OUTSTANDING CONTRACTUAL LIFE
- -------------- ------------------ ----------------
<S> <C> <C>
$0.50....................................... 2,047,560 9.37
$1.00....................................... 2,036,000 9.82
$2.00....................................... 88,000 9.98
---------
4,171,560
---------
</TABLE>
FAIR VALUE DISCLOSURES
The weighted-average fair values of options granted during 1999 were as
follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE PRICE FAIR VALUE
-------------- ----------
<S> <C> <C>
Exercise price equal to market value.................. $0.50 $ 0.27
Exercise price less than market value................. $1.00 $ 3.98
</TABLE>
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS No. 123, the Company's net loss for 1999 would have
increased by approximately $245,000.
The Company calculated the fair value of each option grant using the
Black-Scholes pricing model with the following assumptions:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Risk-free interest rates.................................... 5.68%
Expected life............................................... 4 years
Expected dividends.......................................... 0
Expected volatility......................................... 65%
</TABLE>
DEFERRED STOCK COMPENSATION
In the year ended December 31, 1999, the Company recorded deferred stock
compensation expense of approximately $8.7 million related to the issuance of
stock options at prices subsequently determined to be below fair market value.
These charges are being amortized over a period of four years from the date of
option issuance using the method specified in FASB Interpretation No. 28.
Amortization of $876,000 has been recognized as stock compensation expense in
the year ended December 31, 1999.
11. EMPLOYEE BENEFITS PLANS
The Company sponsors a 401(k) defined contribution plan covering all
employees. Contributions made by the Company are determined annually by the
Board of Directors. The Company matches contributions on a discretionary basis
provided that matching contributions must apply uniformly to all
F-16
<PAGE>
FREEI NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFITS PLANS (CONTINUED)
plan participants. Company matching contributions to the Plan in the year ended
December 31, 1999 totaled $9,000.
12. COMMITMENTS
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through 2003.
Telecommunications services are provided pursuant to cancellable short-term
agreements.
The terms of the facility lease, entered into subsequent to December 31,
1999, provide for rental payments on a graduated scale. The facility lease
expires in December 2002. The Company will recognize rent expense on a
straight-line basis over the lease period.
During the periods ended December 31, 1998 and 1999, the Company entered
into certain noncancelable lease obligations for network and computer equipment.
These capital leases are collateralized by the Company's assets. The future
minimum lease payments are discounted using an interest rate of 10.0% over the
36 to 42 month lease terms.
Future minimum lease obligations as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING DECEMBER 31, LEASES LEASES
- ------------------------- -------- ---------
(IN THOUSANDS)
<S> <C> <C>
2000..................................................... $ 9,212 $ 6,360
2001..................................................... 10,958 7,078
2002..................................................... 9,604 3,150
2003..................................................... 1,746 --
------- -------
Total minimum lease payments............................. 31,520 $16,588
=======
Less: Amount representing interest....................... 5,116
-------
Present value of obligations under capital leases........ 26,404
Less: Current portion.................................... 6,461
-------
Non-current portion of obligations under capital
leases................................................. $19,943
=======
</TABLE>
Rental expense including telecommunications services amounts for the period
from July 1, 1998 (inception) to December 31, 1998 and for the year ended
December 31, 1999 was $27,000 and $5.7 million, respectively.
In November 1999, the Company entered into an agreement to purchase
advertising, promotion and marketing services for $4.0 million from a Company
which is also a preferred stock shareholder. The agreement is for a one-year
period ending in December 2000.
13. SUBSEQUENT EVENTS
STOCK SPLITS
In January 2000, the Company authorized a 2 for 1 common stock split. All
share and per share amounts for common stock have been retroactively restated to
give effect to this common stock split.
F-17
<PAGE>
FREEI NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. SUBSEQUENT EVENTS (CONTINUED)
In March 2000, the Company authorized, subject to shareholder approval, a 2
for 1 preferred stock split. All share and per share amounts have been
retroactively restated to give effect to this preferred stock split.
AMENDMENTS TO CERTIFICATE OF INCORPORATION
In January 2000, the Company approved an amendment to the Company's Articles
of Incorporation to provide for an increase in the authorized capital stock to
200,000,000 shares of common stock.
In March 2000, the Company approved an amendment, subject to shareholder
approval, to the Company's Articles of Incorporation to provide for an increase
in the authorized capital stock to 400,000,000 shares of common stock and
20,000,000 shares of preferred stock.
SALE OF SERIES C CONVERTIBLE PREFERRED STOCK (UNAUDITED)
In March 2000, the Company issued 2,703,755 shares of Series C convertible
preferred stock ("Series C preferred") at a price of $19.69 per share for
aggregate net proceeds of $53.1 million. All holders of Series C convertible
preferred have voting, dividend and liquidation preferences substantially the
same as holders of convertible preferred stocks Series A and Series B
convertible preferred stock. The Series C convertible preferred stock is
convertible into 2,703,755 shares of common stock.
F-18
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the securities being registered. All amounts are estimates
except the Securities and Exchange Commission registration fee, the NASD filing
fee and The Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 45,540
NASD Filing Fee............................................. 20,000
Nasdaq National Market Filing Fee........................... 90,000
Printing Costs.............................................. 200,000
Legal Fees and Expenses..................................... 375,000
Accounting Fees and Expenses................................ 250,000
Directors' and Officers' Insurance Policy Premium........... 500,000
Blue Sky Fees and Expenses.................................. 5,000
Transfer Agent and Registrar Fees........................... 5,000
Miscellaneous............................................... 59,460
----------
Total................................................. $1,550,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a corporation to indemnify its directors,
officers, employees and agents against certain liabilities they may incur in
such capacities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"), provided they acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
corporation. The registrant's Articles of Incorporation (Exhibit 3.1 hereto) and
Bylaws (Exhibit 3.2 hereto) require the registrant to indemnify its officers and
directors to the fullest extent permitted by Washington law.
Section 23B.08.320 of the WBCA authorizes a corporation to limit or
eliminate a director's liability to the corporation or its shareholders for
monetary damages for breaches of fiduciary duties, other than for (1) acts or
omissions that involve intentional misconduct or a knowing violation of law,
(2) unlawful distributions to shareholders, or (3) transactions from which a
director derives an improper personal benefit. The registrant's Amended and
Restated Articles of Incorporation (Exhibit 3.1 hereto) contain provisions
implementing, to the fullest extent permitted by Washington law, such
limitations on a director's liability to the registrant and its shareholders.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
between the underwriters and the registrant from and against certain liabilities
arising in connection with the offering which is the subject of this
registration statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a description of all securities that the registrant has
sold within the past three years without registering the securities under the
Securities Act:
Effective as of September 22, 1998, the registrant issued an aggregate of
24,000,000 shares of its common stock to three of its employees in exchange for
$551,000 in cash, intellectual property rights and payment of company expenses.
These issuances were exempt from registration pursuant to Section 4(2) of the
Securities Act.
II-1
<PAGE>
On March 9, 1999 the registrant sold and aggregate of 2,879,999 shares of
its common stock at a price of $1.00 per share, and issued warrants to purchase
2,879,000 shares of its common stock at an exercise price of $0.50 per share to
22 accredited investors in a private transaction for an aggregate offering price
of approximately $2.80 million. This issuance was exempt from registration
pursuant to Rule 506 of Regulation D under Section 4(2) of the Securities Act.
On March 16, 1999, the registrant granted a warrant to an accredited
investor to purchase up to 307,974 shares of its common stock at an exercise
price $0.001 per share as payment of placement fees equal to $272,000. This
issuance was exempt from registration pursuant to Section 4(2) of the Securities
Act.
On June 28, 1999, the registrant granted a warrant to an accredited investor
to purchase up to 331,550 shares of its common stock at an exercise price of
$1.20 per share as payment of loan issuance costs equal to $108,000. This
issuance was exempt from registration pursuant to Section 4(2) of the Securities
Act.
On August 12, 1999, the registrant sold 9,624,148 shares of its Series A
Convertible Preferred Stock at a price of $1.03905 per share to three accredited
investors in a private transaction for an aggregate offering price of
$10.0 million. This issuance was exempt from registration pursuant to Rule 506
of Regulation D under Section 4(2) of the Securities Act.
On November 12, 1999, the registrant sold 3,105,310 shares of its Series B
Convertible Preferred Stock at a price of $8.05073 per share to four accredited
investors in a private transaction for an aggregate offering price of
$25.0 million. This issuance was exempt from registration pursuant to Rule 506
of Regulation D under Section 4(2) of the Securities Act.
On March 7 and March 31, 2000, the registrant sold an aggregate of 2,703,755
shares of its Series C Convertible Preferred Stock at a price of $19.643052 per
share to 49 accredited investors in a private transaction for an aggregate
offering price of approximately $53.1 million. This issuance was exempt from
registration pursuant to Rule 506 of Regulation D under Section 4(2) of the
Securities Act.
From April 1, 1999 to March 26, 2000, the registrant granted options to
purchase up to 5,274,862 shares of the registrant's common stock under the
registrant's stock option plan at a weighted average exercise price of $1.32 per
share. These grants were exempt from registration pursuant to Rule 701 under the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1# Articles of Incorporation and all amendments thereto.
3.1(a)* Form of Amended and Restated Articles of Incorporation.
3.2# Bylaws.
4.1 See Exhibits 3.1, 3.2, 10.9, 10.9(a) and 10.9(b) for
provisions defining the rights of the holders of common
stock.
5.1* Opinion of Summit Law Group, PLLC regarding legality of
shares.
10.1# Stock Option Plan.
10.2# Employee Stock Purchase Plan.
10.3# 401(k) Plan.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
10.4# Employment Agreement with Robert McCausland dated November
11, 1999.
10.5# Employment Agreement with Steve Bourg dated November 11,
1999.
10.6+# Advertising, Promotion and Marketing Agreement with MP3.com,
Inc. dated November 12, 1999.
10.7# Freei Networks, Inc. Series A Preferred Stock Purchase
Agreement dated as of August 12, 1999.
10.8# Freei Networks, Inc. Series B Stock Purchase Agreement dated
as of November 12, 1999.
10.9# Investor Rights Agreement dated August 12, 1999.
10.9(a)# Amendment No. 1 to Investor Rights Agreement dated
November 12, 1999.
10.9(b)* Second Amendment to Investor Rights Agreement dated March 7,
2000.
10.10# Freei Networks, Inc. Series C Stock Purchase Agreement dated
as of March 7, 2000 and March 31, 2000.
10.11+# Internet Content (World Wide Web Site) Distribution
Agreement dated as of November 24, 1999, by and between
InfoSpace.com, Inc. and Freei Networks, Inc.
10.12# Commercial Lease dated November 15, 1999, made between Inter
Co-op USA No. III and Freei Networks, Inc.
10.13# Office Building Lease between All Service West Campus &
Washington General Partnership and Washington Mortgage Svcs.
Inc. dated January 18, 1997.
10.14## Lease Agreement dated as of January 21, 2000, by and between
Primestar Investment Corp. and Freei Networks, Inc.
10.15+# Customer Agreement for WholeSale and Virtual ISP Integrated
Solutions Dial-Up Internet Access Services dated
December 23, 1999, by and between Cable & Wireless USA, Inc.
and Freei Networks, Inc.
10.16+### Master Services Agreement dated as of September 30, 1999, by
and between SplitRock Services Inc. and Freei Networks, Inc.
10.17+## Dial Access Agreement dated October 18, 1999, as amended, by
and between PSINet, Inc. and Freei Networks, Inc.
10.18+## United States Internet Content (Worldwide Web Site)
Distribution Agreement dated March 30, 2000, by and between
InfoSpace.com, Inc. and Freei Networks, Inc.
10.19+# Phone Site Service Agreement dated as of March 30, 2000, by
and between InfoSpace.com, Inc. and Freei Networks, Inc.
10.20+## License Agreement dated as of March 31, 2000 by and between
Freei.net Sdn. Bhd. and Freei Networks, Inc.
23.1## Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2 Consent of Summit Law Group, PLLC (contained in the opinion
filed as Exhibit 5.1 hereto).
24.1 Power of Attorney (See Page II-4).
27.1# Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
+ Confidential treatment requested.
# Previously filed.
II-3
<PAGE>
## Filed herewith.
### Replaces previously filed exhibit.
(b) Financial Statement Schedules.
All schedules are omitted because they are inapplicable or the requested
information is shown in the financial statements of the registrant or related
notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of 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 questions whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be a 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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Federal Way, State of Washington, on the 7th day of April, 2000.
<TABLE>
<S> <C> <C>
FREEI NETWORKS, INC.
BY: /S/ ROBERT MCCAUSLAND
-----------------------------------------
Robert McCausland,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by the following persons in
the capacities indicated below on the 7th day of April, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ ROBERT MCCAUSLAND Chairman of the Board, Chief Executive Officer
------------------------------------------- and President (Principal Executive Officer)
Robert McCausland
* Chief Financial Officer (Principal Financial
------------------------------------------- and Accounting Officer)
Ned Menninger
* Director
-------------------------------------------
Ronald Erickson
* Director
-------------------------------------------
Mark Stevens
* Director
-------------------------------------------
William Owens
* Director
-------------------------------------------
Naveen Jain
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROBERT MCCAUSLAND
--------------------------------------
Robert McCausland
AS ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1# Articles of Incorporation and all amendments thereto.
3.1(a)* Form of Amended and Restated Articles of Incorporation.
3.2# Bylaws.
4.1 See Exhibits 3.1, 3.2, 10.9, 10.9(a) and 10.9(b) for
provisions defining the rights of the holders of common
stock.
5.1* Opinion of Summit Law Group, PLLC regarding legality of
shares.
10.1# Stock Option Plan.
10.2# Employee Stock Purchase Plan.
10.3# 401(k) Plan.
10.4# Employment Agreement with Robert McCausland dated November
11, 1999.
10.5# Employment Agreement with Steve Bourg dated November 11,
1999.
10.6+# Advertising, Promotion and Marketing Agreement with MP3.com,
Inc. dated November 12, 1999.
10.7# Freei Networks, Inc. Series A Preferred Stock Purchase
Agreement dated as of August 12, 1999.
10.8# Freei Networks, Inc. Series B Stock Purchase Agreement dated
as of November 12, 1999.
10.9# Investor Rights Agreement dated August 12, 1999.
10.9(a)# Amendment No. 1 to Investor Rights Agreement dated
November 12, 1999.
10.9(b)* Second Amendment to Investor Rights Agreement dated March 7,
2000.
10.10# Freei Networks, Inc. Series C Stock Purchase Agreement dated
as of March 7, 2000 and March 31, 2000.
10.11+# Internet Content (World Wide Web Site) Distribution
Agreement dated as of November 24, 1999, by and between
InfoSpace.com, Inc. and Freei Networks, Inc.
10.12# Commercial Lease dated November 15, 1999, made between Inter
Co-op USA No. III and Freei Networks, Inc.
10.13# Office Building Lease between All Service West Campus &
Washington General Partnership and Washington Mortgage Svcs.
Inc. dated January 18, 1997.
10.14## Lease Agreement dated as of January 21, 2000, by and between
Primestar Investment Corp. and Freei Networks, Inc.
10.15+# Customer Agreement for WholeSale and Virtual ISP Integrated
Solutions Dial-Up Internet Access Services dated
December 23, 1999, by and between Cable & Wireless USA, Inc.
and Freei Networks, Inc.
10.16+### Master Services Agreement dated as of September 30, 1999, by
and between SplitRock Services Inc. and Freei Networks, Inc.
10.17+## Dial Access Agreement dated October 18, 1999, as amended, by
and between PSINet, Inc. and Freei Networks, Inc.
10.18+## United States Internet Content (Worldwide Web Site)
Distribution Agreement dated March 30, 2000, by and between
InfoSpace.com, Inc. and Freei Networks, Inc.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
10.19+# Phone Site Service Agreement dated as of March 30, 2000, by
and between InfoSpace.com, Inc. and Freei Networks, Inc.
10.20+## License Agreement dated as of March 31, 2000 by and between
Freei.net Sdn. Bhd. and Freei Networks, Inc.
23.1## Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2 Consent of Summit Law Group, PLLC (contained in the opinion
filed as Exhibit 5.1 hereto).
24.1 Power of Attorney (See Page II-4).
27.1# Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
+ Confidential treatment requested.
# Previously filed.
## Filed herewith.
### Replaces previously filed exhibit.
II-7
<PAGE>
Exhibit 10.14
LEASE
LEASE AGREEMENT ("LEASE") made as of the 21st day of January, 2000,
between Primestar Investment Corp., a Washington corporation ("LANDLORD"),
with an address at 2505 South 320th Street, Suite 101, Federal Way WA 98003;
and Freel Networks, Inc. a Washington corporation d/b/a freel.net ("TENANT")
with an address at 909 South 336th Street, Suite 110, Federal Way WA 98003 as
of the date of this Lease and at 2505 South 320th Street, Floors 2-6, Federal
Way WA 98003 as of February 1, 2000.
Landlord and Tenant agree that:
ARTICLE 1. LEASE SUMMARY:
The following summary of a limited number of the provisions of this Lease is
provided simply for convenient reference. This Lease must be reviewed carefully
in its entirety to ascertain the provisions of this Lease. In no event shall any
portion of this summary limit or affect the application of any other provision
of this Lease.
1.01. TERM: Five years.
1.02. OFFICE AREA: 63,729 square feet. The Office Area consists of: (i)
approximately 60,763 square feet of gross leasable floor area within the Office
(as such term is defined in Section 2.02 of this Lease); and (ii) a specially
allocated share of the square footage of the Common Area within the building(s)
in the Project.
1.03. MINIMUM RENT: $65,893.33 for the first calendar month for Floors 2, 4 and
6.
1.04. OPERATING EXPENSES: Tenant pays its Pro Rata Share of Operating Expense
Increases beginning on the first day of the 13th month in the term of this
Lease.
1.05. SECURITY DEPOSIT: $172,108.66
1.08. PREPAID MINIMUM RENT: $65,893.33, to be applied to payment of the first
month's Minimum Rent for Floors 2, 4 and 6.
ARTICLE 2. LEASE/USE OF OFFICE:
2.01. PROJECT DEFINED: "PROJECT" shall mean the land owned or leased by
Landlord, in the City of Federal Way, King County, Washington, currently
known as 2505 South 320th Street, Federal Way, Washington, and more
particularly described on EXHIBIT "A" of this
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Lease, the building(s) and improvement(s) located on the land, the fixtures
(excluding the tenants' trade fixtures), and all personal property located on
and used by the Landlord in the operation, maintenance, repair or replacement of
the building(s), improvement(s), fixtures and personal property. A site plan of
the Project showing its current configuration is annexed to this Lease as
EXHIBIT "B".
2.02. OFFICE DEFINED: "OFFICE' shall mean the part of the Project which is
leased to Tenant. The location of the Office is depicted on the floor plan
attached as EXHIBIT "C" to this Lease. The approximate dimensions of the Office
Floors are set forth in Exhibit "C" of this Lease. The Office does not include
any property not shown as part of the Office on Exhibit "C", including without
limitation intended: any basement, balcony or terrace; the land underneath the
Office; any demising or exterior wall except the interior surface; any area
more than ten feet above the finished floor of the Office; or any portion of the
Office consisting of slab, ceiling, roof, partition, duct, wall or otherwise not
open space of the Office, which is now or later reasonably required by Landlord
to install, maintain, repair or replace, pipes, conduits, lines and wires to
furnish utilities and other services to the Project.
2.03. LEASE: Landlord leases the Office to Tenant and Tenant hires and takes the
Office from Landlord, subject to and in accordance with all the provisions of
this Lease.
2.04. USE/TRADE NAME: Tenant shall use the Office:
(A) Solely as commercial offices. Without limiting the application of the
preceding sentence, Tenant shall not use the Office in any manner which would
(i) violate any prohibition, restriction or limitation in any instrument
presently encumbering the Project or (ii) any use which would materially
adversely affect the image of the Project as a wholesome place for families to
visit, including by way of example only, for the operation or to assist in the
operation of escort service, telephone sex service or internet pornography
service; or (iii) any display or depiction of graphic violence, nudity or sex.
(B) During the entire term of this Lease solely under the name freel.net;
provided, however, that after 30 days prior notice to Landlord, Tenant shall
have the right without Landlord's prior consent, to do business in the Office
under any other trade name specified in the notice.
ARTICLE 3. TERM:
The term of this Lease shall be for a period of five years (unless sooner
terminated in accordance with the provisions of this Lease). The term of this
Lease shall begin on February 1, 2000 ("COMMENCEMENT DATE"). The term of this
Lease shall end on the earlier of the following dates ("TERMINATION DATE"):
(i) fifth year anniversary of the Commencement Date; or (ii) the date the
term of this Lease is sooner terminated in accordance with the provisions of
this Lease. Tenant shall have the right beginning July 31, 2001 and ending
August 31, 2001, to give Landlord notice electing to terminate this Lease
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on the six month anniversary of the date the notice is given.
ARTICLE 4. VERIFICATION OF TERM, ETC.:
After the Commencement Date is determined at the request of either party
Landlord and Tenant shall promptly execute and acknowledge an agreement in the
form annexed as EXHIBIT "D" to this Lease.
ARTICLE 5. LANDLORD'S CONSTRUCTION:
5.01. IMPROVEMENTS DEFINED: "IMPROVEMENTS" shall mean all tangible property
which is not land, currency, commercial paper, or inventory. Improvements
include without limitation intended, all buildings, improvements, fixtures,
trade fixtures, equipment, furnishings, furniture, wall and floor coverings,
signs and decorations.
5.02. LANDLORD IMPROVEMENTS: Prior to the Commencement Date or as soon
thereafter as feasible, Landlord shall provide the Improvements ("LANDLORD
IMPROVEMENTS"), if any, which Landlord is obligated to construct or install
pursuant to the provisions of Section 6 in EXHIBIT "E" of this Lease. Landlord
Improvements shall be completed substantially in accordance with the applicable
provisions of Exhibit "E" and any work order signed by Landlord and Tenant. The
Office is an existing commercial office in an existing office building. Except
for any Landlord Improvements specified in Section 6 in Exhibit "E", the Office
is offered for lease in its current condition, "AS IS" with all existing faults
and defects, patent and latent. Except for any representations and warranties
specified in this Lease, Landlord makes no representations or warranties with
respect to the condition of the Office or the Project, express or implied and
hereby disclaims any representation or warranty which might be implied.
5.03. Intentionally Deleted.
5.04. READY FOR OCCUPANCY/WAIVER: The Office shall be deemed ready for
occupancy ("READY FOR OCCUPANCY") on the earlier of: (i) February 1, 2000; or
(ii) the date that the Landlord Improvements (but only those which can be
completed without the completion of any work which Tenant is obligated to
perform) are substantially completed. In the event Tenant takes possession of
the Office and fails to give Landlord prompt notice of any Landlord
Improvements which are improperly completed, Landlord shall be relieved of
any obligation to replace or repair such improperly completed Landlord
Improvements. If there is any delay in the completion of Landlord
Improvements as a result of any acts or omissions of Tenant, the Office shall
be deemed Ready for Occupancy on the date the Office would have been Ready
for Occupancy, but for such acts or omissions of Tenant.
5.05. OCCUPANCY IS EVIDENCE: If Tenant occupies the Office; then in any action
or proceeding it shall be presumed that the Office was on the date of occupancy
in good
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condition and repair and that Landlord fulfilled all of its obligations under
this Lease which were required to be fulfilled on or prior to the date of
Tenant's occupancy.
ARTICLE 6: TENANT'S CONSTRUCTION AND ALTERATIONS:
6.01. Within thirty (30) days after the date of this Lease, Tenant shall furnish
Landlord with Office design drawings. Within thirty (30) days after the date
Landlord gives notice of the Landlord's approval of such drawings, Tenant shall
furnish Landlord with detailed plans and specifications ("PROPOSED PLANS AND
SPECIFICATIONS") of the Improvements, if any, which Tenant is obligated to
construct or install pursuant to the provisions of Exhibit "E", and any other
Improvements Tenant may desire to construct or install ("TENANT IMPROVEMENTS").
Subject to and in accordance with the provisions of Exhibit "E", within fifteen
(15) days after the date Landlord gives notice of its approval of such plans and
specifications, Tenant shall commence construction of Tenant Improvements and
thereafter diligently and continuously pursue the completion of Tenant
Improvements. Landlord shall either approve or disapprove Tenant's Office design
drawings within five (5) days after receiving the same. In the event Landlord
disapproves the Office drawing designs or Proposed Plans and Specifications,
Landlord shall provide a written explanation of the reasons for its disapproval.
All re-submissions by Tenant office drawing designs and Proposed Plans and
Specifications shall be marked to show the changes made and reviewed by Landlord
within five (5) days.
6.02. OTHER IMPROVEMENTS: Tenant shall install or construct any Improvements and
other property necessary for the conduct of its business, which are not
specifically described in Section 6 of Exhibit "E" of this Lease.
6.03. LANDLORD'S CONSENT: Tenant shall not install or construct any
Improvements in the Office or the Project, nor make any alterations to the
Office, without obtaining the prior written consent of Landlord. However,
without Landlord's consent, Tenant shall have the right to make alterations
within the Office if: (i) the alterations will not: (a) be visible to anyone
from the exterior of the Office; nor (b) reduce the value of the Office; nor
(c) reduce the utility of the Office; nor (d) involve any structural
alteration or affect any structural component of the Office or the Project;
nor (e) affect or involve any utility system; and (ii) the total cost of all
alterations performed within a twelve (12) calendar month period does not
exceed $50,000.00 No request for Landlord's consent shall be made without
furnishing Landlord with detailed plans and specifications of the
Improvements and alterations.
6.04. BONDS: If this Lease obligates Tenant to provide or maintain a Security
Deposit, then Tenant shall not commence the installation or construction of
Tenant Improvements or any other Improvements or alterations, unless and until
Tenant furnishes Landlord with payment and performance bonds, in form, amount
and from surety acceptable to Landlord, naming Landlord and Tenant as the
co-insureds, and insuring that the proposed work will be completed free and
clear of any liens.
6.05. LIENS: Tenant shall not cause or permit the creation, existence, recording
or filing, of
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any mechanic's lien, materialman's lien or similar lien, arising out of the
performance of any labor or service or the provision of any material in
connection with the Office. Nor shall Tenant cause or permit the creation,
existence, recording or filing of any other lien, security interest or
encumbrance of any nature whatsoever, which may adversely affect or constitute a
breach by Landlord, or the holder of any deed of trust or mortgage, or the
landlord under any ground or other underlying lease encumbering the Project, or
any part thereof, under any such deed of trust, mortgage or lease.
ARTICLE 7. LANDLORD'S ARCHITECT/ENGINEER:
7.01. APPROVALS/DETERMINATIONS: Whenever any consent or approval may be sought
by Tenant for the installation or construction of any Tenant Improvements,
Improvements, or alterations; or any dispute may arise concerning the completion
of Landlord Improvements, or the physical damage of a Casualty or Condemnation
(as such terms are defined in Sections 15.01 and 16.01 of this Lease), or the
reconstruction of the Office after Casualty or Condemnation, in the sole
discretion of Landlord, the approval or consent shall be given or withheld
and/or such issue shall be determined by any registered architect or licensed
professional engineer (collectively "ARBITER") selected by Landlord. The Arbiter
need not be registered or licensed in the jurisdiction in which the Project is
located. The fees and expenses of the Arbiter shall be borne equally by Landlord
and Tenant. Tenant shall pay its share of such fees and expenses to Landlord or
its designee within ten days after demand by Landlord. The decision of the
Arbiter shall be Final and Binding (as such term is defined in Section 7.02
below).
7.02. FINAL AND BINDING DEFINED: "FINAL AND BINDING" shall mean a decision or
determination which (i) is not subject to any judicial review or appeal
whatsoever, other than by writ of certiorari or its equivalent, to determine if
the decision or determination was arbitrary or capricious or in violation of
Law, and (ii) shall be presumed correct in any action or proceeding.
ARTICLE 8. RENT PAYABLE TO LANDLORD:
8.01. GENERALLY: "RENT" shall mean all moneys which Tenant is obligated to
pay under the provisions of this Lease, regardless of their characterization,
including without limitation intended, Minimum Rent; Pro Rata Share of
Operating Expense Increases, liquidated damages, and attorneys' fees. All
Rent shall be paid in legal currency of the United States, to Landlord, or
its designee, at the address of Landlord set forth in the first paragraph of
this Lease, or any other place designated by Landlord, without offset or
reduction on account of any claim whatsoever. Landlord may require the
payment of Rent by electronic funds transfer by giving Tenant sixty (60) days
prior notice specifying how the transfers will be made and requesting Tenant
provide specific information to effect the automatic monthly electronic
transfer of funds to Landlord's designated account. Tenant shall provide the
requested information within thirty (30) days after Landlord's request.
8.02. MINIMUM RENT:
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(A) Beginning on the Commencement Date and continuing through and including
the Termination Date, Tenant shall pay Minimum Rent (as such term is defined
in Section 8.02 (B) of this Article), in advance, on the first day of each
calendar month during the term of this Lease. Each payment of Minimum Rent
shall be made without prior notice of or demand for payment. In the event the
Commencement Date or Termination Date is not the first day of a calendar
month, the Minimum Rent for such calendar month shall be prorated on a per
diem basis.
(B) "MINIMUM RENT" for each month during the term of this Lease shall be the
following amounts:
<TABLE>
<CAPTION>
Floor Minimum Rent
- ----------------------------------------------
<S> <C>
2, 4 and 6 $65,893.33 per month ("A RENT")
2,3,4 and 6 $86,998.33 per month ("B RENT")
2 through 6 $106,215.33 per month ("C RENT")
</TABLE>
(i) A Rent shall be payable only for so long as Tenant occupies only
Floors 2, 4 and 6. Tenant shall have the right to install equipment and switches
on Floors 3 and 5 and/or locate employees on Floor 5 at any time during the term
of this Lease. As soon as any equipment or switch is installed in any room on
Floor 3, Tenant shall commence payment of additional Minimum Rent for each
room(s) and/or open floor area in which equipment is installed, calculated at
the rate of $20.00 per annum for each gross leasable square foot of floor area.
As soon as either (a) rooms and/or open floor area on Floor 5 containing more
than one-half of the gross leasable area on Floor 5 are occupied by equipment
and/or employees, or (b) rooms and/or open floor area on Floor 5 are occupied by
equipment and/or employees for more than five weeks, whichever event shall occur
earlier, Tenant shall commence payment of additional Minimum Rent for each
room(s) and/or open area in which an employee is stationed or equipment is
maintained, calculated at the rate of $20.00 per annum for each gross leasable
square foot of floor area
(ii) B Rent shall be payable on the earlier of: (i) the date Tenant
occupies Floor 3 or any part thereof except for mere installation and
maintenance of equipment or switches as provided in the preceding subsection
(i), or (ii) May 1, 2000.
(iii) C Rent shall be payable commencing on the earlier of (a) the
date Tenant occupies Floor 5 or any part thereof, except as otherwise provided
for in the preceding subsection (i); or (b) August 1, 2000.
Despite any other provision of this Section B to the contrary, the Minimum Rent
shall be increased on the first day of the 13th month during the Lease term and
on each one year anniversary thereof ("CPI ADJUSTMENT DATE"), to reflect any
Consumer Nice Increase.
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"CONSUMER PRICE INDEX INCREASE" shall mean an increase in Rent made in
proportion to any decrease, but not any increase in the purchasing power of the
United States dollar, by reference to the Consumer Price Index-
Seattle-Tacoma-Bremerton WA - All Items - (1982-84=100) (the "PRICE INDEX")
published by the Bureau of Labor Statistics of the U.S. Department of Labor, or
a successor or substitute index selected by Landlord and appropriately adjusted
by Landlord. A Consumer Price Index Increase shall be computed as follows:
(i) The Price Index figure for the month of December during each year
shall be compared to the Price Index figure for the month of December in the
immediately preceding calendar year, and the applicable Rent shall be increased,
if at all, for the 12 months immediately following the applicable CPI Adjustment
Date by an amount equal to the percentage increase (rounded off to the nearest
whole percent) between the Price Index figure for the month of December in the
immediately preceding calendar year, and the Price Index figure for the month of
December in the current Lease Year, multiplied by the applicable Rent payable
during the current calendar year (and in the event the Rent for the current
calendar year was reduced or abated for any reason or the Lease term did not
begin on January 1st of then current calendar year; then nevertheless for the
purposes of this section (i), the applicable Rent payable for the current
calendar year shall be deemed payable in full for a complete calendar year.
(ii) By way of example only: Assuming that the Commencement Date of
this Lease was June 1, 1994; the Minimum Rent for the first 12 months of the
Lease term were $100.00 per month; the Price Index figure for the month of
December, 1993 was 300; and the Price Index figure for the month of December,
1994 was 315.2; the Minimum Rent for the 12 months immediately following the
first CPI Adjustment Date (June 1, 1995) would be increased as follows: the
percentage of increase of the Price Index figure for December, 1994 (315.2)
above the Price Index figure for December, 1993 (300), would be five percent
(5.00%) (rounded off to the nearest whole percent). The Minimum Rent for the
first calendar year (1994) is deemed to be $1,200.00 (even though the Minimum
Rent payable during the 1994 calendar year were actually only $700.00);
multiplied by five percent (5.00%), the Minimum Rent for the 12 months
immediately following the first CPI Adjustment Date (June 1, 1995) would be
$1,260.00.
(C) LEASE YEAR shall mean a period of 12 consecutive calendar months. However,
the first and last Lease Year may be less than 12 complete calendar months. The
first Lease Year shall begin on the Commencement Date and end on the 31st day of
December in the same calendar year that the term of this Lease begins. Each
succeeding Lease Year shall begin on the first day of January and end on the
31st day of December. If the Termination Date is a date other than the 31st day
of December, the last Lease Year shall be less than 12 complete calendar months.
8.03. PRO RATA SHARE:
(A) "PRO RATA SHARE" shall mean a fraction, with the Office Area as the
numerator and the Project Area (as such term is defined in Section 8.03(C) of
this Lease) as the
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denominator.
(B) The dimensions and square footage of the gross leasable floor area within
the Office were determined by measuring from the center of demising walls,
except where the wall is an end or exterior wall, in which case the measurement
was made to the exterior side of the wall), Without any deduction for any area
within the Office, including by way of example only: elevator shafts, columns,
stairs, fire escapes, lobbies, electric or other utility closets, rest rooms,
hallways.
(C) "PROJECT AREA" shall mean the square footage of the gross leasable floor
area within the building(s) within the Project, but excluding: (i) any parking
garages or other free-standing structures designed for parking vehicles, and
(ii) all Common Area. The Project Area as of the date of this Lease is
approximately 74,645 square feet.
8.04. REAL ESTATE TAXES
(A) "REAL ESTATE TAXES" shall mean real estate taxes and assessments of every
nature whatsoever (including without limitation intended, ordinary,
extraordinary, general and special), levied, assessed or imposed upon the
Project or any part thereof, or which becomes a lien against the Project or
any part thereof. Real Estate Taxes include without limitation intended (i)
all assessments and charges imposed by any Government (as such term is
defined in Section 8.04(B) of this Lease), or pursuant to any Law whatsoever;
and (ii) any tax, regardless of its characterization, which may be levied or
imposed upon Landlord or the Rent, in lieu of, or in addition to any other
tax which would otherwise constitute Real Estate Taxes. In the case of
assessments which can be paid in installments without the imposition of any
penalty, only the installments (together with any interest payable by reason
of payment in installments) which accrue during the Lease term shall be
included in Real Estate Taxes. Real Estate Taxes shall not include: (i) any
assessments levied for either (a) any new construction in or expansion of the
Project, or (b) which are required for any new construction in or expansion
of the Project; and (ii) any transfer, inheritance, estate, income (subject
to Tenant's obligation to pay to Landlord the amount of any tax specifically
levied on the Rent), corporate or franchise tax. Within 20 days after a
request by Tenant, Landlord shall provide Tenant with copies of all bills and
statements received by Landlord for Real Estate Taxes for the then current
fiscal year and the previous fiscal year.
(B) "GOVERNMENT" shall mean all federal, state, county, municipal and other
governments; and governmental and quasi-governmental branches, authorities,
districts, courts, tribunals, boards, agencies, departments, commissions,
officers, judges, agents, employees, and other instrumentalities.
(C) "LAW" shall mean all law; and all statutes , ordinances, regulations, rules,
orders, judgments, and other requirements of the Government.
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(D) Tenant shall also pay to Landlord upon demand by Landlord, the entire amount
of any Real Estate Taxes due as a result of any inventory in the Office and any
Improvements constructed or installed in the Office by the Tenant.
(E) Tenant shall pay at least ten days before the date due all taxes levied,
assessed or imposed upon any personal property owned, installed or used by
Tenant. Within 20 days after a request from Landlord, Tenant shall furnish
Landlord with proof of payment reasonably satisfactory to Landlord.
8.05. TAX APPEALS:
(A) Landlord shall have the right at any time and from time to time, to effect
any action or proceeding whatsoever ("TAX APPEAL"), challenging any
determination of the amount of the assessed value of the Project, or any part of
the Project, for the purposes of Real Estate Taxes. For this purpose Landlord
may retain such attorneys, appraisers and other persons and entities as Landlord
may deem appropriate. Tenant shall cooperate with Landlord in the preparation,
commencement, prosecution and appeal of any Tax Appeal.
(B) In the event Landlord shall successfully prosecute any Tax Appeal, Tenant
shall pay to Landlord or its designees, within 20 days after demand by Landlord,
Tenant's Pro Rata Share of all costs and expenses incurred by Landlord in
connection with such Tax Appeal, including without limitation intended, all
Litigation Expenses (as such term is defined in Section 8.05(C) of this Lease);
provided, however, that Tenant shall have no obligation to make payment under
this Section B to the extent that the payment would exceed the savings that the
Tenant will enjoy over the Lease term as a result of the Tax Appeal..
(C) "LITIGATION EXPENSES" shall mean all costs and expenses whatsoever, paid or
incurred by a party under this Lease, in preparation for, or during the
prosecution, appeal, settlement or enforcement of any action or proceeding
whatsoever. Litigation Expenses shall include without limitation intended, the
amounts of attorneys' fees and disbursements; expert witness', title search,
title commitment, title insurance, stenographers', transcript, filing, printing,
copying, marshals', sheriffs', and process servers' fees.
(D) If as a result of a successful Tax Appeal, there shall be a Real Estate Tax
overpayment, Tenant's proportionate share of the excess payment will be credited
against the succeeding payments of Estimated Common Charges due. If the Lease
term expires before the credit is exhausted, the unexhausted portion of the
credit shall be refunded to Tenant within 30 days after the later of the date
(i) the term of this Lease expires, or (ii) of Tenant's request for the refund.
Landlord shall promptly notify Tenant of any credit resulting from a successful
Tax Appeal or any other overpayment of Real Estate Taxes made by Tenant.
8.06. Intentionally Deleted.
8.07. OPERATING EXPENSES:
(A) Tenant shall pay its Pro Rata Share of all increases ("OPERATING EXPENSE
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INCREASES") in the reasonable costs and expenses of every nature whatsoever,
paid or incurred by Landlord, in the operation, management, maintenance,
repair, and replacement of the Project ("OPERATING EXPENSES"). Operating
Expenses shall include without limitation intended, all costs and expenses
of: janitorial services for the Project including the Office and other
offices in the Project, Monday through Friday, federal and State holidays
excluded, at the same or greater level of service as the Landlord has
customarily provided to all tenants of the Building; maintenance, repairs and
replacements of elevators, HAC system, electrical system, plumbing system,
and all life safety systems; management; snow removal; landscaping;
re-paving; striping; painting; cleaning and replacing flooring; sewage and
Refuse (as such term is defined in Section 12.05 of this Lease) removal;
traffic and parking enforcement and control; security in the Common Area;
pest and vermin control; reasonable compensation and benefits of employees;
fire protection; supplies; insurance, including without limitation intended,
public liability and property damage insurance; personal property taxes on
any personal property necessary or appropriate for the Project; charges and
rents for Utilities (as such term is defined in Section 8.07(E) of this
Lease); compliance with applicable Law; licenses, permits and other fees;
parking area surcharges and levies; a fee for the administration of the
Project in an amount equal to five percent of the total of all Operating
Expenses; attorneys', accountants' and other professionals' fees; and the
cost of any financing of any equipment necessary or appropriate for the
Project.
(B) The Operating Expenses shall not include any of the following costs or
expenses:
(i) Costs incurred in connection with the initial construction or
design of the Project or, any expansion of the Project, or the construction of
additional buildings or structures on any part of the Project, or to repair,
change, improve, replace or correct defects in the original construction,
expansion or design of the Project or any buildings or structures on any part of
the Project
(ii) Capital replacements, expansions, additions, Improvements and
repairs; provided, however, that: (a) the cost of capital replacements and
repairs shall be amortized over the useful life of the replacements and repairs
using straight line depreciation, and the amount amortized each year, together
with interest on the unamortized balance at the rate of interest payable on the
first mortgage or deed of trust encumbering the Project shall be included within
Operating Expenses; and (b) the cost of capital expansions, additions and
improvements included in the Operating Expenses shall be limited to those which
will improve the operating efficiency of the Project or reduce the Operating
Expenses or which may be required by any provision or application of Law not in
effect as of the date of this Lease.
(iii) Costs that are or are required to be reimbursed to Landlord
(other than through prorated absorption of such costs by a majority of the
tenants in the Project, and costs required to be reimbursed which are not
collectible for any reason except Landlord's negligence), including without
limitation costs covered by insurance that Landlord acquires or is obligated to
provide under this Lease (but reasonable deductibles shall be included in the
Operating Expenses) or pursuant to warranties made for the benefit of Landlord
or costs reimbursed to Landlord pursuant to provisions in leases with other
tenants (except for such "pro-rated" cost provisions, and costs required to be
reimbursed which are not collectible for any reason except Landlord's
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negligence);
(iv) Landlord's administrative and overhead expenses not incurred
directly in operating, maintaining, repairing or replacing the Project;
(v) Costs incurred by reason of Landlord's negligence or breach of any
legal obligation (including any obligation of Landlord under any lease in the
Project);
(vi) Costs, including (without limitation) any professional fees,
commissions, remodeling costs or court costs, incurred in connection with the
enforcement of leases with other tenants of the Project, or obtaining or
retaining tenants for the Project;
(vii) Management fees in excess of five percent of the rents and other
charges collected from the tenants of the Project;
(viii) Amounts paid to persons or entities related to Landlord in
excess of the fair market value of services or materials provided in exchange;
(ix) Costs of achieving compliance with any environmental or other law
or regulation applicable to the Project which was in effect as of the date of
this Lease;
(x) Amounts payable under or in connection with Landlord's mortgage,
deed of trust, ground lease or other financing or refinancing arrangements;
(xi) Depreciation of or reserves for replacement of any of Landlord's
assets.
(xii). Costs incurred in advertising or promoting the Project for any
purpose, including (without limitation) sale of the Project;
(xiii) Costs, fines or penalties incurred due to violation by Landlord
of any applicable Law.
(xiv) Costs of sculpture, paintings, or other objects of art installed
in or on the Project.
(xv) Wages, salaries or other compensation or costs incurred for
(a) any managerial or executive employees or agents of Landlord (exclusive of
that portion attributable to the operation, management, maintenance, repair
and replacement of the Project; or (b) any persons employed in commercial
concessions operated by Landlord.
(xvi) Increases in insurance premiums attributable to hazardous
conditions, uses or activities of other tenants or occupants of the Project.
(C) Based upon estimates made by Landlord, at any time and from time to time,
Tenant shall pay an estimated amount of its Pro Rata Share of the Operating
Expense Increases ("ESTIMATED COMMON CHARGE"), in advance, on the first day of
each calendar month during the
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term of this Lease commencing with the first day of the 13th month in the
Lease term. In the event Landlord determines at any time and from time to
time that Tenant's actual Pro Rata Share of Operating Expense Increases
exceeds the Estimated Common Charge, Tenant shall pay the amount of the
deficiency ("COMMON CHARGE UNDERPAYMENT") to Landlord or its designee, within
20 days after demand by Landlord. In the event the Estimated Common Charge
for any Lease Year exceed Tenant's actual Pro Rata Share of the Operating
Expense Increase, Tenant shall be credited the amount of such overpayment
against the succeeding Estimated Common Charge(s) due. If the Lease term
expires before the credit is exhausted, the unexhausted portion of the credit
shall be refunded to Tenant within 30 days after the later of the date of (i)
expiration of the Lease term or (ii) Tenant's request for the refund. The
actual amount of Tenant's Pro Rata Share of Operating Expense Increases shall
be determined separately for each Lease Year. No later than the 1st day of
April during each calendar year beginning with the 2002 calendar year,
Landlord shall make available to Tenant a written statement showing in
reasonable detail the amounts of the items comprising the Operating Expenses
and the calculation of Tenant's Pro Rata Share of the Operating Expense
Increases for the immediately preceding calendar year.
If the Tenant in not in Default and the Tenant in good faith reasonably disputes
the amount of the Operating Expense Increases, then the Tenant shall have the
right on not less than 15 days' prior notice, to conduct an audit of the
Landlord's records of Operating Expenses, during regular business hours, at the
location the records are then kept by the Landlord, at the Tenant's sole cost
and expense. Tenant shall not exercise such right more than once in any calendar
year and shall not have the right to audit any records except those for the
previous fiscal year. Tenant shall bear all costs and expenses incurred by the
Landlord in connection with the audit including without limitation intended,
wages and benefits for all personnel utilized during the audit including
personnel to maintain the security of the Landlord's books and records; and
photocopy expenses. Landlord shall not be required to provide Tenant with access
to the records during any period of time the records are required for the
preparation of any government audit, required tax return or financial report.
Tenant shall not have the right to conduct any audit if: (i) the auditors are
not either: (x) employed full time by Tenant as accounting staff, or
(y) members, managers or staff of a nationally or regionally recognized firm of
certified public accountants; or (ii) Landlord provides Tenant with a report of
an audit conducted for the pertinent fiscal year which was conducted by members,
managers or staff of a nationally or regionally recognized firm of certified
public accountants; or (iii) the auditors are compensated on a contingency fee
or partial contingency fee basis. No audit shall be conducted for a period
lasting more than ten business days and no audit shall be conducted by more than
three individuals. No later than 30 days after the date an audit is conducted
by the Tenant, the Tenant shall provide the Landlord with a copy of the
auditors' report to the Tenant, together with written authorization to provide
other tenants with copies of the report. Tenant and its auditor shall keep any
audit, audit report and information obtained during the audit confidential;
shall not disclose nor permit any employee, agent or other person to disclose
the audit, audit report or information obtained during the audit to any other
person or entity; and shall indemnify and hold Landlord harmless from all
liabilities, damages, costs and expenses, including Litigation Expenses arising
out of any breach of the obligations described in this
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sentence. No auditor shall be given access to any books or records until the
auditor has executed an undertaking satisfactory to the Landlord and consistent
with the preceding sentence.
(D) "COMMON AREA" shall mean all property constituting the Project (including
without limitation intended, the foundations, roofs, walls, columns and other
structural elements; signs; parking areas; roads; malls; sidewalks; curbs;
unpaved areas; rooms; halls; stairs, ramps and other conveyances; and Utility
systems), except the offices in the Project.
(E) "UTILITIES" shall mean all utilities, including without limitation intended,
telephone, public address, electric, gas, water, sewage, drainage, heating, air
conditioning, ventilation, and cable television.
(F) Operating Expense Increases shall be calculated in accordance with this
Section:
(i) "BASE YEAR" shall mean the calendar year in which the Commencement Date
occurs.
(ii) "CURRENT YEAR" shall mean each calendar year subsequent to the Base Year.
(iii) Tenant's obligation to pay its Pro Rata Share of Operating Expense
Increases shall commence on the first day of the 13th month during the term of
this Lease ("FIRST ADJUSTMENT DATE"), with subsequent adjustments as of each
succeeding one year anniversary of the First Adjustment Date.
(iv) Operating Expenses for the Base Year (or the estimated Operating Expenses
if the actual Operating Expenses for the Base Year are not yet available) shall
be subtracted from the Operating Expenses for the Current Year (or the estimated
Operating Expenses if the actual Operating Expenses for the Current Year are not
yet available), to determine the Operating Expense Increase for the Current
Year.
(v) For the purposes of calculating Tenant's Pro Rata Share of Operating Expense
Increases, those Operating Expenses which are entirely or almost entirely
affected by the level of occupancy in the Project, shall be calculated (i.e.
"grossed up") as if the leasable floor area of the Project were 95.00 percent
occupied regardless of the actual level of occupancy. Operating Expenses which
are subject to being "grossed up" include without limitation intended:
electricity, water and sewer, janitorial services, Refuse disposal, management
fees, supplies, repairs and maintenance. Operating Expenses which are not
subject to being "grossed up" include without limitation intended: insurance,
Real Estate Taxes, security, elevator maintenance, and landscaping. Operating
Expenses which are not "grossed up" shall be determined based on actual costs.
(vi) Despite the preceding Section (v), at the request of Tenant, in the
calculation of Operating Expenses for the Base Year, the cost of electricity
shall be the actual cost and the cost of electricity for the Base Year shall not
be "grossed up" to reflect the cost which
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would have been incurred assuming a 95.00 percent level of occupancy in the
Project.
8.08. LATE CHARGES:
In the event Landlord or its designee does not receive any payment of Rent on or
before the date the payment is due; then within ten (10) days after demand by
Landlord or its designee, Tenant shall pay a late charge, in an amount equal to
the greater of (i) $50.00; or (ii) 5.00 percent of the amount overdue.
8.09. INTEREST AT DEFAULT RATE:
In the event Landlord or its designee does not receive any payment of Rent on or
before the date it is due; then within ten (10) days after demand by Landlord or
its designee, Tenant shall pay interest on the amount overdue from the date it
was due until the date it is paid, at a rate of interest equal to 12.00 percent
per year ("DEFAULT RATE").
8.10. BAD CHECK FEES:
In the event a check or draft tendered by Tenant in payment of Rent is not paid
by the drawee upon initial presentation, for any reason whatsoever; then within
ten (10) days after demand by Landlord or its designee, Tenant shall pay a bad
check charge in the amount of $50.00.
8.11. AMOUNTS PAID BY LANDLORD:
In the event the Landlord incurs or pays any cost or expense whatsoever, as a
result of (i) a Default (as such term is defined in Section 23.01 of this
Lease); and/or (ii) any actual or apparent emergency arising out of a breach
in the performance of any of Tenant's obligations under this Lease; and/or
(iii) Landlord's election to take such action as Landlord may deem
appropriate to: (a) cure such Default, or (b) mitigate the damages or
potential damages arising from such breach, if there is an actual or apparent
emergency, which action may be taken without notice to Tenant in the case of
any actual or apparent emergency (; provided, that in the case of any actual
or apparent emergency Landlord shall attempt to notify Tenant by telephone or
some other means reasonable under the circumstances) ; then within 20 days
after demand by Landlord, Tenant shall reimburse Landlord for all such
reasonable costs and expenses (including without limitation intended, the
reasonable cost and expense of any work performed by any employee of Landlord
or its agent).
8.12. NET RENT:
This Lease is a "Net Lease." The Rent due under this Lease shall be "Net Rent."
Except for those obligations which Landlord expressly agrees to perform at its
sole cost and expense, Landlord shall not be obligated to incur or pay any cost
or expense in connection with the Office or the Project. Tenant shall perform
all of its obligations under this Lease at its sole cost and expense.
8.13. RENT TAX:
In the event any Government levies, imposes or charges any tax whatsoever, on
account of the Project, the interest of Landlord in the Project, this Lease,
Tenant, or the Rent, and the amount of such tax is not an obligation of Tenant
under any other provision of this Lease, within ten days after demand by
Landlord, Tenant shall remit its Pro Rata Share of such tax to Landlord (and in
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the event Tenant's Pro Rata Share would not fully reimburse Landlord for the
amount of such tax which is fairly attributable to this Lease, Tenant shall pay
its fair share).
ARTICLE 9. INSURANCE:
9.01. MUTUAL WAIVER OF CLAIMS:
Despite any other provision of this Lease to the contrary, Landlord and Tenant
hereby waive any rights each may have against the other as a result of any loss
or damage caused to the respective party and its property, the Office and the
Project, arising from any risk covered by casualty insurance with "all-perils"
coverage ("CASUALTY INSURANCE") in the jurisdiction in which the Project is
located. Landlord and Tenant shall cause their respective Casualty Insurance and
any other policies covering loss by fire and/or causes covered by all-perils
coverage, to provide that the insurer waives ("WAIVER OF SUBROGATION") all
rights of recovery by way of subrogation against the other party to this Lease,
in connection with any loss covered by any such policies. However, in the event
the Waiver of Subrogation can only be obtained by the payment of an additional
premium over and above the premium for insurance without the Waiver of
Subrogation, (i) the party seeking to obtain the insurance shall give the other
party notice of such additional premium and request that the other party pay
such premium; and (ii) the other party shall have ten days after the giving of
such notice to either (a) place such insurance with another insurer which is
reasonably satisfactory to the party which gave the notice, without such
additional premium, or (b) agree to pay such additional premium (in the case of
Tenant, Tenant's Pro Rata Share). In the event that either Landlord or Tenant
cannot obtain than Waiver of Subrogation, or either Landlord or Tenant cannot
obtain the Waiver of Subrogation without additional premium and the other party
fails to fulfill the requirements of clause (a) or (b) of the immediately
preceding sentence, this Section 9.01 shall be deemed deleted and of no force or
effect while such conditions persist.
9.02. TENANT'S INSURANCE:
(A) Tenant shall maintain the following insurance coverage, commencing on the
date Tenant is given access to the Office and continuing through the Termination
Date and the date Tenant fulfills all of its obligations under Section 33.01 of
this Lease:
(i) PUBLIC LIABILITY AND PROPERTY DAMAGE:
Comprehensive bodily injury liability insurance with combined single limits of
not less than $2,000,000., covering any and all liability of Tenant for bodily
injury, death or property damage occurring in or about the Project, portions of
which may be provided under a so called "umbrella" or "excess liability" policy.
In the event that Tenant is unable to obtain such coverage Tenant shall obtain
commercial general liability and property damage insurance for bodily injury,
death or property damage occurring in or about the Project, with combined single
limits of at least $2,000,000. in the case of bodily injury, death or property
damage; portions of which may be provided under a so-called "umbrella" or
"excess liability" policy. In addition, in the event that Tenant is fails to
obtain liability insurance policies on an "occurrence basis" Tenant shall obtain
extension policies commonly referred to as "tail" policies at least 30 days
prior to the expiration of any policy which will not be renewed. All extension
policies (a) shall include coverage for all
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claims made after the date, of the policy not renewed, regardless of the date
such claims are made; and (b) shall have limits equal to or greater than the
policies which are not being renewed. All liability policies shall specifically
insure performance of the agreement of Tenant, to indemnify Landlord, set forth
in Section 32.01 of this Lease, as it relates to liability for injury to or
death of persons and damage to property, and shall include an endorsement to
specifically cover liability arising out of the balconies. Until the specific
coverage for the balconies is procured, Tenant shall not use nor permit any
other person to use any of the balconies in the Office.
(ii) TENANT IMPROVEMENTS AND INVENTORY:
Casualty Insurance covering all of Tenant Improvements (except any improvements
and fixtures which are covered by the Project's Insurance), inventory and other
personal property in or about the Office from time to time, in an amount not
less than the full replacement cost, without any deduction for depreciation
during the term of this Lease.
(iii) PLATE GLASS/BOILER:
Insurance, or self-insurance if Tenant is not required to provide nor maintain a
Security Deposit under this Lease ("CREDIT TENANT"), against breakage of, or
damage to all plate glass in and about the Office, and insurance on any boiler,
furnace or air conditioning system, in or about the Office, with broad form
coverage in an amount not less than the full replacement cost, without any
deduction for depreciation during the term of this Lease.
(iv) OTHER INSURANCE/LIMITS: Not sooner than the fifth anniversary of the
Commencement Date and not more often than once every five years during term of
this Lease, Landlord shall have the right to increase the limits and types of
insurance coverage which Tenant is required to obtain and maintain, by giving
Tenant notice of such increase in limits or coverage. Any such increase in
limits or coverage shall be applicable to the immediately succeeding renewal or
replacement liability insurance policy, provided, however, that if the term of
the then current policy is longer than one year, any such increase shall be
applicable to the insurance coverage in effect on and after the first
anniversary that notice of such increase in limits or coverage is given.
Landlord's right to increase the limits or types of insurance coverage is
limited to such limits and types of coverage as the holder of any first mortgage
or deed of trust encumbering the Project may reasonably require; provided such
mortgagee is a bank, savings and loan association, trust company, life insurance
company, national broker-dealer, corporation whose securities are listed on the
New York Stock Exchange, Inc., or a pension fund with a net worth in excess of
$10,000,000 ("INSTITUTIONAL LENDER"); or in the event that there is no such
first mortgagee or deed of trust holder, such other insurance coverages and such
higher limits as may be required by any Institutional Lender then holding or
servicing mortgage or deed of trust loans secured by comparable commercial
property in the Seattle Metropolitan Area in State of Washington.
(B) OWNER'S CONTINGENT OR PROTECTIVE LIABILITY INSURANCE:
Prior to commencing the installation or construction of Improvements, or
alterations, Tenant shall procure; and during the entire period of time that
Tenant installs or constructs Improvements, or alters the Office, Tenant shall
maintain; owner's contingent or protective liability insurance,
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covering all claims not covered by the public liability and property damage
insurance required by Section 9.02.A (i) of this Lease.
(C) INSURERS/POLICIES:
All insurance which Tenant is obligated to maintain, shall be issued by
insurance companies authorized to do business in the jurisdiction in which the
Project is located, which have a "Best's Letter Rating" of not less than "A"
("Excellent"), with no adverse "Rating Modifier," and a "Financial Size
Category" of not less than "Class X" (or their then current equivalents) in the
most current "Best's Key Rating Guide" or the equivalent in a substitute or
successor publication selected by Landlord. All insurance policies shall: (i) in
form and substance be reasonably satisfactory to Landlord, unless Tenant is a
Credit Tenant in which case all insurance policies shall comply with each
applicable provision of this Lease; (ii) be written as primary policy coverage,
not contributing with, or in excess of any coverage carried by Landlord or
another; (iii) name Landlord, any mortgagee and management agent designated by
Landlord as additional insureds; (iv) except as otherwise provided for in
Section 9.01 of this Article, contain in each policy covering loss or damage to
property, an express waiver of the right of subrogation against Landlord;
(v) contain a provision that although Landlord is named as an insured, it shall
nevertheless be entitled to recover under the policy for any loss suffered as a
result of the acts or omissions of the Tenant; and (vi) contain a provision that
the insurer shall give Landlord at least 30 days prior written notice of any
termination or lapse of insurance coverage, reduction in insurance coverage, or
material change in the terms of insurance. Original policies of all required
insurance (or certificates satisfactory to Landlord), together with proof of
payment of the premiums, shall be delivered to Landlord prior to the date that
Tenant is given access to the Office. Thereafter, at least 30 days prior to the
termination or lapse of any original, renewal or replacement coverage, original
renewal or replacement policies (or certificates satisfactory to Landlord),
together with proof of payment of the premiums, shall be delivered to Landlord.
9.03. PROJECT'S INSURANCE:
(A) Landlord shall at all times during the term of this Lease, to the extent
obtainable, at the sole cost and expense of Tenant and other tenants of the
Project, procure and maintain Casualty Insurance (and insurance against such
other hazards, including earthquake, as Landlord may deem appropriate) covering
the Project; rent loss insurance; broad form boiler and machinery insurance;
and insurance on vehicles and equipment (collectively "PROJECT'S INSURANCE"),
with such limits and with such insurers as Landlord may deem appropriate. The
Casualty Insurance coverage shall be no less than an amount sufficient to avoid
coinsurance. Landlord intends, but shall not be obligated, to obtain Casualty
Insurance which covers some or all of the improvements and fixtures (but not
trade fixtures and personal property) installed or constructed by Tenant.
Accordingly, within 30 days after the date Tenant opens the Office for business,
Tenant shall submit to Landlord, a detailed written statement, signed by Tenant,
enumerating such improvements and fixtures and their respective cost.
(B) Tenant shall not at any time during the term of this Lease keep or permit
any Improvements or inventory in or about the Project, or do anything in or
about the Project, which would increase the premium of, or nullify any of the
Project's Insurance or any other insurance obtained by Landlord. Within ten days
after demand by Landlord, Tenant shall pay any premium surcharge
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or increase arising out of any act or omission of Tenant contrary to the
prohibitions in the immediately preceding sentence.
ARTICLE 10. LICENSES:
10.01. TO ENTER OFFICE:
Landlord may elect to give Tenant access to the Office, prior to the date it is
Ready for Occupancy, for the purpose of permitting Tenant to install and
construct Tenant Improvements. In the event Tenant is given access for such
purpose, Tenant shall not in any manner interfere with or impede the
installation or construction of Landlord Improvements; and all of the provisions
of this Lease shall be in full force and effect, provided, however, that Tenant
shall not be obligated to pay Minimum Rent, Overage Rent, Dues, and Tenant's Pro
Rata Share of Operating Expenses, Real Estate Taxes and Project's Insurance
(collectively "MONTHLY RENT"), for any period prior to the Commencement Date.
10.02. TO ENTER COMMON AREA:
Tenant and all persons permitted in the Office by Tenant may use the accessways,
sidewalks, lobby, elevators, stairs, hallways and restrooms in the Common Area
("OPEN COMMON AREA"), in common with all other persons and entities entitled to
use Open Common Area; subject, however, to the provisions of this Lease and the
Rules and Regulations (as such term is defined in Article 28 of this Lease). The
permission granted by the immediately preceding sentence is a revocable license,
granted upon the condition that any use of the Open Common Area conforms to the
provisions of this Lease and the Rules and Regulations. If Tenant is an entity,
then Tenant's license to use the Open Common Area is not subject to revocation
unless there is a breach of the Rules and Regulations which continues after the
expiration of any applicable grace period. However, if Tenant is an entity, the
license of any principal, employee, agent, contractor or supplier to use the
Open Common Area, is subject to revocation upon any breach of the provisions of
this Lease or the Rules and Regulations affecting the Open Common Area. Despite
the foregoing, Tenant shall have the following exclusive rights with respect to
the elevators: (i) exclusive use of the elevators, subject to use by Landlord,
its management agent, contractors and suppliers, and any rights of use conferred
by the existing leases for use of the roof; (ii) to cosmetically convert one of
the elevators into a freight elevator, subject to the requirements of this Lease
governing Tenant Improvements, and (iii) require that all freight be transported
in the freight elevator so long as one elevator is converted to use as a freight
elevator and is in operation.
10.03. TO PARK VEHICLES:
Subject to the provisions of Section R.1. in the attached Rider, Tenant shall
have the non-exclusive right to use 198 spaces for parking motor vehicles
operated by Tenant or its employees. Landlord shall have the right but not the
obligation to designate parking spaces for the exclusive use of tenants of the
Project and their employees. If the Landlord makes such designation then Tenant
and Tenant shall cause it's employees to park their vehicles solely in the
parking spaces designated by the Landlord for the exclusive use of the Tenant
and
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its employees, or all tenants of the Project and their employees, as the case
may be. Tenant, its employees and visitors shall also have the right to park
their motor vehicles without additional charge, on the adjoining lot or parcel
currently operated as a Holiday Inn, in the parking spaces otherwise available
for guests of the Holiday Inn lot or parcel, but only if there are parking
spaces available after the vehicles of all guests and employees of the Holiday
Inn lot or parcel are parked.
ARTICLE 11. USE AND OPERATION OF OFFICE:
11.01. Intentionally Deleted.
11.02. COMPLIANCE WITH THE LAW, ETC.:
Tenant shall (i) comply with all Law governing the Tenant's use or occupancy of
the Office; (ii) not conduct any action or permit any action or condition which
would (a) violate any Law or the certificate of occupancy or any other Required
Permits (as such term is defined in Section 11.03 of this Lease) covering the
Office; or (b) which in the reasonable judgment of Landlord constitutes a public
or private nuisance, or a trespass; or (c) materially adversely affects the
business of the tenants of the Project; or (d) creates any hazardous condition
in the Project; (e) violates any work order issued by any insurer or holder of
any deed of trust or mortgage encumbering the Project or any part of the
Project; or (f) violates any of the encumbrances against the Project. The
obligations of Tenant under this Section 11.02 shall include without limitation
intended, the construction and installation of any Improvements required to
comply with Law or any work order issued by any insurer or holder of any deed of
trust or mortgage encumbering the Project or any part of the Project, but only
if required as a result of any Improvements or alterations made by Tenant, or
Tenant's specific use or method of operations. Landlord represents that the
Landlord has no actual current knowledge and has received no actual outstanding
notice that the gross leasable floor area within the Office including but not
limited to, elevators, elevator shafts, stairs, lobbies, electric systems,
utility closets, plumbing, rest rooms, and hallways, violate any existing
applicable Law.
11.03. REQUIRED PERMITS:
Tenant shall (i) obtain and maintain in full force and effect all licenses,
permits, certificates, approvals and other authorizations (collectively
"REQUIRED PERMITS") required by Law or the board of fire underwriters or other
recognized fire insurance rating organization, in connection with Tenant
Improvements or Tenant's use or occupancy of the Office; and (ii) prior to
opening the Office for business and thereafter from time to time within ten days
after a request from Landlord, deliver to Landlord evidence reasonably
satisfactory to Landlord that all Required Permits have been issued and are in
full force and effect.
11.04. HAZARDOUS SUBSTANCES:
(A) In the Office and Project and in the vicinity of the Office and Project,
Tenant shall not: (i) cause or permit the generation, manufacture, refinement,
transportation, treatment, storage, handling, installation, removal, disposal,
transfer, sale, production or processing of Hazardous Substances (as such term
is defined in this Section 11.04) or other dangerous or toxic
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substances, or solid wastes; (ii) cause or permit the Release (as such term is
defined in this Section 11.04) or existence of any Hazardous Substances which
might affect the Project; (iii) cause or permit any substances or conditions,
which may support a claim or cause of action, whether by any Government or
representative thereof, or any other person, under the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended
("SUPERFUND ACT"), the Resource Conservation and Recovery Act of 1976, the Toxic
Substances Control Act or any other Law. For the purposes of this Lease the term
"RELEASE" shall have the following meaning: (i) the definition used in the
Superfund Act; and (ii) (if not included within the definition contained in the
Superfund Act) the presence of any Hazardous Substance. For the purposes of this
Lease the term "HAZARDOUS SUBSTANCES" shall have the following meaning: (i) the
definition used in the Superfund Act; and (ii) all matter which might adversely
affect health, safety or the environment and is subject to any Law regulating
its Release, including without limitation intended, petroleum and related
by-products, hydrocarbons, radon, asbestos, urea formaldehyde and
polychlorinated biphenyl compounds ("PCB'S") Despite the provisions of this
Section 11.04, Tenant may stock and use factory packaged retail containers of
products designed for office use, such as photocopy toner, cleaning fluids, and
correction fluids, but only if such products are transported, treated, handled,
removed, disposed, transferred, and sold in strict compliance with all Law.
(B) Landlord has no actual current knowledge that the Office contains any
Hazardous Substance in violation of applicable Law. If the Office contains any
Hazardous Substance on the date the Office is Ready for Occupancy, Landlord
shall remove or encapsulate the Hazardous Substance in compliance with
applicable Law. If the Office contains Hazardous Substances on the date the
Office is Ready for Occupancy, the Outside Commencement Date shall be extended
one day for each day Tenant is required to cease making Tenant Improvements,
Tenant fixturing and/or Tenant stocking of the Office.
11.05. AMERICANS WITH DISABILITIES ACT:
Tenant shall comply with all applicable provisions of the Americans with
Disabilities Act (42 USC Sec. 12101 et seg.) and all of the applicable
regulations, rules, guidelines and technical standards promulgated pursuant to
the Americans with Disabilities Act (28 CFR 36), all as amended from time to
time (collectively "ADA"). Without limiting the obligation imposed by the
preceding sentence, Tenant shall:
(A) Be solely responsible for the Office's compliance with all applicable
provisions of the ADA, including without limitation intended, solely responsible
for making any structural and non-structural changes in the Office which may be
required by the ADA, except those required as a result of the Landlord
Improvements which shall be the sole responsibility of the Landlord. Tenant
shall ensure that there are at least three feet of space between each cubicle
erected by or on behalf of Tenant;
(B) Not discriminate nor permit anyone in the Office to discriminate, directly
or through policies, procedures, standards or other criteria, or through
physical barriers or obstacles,
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against any individual on the basis of disability in the full and equal
enjoyment of the goods, services, facilities and privileges available in and/or
through the Office; and
(C)Take such affirmative steps as may be necessary to ensure that disabled
individuals are not excluded or denied goods or services or otherwise dealt with
differently than individuals who are not disabled.
(D)Landlord warrants that the existing Improvements in the Office (including the
elevators, stairs, hallways and rest rooms) currently comply with all applicable
provisions of the Americans with Disabilities Act (42 USC Sec. 12101 et. seg.)
in effect as of the date the Project was first occupied.
11.05. GENERAL CONDUCT:
Tenant shall use and occupy the Office carefully, and conduct its business in
a manner consistent with the operation of a first class commercial office
Project. Tenant shall treat all customers politely, and promptly and fully
address all legitimate complaints of customers in an appropriate fashion.
Tenant shall not permit the use of the Office for solicitations,
demonstrations, sales or promotions by persons other than Tenant (and any
other persons or entities consented to by Landlord in writing). Tenant shall
not conduct or permit any retail, catalog, auction, fire, bankruptcy,
distress, liquidation, going-out-of-business, close-out or similar sales in
or about the Office.
11.06. BUSINESS HOURS:
Tenant shall keep the entire Office open for business, adequately furnished,
equipped and staffed from the Commencement Date through the Termination Date,
Monday through Friday excepting any federal, State or religious holidays
observed by the Tenant or its principals, at least from 10:00 A.M. through
4:00 P.M. Landlord shall have the right to adopt Rules and Regulations which
limit access to and from the Project by requiring among other things, that
any or all individuals entering and leaving the Project: (i) sign in and out;
(ii) provide photo identification; and/or (iii) provide written evidence of
their authorization from the Landlord or tenants of the Project to enter or
leave the Project and/or remove property from the Project.
ARTICLE 12. UTILITIES
12.01. GENERALLY. Landlord shall install all Improvements which are required
outside the Office and inside the Project, to supply the Utilities, if any,
which Landlord is specifically obligated to furnish pursuant to the provisions
of Exhibit "E" of this Lease. Except as otherwise provided in Exhibit "E" of
this Lease, Tenant shall install all Improvements which are required in the
Office to supply all Utilities required or desired for the operation of its
business. Tenant shall pay all deposits, assessments and charges for meters,
sub-meters, delivery and the provision of all Utilities servicing the Office,
except electricity and any water or sewer service provided to the Office by
Landlord.
12.02. LANDLORD CONTROLS SELECTION. Landlord has advised Tenant that at present
time Puget Sound Energy ("ELECTRIC SERVICE PROVIDER") is the utility
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company selected by Landlord to provide electricity service for the Project.
Despite the preceding sentence, if permitted by Law, Landlord shall have the
right at any time, and from time to time during the Lease term, to either
contract for service from a different company or companies providing electricity
service (each such company is referred to as an "ALTERNATIVE SERVICE PROVIDER")
or continue to contract for service from the Electric Service Provider.
12.03. TENANT SHALL GIVE LANDLORD ACCESS. Tenant shall cooperate with Landlord,
the Electric Service Provider, and any Alternate Service Provider at all times
and, as reasonably necessary, shall allow Landlord, Electric Service Provider,
and any Alternate Service Provider reasonable access to the Project's electric
lines, feeders, risers, wiring, and any other machinery within the Office.
12.04. LANDLORD NOT RESPONSIBLE FOR INTERRUPTION OF SERVICE. In the absence of
Landlord's negligence Landlord shall not be liable or responsible for any loss,
damage, or expense Tenant may sustain or incur by reason of any change, failure,
interference, disruption or defect in the supply or character of the electric
energy supplied by the Electric Service Provider or any Alternate Service
Provider, or if electric energy is no longer available or suitable for Tenant's
requirements.
12.05. REFUSE. Landlord shall have the right to either (i) impose a uniform
system of refuse, trash, rubbish, garbage and waste (collectively "REFUSE")
removal for the Project, in which case Tenant shall comply with all Rules and
Regulations adopted by Landlord to implement and maintain such system, including
without limitation intended, removal of Refuse from the Office; and/or
(ii) arrange for Refuse removal by an independent contractor. In either or both
events, the Pro Rata Share of the costs shall be borne by Tenant as part of the
Operating Costs.
ARTICLE 13. MAINTENANCE AND REPAIR:
13.01. LANDLORD MAINTENANCE AND REPAIR:
Landlord shall keep in good condition and repair the roof, foundation, concrete
floor slab, suspended ceiling, exterior doors, windows, interior doors and walls
installed by Landlord, demising and exterior walls (except their interior
surface), elevators and Utility systems (including HVAC, electrical, plumbing
and life safety) to the extent not installed or affected by any Improvements or
alterations made by the Tenant; and provide janitorial services at the same or
greater level of service as the Landlord has customarily provided to tenants of
the Building; provided, however, that Landlord shall have no obligation to
repair any damage: (i) caused by the acts or negligence of Tenant or any person
permitted in the Office by Tenant; (ii) to any Improvements installed or
constructed by Tenant; (iii) to any glass or plate glass installed by Tenant;
(iv) to any fixtures installed by Tenant; or (v) to any equipment installed by
Tenant. Landlord shall have no duty to inspect the Office. Tenant shall give
Landlord prompt notice of any condition which might require repair by Landlord.
Landlord shall have no liability, whatsoever, unless (i) the loss or damage is
not the subject of: (a) a Waiver of Subrogation, or (b) any property or business
interruption insurance Tenant may maintain; (ii) Tenant gives
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Landlord prompt notice of the condition which requires repair by Landlord; and
(iii) Landlord fails to perform the required repair before the expiration of the
applicable grace period.
13.02. TENANT MAINTENANCE AND REPAIR:
(A) Tenant shall not commit waste, and shall not damage nor permit any other
person to damage the Office, the improvements in the Office and all other
property of every nature whatsoever, in or about the Office, including without
limitation intended, the windows, glass, doors, walls and Utility components.
Tenant shall maintain in good condition and repair all portions of the Office
which the Landlord is not required to keep in good condition and repair,
(including interior walls, interior doors, fixtures and equipment installed by
Tenant; the interior surface of demising and exterior walls, the Tenant's
Signs; trade fixtures and floor coverings).
(B) Tenant shall keep the Office free from Refuse (except in appropriate Refuse
containers), stains, and objectionable odors. Tenant shall not block or impede
access on to or from, any sidewalk, accessway or other Common Area. Tenant shall
not use or permit the use of any Common Area for any storage, promotional,
distribution or sales purpose, or place or leave any property on the Common
Area.
ARTICLE 14. ASSIGNMENTS, SUBLETS, CONCESSIONS AND LICENSES:
14.01. Without the written consent of Landlord, which shall not be unreasonably
withheld, Tenant shall not cause or permit any assignment of this Lease or any
interest in this Lease (even to another tenant under this Lease), or mortgage,
pledge, hypothecate or otherwise encumber this Lease or any interest in this
Lease, or the occupancy of the Office or any part thereof by any person other
than Tenant, or sublet the Office or any part thereof, or grant any concession
or license to use the Office or any part thereof (collectively "LEASE TRANSFER")
Lease Transfer shall include any Lease Transfer, whether direct or indirect,
voluntary or involuntary, including without limitation intended, by transfer of
a majority or controlling interest in an entity, merger, consolidation,
dissolution or liquidation of an entity or death, divorce or separation of an
individual. Any Lease Transfer effected without the written consent of Landlord
shall be void and of no force or effect whatsoever. Landlord shall not be deemed
to have unreasonably withheld its consent if Landlord in good faith and for a
commercially reasonable reason from a commercial office building landlord's
perspective, refuses to grant Landlord's consent. In its determination whether
to consent or withhold consent to a Lease Transfer, Landlord shall have the
right to consider among other things: (i) the business background and relevant
commercial, managerial, and financial experience of the transferee or its
principals; (ii) the creditworthiness of the transferee; (iii) the financial
resources and net worth of the transferee; (iv) the nature, character and
quality of the transferee's business; (v) the effect of the transferee's
business on the tenant mix in the Project and the operation of the Project,
including by way of example only, the parking of vehicles and the use of the
elevators. The requirement for obtaining Landlord's consent to a Lease Transfer
shall continue to exist for all subsequent Lease Transfers regardless of the
number or nature of consents given to previous Lease Transfer(s).
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14.02. Any request for the consent of Landlord to a Lease Transfer shall be
accompanied by a detailed financial statement of the proposed transferee, a
written statement of the name and addresses of the proposed transferee, a
written authorization from the proposed transferee for the procurement of any
credit reports Landlord may deem appropriate, and a non-refundable $500.00 fee
(paid by certified or cashier's check) to cover the administrative, credit
report and legal costs paid or incurred in connection with the request. In
addition, Tenant shall furnish Landlord with any other information and documents
Landlord may request.
14.03. In the event the proposed Lease Transfer provides for any consideration
from the transferee which is in excess of the Rent (or the portion of the Rent
fairly attributable to the portion of the Office in the case of a sublet,
concession or license), 50.00 percent of the profits collected as a result of
the Lease Transfer (including any profit arising from any sublet, concession or
license affecting less than the entire Office) shall belong to and be paid to
Landlord immediately. By way of example only, if Tenant were paying Rent at the
rate of $25.00 per square foot of gross leasable area and sublet 500 feet
without brokerage commission, improvement allowance or other expense, at a rate
equal to $30.00 per square foot, Landlord would be entitled to $1,250.00 over
the course of the first year of the term of the sublease.
14.04. No Lease Transfer shall operate to relieve any Tenant, or any previous
Tenant, or any person or entity ("GUARANTOR") who signs a guaranty of the
fulfillment of the obligations of Tenant under this Lease, of its obligations
under this Lease or its guaranty, as the case may be, regardless of the number
of Lease Transfers and the nature of any modification, extension, renewal or
termination of this Lease whatsoever. In the event of a Lease Transfer, all of
the provisions of this Lease shall be binding upon the transferee.
14.05. In the event of a Lease Transfer without the written consent of Landlord,
Landlord may nevertheless collect the Rent from the transferee, and the
collection of such Rent shall not be deemed an acceptance of the transferee or a
consent to the Lease Transfer, nor a waiver of any of the provisions of this
Article.
14.06. This Lease, Landlord's interest in this Lease and the Rent, may be freely
assigned and/or mortgaged, pledged, hypothecated or otherwise encumbered by
Landlord.
14.07. Despite the provisions of Paragraph 14.01 above, so long as the Tenant
leasing and occupying the Office is a Credit Tenant, Tenant shall have the
right to effect the following Lease Transfers without Landlord's consent, but
only upon prior notice to Landlord accompanied by a copy of any assignment,
sublease or other agreement which transfers Tenant's interest in this Lease,
if any: (i) make a public offering of stock in Tenant; (ii) a private
offering of stock in Tenant, the primary purpose of which is to raise
additional capital, provided Tenant is a Credit Tenant which has a tangible
net worth determined in accordance with generally accepted accounting
principles consistently applied, which in Landlord's reasonable judgment is
sufficient to successfully operate all of Tenant's operations, and comply
with all of Tenant's obligations under this Lease ("ADEQUATE NET WORTH");
(iii) transfer of stock in Tenant among the existing
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shareholders of Tenant or to Tenant, or the issuance of stock in Tenant to key
employees of Tenant; (iv) transfer of this Lease to a corporation or other
entity which either owns a controlling interest in Tenant, is owned by Tenant or
is under common ownership with Tenant, provided such transferee is a Credit
Tenant with an Adequate Net Worth; (v) sale and/or other transfer of less than
50% of the common stock of Tenant cumulatively, provided either management of
Tenant does not change or Tenant is a Credit Tenant; (vi) sale (whether
structured as a stock sale or an asset sale) of Tenant or Tenant's operations in
the geographic region in which the Project is located (by way of example only,
the Northwest, Northeast, or Middle Atlantic); provided the purchaser is a
Credit Tenant with an Adequate Net Worth; (vii) merger or consolidation of
Tenant; provided the surviving entity is a Credit Tenant with an Adequate Net
Worth; or (viii) mere change in the State of incorporation or organization (by
way of example only, a California corporation becomes a Delaware corporation).
14.08. The use of the Office authorized by this Lease shall not change by virtue
of any Lease Transfer. Without implying any limitation on Landlord's discretion
to refuse to consent to a Lease Transfer, Landlord shall always have the right
to refuse to consent to any Lease Transfer which provides for or contemplates
any change or proposed change in the use of the Office authorized by this Lease.
ARTICLE 15. CASUALTY:
15.01. In the event that all or any part of the Office is damaged or destroyed
by fire or other casualty ("CASUALTY"), this Lease shall remain in full force
and effect; provided, however, that in the event the damage or destruction is
so extensive as to amount to a Total Loss (as such term is defined below) of
the Office or the Project, this Lease shall terminate as of the date of the
Casualty. In the event this Lease is not terminated pursuant to the provisions
of the immediately preceding sentence, Landlord shall repair or restore the
Office provided: (i) the entire cost of repair and restoration is paid out of
the proceeds of the Project's Insurance; (ii) the holders of any mortgages,
deeds of trust, ground and master leases encumbering the Project, consent to the
application of the proceeds of the Project's Insurance to the cost of repair and
restoration; (iii) the damage or destruction does not result in the termination
of any underlying or ground lease; (iv) the damage or destruction was not
caused, by any intentional tort, or violation of Law on the part of Tenant or
any person permitted in the Office by Tenant; (v) there are at least three years
remaining in the term of this Lease or any renewal term then in effect; and
(vi) within 30 days after the date of the damage or destruction, Landlord gives
Tenant notice of Landlord's intention to repair or restore. In the event
Landlord does not give the notice provided for in the immediately preceding
clause (vi), Tenant or Landlord may terminate this Lease as of the date of the
damage or destruction by notice given within 120 days after the date of the
damage or destruction. In the event Landlord elects to repair or restore the
Office subject to and in accordance with clauses (i) through (vi) of this
Section 15.01, Landlord shall commence and prosecute the completion of such
repair or restoration with reasonable diligence, taking into account the amount
of time which may be required to effect a settlement with or otherwise collect
the insurance proceeds from the insurer(s). In the event this Lease is not
terminated as a result of the damage or destruction and Landlord is
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obligated to repair or restore the Office, Tenant shall reinstall and
reconstruct Tenant Improvements within 45 days after the date Landlord gives
Tenant notice that the Office is Ready for Occupancy, and reopen the Office for
business, adequately furnished, equipped and staffed, within 60 days after the
date Landlord gives Tenant notice that the Office is Ready for Occupancy. "TOTAL
LOSS" shall mean damage or destruction which is not reasonably susceptible of
being fully repaired or restored for an amount of money less than 75.00 percent
of the actual cost of replacement of the Office or Project as the case may be.
15.02. Intentionally Deleted.
15.03. In the event the Office or Project is damaged so substantially that
Tenant cannot conduct its business, then the Monthly Rent shall abate from the
date that the business is discontinued. In the event that only part of the
Office is damaged so substantially that Tenant cannot conduct its business in
such portion of the Office, the Monthly Rent shall be abated, by an amount
determined by multiplying the Monthly Rent by a fraction, the numerator of which
is the square footage of the gross leasable floor area in the Office which is
damaged so substantially, and the denominator of which is the square footage of
the gross leasable floor area in the Office. In the event Landlord is required
to repair or restore the Office, such abatement of Monthly Rent shall continue
until 45 days after the date Landlord gives Tenant notice that the Office is
Ready for Occupancy. In the event Landlord is not required to repair or restore
the Office, such abatement of Monthly Rent shall continue until the earlier of
the following dates, (i) the date Tenant reopens the Office for business; or
(ii) 45 days after the date of the damage. Despite any other provision of this
Lease to the contrary, in no event shall the Monthly Rent be abated for a period
in excess of one year.
ARTICLE 16. CONDEMNATION:
16.01. In the event of a condemnation or other lawful taking (including without
limitation intended, by purchase or dedication) for any public or quasi-public
purpose (collectively "CONDEMNATION") of the entire Project or Office, this
Lease shall terminate as of the date possession vests in a grantee ("VESTING")
as a result of the Condemnation. In the event of a Condemnation of less than the
entire Project or Office, which destroys the usefulness of the Office for the
purpose it was leased, either Landlord or Tenant may elect to terminate this
Lease as of the date of the Vesting, by notice given within 30 days after the
date of the Vesting.
16.02. In the event of the Condemnation of the entire Common Area, this Lease
shall terminate as of the date of the Vesting. No Condemnation of parking spaces
shall give Tenant any right to terminate this Lease or obtain any abatement of
Rent, provided the number of parking spaces remaining after the date of the
Vesting is equal to or in excess of the minimum number required by Law; or
within a reasonable time after the date of the Vesting, Landlord provides
substitute parking spaces which together with the remaining parking spaces, is
equal to, or in excess of the minimum number required by Law.
16.03. Intentionally Deleted.
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16.04. In the event of a Condemnation which does not result in the termination
of this Lease pursuant to Paragraphs 16.01, 16.02 or 16.03 above, Landlord shall
repair or restore the Office to the extent practicable, provided: (i) the entire
cost of repair and restoration is paid out of the Condemnation award; (ii) the
holders of any mortgages, deeds of trust, ground and master leases encumbering
the Project, consent to the application of the Condemnation award to the cost of
repair and restoration; (iii) the Condemnation does not result in the
termination of any underlying or ground lease; (iv) there are at least 3 years
remaining in the term of this Lease or any renewal term then in effect; (v)
within 90 days after the date of the Vesting, Landlord gives Tenant notice of
Landlord's intention to repair or restore the Office. In the event Landlord does
not give the notice provided for in the immediately preceding clause (v), Tenant
or Landlord may terminate this Lease as of the date of the Vesting, by notice
given within 120 days after the date of the Vesting. In the event Landlord
elects to repair or restore the Office, Landlord shall commence and prosecute
the completion of such repair or restoration with reasonable diligence, taking
into account the amount of time which may be required to effect a settlement
with, or otherwise collect the Condemnation award from the Condemnation
authority. In the event this Lease is not terminated as a result of a
Condemnation, Tenant shall reinstall and reconstruct Tenant Improvements within
45 days after the date Landlord gives Tenant notice that the Office is Ready for
Occupancy, and reopen the Office for business, adequately furnished, equipped
and staffed within 60 days after the date Landlord gives Tenant notice that the
Office is Ready for Occupancy.
16.05. In the event of any Condemnation, whether or not this Lease is
terminated, the entire award from the Condemnation shall belong solely to
Landlord, without any deduction for the leasehold estate of Tenant. Tenant
hereby irrevocably assigns any and all eight title and interest it might
otherwise have in and to any Condemnation award to Landlord. Nevertheless,
Tenant shall have the right to recover from the Condemnation authority, damages
to Tenants business and the expenses and loss incurred in removing Tenants trade
fixtures inventory and other personal property.
16.06. Despite any other provision of this Lease to the contrary in the event of
a Condemnation for a period not in excess of six months, this Lease shall
continue in full force and effect; provided, however, that the Monthly Rent
shall be equitably abated during the period of the Condemnation.
16.07. In the event of a Condemnation of only part of the Office, the Monthly
Rent shall be abated as of the date of the Vesting, by an amount determined by
multiplying the respective Rent by a fraction, the numerator of which is the
square footage of the gross leasable floor area in the Office which is taken in
Condemnation, and the denominator of which is the square footage of the gross
leasable floor area in the Office.
ARTICLE 17. ESTOPPEL CERTIFICATES:
17.01. EXECUTION: Within 20 days after demand by Landlord, Tenant shall
complete, execute, acknowledge and deliver to Landlord or its designee, a
certificate ("ESTOPPEL CERTIFICATE") representing that: (i) this Lease is
unmodified (or stating the modifications); (ii)
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this Lease is in full force and effect (iii) there are no defenses or offsets to
the performance of the obligations of Tenant under this Lease (or stating those
claimed by Tenant); (iv) the date to which Rents have been paid in advance; (v)
the amount and balance of the Security Deposit, if any; (vi) there is no breach
of Landlord's obligations under this Lease and no event or circumstance which
with the passage of time and/or the giving of notice would constitute a default
on the part of Landlord (or stating the breaches and defaults claimed by
Tenant); (vii) there is no breach of Tenant's obligations under this Lease and
no event or circumstance which with the passage of time and/or the giving of
notice would constitute a Default on the part of Tenant (or stating those in
breach or Default); and (viii) such other information as Landlord or its
designee may reasonably require. Any purchaser, lessee, lender or other person
or entity to whom an Estoppel Certificate is delivered, shall be entitled to
rely upon the contents, regardless of the name of the addressee, if any.
17.02. CONCLUSIVE PRESUMPTION: In the event Tenant fails to complete, sign,
acknowledge or deliver any Estoppel Certificate, within 20 days after a demand
by Landlord; then the person or entity on whose behalf the Estoppel Certificate
was requested shall be entitled to conclusively presume, that (i) this Lease is
unmodified; (ii) this Lease is in full force and effect; (iii) that there are no
defenses or offsets to the performance of the obligations of Tenant under this
Lease; (iv) Rents have not been paid more than one month in advance; (v) there
is no Security Deposit; (vi) there are no outstanding notices of a default by
Landlord in the performance of any of its obligations under this Lease; and
(vii) there is no breach and no default on the part of Landlord in the
performance of any of its obligations under this Lease (and if Landlord is in
breach or default, that Tenant has irrevocably waived its right to require
performance of such obligation).
ARTICLE 18. SECURITY DEPOSIT:
18.01. PAYMENT: Prior to the Commencement Date, the Tenant shall deposit with
the Landlord, $172,108.66 ("SECURITY DEPOSIT"), as security for the fulfillment
of all of the obligations of the Tenant under this Lease. The Security Deposit
shall not be assigned, transferred, pledged, hypothecated or otherwise
encumbered by the Tenant. The Landlord shall not be obligated to pay any
interest on the Security Deposit unless required by valid Law, and may commingle
the Security Deposit with any other security deposits made by any other tenants
at the Center.
2. REPLENISHMENT/REFUND: In the event the Tenant fails to perform any of its
obligations under this Lease at the time and in the manner provided for in this
Lease, the Landlord may after ten days notice to Tenant, apply, all or part of
the Security Deposit to compensate the Landlord for all or part of the damages
incurred by the Landlord as a result of such default by the tenant In such
event, within ten days after demand by the Landlord, the Tenant shall make such
additional deposit of money as may be required to replenish the Security Deposit
to the amount set forth in the first sentence of Section 18.01 of this Lease. In
the event the Tenant has fulfilled all of its obligations under this Lease, no
later than 30 days after the Termination Date the Security Deposit shall be
remitted to the Tenant.
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3. EXCLUSION FROM LIABILITY FOR REFUND: In the event the Landlord sells or
assigns its interest in this Lease, the Landlord shall automatically be released
from all liability for the Security Deposit, upon the delivery or assignment of
the Security Deposit to the purchaser or assignee.
ARTICLE 19. SUBORDINATION:
19.01. AUTOMATIC SUBORDINATION: This Lease is subject and subordinate to all
ground or underlying leases, and all deeds of trust, mortgages and security
agreements which may now or later encumber the Office or the Project, any part
thereof, or interest therein, and all modifications, extensions, renewals,
consolidations and replacements thereof, regardless of the dates of such
instruments. The provisions of the immediately preceding sentence shall be
self-operative and no further instrument of subordination shall be required.
Nevertheless, within 20 days after demand by Landlord, Tenant shall sign,
acknowledge and deliver any instrument of subordination Landlord or its designee
may reasonably require.
19.02. NON-DISTURBANCE AGREEMENTS WITH EXISTING LENDERS: The Landlord shall make
reasonable efforts to obtain within 30 days after the date of full execution of
this Lease, a non-disturbance and attornment agreement between Tenant and the
holders (collectively "LENDER") of any mortgages or deeds of trust encumbering
Landlord's estate, in which the Lenders agree that despite any default by
Landlord in the fulfillment of its obligations under the respective mortgage or
deed of trust loan documents, and any foreclosure of the respective mortgage or
deed of trust or other action or proceeding, judicial or non-judicial, so long
as Tenant performs all of its obligations under this Lease, Tenant's use and
occupancy of the Office shall not be disturbed. In such non-disturbance and
attornment agreement, Tenant shall: (i) agree to attorn to the Lenders and their
successors and assigns if the mortgage or deed of trust is foreclosed or the
Lenders or their successors and assigns otherwise succeed to the estate of
Landlord, and (ii) acknowledge that this Lease is subject and subordinate to the
respective mortgage or deed of trust. Tenant shall pay to Landlord within 15
days after demand, all fees, costs and expenses payable to the Lenders by
Landlord in connection with requests for non-disturbance agreements.
19.03. NON-DISTURBANCE AGREEMENTS WITH SUBSEQUENT LENDERS: With respect to
any deed of trust or mortgage which does not now encumber the Project, the
automatic subordination of this Lease is conditioned on the existence of a
written agreement or undertaking however and wherever expressed, on the part
of the respective Lender, not to disturb Tenant's possession of the Office
and use of the Open Common Areas, so long as the term of this Lease has not
expired or terminated and Tenant is not in Default. Tenant shall attorn to
the Lenders and their successors in interest.
19.04. LIMITATIONS AND WAIVERS: Under no circumstances shall a Lender be liable
for or bound by any of the following:
(A) Any right of the Tenant to any offset, defense (except actual and complete
fulfillment of the
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Tenant's obligations under this Lease), claim, counterclaim, cross-claim,
abatement, deduction, or reduction (collectively "OFFSET") of any of the
Tenant's obligations under this Lease including the Tenant's obligation to pay
any Rent, arising out of any breach of the obligations of the Landlord under
the Lease or any applicable law prior to the date the Lender acquired title
to the Project.
(B) Any payment of Rent made to or for the account of the Landlord which is made
more than 30 days before the date the payment of Rent was due, which relate to a
period of time after the date the Lender acquires title to the Project.
(C) Any obligation to pay to Tenant any money owed to the Tenant by any Landlord
other than the Lender, including without limitation intended, any obligation to
pay Tenant any money for any overcharges collected by any prior Landlord.
(D) Any modification or amendment of this Lease or any waiver of any provision
of this Lease, unless the Lender expressly consented in writing.
(E) Any agreed-to or negotiated surrender, cancellation or termination of the
Lease, in whole or in part, unless either (i) effected solely by the Tenant
pursuant to an express provision of this Lease; or (ii) the Lender expressly
consented in writing.
(F) Any obligation on the part of the Landlord to construct or install any
Improvements or make any alterations.
ARTICLE 20. LANDLORD DEFAULTS/NOTICES TO LENDERS:
If the Project or any part thereof, is encumbered by any deed of trust or
mortgage, and the Rent or this Lease is assigned to the Lender, Tenant shall not
terminate this Lease on account of any Default by Landlord, unless. and until:
(i) Tenant gives the Lender written notice of specifying Default; (ii) a
reasonable time elapses after the expiration of the Landlord's grace period, for
the cure of the breach giving rise to such default by such Lender; and (iii)
such default is not cured within such time.
ARTICLE 21. ACCESS BY LANDLORD AND OTHERS:
21.01. Landlord shall have the right, but not the obligation, to enter and
remain in the Office, on five days prior notice, at all reasonable hours and
from time to time: (i) to permit Landlord and its designees to inspect the
Office; (ii) to perform maintenance, make repairs, restorations or Improvements
to the Office or the Project; (iii) to comply with Law; (iv) to show the Office
for sale, lease (during the 12 months immediately prior to the Termination Date
on one day prior notice) or financing purposes; (v) upon the request of any
trustee, receiver, sheriff, marshal, or court officer purporting to be entitled
to take possession of the Office or any of its contents; and (vi) upon the
request of any fireman, police officer, building inspector, health inspector or
other Government official, purporting to require access for any legitimate
purpose. Despite the preceding sentence, Landlord shall have the right to enter
the Office at any time, without any
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notice, in the case of any actual or apparent emergency of any nature
whatsoever. In the event Tenant is not present in the Office when there is an
actual or apparent emergency, Landlord is entitled to use a master key and/or
break and enter into the Office without liability to Tenant. To ensure Landlord
will be able to enter the Office, Tenant shall not change or install any lock or
alarm without contemporaneously furnishing Landlord or its designee with the
keys, combinations and other devices required to open such lock and disarm such
alarm.
21.02. Landlord's right to enter and remain in the Office, and/or to perform any
maintenance, repairs, replacements or work, shall not be deemed to: (i) impose
any obligation on Landlord to do so; (ii) subject Landlord to any liability to
Tenant or any third person based on Landlord's failure or refusal to do so; and
(iii) relieve or release Tenant from any obligation to indemnify Landlord as
provided for in this Lease.
ARTICLE 22. BANKRUPTCY:
22.01. In the event (i) any action or proceeding is commenced by or against
Tenant or any Guarantor, pursuant to any bankruptcy, insolvency, reorganization
or arrangement Law; or (ii) any action or proceeding is commenced for the
appointment of a receiver, trustee or similar official of all or part of the
property of Tenant, or any Guarantor; or (iii) Tenant or any Guarantor makes an
assignment for the benefit of creditors (collectively "BANKRUPTCY"); and
(A) In the event the Bankruptcy is an action or proceeding commenced by a third
party, without the consent or connivance of Tenant, and the Bankruptcy is not
terminated, discharged or dismissed within 30 days after commencement; Landlord
may elect to terminate this Lease; or
(B) In the event the Bankruptcy is an action or proceeding commenced by Tenant,
or a third party with the consent or connivance of Tenant, Landlord may elect to
terminate this Lease.
22.02. In the event Tenant or any Guarantor is insolvent as defined by any Law;
or any Guarantor terminates, rejects or otherwise disclaims liability under any
guaranty of this Lease; then in any of the preceding circumstances the Landlord
may elect to terminate this Lease.
22.03. In the event the provisions of this Article of the Lease contravene the
Bankruptcy Law, the following provisions shall automatically become effective:
(A) Any and all moneys and other consideration payable or otherwise to be
delivered in connection with any Lease Transfer shall be paid or delivered to
Landlord and shall belong solely to Landlord, and not constitute property of (i)
Tenant or any Guarantor; or (ii) the estate of Tenant or any Guarantor within
the meaning of the Bankruptcy Law. In the event any such moneys or other
consideration cannot be paid or delivered to Landlord immediately, it shall be
held in trust for the benefit of Landlord, and be paid or delivered to Landlord
as soon as possible.
(B) Any person or entity to whom this Lease is assigned shall automatically be
deemed to have assumed the obligations of Tenant under this Lease, which accrue
under this Lease on and
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after the date of such assignment, and no act on the part of Tenant, its
assignee or any other person or entity shall operate to relieve the assignee of
such obligations.
22.04. All Rent shall constitute rent for the purposes of Bankruptcy Code
Section 502(b)(6), 11 U.S.C. Section 502 (b)(6)
ARTICLE 23. TENANT'S DEFAULT:
23.01. The following events or circumstances shall constitute a default
("DEFAULT") in the fulfillment of Tenant's obligations under this Lease:
(A) Tenant shall: (i) breach its obligation to pay any Rent and such breach
shall continue for ten days after the date Landlord gives Tenant notice payment
is past due; or (ii) breach its obligation to maintain any insurance required by
this Lease; or (iii) submit any report or other written statement to Landlord or
its designee, which shall contain a willfully false statement; or (iv) abandon
the Office or fail to keep the Office open for business, fully stocked, fixtured
and staffed for a period in excess of ten succeeding days for any reason except
Force Majeure (as such term is defined in Article 37 of this Lease), or ongoing
diligently pursued alterations authorized by this Lease or consented to by
Landlord; or (v) fail to perform any of its other obligations under this Lease
and such breach shall continue for 30 days after the date Landlord gives Tenant
notice performance is past due; provided, however, that if the breach is not
reasonably susceptible of being cured within such 30 day period, Tenant gives
Landlord notice specifying the Force Majeure within such 30 day period, and
Tenant promptly commences the cure and diligently prosecutes the cure to
completion, then such 30 day period shall automatically be extended for such
period of time as may reasonably be required to cure the breach; provided,
however, that in all circumstances the 30 day period shall not be extended to
last longer than 90 days.
(B) Any Guarantor shall default in the performance of any of its obligations
under a guaranty of this Lease; or
(C) If any person or entity shall attempt to levy or execute upon this Lease or
the Office or any property in the Office, under any writ, order, judgment or
other process of Law; or
(D) If any Bankruptcy occurs and Landlord's right to terminate this Lease as a
result of such Bankruptcy has accrued.
23.02. If any Default occurs, then Landlord may either (i) give Tenant ten days
notice to quit and surrender the Office, as a result of the Default, and upon
the expiration of such ten day period, (a) tenants rights under this Lease shall
expire, and (b) Tenant shall immediately quit and surrender the Office to
Landlord; or (ii) give Tenant ten days notice of the Default and Landlord's
intention to terminate this Lease, and upon the expiration of such ten day
period, (a) Tenant shall immediately quit and surrender the Office to Landlord,
and (g) this Lease shall be terminated.
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23.03. Despite the termination of this Lease and/or the expiration of Tenant's
rights under this Lease, Tenant shall remain liable for the fulfillment of all
of its obligations under this Lease, including without limitation intended, its
obligations to pay Rent; subject, however, to reduction to a lesser sum of money
as provided in Article 24 of this Lease.
ARTICLE 24. RIGHT TO REENTER AND RE-LET:
24.01. In the event Tenant is obligated to quit and surrender the Office to
Landlord pursuant to Article 23 of this Lease, or this Lease is terminated,
Landlord shall have the right to re-enter and repossess the Office, and remove
all persons and property in the Office, by any summary or plenary action or
proceeding, without any liability whatsoever. Landlord may at the expense of
Tenant, Office, sell or discard any property in the Office, without any
liability to Tenant whatsoever. The word "re-enter" shall be broadly construed
and shall not have its technical legal meaning. Tenant waives any right it may
have at Law, to notice of Landlord's intention to enter. No re-entry or
repossession of the Office by Landlord, shall operate to terminate the Lease,
unless Landlord gives explicit notice of termination (which notice may be given
before or after re-entry and repossession); or constitute an acceptance by
Landlord of a surrender, unless Landlord gives explicit notice of its
acceptance.
24.02. Despite re-entry and repossession by Landlord after a Default, Tenant
shall remain liable for the performance of all of its obligations under this
Lease, including without limitation intended, its obligations to pay Rent. All
costs and expenses incurred by Landlord in reentering, repossessing and
re-letting the Office, and moving, storing, selling or discarding the property
in the Office, including without limitation intended, Litigation Expenses;
moving expenses; brokerage, warehouse and sales fees; and the costs of repairing
all damage to the Office caused by the Tenant and neither covered nor required
to be covered by the Project's Insurance, and making it ready for occupancy by
another tenant; shall be paid to Landlord by Tenant within ten days after demand
by Landlord.
24.03. In the event Landlord re-enters and repossesses the Office without
terminating this Lease, Landlord may nevertheless make such alterations and
refurbish the Office to the extent that Landlord reasonably deems appropriate,
and re-let the Office or any part of the Office, on such terms as Landlord may
reasonably deem appropriate. The rents received by Landlord from any such
re-letting (without termination of this Lease) shall be applied: first, to the
payment of all Rent due, which represents costs and expenses incurred by
Landlord, second, to payment of all other Rent due and unpaid; and third, any
rent remaining shall be held by Landlord to be applied to the Rent which becomes
due in the future under this Lease. If the rents from such re-letting are
insufficient to pay the Rent due under this Lease as the Rent becomes due,
Tenant shall pay the deficiency to Landlord or its designee, on or before the
first day of each calendar month for which there will be a deficiency.
24.04. Landlord shall have no obligation to re-enter or re-let the Office, or
otherwise mitigate damages unless tenant and all other occupants have vacated
the Office and Tenant has given landlord notice specifying tenant has
permanently abandoned the Office. Landlord's obligation to mitigate damages
shall be qualified as follows:
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(A) Landlord shall not be obligated to make any effort to mitigate damages
except to the extent the effort would be commercially reasonable for a landlord
in circumstances similar to the Landlord;
(B) Landlord shall have no obligation to pay for any renovations, repairs or
alterations requested by any prospective tenant;
(C) Landlord shall have no obligation to lease the Office at less than fair
market rent and additional rent;
(D) Landlord shall have no obligation to lease the Office if Landlord has other
suitable space for lease or Landlord expects the Landlord will have other
suitable space for lease in the following three months;
(E) Landlord shall have no obligation to lease the Office if the prospective
tenant or the lease acceptable to the proposed tenant is not reasonably
satisfactory to the landlord in every material respect, including the business
background and creditworthiness of the tenant, the compatibility of the
replacement tenant and its use with the other tenants in the Project and the
other tenants' uses and lease provisions;
(F) Landlord shall have no obligation to seek a replacement tenant by any means
the landlord does not generally employ for leasing vacant space in the Project.
24.05. In the event this Lease is terminated by Landlord after a Default, Tenant
shall within ten days after demand by Landlord, pay to Landlord as liquidated
damages, all the Rent required to be paid pursuant to Article 8 of this Lease,
from the Termination Date through the latest date the term of this Lease would
have otherwise expired, less any amount of money which Tenant proves is the fair
market rent and additional rent for the Office in the condition the Tenant left
it in, with the resulting figure discounted to present value at the rate of
interest payable on unpaid money judgments in the State in which the Project is
located. The amount of Rent due during each Lease Year or partial Lease Year
after the Termination Date, shall be equal to (or prorated based upon) the mean
average Rent for the preceding three Lease Years (or such lesser number of Lease
Years [or calendar months] which may have run during the term of this Lease).
ARTICLE 25. WAIVER BY TENANT:
25.01. Tenant hereby waives any right it may have at Law to redeem this Lease or
its interest in this Lease after a Default.
25.02. Tenant hereby waives any homestead rights or exemptions it may have,
which might exempt any property of Tenant from a levy or execution, to satisfy
any outstanding obligations of Tenant under this Lease.
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ARTICLE 26. NO WAIVER BY LANDLORD:
26.01. No act or omission on the part of Landlord shall constitute a waiver of
any right of Landlord or relieve Tenant from the performance of any obligation
under this Lease, unless Landlord expressly grants a waiver in a writing signed
by Landlord. No waiver of any right or obligation on any one or more occasions
shall constitute a waiver with respect to any other occasions.
26.02. No acceptance of money by Landlord in an amount less than the amount of
Rent due shall constitute an acceptance of such lesser amount in full payment.
It shall merely constitute a payment on account of the amount of Rent due, not
an accord and satisfaction, regardless of any endorsement or limitation on any
check or other document Acceptance of payment of Rent on account, shall be
without prejudice to the exercise of any other rights or remedies Landlord may
have.
ARTICLE 27. ATTORNMENT:
Unless and until Landlord, or the holder of a mortgage or deed of trust or the
landlord under any ground or underlying lease encumbering the Office or Project,
shall elect to terminate this Lease, this Lease shall remain in full force and
effect, despite the fact that: (i) any mortgage or deed of trust encumbering the
Office or Project is foreclosed or the Office or Project or any part of the
Project is sold under a power of sale; or (ii) any deed is given in lieu of the
foreclosure of any such mortgage or deed of trust; or (iii) any ground or
underlying lease to which this Lease is subordinated, is terminated; or (iv) any
action or proceeding is commenced by Landlord, or any holder of a deed of trust
or mortgage or the landlord under any ground or other underlying lease
encumbering the Office or Project. Tenant shall attorn to Landlord, or its
successor (including without limitation intended, any purchaser of the Office or
Project at foreclosure), or any holder of any mortgage or deed of trust, or any
landlord under any ground or other underlying lease encumbering the Office or
Project.
ARTICLE 28. RULES AND REGULATIONS:
Tenant shall comply with all reasonable rules and regulations ("RULES AND
REGULATIONS") adopted, amended and repealed, by Landlord, at any time and from
time to time, for the use, operation and occupancy of the Project, including
without limitation intended, the Open Common Area and the Office. A copy of the
Rules and Regulations in effect on the date this Lease was delivered to Tenant
is annexed as EXHIBIT "F" to this Lease. Any act or omission by Tenant, in
breach of the Rules and Regulations shall constitute a breach by Tenant in the
performance of its obligations under this Lease. Landlord shall give Tenant
notice of the adoption of any new Rules and Regulations, or the modification or
repeal of any existing Rules and Regulations, and any such adoption,
modification or repeal shall be binding upon Tenant as if incorporated in this
Lease by reference, ten days after notice thereof is given to Tenant.
ARTICLE 29. CONTROL OF COMMON AREA:
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The Common Area shall at all times be subject to the exclusive control and
management of Landlord, including without limitation intended, the power to
limit, control and direct pedestrian and vehicular traffic and parking. Landlord
shall have the right to use or limit the use of the Common Area for any purpose
whatsoever, that Landlord deems appropriate for the Project, including without
limitation intended, any Improvements, shows, displays, demonstrations,
promotions, and kiosks; and to prevent the dedication of any part of the Project
or the accrual of any prescriptive or other rights in favor of the public or any
other persons. Landlord shall also have the right to remove and/or exclude from
the Common Area, any person who fails to comply with any Rule or Regulation, or
uses or occupies the Common Area for any purpose not specifically authorized by
this Lease or the Rules and Regulations or by Landlord in a writing signed by
Landlord; provided, however, that if Tenant is an entity, Tenant shall not be
removed or excluded from the Common Area (but any offending principal, employee,
agent, contractor or supplier may be excluded) unless Tenant's breach of the
Rules and Regulations continues after the expiration of any applicable grace
period.
ARTICLE 30. CONTROL OF PROJECT:
30.01. Landlord shall have the right at any time, and from time to time, to
(i) make any additional Improvements, in or about the Project or any part
thereof; (ii) to alter, delete and enlarge any existing Improvements; (iii)
to enlarge or decrease the size of the Project by adding additional land
and/or Improvements, or subdividing, selling or otherwise reducing the land
and/or Improvements comprising the Project; provided, however that in no
event shall any such activity unreasonably disrupt the business of Tenant in
the Office, or unreasonably impair access to and from the Office. No site
plan furnished to Tenant shall in any manner limit the rights of Landlord
under this Article. Without limiting the rights of the Landlord under this
Section 30.01, Tenant acknowledges that Landlord shall have the right to
construct or permit the construction of an additional office building with a
parking garage on the Northeasterly portion of the Project.
30.02. Despite the preceding Section 30.01, if Landlord is engaged in any
necessary repairs, replacements, or any expansion or renovation of the
Project or any substantial portion of the Project, then Landlord shall not be
liable for and Tenant shall have no rights arising from any temporary
obstruction of access to or from the Office, or diminution of Tenant's
ability to use the Office, unless the obstruction or diminution could have
readily been avoided without incurring any unusual or extraordinary expense,
which extraordinary expense shall include without limitation intended, the
payment of overtime or other premium compensation.
30.03. If the operation of Tenant's authorized business is disrupted by Landlord
repairs, replacements, expansion or renovation, to such a degree that operation
of Tenants business is not feasible, and such disruption continues for 48
consecutive hours or longer after Tenant gives Landlord notice of such
interference and Tenant's cessation of business as a result; then the Monthly
Rent shall abate for the lesser of the following periods of time: (i) the period
of such disruption following the giving of such notice; or (ii)
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the period of time Tenant ceases its authorized business as a result of such
disruption.
ARTICLE 31. SIGNS:
31.01. SIGNS WITH LANDLORD APPROVAL: Prior to the Commencement Date, Tenant
shall install, and throughout the term of this Lease maintain, a sign on the
front door of the Office or immediately adjacent to the front door, in
accordance with the requirements specified in EXHIBIT "G" of this Lease.
Except as otherwise provided in this Section 31.01, without the prior consent
of the Landlord, Tenant shall not install or permit the installation or
maintenance of any permanent or temporary sign, price, billboard,
advertisement, circular, lettering, placard, poster, pennant, flag, awning,
name, insignia, trademark, logo, decoration, banner, descriptive or similar
item (collectively "SIGN"), which is visible from the exterior of the Office.
Any Sign installed or maintained contrary to the provisions of this Section
31.01, may be removed by Landlord without notice and without any liability.
32.02. SIGNS INSTALLED BY LANDLORD: On the Commencement Date, Landlord shall
insert Tenant's name in: (i) the directory located on the first floor lobby of
the building in which the Office is located; and (ii) if the Office is located
above the first floor, in the directory located in the immediate vicinity of the
elevators on the floor(s) on which the Office is located.
32.03. EXTERIOR SIGNS: Subject to compliance with all applicable Law, Tenant
shall be permitted at its sole cost to install and maintain professionally
prepared exterior signs reasonably acceptable to the Landlord: at a mutually
acceptable location on the parapet walls, identifying the name of the Tenant;
and attached to the curtain glass exterior identifying the name of the Tenant
or directly related to the business of Freei Networks, Inc.
ARTICLE 32. INDEMNIFICATION
32.01. INDEMNIFICATION BY TENANT: Tenant shall indemnify and hold Landlord,
Landlord's predecessors in interest, all persons and entities designated by
Landlord who have any interest in the Project, and all persons acting on their
behalf, harmless, from and against any and all liabilities, costs, damages and
expenses (including without limitation intended, attorneys' fees, disbursements,
and amounts paid in settlement of claims), (collectively "CLAIMS") incurred as a
result of, or in connection with the use, operation or occupancy of the Office
or the Project by Tenant, or any person or entity permitted in the Office by
Tenant (including without limitation intended, any act or omission by Tenant or
any person or entity permitted in the Office by Tenant, or in the Project at the
request of, or on account of the business of Tenant); except for on a
comparative basis for any Claims arising out of the negligence or other tortous
conduct of Landlord, its employees, agents, contractors and suppliers; or any
breach of Landlord's obligations under this Lease; or any violation of Law by
Landlord, its employees, agents, contractors and suppliers.
32.02. INDEMNIFICATION BY LANDLORD: Landlord shall indemnify and hold Tenant,
Tenant's predecessors in interest, all persons and entities occupying the Office
in
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accordance with this Lease, and all persons acting on their behalf, harmless,
from and against any and all Claims, incurred as a result of, or in connection
with the negligence or other tortious conduct of Landlord, its employees,
agents, contractors and suppliers; or any breach of Landlord's obligations under
this Lease; or any violation of Law by Landlord, its employees, agents,
contractors and suppliers; except on a comparative basis for any Claims arising
out of the negligence or other tortious conduct of Tenant, its employees,
agents, contractors and suppliers; or any breach of Tenant's obligations under
this Lease; or any violation of Law by Tenant, its employees, agents,
contractors and suppliers.
ARTICLE 33. SURRENDER OF THE OFFICE:
33.01. On or prior to the Termination Date, Tenant shall surrender the
Office, broom clean, in good condition and repair (except for reasonable wear
and tear, and damage caused by Casualty covered or required to be covered by
the Project's Insurance) and deliver all keys, combinations and other lock
opening devices for all locks and alarms in and about the Office, to
Landlord. Within five days after the Termination Date, Tenant shall remove
all property of Tenant, including without limitation intended, all trade
fixtures and furnishings, and repair all damage which may result from the
removal of such property. Despite the provisions of the immediately preceding
sentence Tenant shall not remove any property of Tenant, in the event
Landlord has given Tenant notice of any default by Tenant, in the performance
of any of its obligations under this Lease, and such notice remains
outstanding. If Tenant made any Improvements or alterations without
Landlord's consent, at the request of Landlord Tenant shall remove the
Improvements or alterations on or before the Termination Date and restore the
Office to the condition which existed before the Improvements or alterations
were made without Landlord's consent.
33.02. In the event Tenant fails to remove any property of Tenant or any person
or entity permitted in the Office, by Tenant, within five days after the
Termination Date, then such property shall be deemed abandoned by Tenant, and
may be removed, stored or sold by Landlord without notice or liability to, and
at the sole expense of Tenant.
ARTICLE 34. LIMITATIONS OF LANDLORD'S LIABILITY:
34.01. Landlord shall have no obligation or liability for the fulfillment of any
obligation of the Landlord under this Lease, which accrues prior to or after the
date Landlord is the owner or ground lessee of the real property comprising the
Project.
34.02. Landlord shall have no obligation or liability for the fulfillment of any
obligation of the Landlord under this Lease unless Landlord fails to perform any
of its obligations under this Lease and such breach shall continue for 30 days
after the date Tenant gives Landlord notice specifying Landlord's breach of its
obligations; provided, however, that if the breach is not reasonably susceptible
of being cured within such 30 day period, Landlord gives Tenant notice
specifying the reason(s) for the delay within such 30 day period, and Landlord
promptly commences the cure and diligently prosecutes the cure to completion,
then such 30 day period
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shall automatically be extended for such period of time as may reasonably be
required to cure the breach; provided, however, that in all circumstances the 30
day period shall not be extended to last longer than 90 days.
34.03. In the event Landlord breaches its obligations under this Lease and fails
to cure the breach prior to the expiration of the applicable grace period, or
Landlord is otherwise liable to Tenant as a result of any act or omission by
Landlord or any person or entity acting on behalf of Landlord, Tenant shall look
solely to the ownership or leasehold interest of Landlord in the Project, for
the recovery of any damages incurred by Tenant. Tenant shall not seek to
restrain Landlord, or levy, execute or otherwise seek to enforce any order,
judgment or claim against any other assets of Landlord; nor against Landlord's
principals, agents, or employees or any of their assets.
ARTICLE 35. DISPUTES BY TENANT:
In the event Tenant disputes the amount or propriety of any demand by Landlord,
for the payment of any Rent, Tenant shall immediately pay the amount demanded by
Landlord, and simultaneously with payment, give Landlord specific notice of the
nature of the Rent and amount disputed by Tenant.
ARTICLE 36. Intentionally Deleted.
ARTICLE 37. FORCE MAJEURE:
In the event that Landlord or Tenant is delayed or prevented from the
performance of any of their respective obligations under this Lease, because of
any strike, lockout, labor trouble, inability to procure materials, failure of
power, Law, riot, insurrection, war, act of God, or similar cause wholly outside
the control of, and brought about by a force or persons or entities wholly
unrelated to the party delayed or unable to perform (collectively "FORCE
MAJEURE"); the performance of such act shall be excused for the period of any
such delay; provided notice specifying the Force Majeure is promptly given to
the other party under this Lease and if such notice is not given promptly, then
delay shall be excused only to the extent delay occurs after notice specifying
Force Majeure is given to the other party under this Lease. Despite the
provisions of the immediately preceding sentence to the contrary, the provisions
of this Article shag not excuse Tenant from its obligations to pay all Rent.
ARTICLE 38. HOLDING OVER:
In the event Tenant holds possession of the Office, (i) after the Termination
Date or after the date Tenant's right to possession of the Office ends, and
(ii) without the written consent of Landlord; then Landlord may elect by notice,
to either:
38.01. Make Tenant a tenant from month-to-month, at double the Minimum Rent
provided for in this Lease, but subject to all other obligations of Tenant under
this Lease, and all other provisions of this Lease, prorated or adjusted to a
month-to-month tenancy; or
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38.02. Treat Tenant as a trespasser, and recover possession of the Office from
Tenant by any means provided for in this Lease or by Law; including seeking
recovery of damages incurred by the Landlord as a result of Tenant's failure or
refusal to surrender possession (including any damages incurred by Landlord as a
result of Landlord's failure to timely deliver possession to any other tenant).
In the event Landlord accepts payment of Monthly Rent for any period after the
Termination Date or Tenant's right to possession of the Office ends, then
Landlord shall be deemed to have made the election provided for in Section 38.01
of this Lease.
ARTICLE 39. TITLE EXCEPTIONS:
This Lease is subject to all recorded and unrecorded mortgages, deeds of trust,
security agreements, ground and other underlying leases, easements,
restrictions, covenants and Law, now in existence or later created.
ARTICLE 40. BROKERS:
40.01. The parties to this Lease ("WARRANTOR") represent and warrant to each
other ("WARRANTEE") that except for Colliers International (Arvin L. Vanderween
("BROKER"), no broker, finder or other person is entitled to any money or other
consideration (including without limitation intended, broker's or finder's fee
or commission), on account of the acts of the Warrantor or any person acting on
its behalf, and the execution or delivery of this Lease, or the leasing of the
Office. Landlord shall pay the Broker any money or other consideration which the
Broker is entitled to in connection with this Lease and the leasing of the
Office; provided there is a written brokerage agreement between the Landlord and
the Broker and the money or other consideration is specified in the brokerage
agreement. Warrantor shall indemnify and hold the Warrantee harmless, from and
against any and all liabilities, costs, damages and expenses (including without
limitation intended, Litigation Expenses), incurred by the Warrantee, as a
result of any claim made by any person or entity, which is inconsistent with the
representation and warranty made by the Warrantor in the first sentence in this
Article.
40.02. WASHINGTON STATE ONLY - Landlord and Tenant acknowledge that prior to the
signing of this Lease and any related documents, they were each provided with a
copy of a pamphlet titled "Law of Real Estate Agency" which included the text of
RCW 18.86.010 through 18.86.030, 18.86.040 through 18.86.110 and 18.86.900.
Initial: [Illegible] [Illegible]
---------------- ---------------
ARTICLE 41. QUIET ENJOYMENT:
Provided and for so long as Tenant shall fulfill all of its obligations under
this Lease, Tenant shall quietly enjoy the Office without molestation by
Landlord or any person or entity claiming the office in compliance with the Law,
subject to the provisions of this Lease and all mortgages, deeds of trust, other
security agreements, ground and other underlying leases to which this lease may
be subordinate.
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ARTICLE 42. NO PARTNERSHIP/JOINT VENTURE:
This Lease and the relationship of Landlord and Tenant shall not create a
partnership or joint venture.
ARTICLE 43. REMEDIES CUMULATIVE:
Each remedy and right of Landlord and Tenant in this Lease shall be cumulative
and shall be in addition to all rights and remedies granted in this Lease or by
Law. The exercise of any one or more of such remedies as a result of a default
shall not preclude the exercise of any other remedies as a result of such
default.
ARTICLE 44. NOTICES:
Any notice, request, demand, approval, consent or other communication
(collectively "COMMUNICATION") concerning this Lease or any transaction or
matter arising in connection with this Lease, including any contemplated by any
of the exhibits to this Lease, shall be in writing and given to the party to
which it is directed, at the address specified in the first paragraph of this
Lease. Such address may be changed by a Communication given in accordance with
the provisions of this Article. Any Communication shall be (i) delivered
personally and a signed receipt obtained: or (ii) sent by certified mail, return
receipt requested; or (iii) sent by Federal Express or similar nationally
recognized courier service which promises next business day delivery. Any
Communication shall be deemed given on (i) the date personally delivered to the
other party and a signed receipt obtained; or (ii) three days after deposit,
postage prepaid, in any United States Postal Service branch or official
depository; or (iii) the next business day after delivery to and acceptance by
Federal Express or similar nationally recognized overnight courier service
promising next business day delivery; whichever event shall occur earliest. Any
Communication given by any management agent of the Project or attorney for
Landlord shall be deemed a Communication given by Landlord.
ARTICLE 45. ATTORNEY & FEES:
In the event of a default by a party under this Lease, any Litigation Expenses
incurred by the party entitled to performance under this Lease, in the exercise
or enforcement of any of the fights or remedies of such party under this Lease
or the Law, shall be paid by the party in default to the party entitled to
performance (and if payable to Landlord shall be paid as Rent), within ten days
after demand by the party entitled to payment.
ARTICLE 46. LANDLORD'S RIGHT TO PERFORM TENANTS OBLIGATIONS:
In the event that (i) there Is a Default, or (ii) Tenant breaches any of its
obligations under this Lease and there is an actual or apparent emergency; then
in either case, Landlord shall have the right at the sole cost and expense of
Tenant, to elect to perform any such obligation, without notice to Tenant in the
case of any actual or apparent emergency (provided Landlord
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shall attempt to give Tenant notice by telephone or other means reasonable under
the circumstances), and in the absence of any actual or apparent emergency
without any notice except any notice of breach or potential default required by
this Lease.
ARTICLE 47: RECORDING:
Tenant shall not record this Lease. At the request of Landlord or Tenant, the
parties shall at the sole cost and expense of the party making the request,
execute, acknowledge and deliver a memorandum of this Lease, in form suitable
for recording.
ARTICLE 48. DISCRETION:
Whenever the consent, approval or permission of a party under this Lease is
sought from the other party under this Lease, or the satisfaction, discretion,
or designation of a party under this Lease is provided for by this Lease, the
party whose consent, approval or permission is sought and the party whose
satisfaction, discretion or designation is provided for, shall not unreasonably
withhold, delay, condition or exercise its consent, approval, permission,
satisfaction, discretion or designation.
ARTICLE 49: TIME OF THE ESSENCE:
Time shall be of the essence for the performance of all of the obligations of
Tenant under this Lease.
ARTICLE 50: MISCELLANEOUS:
50.01. SUCCESSORS: The rights and obligations of Landlord and Tenant under this
Lease, shall inure to the benefit of and be binding upon Landlord and Tenant and
all persons and entities who succeed to the respective rights and obligations of
Landlord or Tenant, in accordance with the provisions of this Lease.
50.02. MODIFICATION: This Lease cannot be changed orally. It can only be changed
in writing and the writing must be signed by the party against whom the change
is sought to be enforced.
50.03. ENTIRE AGREEMENT: This Lease is signed by Landlord and Tenant as a final
expression of all the terms of their agreement and as a complete and exclusive
statement of its terms.
50.04. COUNTERPARTS: This Lease may be signed in counterparts with the same
force and effect as if all required signatures were contained in a single
original instrument.
50.05. LANDLORD'S SIGNATURE: Despite the statements, promises, acts or omissions
of any person or entity, this Lease shall not be binding upon Landlord, unless
and until this Lease (or a counterpart) Is signed by both Landlord and Tenant.
LEASE - 42
<PAGE>
50.06. CAPTIONS: The captions in this Lease were inserted for the convenience of
reference only. They do not in any manner define, limit or describe the
provisions of this Lease or the intentions of Landlord or Tenant.
50.07. GENDER/SINGULAR/PLURAL. Whenever masculine, feminine, neuter, singular or
plural terms are used in this Lease, they shall be construed to read in whatever
form is appropriate to make this Lease applicable to all persons, entities, acts
and transactions.
50.08. RULE OF CONSTRUCTION NEGATED: In the event it shall be necessary to
construe this Lease, the rule of construction that an instrument should be
construed against the party who prepared the instrument, shall be disregarded.
50.09. PARTIAL INVALIDITY: In the event that a court of competent jurisdiction
declares that one or more provisions of this Lease are invalid or unenforceable,
the remaining provisions of this Lease shall nevertheless remain in full force
and effect. However, in the event that such declaration results in any reduction
of any Rent, Landlord shall have the right to terminate this Lease 30 days after
the date that notice of termination is given by the Landlord.
50.10. EXHIBITS INCORPORATED: The exhibits annexed to this Lease are hereby
incorporated by reference in their entirety with the same force and effect as if
they were set forth in this Lease in their entirety.
50.11. COVENANTS: All of the obligations of Tenant under this Lease shall
constitute material covenants.
50.12. JOINT AND SEVERAL LIABILITY: Each person and entity which is a Landlord
or Tenant (if more than one) shall be singularly and collectively liable for the
full performance of all of the obligations of the respective party under this
Lease.
50.13. TENANTS REVIEW/ATTORNEY: Tenant acknowledges that prior to signing this
Lease, Tenant has been given an adequate opportunity to (i) review this Lease;
and (ii) consult with an attorney.
50.14. OBLIGATIONS SURVIVE: The termination or expiration of this Lease shall
not relieve Tenant from performance of its obligations under this Lease, which
have accrued prior to the Termination Date, or are expressly or impliedly
required to be performed after the Termination Date. Without in any way limiting
the general application of the provisions of the immediately preceding sentence,
the obligations of Tenant under the Article of this Lease captioned
"INDEMNIFICATION" shall survive the termination or expiration of this Lease.
50.15. CONDITION TO LEASE EFFECTIVENESS: Despite any other provision of this
Lease to the contrary, this Lease shall not become effective when executed,
unless and until the beneficiary under the trust deed which encumbers the
Project ("LANDLORD'S MORTGAGEE"), consents to the Landlord's execution of this
Lease. If such consent is not
LEASE - 43
<PAGE>
Obtained prior to January 31, 2000; then both parties shall be relieved of
and released from all obligations and liabilities under this Lease. Within
one business day after Tenant receives a copy of this Lease executed by
Landlord, Tenant shall deliver to Landlord for distribution to Landlord's
Mortgagee, copies of: (i) Tenant's financial statement, including balance
sheet and income and expense statement, covering the Tenant's most recently
completed fiscal year, or if Tenant has not been engaged in business for a
complete fiscal year; then for the completed quarters Tenant has been engaged
in business; and (ii) any business plan, preliminary prospectus, annual
report or similar document which describes the Tenant and its operations. The
distribution shall be made to Landlord's Mortgagee to provide the Landlord's
Mortgagee with information it may use to evaluate whether to consent to the
Landlord's execution of this Lease.
50.16. SATELLITE DISHES, ANTENNAE, ETC.: Tenant shall have the right to
install, operate, maintain, repair, replace and remove a satellite dish or
antenna (including a microwave antennae) and all necessary related equipment
at the Center (collectively "Communications Equipment") subject to the
following terms, conditions and limitations: (i) the location of the
Communications Equipment shall be on the roof of the building within the area
depicted on EXHIBIT "H" of this Lease or on top of the parapet walls of the
Project or such other location at the Project as Landlord shall reasonably
direct (so long as such location provides for the same or better reception
and transmission of signals) and if Landlord expands or reconfigures the
Project so as to require the relocation of the Communications Equipment,
Tenant shall relocate the Communications Equipment, as Tenant's sole cost and
expense, to a new location at the Project reasonably designated by Landlord
(so long as such location provides for the same or better reception and
transmission of signals); (ii) the installation, operation, maintenance,
repair, replacement and removal of the Communications Equipment, and any
attendant costs and expense, shall be the sole responsibility of Tenant;
(iii) if required by Landlord, Tenant shall screen the Communications
Equipment in the manner and using the materials required by Landlord; (iv)
Tenant shall obtain any approval required by any Government having authority
over the Communications Equipment, including its installation or operation
and upon Landlord's request, shall deliver evidence of same to Landlord; (v)
Tenant's installation and operation of the Communications Equipment shall not
interfere with the operation of any other tenant's business in the Project,
including without limitation intended, any other tenant's reception of radio,
television or other broadcast signals, or the operation or any other
transmission or receiving device at the Project; (vi) Tenant shall give
Landlord reasonable prior notice of the necessity to access the
Communications Equipment for service, except in the case of an emergency;
(vii) at the expiration or earlier termination of the Lease, Tenant shall
remove the Communications Equipment and (if located on the roof, Tenant shall
use Landlord's roofing contractor to) repair all damage caused by such
removal; (viii) the height of the Communications Facilities and screening,
shall not exceed 5 feet and the weight of the Communications Equipment and
screening shall not exceed 25 pounds per square foot; (ix) any roof or
exterior wall installations or penetrations must be performed by the
Landlord's contractor at Tenant's expense; (x) Tenant shall maintain and
operate the Communications Equipment in accordance with all applicable Law;
(xi) Tenant shall maintain the Communications Equipment in good condition and
repair; (xii) Tenant shall indemnify and hold the Landlord harmless from any
liabilities, damages, costs and expenses (including reasonable
LEASE - 44
<PAGE>
Litigation Expenses), arising out of any claim, cause of action, suit,
proceeding or investigation related to the Communications Facilities.
IN WITNESS WHEREOF, Landlord and Tenant have signed this Lease as of
the date first set forth in the first paragraph of this Lease.
TENANT: Witness/Attest:
FREEI NETWORKS, INC.
By: /s/ Bob McCausland /s/ John D. Smith
------------------------------ ------------------------------
Signature Signature John D. Smith
Title: President/CEO
LANDLORD: Witness/Attest
PRIMESTAR INVESTMENT CORP.
By: /s/ Tasnim Sayani [Illegible]
------------------------------ ------------------------------
Signature Signature
Title: President
------------------------
LEASE - 45
<PAGE>
STATE OF WASHINGTON)
)ss.
COUNTY OF KING )
1, the undersigned, a notary public in and for the State of
Washington, hereby certify that on this 21st day of January, 2000, personally
appeared before me Robert (Bob) McCausland to me known to be the
President/CEO of FREEi Networks, Inc., the corporation that executed the
foregoing instrument, and acknowledged the said instrument to be the free and
voluntary act and deed of said corporation, for the uses and purposes therein
mentioned, and on oath stated that he/she is authorized to execute the said
instrument and that the seal affixed is the corporate seal of said
corporation.
/s/ Michelle Pion
--------------------------------
[affix seal] NOTARY PUBLIC, in and for the
State of Washington
My appointment expires
11-16-2003
--------------------------
Residing at Pierce County
---------------
STATE OF WASHINGTON)
)ss. MICHELLE PROPER
COUNTY OF KING ) Notary Public, State of Washington
Expiration Date November 16, 2003
I certify that on the undersigned, a notary public in and for the
State of Washington, hereby, this 21st day of January, 2000, personally
appeared before me Tasnim Sayani, to me known to be the PRESIDENT of
Primestar Investment Corp., the corporation that executed the foregoing
instrument, and acknowledged the said instrument to be the free and voluntary
act and deed of said corporation, for the uses and purposes therein
mentioned, and on oath stated that he/she is authorized to execute the said
instrument and that the seal affixed is the corporate seal of said
corporation.
/s/ John D. Smith
----------------------------
[affix seal.] NOTARY PUBLIC, in and for the
State of Washington
My appointment expires
11.16.2000
----------------------- JOLENE D. SMITH
Residing at Pierce County Notary Public, State of
--------------- Washington
Expiration Date November
16, 2003
LEASE - 46
<PAGE>
Rider to Lease dated January 21st, 2000, between Primestar Investment Corp.,
as Landlord, and Freei Networks, Inc., as tenant. Landlord and Tenant further
agree that:
R.1. Generator:
1.01. Provided Tenant obtains Landlord's prior approval of plans and
specifications, Tenant shall have the right to install: (i) one new or like-new
220 KW emergency generator, East of the dumpster, on a concrete slab with
concrete vault Tenant shall pour and install to support the generator, and (ii)
an electrical raceway running from the concrete vault to the building and up to
the second floor and roof.
1.02. Landlord shall give Tenant access to the existing electrical utility vault
and from the existing electrical utility vault to the vault described in Section
R.1.01 above.
1.03. The generator shall be operated only during such periods of time as the
electrical supply to the Office is interrupted, for required servicing,
maintenance and repairs.
1.04. The generator shall be maintained in good condition and repair and
mufflered at all times.
1.05. When the term of this Lease expires or is sooner terminated, Tenant shall
remove the generator, and all appurtenances, and at Landlord's request remove
the concrete slab and restore the parking lost as a result of the Tenant's
installation.
1.06. The 198 parking spaces provided for in this Lease shall automatically be
reduced by the number of parking spaces lost a result of the installations
authorized by this Section R.1.01.
R.2. Chiller: Provided Tenant obtains Landlord's prior approval of plans and
specifications, Tenant shall have the right to install a 30 ton chilled water
system on the roof, structurally supported by roof curvings, located between the
parapet wall and penthouse, approximately five feet high, four foot deep and 12
feet long.
R.3. Communication Cable/Wire: When Tenant or its contractor installs new
communicable cable and/or wire, Tenant or its contractor shall have the right to
remove the existing cable and/or wire servicing the Office; provided there is no
interference with any communications services provided to or by any other
occupant of the Project. Landlord shall pay for the reasonable costs of such
removal, but in no event more than $5,000.00
LEASE - 47
<PAGE>
LIST OF EXHIBITS
LEGAL DESCRIPTION OF PROJECT A
SITE PLAN OF PROJECT B
FLOOR PLAN OF OFFICE C
CONFIRMATION AGREEMENT D (to be provided by
Landlord after final
signature and within
two (2) business days)
LANDLORD AND TENANT IMPROVEMENTS E
RULES AND REGULATIONS F
SIGN CRITERIA G
ROOF PLAN H
LEASE - 48
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION:
Lot 1 of King County Short Plat No. 887025, recorded under recording No.
8912140335, records of King County, Washington, being a portion of King
County Short Plat No: 179058, recorded under recording number 7911200818, and
as corrected by affidavit under recording number 8002190659, being a
subdivision of a portion of Tracts 56, 57, & 58 State Plat in Section 16,
Township 21 North, range 4 East, W.M. in King County Washington, according to
the Plat thereof recorded in Volume 41 of Plats, Page 30, in King County,
Washington.
<PAGE>
EXHIBIT "B"
[SITE MAP]
<PAGE>
EXHIBIT "B"
[SITE MAP]
<PAGE>
EXHIBIT "C"
OFFICE FLOORS
Floor 2: 13,087
Floor 3: 12,663
Floor 4: 12,663
Floor 5: 11,530
Floor 6: 10,820
<PAGE>
EXHIBIT "C"
SECOND FLOOR PARTITION PLAN
<PAGE>
EXHIBIT "C"
THIRD FLOOR PARTITION PLAN
<PAGE>
EXHIBIT "C"
FOURTH FLOOR PARTITION PLAN
<PAGE>
EXHIBIT "C"
FIFTH FLOOR PARTITION PLAN
<PAGE>
EXHIBIT "C"
SIXTH FLOOR PARTITION PLAN
<PAGE>
EXHIBIT "E"
LANDLORD AND TENANT IMPROVEMENTS
Landlord and Tenant agree that:
1. DEFINITIONS: All capitalized terms used in this exhibit
which are defined in the lease to which this exhibit is attached, shall have
the meanings set forth in the Lease.
2. PLANS & SPECIFICATIONS:
2.01. Tenant shall not construct or install any Tenant
Improvements requiring the Landlord's consent, unless Tenant has obtained
Landlord's prior written consent of plans and specifications describing the
Tenant Improvements ("APPROVED PLANS AND SPECIFICATIONS"). All Tenant
Improvements requiring Landlord's consent, shall be constructed and installed in
accordance with the Approved Plans and Specifications.
2.02. Landlord's consent to Approved Plans and Specifications
does not constitute a determination, representation or warranty that the
Approved Plans and Specifications or Tenant Improvements comply with the Law,
are suitable for their intended purpose or are otherwise satisfactory. Tenant
shall be solely responsible for the content of the Approved Plans and
Specifications, their compliance with the Law, their suitability for their
intended purpose, and otherwise.
3. COMMENCEMENT OF CONSTRUCTION:
3.01. Prior to constructing or installing Tenant Improvements,
Tenant shall (i) procure all licenses, permits, certificates, approvals and
other authorizations (collectively "BUILDING PERMITS") required for the
construction and installation of Tenant Improvements, by any Law or the board of
fire underwriters or other recognized fire insurance rating organization
(collectively "FIRE UNDERWRITERS"); and (ii) deliver to Landlord evidence
satisfactory to Landlord, that all the Building Permits have been issued and are
in full force and effect.
3.02. Prior to constructing or installing any Tenant
Improvements, Tenant shall obtain Landlord's approval of all contractors and
subcontractors (collectively "CONTRACTORS") who shall construct or install any
material part of Tenant Improvements. To obtain such approval, Tenant shall
submit to Landlord, notice requesting such approval and containing the name and
address of each of the Contractors. In addition, if requested by Landlord within
ten business days after Landlord's receipt of such notice, Tenant shall deliver
to Landlord a current financial statement and current credit report for each of
the Contractors.
LEASE-49
<PAGE>
3.03. Prior to construction or installation of any Tenant
Improvements, Tenants general contractor shall meet with Landlord's management
agent or other designated representative, to review Tenant Improvements, the
provisions of the Lease, this exhibit and the Rules and Regulations applicable
to the construction and installation of Tenant Improvements.
4. INSURANCE:
4.01. Builder's Risk Insurance: Prior to construction or
installation of any Tenant Improvements, Tenant shall obtain and thereafter
maintain in full force and effect through the date that Tenant Improvements are
completed, builder's completed value risk insurance (non-reporting form)
covering all of Tenant Improvements, Tenant's inventory and other personal
property in or about the Office or in the Project from time to time, in an
amount not less than the full replacement cost, without any deduction for
depreciation. Such insurance shall provide protection against loss or damage
from any hazard included within the coverage of "all perils" coverage.
4.02. Contractors' Insurance: Prior to construction and
installation of any Tenant Improvements, Tenant shall require all of the
Contractors to obtain and thereafter maintain in full force and effect until
completion of Tenant Improvements, the following insurance coverage:
(a) Worker's compensation insurance in accordance
with the requirements of Law;
(b) Employer's liability insurance in an amount not
less than $300,000.00;
(c) Commercial general liability insurance,
including coverage for motor vehicle liability, with limits of not less
$1,000,000.00 combined single limits.
4.03. Prior to the commencement of Tenant Improvements: (a)
Tenant shall obtain and provide Landlord with certificates for the required
insurance coverage and; (b) if so required by Landlord, Tenant shall furnish or
cause its general contractor to provide Landlord with performance and labor and
material payment bonds in form and content satisfactory to Landlord and in an
amount equal to the total cost of Tenant Improvements or the total general
contract price. The bonds shall name Landlord as an additional beneficiary and
shall be issued by a surety company which is (a) authorized to write surety
bonds in the State of Washington; and (b) acceptable to Landlord.
4.04. The provisions of Section 9.02 of the Lease shall apply
to all insurance which Tenant and its Contractors are obligated to obtain and
maintain pursuant to this Article 4,
EXHIBIT "E" - LANDLORD
AND TENANT IMPROVEMENTS
<PAGE>
5. BASIC PROVISIONS GOVERNING TENANT CONSTRUCTION AND
INSTALLATION:
5.01. All of Tenant's fixtures, equipment and supplies
shall be new and of first class quality and appearance. Trade names used in
this exhibit are set forth to specify a standard of type and quality. Unless
otherwise specifically set forth in this exhibit, the use of trade names
shall not impose a requirement that a particular manufacturer's or supplier's
product be utilized; provided, however, that the use or installation of any
product other than that specified in this exhibit must be approved in advance
by Landlord, and any other product must equal or exceed the quality of the
product specified by trade name.
5.02. The construction and installation of Tenant Improvements
must be performed in accordance with all Law, the prevailing design and
construction standards of the Project, the requirements imposed by any insurer
which provides Casualty Insurance and the applicable Fire Underwriters.
5.03. Construction and installation of Tenant Improvements
shall be performed in a first class, workman-like manner, and Tenant
Improvements shall be in good usable condition and in first class appearance at
the time of completion.
5.04. Tenant shall require each of the Contractors, to
guarantee or warrant that their work shall be free from any and all defects in
workmanship and materials for a period ending on the first anniversary of the
date ("COMPLETION DATE") that their respective work is completed. Tenant shall
also require that each of the Contractors obligate itself by guaranty or
warranty to replace or repair without charge, any and all of the work performed
and any and all of the materials supplied by or through the respective
Contractor, which may become defective prior to the first anniversary of the
respective Contractor's Completion Date. The obligation to repair or replace
defective work and materials shall include all costs and expenses related to
correction of defects, and all work performed and materials damaged as a result
of such defects, repairs and/or replacements. All guarantees and warranties
shall name Landlord as a beneficiary, entitled to enforce such guarantees and
warranties against the Contractors without the participation or consent of
Tenant.
5.05. Tenant shall not construct install, use or operate
any bakery or cooking equipment, appliances or facilities (collectively "FOOD
EQUIPMENT"), including without limitation intended, hot plates, burners,
ovens, grills or deep fryers, without Landlord's prior consent. Nothing
contained in the preceding sentence shall prohibit the use of a plug-in drip
coffee maker, percolator or microwave oven solely for the use of Tenant's
employees, provided the appliances are located in a portion of the Office not
accessible to customers. In the event that any Food Equipment is constructed
or installed, prior to operation or use thereof, functional grease traps
shall be installed by Tenant where reasonably necessary for waste removal and
an ansul dry chemical automatic fire extinguisher system or its equivalent
shall be
EXHIBIT "E" - LANDLORD
AND TENANT IMPROVEMENTS
<PAGE>
installed by Tenant and in operation over ail Food Equipment, including without
limitation intended, deep fryers, grills and burners.
5.06. Any changes in the portions of the Project or the Office
which were constructed by or at the behest of Landlord or its predecessor in
interest, and which are requested by Tenant or reasonably required by the
Approved Plans and Specifications, shall be performed by Landlord or a
contractor designated by Landlord, but at the sole cost and expense of Tenant.
Such costs and expenses shall be payable upon demand.
5.07. Tenant shall not open the Office for business, unless
and until any Required Permits, including without limitation intended, any
certificate of occupancy required by any Law for the use or occupancy of the
Office has been issued, is in full force and effect and true copies have been
delivered to Landlord.
5.08. Within 30 days after the Office opens for business,
Tenant shall deliver to Landlord, a detailed breakdown of all the costs and
expenses incurred or paid or which shall be incurred or paid in connection with
Tenant Improvements, proof of payment of all Contractors and suppliers, and
unconditional lien waivers or releases in recordable form reasonably
satisfactory to Landlord, from all Contractors and suppliers.
6. AS IS: Except for the Landlord Improvements specified in
this Section 6, if any, Tenant accepts the Office in its current condition,
"AS IS, "WHERE IS". Landlord will make the following improvements prior to
the Commencement Date (i) build 3 or 4 mini-kitchens consisting of
counter-top, cabinets and sink (no appliances) in locations where the
existing plumbing and drains make it feasible to do so without bringing water
and drainage to new locations; (ii) paint all walls; (iii) shampoo all
carpets within the Office; (iv) replace all elevator lobby carpeting on all
floors leased by Tenant; (v) install new vinyl wall covering on each of the
elevator lobbies on all floors leased by Tenant; (vi) install new panels on
the interiors of all passenger elevator cabs; (vii) install one wide glass
door on the 6th floor; and (viii) in the board rooms on the 2nd and 6th
floors, upgrade the wall covering on one wall in each of the board rooms with
a special vinyl on which you can project a video or transparency image and
write with a felt-tipped pen.
7. ELECTRIC SERVICE:
7.01 The electrical service for the Office shall be:
(a) Actual square footage of gross leasable floor area within the Office (0-1,
199 sq. ft.) - 100 amp panel;
(b) Actual square footage of gross leasable floor area within the Office
(1,200+ sq. ft.) - 225 amp panel;
EXHIBIT "E" - LANDLORD
AND TENANT IMPROVEMENTS
<PAGE>
15.01. Tenant is fully responsible for the work and conduct,
work and supplies of its Contractors.
15.02. Before starting any work, the Contractors shall provide
proof of the insurance required in this exhibit, naming Primestar Investment
Corp. and GMAC Commercial Mortgage Corporation, as additional insureds.
15.03. Unless either this requirement is waived in writing by
Landlord or by the Lease, the general contractor shall provide Landlord with
100% performance bond and payment bonds. In lieu of bonds, general contractor or
Tenant may deposit with Landlord the contract amount in cash or its equivalent.
15.04. The general contractor shall provide Landlord with a
work schedule and a list of Contractors to be used on the job as specified in
Section [3.01], above.
15.05. All work by Contractors shall be performed solely
within the Office's interior during the Projects's business hours. No work shall
be performed during the Project's business hours which creates any noise, dust,
vibration or other offensive condition which may reasonably be objectionable to
any other tenant or occupant of the Project. No supplies shall be moved and no
work shall be done in Projects's Open Common Areas between the hours of 8:00 AM
and 5:30 PM, or the then current Projects business hours.
15.06. Contractor's equipment on floors is strictly limited
to designed weight limits as specified in Section 10.01, above. No special
equipment shall be used without Landlord's prior approval.
15.07. All Contractors shall construct and install the Tenant
Improvements in accordance with the Approved Plans and Specifications. All
significant changes must be approved by Landlord.
15.08. All Contractors shall properly and conspicuously
display all Building Permits.
15,09. Signs on the exterior of the barricade or elsewhere
shall be limited to any which may be approved by Landlord, or shall be limited
to Tenant's name, date of Office opening and general contractor's name and
address, and conform to Exhibit "G" of this Lease.
15.10. All Contractors shall strictly abide by all Law and
especially all State and Federal environmental, health and safety laws.
Contractors shall take every precaution to protect the public from all dangerous
conditions and operations
15.11, Any damage done to adjacent Common Areas or other
Offices during construction shall be immediately repaired to Landlord's
satisfaction.
EXHIBIT "E" - LANDLORD
AND TENANT IMPROVEMENTS
<PAGE>
15.12. General contractor shall maintain a representative at
the job site at all times during construction. Telephone numbers of all
Contractors shall be furnished to Landlord before construction commences, for
contact in event of any after business hours emergencies.
15.13. The general contractor shall arrange for all trash
removal related to construction. The general contractor shall keep all Common
Areas clean at all times. Any cleaning by the Project's personnel or
contractors, arising out of the Tenant Improvements shall be reimbursed by
Tenant upon demand. Before construction begins, general contractor shall make
arrangements with Landlord for any temporary electric power and water.
15.14. Contractors shall not install any finish materials that
do not strictly conform with the materials and colors specified on the Approved
Plans and Specifications.
15.15. Contractors shall not penetrate the roof in any manner,
nor install equipment through the roof without Landlord's prior approval as
specified in Section ___8, above.
16.16. Contractors shall verify entry floor elevations with
Landlord prior to installation. All tripping hazards shall be properly treated,
immediately.
15.17. Prior to installation of HVAC equipment, Tenant shall
submit for Landlord's review and approval HVAC design information, cooling and
heating loads and equipment data. No HVAC equipment shall be installed without
Landlord's prior approval. There shall be no changes, additions, or replacements
of HVAC equipment without the prior approval of Landlord.
15.19. Contractors' vehicles shall be properly marked with job
name on windshields. Non-essential vehicles and workers' personal vehicles
shall be parked in visitor parking areas(s) designated by Landlord.
15.20. All work outside of the Projects business hours shall
be coordinated in advance with the Project's security and maintenance chiefs.
15.21. Delivery and location of Refuse dumpsters and
containers, shall be subject to Landlord's prior approval. No area except the
Office shall be used for construction staging or construction storage. Without
the Landlord's prior approval, no construction equipment, tools, materials or
supplies shall be transported on any passenger elevator.
15.22. Contractors shall maintain peaceful labor relations
with all their workers and all of their suppliers' workers. If there are any
disputes, picketing, or disturbances,
EXHIBIT "E" - LANDLORD
AND TENANT IMPROVEMENTS
<PAGE>
Landlord shall have the right to immediately remove the Contractors subject to
the dispute, picketing or other disturbance from the Project until such dispute,
picketing or disturbance is settled or otherwise halted.
15.23. Contractors shall coordinate the orderly installation
or transfer of all Utilities meters, lines, and other facilities with the
appropriate agencies and/or utility providers.
15.24. This Section 15 is not an exclusive list of the
requirements Contractors must adhere to.
15.25. Any violation of any of the provisions of the Lease
including this exhibit shall be sufficient justification for Landlord to stop
all construction work until the deficiency is corrected.
15.26. Any special requests shall be submitted in advance to
Landlord's designated representative. In the absence of any specific
designation, Nizar Sayani, 2505 South 320th Street, Suite 101, Federal Way WA
98003, is Landlord's designated representative,
15.27. The use of un-licensed contractors and subcontractors
is strictly prohibited.
15.28. If there is no general contractor, then Tenant shall
fulfill all of the requirements to be fulfilled by a general contractor.
16. NOT A COMPLETE DOCUMENT: the provisions of and
obligations of Tenant set forth in this exhibit are in addition to and not in
lieu of the provisions and obligations set forth in the Lease.
17. CONFLICTS: To the extent, if any, that the provisions
of this exhibit may conflict with any of the provisions of the Lease,
whichever provisions are more beneficial to Landlord or Impose greater
obligations upon Tenant, shall govern and prevail.
Initials: /s/ Initials: /s/
---------------------- ----------------
EXHIBIT "E" - LANDLORD
AND TENANT IMPROVEMENTS
<PAGE>
EXHIBIT "F"
RULES AND REGULATIONS
The following rules and regulations constitute the Rules and Regulations for the
Project known as 2505 South 320th, Federal Way, Washington. Each of the
capitalized terms used in these Rules and Regulations shall have the definition
set forth in the printed form of lease currently used by Landlord at the
Project.
1. Tenant shall not commit or permit any action or thing which
may disturb the quiet enjoyment of any other tenant in the Project, or any
person within 1,000 feet from the boundary of the Project.
2. Tenant shall not sell, distribute, or display or permit the
sale, distribution, or display of any alcoholic or intoxicating substances or
liquids whatsoever, or any other substance or liquid which may create a hazard
or may be annoying to other persons, or tenants, in or about the Project.
3. Tenant shall not use or permit the use of any advertising
or promotional media or devices which may create a hazard or may be annoying to
other persons or tenants in or about the Project, including without limitation
intended, handbills, flashing lights, searchlights, loudspeakers, sound
amplifiers, or any other- audio or video device heard or seen outside the
Office.
4. Tenant shall not use any portion of the Project outside of
the Office for the promotion or conduct of its business, including without
limitation intended, for the solicitation of business, advertising, display or
sales purposes. The prohibitions contained in the immediately preceding sentence
shall include without limitation intended, the distribution of handbills or
bumper stickers on or to motor vehicles in or about the Common Area.
5. Without the Landlord's prior approval of the dates, times
and means, Tenant, its contractors and suppliers, shall not: (i) move Tenant in
or out of the Office or in or out of the Project; nor (ii) move more than 500
pounds of personal property in the aggregate, in or out of the Office or in or
out of the Project during any single day. Landlord shall have the right to
prohibit any move between 8:00 AM and 5:30 PM or the then current business hours
of the Project. Tenant shall not move in or out of the Office or in or out of
the Project nor permit any of its contractors or suppliers to move in or out of
the Office or in or out of the Project, any fixtures, trade fixtures, furniture
or equipment, using any passenger elevators without the prior approval of the
Landlord.
6. Landlord may from time to time and at any time, designate
an area
EXHIBIT "F"
RULES AND REGULATIONS
1
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("EMPLOYEE PARKING AREA") which shall be used for parking by Tenant and any
employees of Tenant. The Employee Parking Area may or may not be within the
Project. In such event, Tenant shall not park or permit any of its employees
to park any vehicles on any other portion (or any portion) of the Common
Area. Tenant shall within five days after demand by Landlord, furnish
Landlord with the colors, makes, models and license plates of all vehicles
used by Tenant and its employees. In the event Landlord designates an
Employee Parking Area, and Tenant or an employee of Tenant parks a vehicle in
Common Area which is outside the Employee Parking Area, Landlord may elect to
tow and Office such vehicle, and/or place violation stickers upon such
vehicle, and Tenant shall pay upon demand to Landlord or any tow truck
operator engaged by Landlord, the charges incurred for the tow and storage of
such vehicle.
7. Tenant shall use metal or plastic containers for the
storage of all day-to-day Refuse. Any out-of-the-ordinary Refuse, including by
way of example only, shipping cartons, construction debris and substantially
larger than normal volumes of ordinary Office Refuse, shall be disposed of by
the Tenant in the manner designated by Landlord.
8. Tenant shall segregate its used paper, magazines, cans,
bottles and other recyclables by distribution into such containers as the
Landlord may provide.
9. Tenant shall not load or unload or permit the loading or
unloading of any Improvements or inventory during any time other than such time
as Landlord may designate in writing; and shall not park or permit the parking
of any vehicles in any manner which shall unreasonably interfere with access to
or from any part of the Project. All loading and unloading of Improvements and
inventory shall be made through the service entrance of the Project and/or such
other locations as Landlord may designate in writing.
10. Tenant shall not obstruct or permit the obstruction of any
portion of the Common Area, nor erect or install or permit the erection or
installation of any Improvement in or about the Common Area.
11. Tenant shall not permit the use of any fire extinguishers,
fire alarm systems and other fire protection or suppression devices required by
any insurance company or Law except for the purpose for which they were
intended. Tenant shall fully cooperate in any fire drills or inspections
required by Landlord or Law.
12. If the Office has a separate thermostat, at a minimum,
Tenant shall keep the thermostat at a temperature no lower than 55 degrees to
avoid the freezing of pipes.
13. Tenant shall not (i) change the exterior color or surface
of the Office, or any Improvement on the exterior of the Office, or otherwise
change the exterior of the Office In any manner whatsoever, or (ii) use any of
the Utility systems for any purpose other
EXHIBIT "F"
RULES AND REGULATIONS
2
<PAGE>
than that for which they were specifically designed, or (iii) dispose of any
Refuse in any plumbing system other than ordinary human waste; or (iv) install,
maintain or operate any disposal system of any nature whatsoever; or (v) except
in any area of the Office reserved solely for use by Tenants principals and
employees, install or operate or permit the installation or operation of any
coin, token, card operated or free vending machines for the sale or offer of any
property or service (including without limitation intended, pay telephones,
amusement devices and machines for the sale of food or beverage).
14. Tenant shall maintain peaceful relations with the public,
all of the Tenants customers, employees and agents, and all of Tenant's
contractors' and suppliers' employees and agents. If there are any disputes,
picketing, or disturbances (collectively "PROTEST"), Landlord shall have the
right to immediately remove any of the Tenant's contractors or suppliers subject
to the Protest from the Project until the Protest is settled or otherwise
halted. If there is a Protest against the Tenant, either (i) Tenant shall employ
only union labor and contractors if necessary to avoid or halt the Protest in or
about the Project; or (ii) Tenant shall at Landlord's request desist from any
further use or occupancy of the Office until the Protest ends.
15. Neither Tenant, its employees and agents, Tenants
contractors or suppliers, or contractors' or suppliers' employees and agents,
shall loiter, daily or otherwise hang out in the Common Area; nor consume any
beverage or food in any part of the Common Area except any areas designated by
the Landlord for such purpose. Landlord may designate an area (the "Employee
Break Area') which shall be used for breaks by the Tenant and its employees. If
Landlord designates an Employee Break Area, then Tenant shall not permit any of
its employees to take their breaks in any other portion (or any portion) of the
Common Area which is not an Employee Break Area.
16. The use of tobacco products is strictly prohibited in the
enclosed portions of the Project and the Office, including Without limitation
intended, smoking or chewing. Use of tobacco products is only permitted in the
portions of the Common Area which are not enclosed.
17. To the extent permitted by Law, Landlord shall have the
right to exclude from the Project, for any reason or no reason, any individual
who is not a tenant or other authorized occupant, or an employee, agent,
supplier or contractor of a tenant or other authorized occupant.
18. No individual shall wear or display any apparel or Sign,
which Landlord reasonably suspects may create a public disturbance or physical
conflict, including without limitation intended, any colors or apparel
associated with any gang.
19. No individual shall possess a firearm or dangerous weapon
in the
EXHIBIT "F"
RULES AND REGULATIONS
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Project without the Landlord's prior consent.
20. No individual or entity shall make, convey or
disseminate any verbal, written or published statement or other form of
communication, including without limitation intended, Sign, advertisement,
pamphlet, or handout (except statements or other forms of communication
contained within inventory carried in the ordinary course of a Tenant's
authorized business), in or about the Project, to any customer or potential
customer, which: (i) criticizes the Landlord, the Project, or any occupant of
the Project or (ii) casts or tends to cast, the Landlord, the Project, or any
occupant of the Project in a false or unfavorable light; or (iii) subjects or
tends to subject, the Landlord, the Project or any occupant of the Project to
ridicule or scorn.
Intials:
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EXHIBIT "OF"
RULES AND REGULATIONS
4
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EXHIBIT "G"
SIGN CRITERIA
1. INTRODUCTION:
1.01. The following criteria have been established for the
purpose of enhancing the aesthetics of the Project, enhancing the quality of the
Project, and for the mutual benefit of all tenants.
1.02. All capitalized terms used in this exhibit and not
defined in this exhibit shall have the meanings given to them in the Lease.
2. COMPLIANCE: Tenant shall strictly conform the following criteria. Any Tenant
Signs visible from the exterior of the Office which do not conform must promptly
be either: (i) brought into conformance at the Tenant's expense; or (ii) removed
at the Tenant's expense.
3. GENERAL REQUIREMENTS:
3.01. Tenant shall submit or cause to be submitted to Landlord
for approval before fabrication, at least three copies of detailed drawings (to
scale), showing the location, size, layout, design and color of the proposed
exterior Sign(s), including all lettering and/or graphics. Landlord shall have
ten days after receipt of such drawings to approve or reject the drawings and
exterior Signs.
3.02. Any Required Permits for Signs and their installation
shall be obtained by Tenant, and copies delivered to Landlord before any
installation is begun.
3.03. All Signs shall be designed, constructed, installed and
removed at Tenant's expense.
4. GENERAL SPECIFICATIONS:
4.01. Signs must be professionally prepared and project a
professionally prepared appearance. Handmade, hand painted, hand lettered and
stenciled Signs shall not be used.
4.02. Signs shall employ red and/or black paint for all names,
words and other text,
4.03. No interior Sign shall exceed four square feet in size.
No Sign on the
EXHIBIT "G"
SIGN CRITERIA
1
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exterior of the building shall exceed the size permitted by Law.
5. DESIGN REQUIREMENTS:
6.01. Wording of Signs shall not include the product or
service sold by the Tenant except as part of Tenant's trade name or insignia. No
"Tagline" Signs are permitted as Signs.
6.02. Signs shall not display the name of any tenant or other
occupant, except Tenant's name as shown in the Lease or as authorized by the
Lease. No product names shall be used in Signs.
6.03. Tenants are encouraged to have Signs with letter size
and location appropriately scaled and proportioned to the overall entrance to
the Office. The design of all Signs, including style and placement of lettering,
size, color, and materials, shall be subject to the prior approval of Landlord.
7. SIGN CONTENT:
No Sign shall be derogatory, critical or political in nature.
No Sign shall be inaccurate or misleading. No Sign shall promote or refer to any
conduct which is prohibited or not authorized by the Lease. Each Sign shall be
directly related to the identification of the Tenant in the Office.
8. MISCELLANEOUS SIGNS/REQUIREMENTS:
8.01. Tenant shall be permitted to neatly place upon each
entrance of its Office not more than 144 square inches of gold leaf or decal
application with red and/or black lettering not to exceed two inches (2") in
height with Tenant's name, the name of any department suite number, hours of
business, emergency telephone numbers, and the like.
8.02. Modifications or deviations from the Sign criteria shall
be permitted when, in Landlord's sole discretion, they produce an outstanding
Sign. Any modifications or deviations from the Sign criteria shall be
highlighted in all drawings submitted by Tenant, to bring them to the Landlord's
attention. Landlord's decision to reject or approve modifications and deviations
shall be final.
9. STANCHION SIGNS:
9.01. One free standing stanchion Sign may be
permitted,subject to Landlord's prior approval. No easels, free standing,
sandwich board or blade Signs are permitted, Sign drawings for all stanchion
Signs must be submitted to Landlord for prior
EXHIBIT "G"
SIGN CRITERIA
2
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approval.
9.02. Stanchion Signs shall not exceed the following
dimensions:
(a) Height: 4'-0"
(b) Sign face: 18" x 24"
(c) Maximum letter height: Capitals 6", Lower
case 4"
9.03. Stanchion Signs shall used only to announce the opening
or closing of a Office, or for a promotional event, and shall be visible for no
longer and no more frequently than a two week time period, not to occur more
often than four times in any 12 calendar month period.
9.04. Stanchion Signs shall not protrude more than 16 inches
from the Office into the Open Common Area and shall be located directly in front
of the Office.
10. TEMPORARY SIGNS:
10.01. New Tenants, or existing Tenants undergoing a
significant remodel will be permitted to announce their Office and opening or
completion of remodeling with professionally prepared graphics painted on their
temporary construction walls, or a temporary hanging banner.
10.02. Tenants are encouraged to have unique and graphic
Signs. The text shall be limited to the name of the Tenant, name and address of
Tenants general contractor, and the opening date.
10.03. Signs permitted under this Section 10 shall not exceed
the following dimensions:
(a) Office name & opening date: Maximum letter
height: Capitals 18", Lower case 12"
(b) Special opening promotions: Maximum letter
height: Capitals 8", Lower case 6".
(C) Sign length shall not exceed 6'- 0"
(d) Sign height shall exceed 2'-0"
EXHIBIT "G"
SIGN CRITERIA
3
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10.04. Temporary banners announcing the opening of a Office
may be attached to the exterior (inside the building) Office wall or door until
such time as the Office opens.
10.05. Immediately upon opening the Office for business,
temporary opening and remodeling banners must be removed by Tenant.
Initials: /s/ /s/
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EXHIBIT "G"
SIGN CRITERIA
4
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EXHIBIT H
[ROOF PLAN]
<PAGE>
Exhibit 10.16
SPLITROCK
MASTER SERVICES AGREEMENT
NO. 990930-01
The Master Services Agreement (the "MSA") is made by SPLITROCK SERVICES, INC. a
Delaware corporation with its principal office at 9012 New Trails Drive, The
Woodlands, Texas 77381, ("SPLITROCK"), and FreeiNetworks, Inc., a Washington
corporation, with its principal office at 909 South 336th Street, Suite 110,
Federal Way, WA 98003 ("CUSTOMER"), effective September 30, 1999 (the "Effective
Date"). SPLITROCK and Customer agree that the following terms and conditions
apply to the provision and use of the products and services referenced in any
attachments to this Agreement and Customer Orders signed by Customer and
accepted in writing by SPLITROCK.
DEFINITIONS
COMMITMENT: A commitment for Service which, if made by Customer in the MSA, a
Customer Order, or in any other form specified and accepted by SPLITROCK,
obligates Customer to pay for a minimum revenue, subscribers, usage or volume of
Service and commences upon billing unless otherwise specified.
CONFIDENTIAL INFORMATION: Non-public information regarding the business of a
Party provided to either Party by the other where such information is marked or
otherwise communicated as being "proprietary" or "confidential" or the like, or
where such information is, by its nature, confidential.
CUSTOMER: The person, firm or corporation so named herein and on the Customer
Order.
CUSTOMER ORDER: A request for SPLITROCK Service submitted by Customer on a form
provided by SPLITROCK.
PARTY: Either SPLITROCK or Customer may be referred to individually as a Party
or collectively as the Parties herein.
PREMISES: The location(s) occupied by Customer or its end users specified in the
Customer Order to or from which Services will be delivered.
SERVICE: Any data communications or related products or service(s) offered by
SPLITROCK pursuant to a Customer Order.
START BILLING DATE: Billing begins upon confirmation to Customer of installation
by SPLITROCK and continues for the term set forth.
TERM: The number of months of Customer commitment for Service from SPLITROCK
in the MSA; herein, thirty-six (36) months from the Effective Date.
TERMINATION CHARGES: The standard Termination Charges of SPLITROCK which shall
apply for Customer terminating service at the conclusion of the term on the
Customer Order. Termination Charges shall also apply for early termination by
either Party prior to expiration of the term on the Customer Order.
SECTION 1. CUSTOMER ORDERS
1.1 SUBMISSION OF CUSTOMER ORDERS. Customer shall submit to SPLITROCK signed
Customer Order forms requesting the provision of Service. SPLITROCK shall
confirm the accuracy of information on the Customer Order form and the
availability of the Service requested and return the Customer Order form
countersigned constituting SPLITROCK's acceptance. The term on the Customer
Order shall not extend beyond the expiration date of the MSA without an
Amendment to the MSA.
SECTION 2. BILLING AND PAYMENT
2.1 PAYMENT AND RENDERING OF BILLS. SPLITROCK shall bill all charges incurred by
and credits due to Customer on a monthly basis. SPLITROCK shall bill in advance
charges for all Service to be provided during the ensuing month except for
charges which are dependent upon usage of Service, which charges shall be billed
in arrears. Adjustments for the quantities of Service established or
discontinued in any billing period during the Term will be prorated to the
number of days based on a thirty (30) day month.
<PAGE>
2.2 PAYMENT OF BILLS. All invoices are issued on the 20th of the month,
subject to change, are due by the due date stated on the invoice, and
become past due if not received by the due date. The unpaid balance of any
past due amounts shall bear interest at the rate of the one percent (1%) per
month, or the highest rate allowed by law, whichever is less.
2.3 TAXES AND FEES. Except for taxes based on SPLITROCK's net income and except
with respect to ad valorem personal and real property taxes imposed on
SPLITROCK's property, Customer shall be responsible for payment of all sales,
use, gross receipts, excise, access, bypass, franchise or other local, state and
federal taxes, fees, charges, or surcharges, however designated, imposed on or
based upon the provision, sale or use of the Service delivered by SPLITROCK.
2.4 REGULATORY AND LEGAL CHANGES. SPLITROCK may elect or be required by law to
file with the appropriate regulatory agency tariffs respecting the delivery of
certain Service. In the event and to the extent that such tariffs have been or
are filed respecting Service ordered by Customer, the terms set forth in the
applicable tariff shall govern SPLITROCK's delivery of, and Customer's
consumption or use of, such service. In the event of any change in applicable
law or regulation that materially increases the cost of delivery of Service,
SPLITROCK and Customer shall renegotiate regarding the rates charged to Customer
to reflect such increase in cost and, in the event that the Parties are unable
to reach agreement respecting new rates, then (a) Customer may elect to continue
the affected Customer Order at the new rates, or (b) Customer may terminate the
affected Customer Order upon thirty (30) days' written notice without payment of
any Termination Charge.
2.5 DISPUTED BILLS. In the event that Customer disputes greater than ten percent
(10%) of the bill. Customer must timely pay the undisputed portion of the
Invoice in full and submit a documented claim for the disputed amount. All
claims must be submitted to SPLITROCK within sixty (60) days of the due date
stated on the invoice. If Customer does not submit a claim within such period
and in the manner stated above, Customer waives all rights to dispute such
charges.
2.6 CREDIT ALLOWANCE. SPLITROCK shall issue a credit for any total Service
outage of twenty-four (24) hours or more.
2.7 CREDIT APPROVAL AND DEPOSITS. Customer shall provide SPLITROCK with credit
information as requested in advance of the commencement of delivery of
Service under any Customer Order. SPLITROCK may require Customer to make a
deposit:
A. As a condition to SPLITROCK's acceptance of any Customer Order submitted by
Customer,
B. As a condition to SPLITROCK's continuation of Service under any Customer
Order, but only when Customer's consumption of Service materially exceeds
Customer's anticipated use,
C. When, in SPLITROCK's reasonable discretion, such deposit is required in order
to secure Customer's anticipated use, or
D. When, in SPLITROCK's reasonable discretion, such deposit is required in order
to secure Customer's continued payment obligation, which deposit shall be held
by SPLITROCK as security for payment of charges. At such time as the provision
of Service to Customer is terminated, the amount of the deposit shall be
credited to Customer's account and any credit balance which may remain shall be
refunded.
2.8 FRAUDULENT USE OF SERVICE. Customer shall comply with SPLITROCK's Acceptable
Use Policy and shall be solely responsible for all charges incurred respecting
Service, even if such charges were incurred through or as a result of fraudulent
or unauthorized use of the Service, unless SPLITROCK has actual knowledge of
such fraudulent or unauthorized use and fails to inform Customer thereof.
Nothing in this subsection 2.7, however, shall be construed to obligate
SPLITROCK to detect or report unauthorized or fraudulent use of Services.
SECTION 3. CANCELLATION OF CUSTOMER ORDERS
3.1 CANCELLATION OF CUSTOMER ORDER BY SPLITROCK. SPLITROCK may immediately
discontinue Service without incurring any liability:
A. For nonpayment, upon five (5) days' written notice when there is an unpaid
balance for Service that is past due.
<PAGE>
B. For violation of any law, rule, regulation or policy of any government
authority having jurisdiction over such Service or by reason of any order or
decision of a court or other government authority having jurisdiction over
Service, without notice.
C. For any Customer filing of bankruptcy or reorganization or failing to
discharge an involuntary petition within sixty (60) days after filing.
D. For consumption of Service that materially exceeds Customer's credit limit,
upon five (5) days written notice and provided Customer has not provided
additional security for payment which is sufficient in SPLITROCK's reasonable
discretion.
E. For breach of a material term of the MSA.
3.2 EFFECT OF CANCELLATION. Upon cancellation of Service to Customer prior to
expiration of the term on the Customer Order, whether by SPLITROCK pursuant to
subsection 3.1 or by Customer, SPLITROCK may, in addition to all other remedies
that may be available to SPLITROCK at law or in equity, assess and collect from
Customer Termination Charges. Termination Charges include (i) all charges
incurred by SPLITROCK to terminate Service, and (ii) fifty percent (50%) of the
minimum unpaid monthly Commitment, or of the average monthly charges for the
three (3) full calendar months preceding termination multiplied by the months
remaining under the term in the Customer Order, whichever is lower. SPLITROCK
shall have the sole and absolute discretion to restore such Service only after
satisfaction of such conditions as SPLITROCK determines to be required for its
protection. Nonrecurring charges will be applied to restoration of Service.
SECTION 4. DELIVERY OF SERVICES
4.1 SPLITROCK FACILITIES. Customers shall not and shall not permit others to
rearrange, disconnect, remove, attempt to repair, or otherwise tamper with any
of the facilities or equipment installed by SPLITROCK, except upon the written
consent of SPLITROCK. Equipment provided or installed by SPLITROCK for use in
connection with the Service shall not be used for any purpose other than that
for which SPLITROCK provided it. In the event that Customer or a third party
attempts to operate or maintain any SPLITROCK-owned equipment without first
obtaining SPLITROCK's written approval, in addition to any other remedies of
SPLITROCK for breach by Customer of Customer's obligations hereunder,
Customer shall pay SPLITROCK for any damage to SPLITROCK-owned equipment and
service charges in the event that maintenance or inspection of the equipment
is required as a result of Customer's breach of this Section upon invoice. In
no event shall SPLITROCK be liable to Customer or any other person for
interruption of Service or for any other loss, cost or damage caused or
related to improper use or maintenance of SPLITROCK-owned equipment.
4.2 CUSTOMER-PROVIDED EQUIPMENT. SPLITROCK shall not be responsible for the
operation or maintenance of any Customer-provided communications equipment.
SPLITROCK shall not be responsible for the transmission or reception of signals
by Customer-provided equipment or for the quality of, or defects in, such
transmission.
4.3 NO LIABILITY FOR FAILURE TO TRANSMIT MESSAGES. SPLITROCK does not undertake
to transmit messages, but offers the use of its Service when available, and, as
more fully set forth elsewhere in these terms and conditions and applicable
Customer Orders, shall not be liable for errors in transmission or for failure
to establish connections.
SECTION 5. OBLIGATIONS AND LIABILITY LIMITATION
5.1 OBLIGATIONS OF THE CUSTOMER. Customer shall be responsible for:
A. The payment of all charges applicable to the Service (including charges
incurred as a result of fraud or unauthorized use of the Service).
B. Compliance with SPLITROCK's Acceptable Use Policy;
C. Providing the level of power, heating and air conditioning necessary to
maintain the proper environment on the Premises for the provision of Service;
5.2 LIMITATIONS OF LIABILITY OF SPLITROCK. The liability of SPLITROCK for
damages, if any, arising out of the furnishing of Service, including but not
limited to mistakes, omissions, interruptions, delays, tortious conduct or
errors, or other defects, representations, use of Service or arising out of the
failure to furnish Service,
<PAGE>
whether caused by acts of commission or omission shall be limited to the
extension of credit allowances. The extension of such credit allowances or
refunds shall be the sole remedy of Customer and the sole liability of
SPLITROCK. Neither Party shall be liable for any indirect, incidental,
special, consequential, exemplary or punitive damages (including but not
limited to damages for lost profits or lost revenues), whether or not caused
by the acts or omissions or negligence of its employees or agents, and
regardless of whether such Party has been informed of the possibility or
likelihood of such damages.
5.3 DISCLAIMER OF WARRANTIES. SPLITROCK MAKES NO WARRANTIES OR REPRESENTATIONS,
EXPRESS OR IMPLIED EITHER IN FACT OR BY OPERATION OF LAW, STATUTORY OR
OTHERWISE, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
USE, EXCEPT THOSE EXPRESSLY SET FORTH HEREIN OR IN ANY APPLICABLE SERVICE LEVEL
AGREEMENT.
SECTION 6. CONFIDENTIAL INFORMATION
6.1 DISCLOSURE AND USE. The Confidential Information disclosed by either Party
constitutes the confidential and proprietary information of the disclosing Party
and the receiving Party shall retain same in strict confidence and not disclose
to any third party except as authorized by these terms and conditions without
the disclosing Party's express written consent.
6.2 EXCEPTIONS. Notwithstanding the foregoing, each Party's confidentiality
obligations hereunder shall not apply to information which:
A. is already known to the receiving Party;
B. becomes publicly available without fault of the receiving Party;
C. is rightfully obtained by the receiving Party from a third party without
restriction as to disclosure, or is approved for release by written
authorization of the disclosing Party;
D. is developed independently by the receiving Party without use of the
disclosing Party's Confidential Information; or
E. is required to be disclosed by law.
6.3 PUBLICITY. This MSA shall not be construed as granting to either Party any
right to use any of the other Party's or its affiliates' trademarks, service
marks or trade names or otherwise refer to the other Party in any marketing,
promotional or advertising materials or activities. Without limiting the
generality of the foregoing, neither Party shall issue any publication or
press release relating to or otherwise disclose the existence of any
contractual relationship between SPLITROCK and Customer, without the written
consent of the other Party, except as may be required by law.
SECTION 7. GENERAL TERMS
7.1 FORCE MAJEURE. Except with respect to payment obligations, neither Party
shall be liable, nor shall any credit allowance or other remedy be extended, for
any failure of performance or equipment due to causes beyond such Party's
reasonable control, including but not limited to: acts of God, fire, flood or
other catastrophes; any law, order, regulation, direction, action, or request of
any governmental entity or agency, or any civil or military authority; national
emergencies, insurrections, riots, wars, unavailability of rights-of-way or
materials; or strikes, lock-outs work stoppages, or other labor difficulties.
7.2 ASSIGNMENT OF TRANSFER. Customer may not transfer or assign this MSA without
the express prior written consent of SPLITROCK, whose consent shall not be
unreasonably withheld, and then only when such transfer or assignment can be
accomplished without interruption of the use or location of Service. These terms
and conditions shall apply to all such permitted transferees or assignees.
Customer shall, unless otherwise expressly agreed by SPLITROCK in writing,
remain liable for the payment of all charges due under each Customer Order.
7.3 NOTICES. Any notice between the Parties shall be deemed properly given when
delivered, if delivered in person, or when sent via overnight courier,
electronic mail or when deposited with the U.S. Postal Service to the addresses
first listed above.
7.4 INDEMNIFICATION BY CUSTOMER. Customer shall indemnify, defend and hold
SPLITROCK harmless from claims, loss, damage, expense (including attorney's fees
and court costs), or liability (including liability for patent infringement)
arising from (1) any claims made against SPLITROCK by any end user in
<PAGE>
connection with the delivery or consumption of Service. (2) use of facilities
furnished by SPLITROCK in a manner inconsistent with the terms thereof or in a
manner that SPLITROCK did not contemplate and over which SPLITROCK exercises no
control and (3) all other claims, loss, damage, expense (including attorney's
fees and court costs), or liability arising out of any commission or omission
by Customer in connection with the Service.
7.5 INDEMNIFICATION BY SPLITROCK. SPLITROCK shall indemnify, defend and hold
Customer harmless from claims, loss, damage, expense (including attorney's fees
and court costs), or liability (including liability for patent infringement)
arising from all claims, loss, damage, expense (including attorney's fees and
court costs), or liability for property damage or personal injury to the extent
that such claims arise out of or are caused by SPLITROCK's negligence or willful
misconduct.
7.6 CONTENTS OF COMMUNICATIONS. SPLITROCK shall have no liability or
responsibility for the content of any communications transmitted via the Service
by Customer or any other party, and Customer shall hold SPLITROCK harmless from
any and all claims (including claims by governmental entities seeking to impose
sanctions) related to such content.
7.7 ENTIRE UNDERSTANDING. These terms and conditions, including any Customer
Orders executed hereunder (and any tariff applicable to the delivery of
Service), constitute the entire understanding of the Parties related to the
subject matter hereof. In the event of a conflict between these terms and
conditions and any Customer Order executed hereunder, the Customer Order shall
control. These terms and conditions shall be governed and constructed in
accordance with the laws of the State of Texas.
7.8 NO WAIVER. No failure by either Party to enforce any rights hereunder shall
constitute a waiver of such right, unless otherwise specifically set forth
herein. Notwithstanding any other section of these terms and conditions, the
non-breaching Party shall be entitled to seek equitable relief to protect its
interests including but not limited to preliminary and permanent injunctive
relief. Nothing stated herein shall be construed to limit any other remedies
available to the Parties.
7.9 DISPUTE RESOLUTION. Any dispute which the parties are unable to resolve upon
written notice to the Defaulting Party, may immediately be submitted to the
American Arbitration association for binding arbitration pursuant to the
Commercial Arbitration Rules with proceedings conducted in Houston, Texas;
however, the Parties shall immediately proceed to negotiate a resolution in good
faith until such proceeding. Notwithstanding any other section of these terms
and conditions, the nonbreaching Party shall be entitled to seek equitable
relief to protect its interests, including but not limited to preliminary and
permanent injunctive relief. Nothing stated herein shall be constructed to limit
any other remedies available to the Parties.
7.10 INTELLECTUAL PROPERTY. Nothing contained in this MSA shall be construed as
conferring by implication, estoppel or otherwise, any license or right under any
patent, trade name or copyright of SPLITROCK or Customer.
7.11 CONFLICTING PROVISIONS. In the event of a conflict between the provisions
of the MSA and any Attachment thereto, the following hierarchy shall control in
interpreting the conflicting language: (i) IDL-001R, (ii) OAF-001, (iii)
IDL-004, (iv) IDL-005, and (v) MSA.
freei Network, Inc. ("Customer") SPLITROCK SERVICES, INC. ("SPLITROCK")
Signature /s/ Bob McCausland Signature /s/ David M. Boatner
-------------------------- ------------------------------
Name Robert (Bob) McCausland Name David M. Boatner
------------------------------ ----------------------------------
Title President/CEO Title EVP & CMO
------------------------------ ----------------------------------
Date September 30, 1999 Date 9-30-99
------------------------------ ----------------------------------
<PAGE>
SPLITROCK
Attachment-Internet Dial Services
Confidential & Proprietary
Customer is purchasing the Service(s) described in this Attachment and in other
Attachments to the Master Services Agreement (MSA).
Definitions
"Point of Presence" (POP) means locations worldwide at which SPLITROCK
connects to the Global Internet either through the SPLITROCK Network or by
agreement between SPLITROCK and a third party service provider.
1. SERVICE DESCRIPTION
The attached Service Description describes the Service that Customer has
purchased.
2. TERM
Customer desires to obtain Internet Dial Service under the terms of the MSA
for a period of thirty-six (36) months. Should the MSA expire prior to the
expiration of Customer's commitment to purchase Internet Dial Service for
Resale, Customer agrees that all terms and conditions of the MSA will
remain effective until the expiration of the Customer's commitment.
3. FORMS INCLUDED AS ATTACHMENTS
3.1 ACCEPTABLE USE POLICY
3.2 SERVICE DESCRIPTION FOR EACH SERVICE describes the standard Service and
available options.
3.3 ORDER AUTHORIZATION FORM specifies the Service(s) and Service options
ordered by Customer.
3.4 OTHER FORMS Those Forms checked on the Order Authorization Form are
attached to this Attachment and other documents may be attached.
4. GRADE OF SERVICE
SPLITROCK shall use reasonable efforts to provide and maintain at least
P.05 Grade of Service ("GOS") for each dial system. P.05 is defined as dial
service call blocking (busies), during the peak busy hour of the dial
system that will not exceed five percent (5%) (or 5 in 100 attempts) as
measured by SPLITROCK network management tools. SPLITROCK shall maintain
P.05 GOS only as to equipment and facilities under SPLITROCK control. All
Dial ports will be available 99.5% of the scheduled up time each month.
Calculations for this availability time will not include scheduled downtime
for maintenance or for any Force Majeure event. Upon development of a
SPLITROCK Service Level Agreement ("SLA"), Customer shall have the option
of incorporating the SLA into the MSA and Attachments.
5. MAINTENANCE
SPLITROCK may perform routine maintenance within the maintenance window of
2:00 a.m. until 6:00 a.m. (local time for the designated location) on a
designated day of the week. Customer point of contact ("POC") shall be
notified via electronic mail forty-eight (48) hours prior to any routine
maintenance that will affect Customer traffic. Periodically, SPLITROCK may
schedule an emergency maintenance window. Emergency maintenance will be
coordinated with the Customer POC and reasonable effort will be made to
minimize the impact on Customer traffic. SPLITROCK shall determine the time
and scope of all emergency maintenance actions.
6. NORMAL USAGE LIMITATIONS, IDLE TIMERS AND SESSION LIMITATIONS
SPLITROCK will issue session disconnects to Subscribers after (15) minutes
of idle use. For Subscribers on a flat rate plan, with less than one
hundred (100) hours of usage during the month, SPLITROCK will issue session
disconnects to such Subscribers after (3) hours of usage per session.
Subscribers disconnected by SPLITROCK must re-initialize the session by
re-dialing and logging into the system. SPLITROCK shall use best efforts to
enable Customer to disconnect
<PAGE>
Subscribers during any session. SPLITROCK shall provide complete radius
accounting data in real time on a continuous basis.
7. DUPLICATE LOGINS
Customer shall be responsible for giving notice to its Subscribers that
simultaneous duplicate logins are prohibited. Customer acknowledges and
understands that SPLITROCK will not authenticate any Subscriber upon any
simultaneous duplicate login.
8. FORECASTING AND NOTIFICATION
Customer shall provide to SPLITROCK, each ninety (90) days, a forecast of
Subscribers by city. The forecast shall include the number of new
Subscribers expected each thirty (30) days over the next ninety (90) day
period. Each month by the fifth (5th) day of the month, if Customer has
purchased Flat Rate Access, Customer agrees to provide SPLITROCK the
Subscriber count for previous month as of the last day of the month.
SPLITROCK reserves the rights to audit such Subscriber count and Customer
will provide any and all information necessary to aid SPLITROCK in their
inquiry. The Customer shall notify SPLITROCK of any promotional, marketing
or advertising activity planned by city ninety (90) days in advance. If
the Customer's actual number of Subscribers increases by more than fifteen
percent (15%) in any city and that growth is not reflected in the forecast,
then SPLITROCK shall not be responsible for maintaining the Grade Of
Service for ninety (90) days in the affected city.
9. AUTHENTICATION AND CUSTOMER REALM
SPLITROCK will proxy all property formatted access authentication requests
to the Customer's authentication server(s) using the RADIUS protocol, as
described by RFC 2138 or its successor, provided the Customer supplies
SPLITROCK with the IP address and host name of each Customer
authentication server. Further, the Customer must configure the account
user name as follows "username@realm", where "realm" is a fully qualified
domain name registered to the Customer with American Registry for Internet
Numbers (ARIN), the Inter-Nic registry or a successor.
10. NETWORK OVERLOADING
From time to time all or some of the Points of Presence (POPS) may
experience temporary overload conditions caused by unforeseeable events.
These could result in excessive busy signals and periods of latency. During
occasional, temporary overload periods, Customer acknowledges that
SPLITROCK may use load-shedding processes that may include issuing session
disconnects in order to return the network to equilibrium more conducive
to overall Subscriber satisfaction.
11. E-MAIL CONTROL
Customer must maintain an active program to control and or eliminate
unwanted or unsolicited e-mail. SPLITROCK shall have the right to limit or
prohibit entirely the use of other than Customer owned, operated or
authorized SMTP gateways. Customer must limit the number outgoing mail
messages per Subscriber to a reasonable amount. The purpose of these
restrictions is to reduce or eliminate Internet UCE (Unsolicited Commercial
E-mail) or spam and SPLITROCK shall disconnect any user for spam without
notice.
12. PRICING
Term and volume discounts for Internet Dial pricing reflect a thirty-six
(36) month term. Month one pricing is based upon the number of Subscribers,
or hours, Customer commits to achieving within a twelve (12) month period.
SPLITROCK offers `forward pricing' based on the volume commitment for the
twelfth month. In the event Customer fails to meet a quarterly commitment
level, Customer shall revert to standard pricing at [*] ($[*]) [*]
on a going-forward basis until such quarter as Customer meets the
respective quarterly commitment level to qualify for forward pricing.
Customer shall continue to be billed the forward pricing so long as the
commitment level is met on a quarterly basis, but will otherwise revert to
standard pricing.
[*]=Confidential Treatment Requested
<PAGE>
Commitment Schedule
[*] hours 4th Quarter 1999
[*] hours 1st Quarter 2000
[*] hours 2nd Quarter 2000
[*] hours 3rd Quarter 2000
OPTION A - FLAT RATE PRICING (not applicable)
Customer has committed to a total of ____________________ Subscribers
by _______________ (date). Based upon Customer's volume commitment,
the forward pricing per Subscriber will be ______________
(S__________). Upon the expiration of the Commitment Schedule,
Customer agrees that its monthly billing will be at least the amount
equal to the number of committed Subscribers times the rate per
Subscriber stated in this paragraph.
OPTION B - [*] USAGE PRICING
Customer has committed to a total of [*] ([*]) [*] by September 30,
2000. Based upon Customer's volume commitment, the forward pricing
[*] will be [*] ($[*]) [*]. Upon the expiration of the Commitment
Schedule, Customer agrees that its monthly billing will be at least
the amount equal to [*] times [*] stated above. Customer's forward
pricing in the event that Customer exceeds (i) [*] will be [*] ($[*])
[*], and (ii) [*] will be [*] ($[*]) [*]. In the event Customer fails
to meet the volume commitment, the forward pricing [*] will be [*]
($[*]) [*] until the Customer meets the volume commitment.
13. Commitment Fee
In addition to any other fees and/or obligations to be paid by Customer
to SPLITROCK in connection with the MSA, Customer will pay a fee to
SPLITROCK in the amount of Twenty-Five Thousand Dollars ($25,000) which
will be due upon the Effective Date of the MSA. Only if Customer
achieves the [*] volume commitment agreed in Section 13 herein, then
SPLITROCK will provide a credit to Customer equivalent to the $25,000
Commitment Fee applied towards billable services beginning in month
seven (7) if all invoices are current.
14. CONTACTS
The Parties shall provide written notice of changes to the following:
<TABLE>
<S> <C> <C> <C>
freei: Engineering Contact: Gus Bourg
E-mail: [email protected]
Phone No.: 253-796-6500 x1466
Cell No.: 206-423-8191
Service Provisioning Management: Steve Bourg
E-mail: [email protected]
Phone No.: 253-796-6555
Cell No.: 206-423-8187
Customer Service Contact: Max Williams
E-mail: [email protected]
Phone No.: 253-796-6505
[*]=Confidential Treatment Requested
<PAGE>
Splitrock: Technical Support Help Desk: Phone No.: 1-800-417-1618 (NOC)
Sales Engineering Support: Al Bloomquist
Phone No.: 206-285-1673
E-mail: [email protected]
ACCEPTED BY SPLITROCK: AGREED TO BY CUSTOMER:
--------------------------------------------------------------------------------------------
Name (Please print or type) Name (Please print or type
Bob McCausland
--------------------------------------------------------------------------------------------
Title Title
President/CEO
--------------------------------------------------------------------------------------------
Date Date
10/1/99
--------------------------------------------------------------------------------------------
Signature of Authorized Person and Date Signature of Authorized Person and Date
/s/ David M. Boatner /s/ Robert (Bob) McCausland
--------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SPLITROCK
SERVICE DESCRIPTION: INTERNET DIAL
STANDARD FEATURES:
o V.90/56KDial Access to the Internet
o 24 X 7 NOC support
o RADIUS proxy to customer end-point authentication server
OPTIONAL FEATURES:
o Primary and Secondary DNS
o Customer Care Web site
o Splitrock run RADIUS authentication
COMMITMENTS:
o SPLITROCK requires a minimum volume commitment from Customer to
sign a specified number of Subscribers within twelve (12) months,
and a 3-year contract term.
o SPLITROCK requires Fee of Twenty-Five Thousand Dollars
($25,000) that will be applied against billing upon the
achievement of minimum committed volume within the agreed
ramp period. Application of the $25,000 begins on the 13th month.
Pricing:
SEE ATTACHMENT
<PAGE>
SPLITROCK
ACCEPTABLE USE POLICY
This Acceptable Use Policy ("AUF") sets forth terms and conditions and
specifies actions prohibited by Splitrock Services, Inc. ("SPLITROCK) and
applies to all SPLITROCK's Customers and Customer's Subscribers (collectively,
"Users"). Use of the SPLITROCK Network constitutes on the part of User,
acceptance of and agreement to abide by all policies of SPLITROCK including
this AUF which is in addition to and supplements the terms of the applicable
Master Services Agreement and SPLITROCK reserves the right to modify this
policy at any time, effective upon posting to the SPLITROCK web page
http:www.splitrock.net. SPLITROCK does not monitor, verify, warrant or
validate the integrity, accuracy or quality of information or data it receives
or transmits. Accordingly, SPLITROCK neither controls nor accepts
responsibility for the content of any communications that are transmitted or
made available to Users of its network and/or services.
A. LAWFUL USE
The SPLITROCK Network may be used only strictly in accordance with all
international, federal, state and local laws, tariffs, ordinances and
regulations and SPLITROCK may report to legal authorities any content that is or
is believe to be unlawful, may disclose to such authority the author of such
content and will cooperate with law enforcement agencies and other parties
investigating or prosecuting claims of illegal or inappropriate activity. This
includes without limitation, material protected by copyright, trademark, trade
secret or other intellectual property right, material that is obscene or
constitutes child pornography, material that is libelous, defamatory, hateful,
or constitutes an illegal threat or abuse, material that violates export control
laws or regulations, and material that encourages conduct that would constitute
a criminal offense or give rise to civil liability.
B. PRIVACY
SPLITROCK makes no guarantee regarding the security and integrity of any data or
information transmitted. Users must respect the privacy of others, shall not
intentionally seek information on, obtain copies of, or modify files, other
data, or passwords belonging to others, or represent themselves as another User
unless explicitly authorized to do so by that User. Revealing a User password to
others is strictly prohibited. Attempting to obtain access beyond that for which
User is authorized is strictly prohibited, including illegal or unauthorized
accessing known as "hacking."
C. NETWORK INTEGRITY
Use of SPLITROCK's Network and/or any attached network in a manner that
precludes or significantly hampers its use by others is not allowed. Connections
which create routing patterns that are inconsistent with the effective and
shared use of the network may not be established. Users must respect the
integrity of computing and network systems. Examples of prohibited uses include,
without limitation:
(i.) Unauthorized access to or use of data, systems or networks,
including any attempt to probe, scan or test the vulnerability of
a system or network or to breach security or authentication
measures without express authorization of the owner of the system
or network;
(ii.) Unauthorized monitoring of data or traffic on any network or system
without express authorization of the owner of the system or network;
(iii.) Interference with service to any User, host or networking including,
without limitation, mailbombing, flooding, deliberate attempts to
overload a system and broadcast attacks;
(iv.) Distribution of Internet Viruses, Worms, Trojan Horses or other
destructive activities; and
(v.) Modification of IP packet content in a malicious manner or forging
of any TCP-IP packet header or any part of the header information in
an e-mail, chat room or a newsgroup posting.
Page 1 of 2
<PAGE>
D. E-MAIL
Unsolicited advertising is prohibited. Other prohibited activities include:
i. Sending unsolicited commercial or bulk e-mail;
ii. Using another site's mail server to relay mail, without express
permission of the site;
iii. Repeated, unsolicited and/or unwanted communication of an intrusive
nature;
iv. Posing or e-mailing of scams such as 'make-money fast' schemes or
pyramid chain letters; and
v. Making fraudulent offers of products
items or services originating from your account.
E. USENET.CHAT
All SPLITROCK Users agree to comply with the guidelines and restrictions of each
news or chat group unconditionally as incorporated herein by reference. Without
limitation of the foregoing, the following activities are prohibited:
(i) Engaging in excessive cross-posting or multi-posting ("spamming");
(ii) Making any posting for commercial purposes (including without
limitation the posting to specific URLs for commercial purposes),
except where such postings are expressly permitted under the charter
and/or Frequently Asked Questions (FAQ) of an applicable newsgroup;
(iii) Canceling newsgroup postings other than their own, or using
auto-responders or cancel-bots (or similar automated or manual
routines) which generate excessive network traffic or disrupt Usenet
newsgroup e-mail use by others (except in cases of official newsgroup
moderators performing their duties); and
(iv) Disrupting newsgroups and or discussion groups with materials,
postings, or activities that are frivolous, unlawful, obscene,
threatening, abusive, libelous, hateful, excessive, or repetitious,
unless such materials or activities are expressly allowed or
encouraged under the newsgroup's name, FAQ, or charter.
F. REMEDIAL ACTION
Responsibility for avoiding the harmful activities as described herein rests
primarily with the User. When SPLITROCK learns of possible inappropriate use, it
may take any of a variety of actions, including but not limited to, removing
information that violates its policies, and/or restricting or terminating access
to the SPLITROCK Network without notice.
HOW TO REPORT ABUSE
If you become aware of inappropriate use, direct the information to
[email protected] who will evaluate all information before taking any
action and upon evaluation may take any appropriate action, including but
not limited to:
(i) Issuing written or verbal warnings;
(ii) Suspending newsgroup posting privileges;
(iii) Suspending the User account; and
(iv) Terminating the User Account
G. LIMITATION OF LIABILITY
SPLITROCK SHALL NOT BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL,
CONSEQUENTIAL, OR PUNITIVE DAMAGES, INCLUDING BUT NOT LIMITED TO LOSS OF
PROFITS, LOSS OF BUSINESS OR BUSINESS OPPORTUNITY, LOSS OF USE, ETC., EVEN IF
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES BY USER. SPLITROCK SHALL NOT BE
LIABLE FOR ANY DIRECT OR ACTUAL DAMAGES OF USER, EXCEPT TO THE EXTENT SPECIFIED
IN A WRITTEN OR ELECTRONIC AGREEMENT ENTERED INTO BETWEEN SPLITROCK AND
CUSTOMER. SPLITROCK MAKES NO WARRANTIES OR REPRESENTATIONS HEREIN, EITHER
EXPRESS OR IMPLIED, CONCERNING THE SPLITROCK NETWORK, AND EXPRESSLY DISCLAIMS
WARRANTIES OF FITNESS FOR A PARTICULAR USE OR PURPOSE, THE WARRANTY OF
MERCHANTABILITY AND ANY OTHER WARRANTY IMPLIED BY LAW.
Page 2 of 2
<PAGE>
PSINET
YOUR INTERNET BUSINESS PARTNER
DIAL ACCESS
AGREEMENT
FOR
FREEI NETWORKS INC.
1 of 22
<PAGE>
DIAL ACCESS AGREEMENT
This Agreement ("Agreement") entered into as of the Effective Date by and
between PSINet Inc., a New York Corporation ("PSINet"), and Freei Networks Inc.,
a Washington Corporation ("Freei.Net").
WHEREAS, PSINet is an internet service provider offering a wide range of
Services for businesses; and
WHEREAS, Freei.Net wishes to purchase Dial Access Services ("Service") from
PSINet for the purpose of making such Service available to its customers (each,
an "END-USER" and, collectively, the "END-USERS") under a private label.
NOW, THEREFORE, In consideration of the foregoing and of the mutual covenants
and promises set forth herein, the parties, intending to be legally bound,
hereby agree as follows:
1. DEFINITIONS
1.1 AGREEMENT
"Agreement" means this agreement and all attachments, schedules and/or
exhibits thereto.
1.2 DIAL ACCESS
"Dial Access" means PSINet making available logical ports on access servers
in its POPs, pursuant to its Dial Service and under the terms and
conditions of this Agreement, to receive incoming analog calls from an
END-USER to establish a TCP/IP connection between a single Host and the
Network and the Internet.
1.3 EFFECTIVE DATE
"Effective Date" means the date on which this Agreement is signed by both
parties, or by the last party to sign if the parties sign on different
dates.
1.4 END-USER
"END-USER" means the individual using Dial Access Service as provided by
Freei.Net.
1.5 HOST
"Host" means a computer with a network (or IP) address.
1.6 NETWORK
"Network" means the combination of PSINet operated equipment, servers,
circuits, and other data transmission facilities comprising its TCP/IP
wide-area network and which, together with other publicly-accessible TCP/IP
networks, comprises the global internet.
1.7 NET-ABUSE
"Net-Abuse" shall mean any content, material, message, or data made
available or transmitted through the Network, wherever it is sent from,
viewed, received, or retrieved, that is in violation of (a) any local,
state, federal, foreign, or international law, or (b) Freei.Net's network
usage policies (as found on its web site).
1.8 POP
"POP" means a Network "point-of-presence" where PSINet data communications
equipment and servers are located to provide END-USERS with access to the
Network and the internet by means of the Services.
1.9 RAMP PERIOD
"Ramp Period" means the length of time from the Effective Date during which
Freei.Net is committed to attaining the Net Monthly Revenue levels set
forth in Schedule B.
1.10 SERVICE AGREEMENT
"Service Agreement" means a legally binding agreement between Freei.Net and
an END-USER for Dial Access Service, subject to the applicable terms and
conditions of this Agreement.
2 of 22
<PAGE>
1.11 SERVICE
"Service" means the Dial Access Internet services and any Option sold by
PSINet to Freei.Net for its END-USERS.
2. SERVICE
2.1 GENERAL
Freei.Net shall purchase from PSINet, and PSINet shall sell to Free.Net for
use by its END-USERS, Dial Access Service ("Service"), as described herein,
at the prices described in Schedule B, attached hereto and incorporated
herein by reference. Freei.Net commits to reach the Minimum Net Monthly
Revenue levels in Schedule B through its total payments to PSINet for the
Service (excluding taxes).
2.2 DIAL ACCESS
PSINet shall provide to Freei.Net, for use by its END-USERS, Dial Access
through analog dialup telephone service, for the fees set forth in Schedule
B. Each END-USER is solely and exclusively responsible for obtaining analog
telephone service to place the data call to PSINet's POP, and for all
changes relating to such service (unless Freei.Net assumes such obligations
on behalf of its END-USERS). PSINet assumes no liability or responsibility
to Freei.Net, END-USER or any third party for long distance toll charges
incurred by Freei.Net, END-USER or any third party using the Service.
2.2.1 PERFORMANCE
PSINet's Network shall be available 99% during a given month,
excluding scheduled maintenance, outages caused by third parties,
Telco equipment failure, and other circumstances beyond the reasonable
control of PSINet.
2.2.2 Operational Requirements. PSINet shall provide 24 X7 X 365
operational support, contacts, problem and escalation procedures. Such
escalation operational support, contacts, and escalation procedures
are to be used by Freei.net and not END-USERS.
2.2.3 Freei.net Contacts. Freei.net provides the following contact
names and phone numbers for engineering and network operations, and
circuit provisioning administration, and will provide written notice
to PSINet, if and whenever such names shall change, within five (5)
business days of said change.
Engineering Contact:
Gus Bourg
E-mail: [email protected]
Phone No.: 253-796-6500 X 1486
Cell No.: 206-423-8191
Service Provisioning Management
Steve Bourg
E-mail: [email protected]
Phone No.: 253-798-6555
Cell No.: 206-423-8187
Freei.net Service Contact:
Max Willaims
E-mail: [email protected]
Phone No.: 253-795-6505
2.2.4 WARRANTY. PSINet hereby represents and warrants that:
a. PSINet has all necessary rights, title, ownership interest,
marketing rights and governmental approvals, permits or licenses, to
provide the Services to Freei.net, except those which Freei.net as a
user of Services or its End-Users are required to secure.
2.2.8 PSINet shall provide to Freei.Net (for its END-USERS) Services
that meet reasonable wholesale commercial standards, including, but
not limited to, accessibility, latancy, packet loss, and throughput.
PSINet shall keep and maintain its Network in good condition and
repair. The Network shall be properly maintained, serviced and
upgraded by PSINet as it, in its sole discretion, shall determine is
necessary in order to provide connectivity to END-USERS. PSINet agrees
to provide levels of service to Freei.Net that meet or exceed the
levels of service it provides to its own end users or its other
wholesale customers. Notwithstanding anything to the contrary in
this Agreement, if an outage or other circumstance within PSINet's
reasonable control precludes 50% of Freei.Net's END-USERS that
attempt to access the PSINet Network from having access to the
PSINet Network for four (4) continuous hours ("Service interruption")
then in that event, an appropriate adjustment will be made in the Net
Monthly Revenue commitment for that month. Thereafter the Net Monthly
Revenue commitment will be as set forth in Schedule B. If
3 of 22
<PAGE>
two or more Service interruptions occur in any one month, then in that
event, Freei.Net may terminate this Agreement upon thirty (30) days
prior notice to PSINet without any further liability (except for fees,
charges and any applicable Net Monthly Revenue requirement accrued
prior to such termination.)
2.2.6 PSINet will provide Freei.net with reports including information
on Services usage, System Outages and changes made to the PSINet
System during that month. Each report will be published on PSINet's
website in real time at www.isp.psl.net. The information shall include
the following, provided that PSINet may revise the type of information
provided to Freei.Net at its own discretion:
Summary Data for the month:
- PSINet System uptime
- Number of PSINet System outages
- U.S. Connectivity Matrix
- Outages and issues
- Planned outages, upgrades and maintenance
- Specific System Outage Details Time of Outage
- Length of outage
- Affected areas
- Reason for outage
- Location
- Problem
- Estimated Time to Repair
- Status
- Ticket Number
2.2.7 System Outage Recovery Procedures
If a System Outage occurs,
a. Freei.net may contact the Technical Support staff at PSINet at (518)
283-8860 (hit #1, then #3) to receive the information regarding the
Outage or else utilize the ISP web site (www.isp.psl.net). During the
time of the System Outage, Freei.Net may check the ISP web site to
obtain updated status reports. [email protected]
b. Following recovery from the System Outage, PSINet will provide
affected wholesale customers with a post-incident summary via the ISP
web site that will include:
- Cause of the System Outage (if determined):
- Problem
- Cause
- Affects
- Status
- Start time
- Estimated Time to Repair
- Alternative number(s), if applicable
c. Upon notification of a problem with the PSINet system or the Services,
PSINet will investigate the problem and determine if a System Outage
exists, PSINet will promptly commence remedial activities and use
commercially reasonable efforts to resolve the System Outage.
2.2.8 WEB INTERFACE.
Within sixty (60) days of the mutual execution of this agreement, PSINet
shall provide a web interface which enables Freei.net to disconnect all End
Users at any point during any session established by Freei.net's
authentication. This interface may accept as input either 1) a radius
session id and NAS IP address, or 2) an account name: but must accept at
least one. The disconnect must be completed within 30 seconds of sending
the HTTP response header. In the event PSINet is unable to provide the web
interface referenced herein, within sixty (60) days Freei.net may terminate
this agreement without penalty or termination charges, except for fees for
Services utilized up to the date of termination.
2.2.9 SHARED HUNT DEPLOYMENT. PSINet shall provide Freei.Net with
additional hunt numbers that are shared by PSINet's other wholesale
customers. The initial shared hunts are identified at Schedule D. The
parties may, from time to time, update Schedule D. PSINet shall make
the hunt numbers identified in Schedule D available to Freei.Net for
use in the identified cities, provided that Freei.Net does not exceed
the number of maximum hours allocated for each such city. If Freei.Net
exceeds the maximum number of hours, (1) PSINet may after seven (7)
days notice charge Freei.Net, an additional fee equal to 30% of the
Dial Service Pricing multiplied by the total number of hours used
during the given month for that particular hunt number; and (2) PSINet
may, at its sole
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discretion, after notice of a seven (7) day cure period, suspend
Service to Freei.Net in any of the shared hunts set forth in the
Implementation Schedule.
Freei.Net acknowledges that the foregoing provisions are fair and
reasonable, and are necessary for PSINet to maintain its existing
Network capacity for its other wholesale customers.
2.2.10 PORT PRODUCT. PSINet shall make commercially reasonable
efforts to provide Freei.Net with a port service offering within
one-hundred and twenty (120) days of the Effective Date. In the event
Freei.net enters into an agreement to purchase port services from
PSINet, the terms of this agreement shall be adjusted or terminated
correspondingly.
2.3 RADIUS PROXY.
The parties will mutually cooperate as needed, for the provision by PSINet
of a Radius Proxy service for Freei.Net, whereby PSINet will automatically
forward Freei.Net customer identification information to Freei.Net for
Freei.Net to authenticate for Network Access. Freei.Net shall also comply
with the Net-Abuse procedures regarding such Radius Proxy service.
Under the Radius Proxy service, PSINet will proxy authentication data based
on a Freei.Net's unique prefix or legal domain name (realm). Further,
Freei.Net represents that it owns or is legally authorized to provide
Service for the domain name(s) nominated for use with Radius Proxy
service. PSINet shall provide to Freei.net to complete radius accounting
data in real time on a continuous basis.
2.4 DEDICATED CONNECTIVITY
PSINet will provide dedicated connectivity to Freei.Net consisting of one
of more dedicated circuits between Freei.Net's equipment and PSINet's
Network (as mutually agreed to by the parties). Such connectivity shall be
used exclusively for the transmission of data between Freei.Net and PSINet
as a result of this Agreement and shall not be utilized for any other type
of data transmission between Freei.Net and any other third party. The
applicable PSINet service fee for this dedicated connectivity shall be
included in the Dial Service pricing. Freei.Net shall be responsible to
PSINet for the applicable Telco circuit charges, as such charges are passed
through by PSINet to Freei.Net on a monthly basis. The dedicated
connectivity shall be provided during the term of this Agreement, and shall
be immediately terminated upon suspension or termination of this Agreement,
for any reason, or as a result of Freei.Net's misuse of such dedicated
connectivity (meaning that Freei.Net is using the connection other than as
provided for herein).
2.5 LIMITS ON ORDERS.
Freei.Net may order Dial Access on behalf of its present or future
END-USERS and there shall be no limit on the number of END-USERS who may
use the Network. Freei.Net acknowledges, however, that Network capacity
cannot be guaranteed, therefore, PSINet may limit Freei.Net's requests to
add additional hours because there is insufficient capacity on the Network
or in the POP to provide Dial Access to the number of hours requested.
2.6 ADDITION OF PSINET SERVICES.
The parties may agree to include additional PSINet services under this
Agreement from time to time. If so, such additional PSINet services shall
be added only by a written modification in the form of an Agreement
Amendment.
2.7 LICENSE FOR SERVICES.
2.7.1 GRANT OF LICENSE.
Subject to the terms of this Agreement, PSINet hereby grants to
Freei.Net a limited, non-exclusive, revocable license to, within the
48 contiguous United States, market, distribute, and offer the Service
directly to END-USERS under Freei.Net's private label.
2.7.2 LIMITATIONS ON LICENSE.
The grant of the foregoing license shall not entitle or in any way be
construed to entitle Freei.Net to (a) use PSINet trademarks, trade
names, copyrighted material, service marks and/or logos in connection
with Freei.Net's sales, advertisements and promotion of the Services,
except in materials provided (or approved prior to Freei.Net's use
thereof) by PSINet; (b) distribute any Services in violation of any
United States governmental export restriction; (c) sublicense or
assign any of its rights under by this Agreement, except as may be
expressly permitted by this Agreement; or (d) make any agreement or
incur any liability for or on behalf of PSINet, except as may be
expressly permitted by this Agreement.
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2.8 REQUIRED TERMS IN SERVICE AGREEMENTS. Freei.Net's Service Agreement
(acceptable use guidelines and terms and conditions) with its END-USERS
is attached as Schedule A. Any modification to this Service Agreement
shall not impose any liability, obligation or commitment on the part of
PSINet.
2.9 EMERGENCY TERMINATION. In order for PSINet to disconnect an
END-USER, Freei.Net must notify PSINet by e-mail, followed by telephone
contact to PSINet for confirmation. The current session of the
specified END-USER will be then terminated within two (2) hours or less
from the time of the telephone contact by Freei.Net.
2.10 SECOND-LEVEL TECHNICAL SUPPORT. PSINet, through its staff or
through a third party, shall provide directly to Freei.Net's designated
technical contacts only (as identified by Freei.Net on a PSINet-provided
form), at no additional charge, reasonable second-level technical
support for the Services provided herein and for Network problems.
However, under no circumstances shall PSINet provide any type of
techincal support, customer service, or problem escalation support
directly to END-USERS. Freei.Net shall not disclose to its END-USERS any
of the contact information for PSINet's or the third party's staff
provided to Freei.Net for its exclusive use.
2.11 PSINET POPS. PSINet may change location of an existing POP, an/or
change the means for accessing such POP (i.e., access numbers) as it, in
its sole discretion, deems appropriate. In the event PSINet deems it
necessary to decommission an existing POP, PSINet shall provide
Freei.Net with thirty (30) days written notice thereof, and provide
reasonable assistance to facilltate the transfer of END-USERS to an
alternative POP, in case of closure of a POP, PSINet shall provide
Freei.Net with ninety (90) days prior written notice, unless PSINet
provides Freei.Net with an alternative POP that provides similar
coverage.
3. FREEI.NET'S OBLIGATIONS.
3.1 TECHINCAL SUPPORT, CUSTOMER SERVICE, AND PROBLEM ESCALATION SUPPORT.
Freei.Net shall be exclusively responsible for all technical support,
customer service, and problem escalation support for its END-USERS.
Under no circumstances shall Freei.Net refer END-USER phone calls,
e-mail, or other communications to any PSINet or third party staff. All
communications by Freei.Net relating to END-USER problems or concerns
shall be made directly and exclusively between PSINet (or its designated
third party) and Freei.Net's designated technical contacts.
3.2 END-USER BILLING. Freei.Net shall be responsible for all pricing
and service plans, billing and collections with respect to END-USERS. If
END-USER is charged by Freei.Net for Dial Access Service, and will be
Freei.Net solely responsible for establishing and collecting END-USER
fees for Service sold to END-USERS and for preparing and mailing
invoices to END-USERS. Freei.Net is responsible for payment of all
PSINet charges, pursuant to Section 6 hereof, regardless of whether
Freei.Net is paid by its END-USERS, advertisers or any other entity.
3.3 LIMITATION ON WARRANTIES AND REPRESENTATIONS. Neither Freei.Net nor
its agents shall offer warranties or representations for the Service
which would obligate or otherwise bind PSINet beyond any warranty or
representation expressly set forth in this Agreement, or make any other
warranties, promises or representations with respect the Service or the
Network, to any END-USER, prospective END-USER, or any other person or
entity.
3.4 COMPLIANCE WITH NET-ABUSE POLICY
3.4.1 COMPLIANCE WITH NET-ABUSE POLICY. Freei.Net agrees and
acknowledges that PSINet requires, without exception, that every
party utilizing the Network comply with PSINet's Net-Abuse Policy,
or that any wholesale entity have its own acceptable use policy
consistent with PSINet's Net-Abuse Policy (http://www.psinet.com).
Freei.Net represents its network usage policies are substantially
consistent with PSINet's Net-Abuse Policy, so that any content,
material, message, or data made available or transmitted through
the Network, wherever it is sent from, viewed, received, or
retrieved, that is in violation of (a) any local, state, federal,
or international law or (b) Freei.Net's Acceptable Use Guidelines
(as found on its web site) will be prohibited by Freei.Net and
Freei.Net will take appropriate action, as outlined below.
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PSINet PROPRIETARY AND CONFIDENTIAL INFORMATION
3.4.2. ACTION UPON VIOLATION. In the event of violation of Section
3.4.1 by any Freei.Net END-USER, or any other users of Freei.Net's
connection to PSINet, Freei.Net agrees, upon receiving an e-mail report
or a telephone contact specifying the particular circumstances which
violates section 3.4.1 from PSINet, to immediately, but not later than
4 hours, investigate the complaint, and to 1) suspend or terminate
the access used to commit the violation, if the investigation warrants,
or 2) not take action if the complaint is unfounded. Freei.Net will
provide PSINet with an e-mail report describing the action and
rationale within 24 hours of beginning Investigation. The parties agree
to cooperate fully in this process, to include periodic telephone or
e-mail discussions between their respective Net Abuse teams, and to
develop specific procedures between the teams.
3.4.3. NET ABUSE CONTACT TEAM. Freei.Net represents that the following
individuals will serve as its Net Abuse contacts, and will be available
on a 24 hour, 7 day basis to receive complaints from PSINet, and to
coordinate the above procedures. These individual are:
<TABLE>
<S> <C> <C> <C>
Name: Jolene Smith Ph: 253-796-5500 ext. 1367 Pager: cell 253-671-4777 E-Mail: [email protected]
Name: Steve Bourg Ph: 253-796-6500 ext. 1429 Pager: cell 205-423-8187 E-Mail: [email protected]
Name: Michelle Proper Ph: 253-796-6500 ext. 1332 Pager: N/A E-Mail: [email protected]
PSINet's Net Abuse contacts are:
Name: Jim Murray, Manager Ph:(518)283-8860 x2816 Pager:1-800-920-4366 E-Mail: [email protected]
Name: Jennifer Munger Ph:(518)283-8860 x2866 Pager: None E-Mail: [email protected]
Name: Tim Stowell Ph:(518)283-8860 x2834 Pager: None E-Mail: [email protected]
Name: Carrie McLaughlin (PT) Ph:(518)283-8860 x2822 Pager: None E-Mail: [email protected]
</TABLE>
3.5 USE OF SERVICE.
3.5.1 MONTHLY REVIEW MEETING.
The parties agree to discuss on a monthly basis, either by
in-person or by telephone, email or letter, the present and
proposed allocation of users on the Network. The PSINet National
Account Manager for Freei.Net shall set up such sessions.
3.5.2 PREDOMINANT USE OF TIER 1/TIER 2 CITIES.
Freei.Net acknowledges that the Dial Service Pricing set forth in
Schedule B is based on certain assumptions made by PSINet. An important
assumption is the predominant use of the Network in Tier 1 and Tier 2
cities (as such cities are identified by PSINet in Schedule c.).
Therefore, Freei.Net shall undertake all commercially reasonable
efforts to maintain no less than 60% of the Dial Access Service in
such Tier 1 and Tier 2 cities. PSINet reserves the right to audit use
of the Service, by reviewing generic service reports, and shall provide
notice of such non-compliance by Freei.Net to the foregoing Tier 1 and
Tier 2 usage. If PSINet identifies that Freei.Net has been
non-compliant over two consecutive months ("Period"), PSINet reserves
the right to increase the Dial Access Pricing of the affected cities
in a sum not to exceed 15% of the current pricing.
3.5.3 NOTICE OF MATERIAL CHANGE IN NETWORK USAGE.
In addition, Freei.Net agrees that it shall provide PSINet with 60 days
advance, written notice for any POP location where Freei.Net will
dramatically decrease the number of hours on the Network, Freei.Net
agrees not to remove in each month, during such notice period, more
than one-third of the estimated decrease at the time such notice is
given.
3.5.4 LIMITED DISCLOSURE OF PSINET DIAL ACCESS NUMBERS. Freei.Net
agrees not to publish or otherwise disclose any PSINet Dial Access
phone numbers that are not specifically provided by PSINet to
Freei.Net for use under this Agreement.
3.5.5 FORECAST.
Freei.Net shall provide to PSINet, on a monthly basis in conjunction
with the Monthly Account Review, a six-month rolling forecast of the
number of END-USERS expected to purchase each type of Service and the
POPs to which they are expected to connect. Freei.Net acknowledges that
Network capacity can only be planned with such forecasts, therefore
Freei.Net agrees to provide realistic forecasts as provided above.
4. PAYMENT
4.1 PAYMENT TERMS.
Subject to Section 4.5, below PSINet shall invoice Freei.Net monthly,
in arrears, for all fees for Service under this Agreement. In every
case, Freei.Net agrees to pay for all Service utilized by Freei.Net.
All invoices will be payable within thirty (30) days of date of invoice
(the "Due Date").
PSINET - FREEI.NET - DIAL ACCESS AGREEMENT
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PSINet PROPRIETARY AND CONFIDENTIAL INFORMATION
4.2 LATE PAYMENT CHARGES.
Delinquent payments are subject to a late payment charge accruing from the
Due Date at the rate of prime plus one and one-half percent (1.5%) per
month, or portion thereof, of the amount due (but not to exceed the
maximum lawful rate).
4.3 CONSEQUENCES OF NON-PAYMENT.
In the event Freei.Net does not remit payment for Undisputed Charges
(defined as all charges invoiced to Freei.Net except for any specified
amounts which Freei.Net disputes in good faith, with reference to specific
provisions of this Agreement, and with supporting factual documentation)
within five (5) days after written notification to Freei.net, PSINet may,
at its option immediately suspend Service to Freei.Net and/or END-USERS,
and/or charge applicable late-payment fees pursuant to Section 4.2; or as
an alternative to such suspension, and at its sole option, PSINet may
terminate this Agreement for material breach under the provisions of
Section 5.3.2. In the event PSINet chooses not to exercise its option to
terminate. PSINet shall resume providing Service as soon as is reasonably
practicable upon receipt of such payment, and in such event Freei.Net
shall pay PSINet a reasonable reconnection fee, which shall be invoiced
and paid in accordance with this Section.
4.4 TAXES.
All charges to Freei.Net hereunder are exclusive of federal, state, local
and foreign sales, use, excise, utility, gross receipts and value added
(VAT) taxes and other similar tax-like charges, including tax-related
surcharges or applicable tariffs, which, if required by law to be paid
Freei.Net agrees to pay such charges and/or taxes. In the event that
Freei.Net provides PSINet with a duly authorized exemption certificate,
PSINet agrees to exempt Freei.Net in accordance with the law, effective
on the date the exemption certificate is received by PSINet.
5. TERM AND TERMINATION.
5.1 TERM.
The term of this Agreement shall be fifteen (15) months beginning on the
Effective Date of this agreement. The parties agree to meet no later than
ninety (90) days prior to the end of the initial term to discuss possible
renewal of this Agreement. If mutually agreed to by the parties, the
parties will enter into an Agreement through a written addendum to this
Agreement.
5.3 TERMINATION.
5.3.1 BY EITHER PARTY.
Subject to Section 5.3.2, either party may terminate this Agreement
(a) If the other party has materially breached this Agreement and has
failed to cure such breach within thirty (30) days after the
non-breaching party has given written notice clearly specifying such
breach, or (b) without cause, at anytime after the initial term, by
providing the other party with ninety (90) days prior written notice.
5.3.2 BY PSINet.
PSINet may terminate this agreement, with written notice to Freei.Net
but without the cure period specified in Section 5.3.1, upon (a)
breach by Freei.Net of its payment obligations, pursuant to the
procedures set forth in Section 4.3, or (b) violation by Freei.Net of
Section 3.4, pursuant to the procedures set forth in Section 5.3.2.1,
below, but without the cure period only if, in PSINet's sole good
faith judgment, delaying termination during such cure period will
cause substantial injury to PSINet or to the Network.
5.3.2.1 NET ABUSE TERMINATION PROCEDURES.
If a violation of Section 3.4.1 by either Freei.Net or any of
Freei.Net END-USER's results in: 1) PSINet being placed at risk of
substantial or irreparable harm (including but not limited to civil
or criminal liability) If immediate action is not taken, or 2)
Freei.Net repeatedly fails to act promptly following PSINet notice to
suspend or terminate such access, or 3) Freei.Net permits the
re-enablement of a Freei.Net END-USER'S access (through the same or a
different account) after two or more notices by PSINet of specific
violation of Section 3.4.1, then PSINet may take action immediately
to suspend Freei.Net's entire access to the Network, and reserves the
right to terminate this Agreement by issuing a three (3) day net
abuse termination notice to Freei.net. In the event Freei.net fails
to take action to remedy the situation to the satisfaction of PSInet,
Freei.net may be declared in material default of this agreement and
PSINet may pursue all remedies pursuant to paragraph 4.3 of
this Agreement.
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<PAGE>
PSINET PROPRIETY AND CONFIDENTIAL INFORMATION
6. LIMITATION OF WARRANTIES & LIABILITY.
6.1 LIMITATION OF WARRANTIES.
EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED HEREIN, PSINet DOES NOT WARRANT
ANY CONNECTION TO, TRANSMISSION OVER, NOR RESULTS OF USE OF, ANY NETWORK
CONNECTION, SERVICE, EQUIPMENT OR FACILITIES PROVIDED UNDER THIS
AGREEMENT. PSINet FURTHER DISCLAIMS ALL WARRANTIES, WHETHER EXPRESS,
IMPLIED OR STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND
NON-INFRINGEMENT OF THIRD-PARTY RIGHTS, EXCEPT AS SPECIFICALLY PROVIDED
HEREIN, AND SUBJECT TO THE LIMITATION SET FORTH IN SECTION 6.2, PSINet
SPECIFICALLY DISCLAIMS ANY RESPONSIBILITY FOR ANY DAMAGES SUFFERED BY
Freei.Net OR ANY THIRD PARTY, EXCEPT FOR THOSE CAUSED BY PSINet's GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT.
Freei.Net ACKNOWLEDGES THAT ITS END-USERS MAY PERIODICALLY NOT BE ABLE TO
ACCESS THE NETWORK. PSINet WILL TAKE COMMERCIALLY REASONABLE MEASURES TO
MINIMIZE SUCH INABILITY TO ACCESS THE NETWORK IF WITHIN PSINet's
REASONABLE CONTROL, HOWEVER, PSINet DOES NOT WARRANT OR REPRESENT THAT
EACH AND EVERY END-USER WILL BE ABLE TO ACCESS THE NETWORK ON EVERY
LOG-IN ATTEMPT.
6.2 LIMITATION OF LIABILITIES.
EXCEPT FOR Freei.Net's PAYMENT OBLIGATIONS, OR THE PARTIES' RESPECTIVE
INDEMNIFICATION OBLIGATIONS, NEITHER PARTY (TO INCLUDE ITS PARENT COMPANY
IF ANY), SHALL BE LIABLE TO THE OTHER FOR ANY LOSS, DAMAGE, LIABILITY,
CLAIM OR EXPENSE ("CLAIMS") ARISING OUT OF OR IN RELATION TO THIS
AGREEMENT OR THE PROVISION OF ANY SOFTWARE, HARDWARE OR SERVICE HOWEVER
CAUSED, WHETHER GROUNDED IN CONTRACT, TORT (INCLUDING NEGLIGENCE) OR
THEORY OF STRICT LIABILITY, GREATER THAN THE SUM TOTAL OF Freei.Net's
PAYMENTS TO PSINet DURING THE (6) MONTHS IMMEDIATELY PRECEDING THE EVENT
FOR WHICH DAMAGES ARE CLAIMED. EXCEPT FOR THE PARTIES' RESPECTIVE
INDEMNIFICATION OBLIGATIONS, IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR
ANY INDIRECT, INCIDENTAL, SPECIAL, PUNITIVE OR OTHER CONSEQUENTIAL
DAMAGES WHETHER OR NOT FORSEEABLE (INCLUDING, WITHOUT LIMITATION, DAMAGES
FOR THE LOSS OF DATA, GOODWILL OR PROFITS) ARISING OUT OF OR IN RELATION
TO THIS AGREEMENT EVEN IF ADVISED BEFOREHAND OF THE POSSIBILITY OF SUCH
LIABILITY. NO ACTION OR PROCEEDING AGAINST EITHER PARTY MAY BE COMMENCED
MORE THAN TWO YEARS AFTER THE SERVICES GIVING RISE TO THE CLAIM ARE
RENDERED. SECTIONS 6.1 AND 6.2 SHALL SURVIVE FAILURE OF AN EXCLUSIVE
REMEDY.
7. PROPRIETARY RIGHTS
7.1 OWNERSHIP OF PROPRIETARY DATA.
Except for the limited license specifically granted to Freei.Net as set
forth in Section 2.7, PSINet shall at all times retain full and exclusive
right, title, and ownership interest in and to the Service, the Network,
all its names, logos, trade names, trademarks, copyrights, service marks
and any and all other intellectual property or trade secret rights
related thereto, and Freei.Net shall at all times retain full and
exclusive right, title, and ownership interest in and to its service, all
its names, logos, trade names, trademarks, copyrights, and service marks
and any and all other intellectual property or trade secret rights
related thereto. Neither Party may use any patent, copyrightable
material, trademark, trade name, trade secret or other intellectual
property right of the other Party except in accordance with the terms of
the license provision contained herein.
7.2 NOTICE REQUIREMENT.
Freei.Net shall place a notice on all materials using PSINet copyrighted
materials, trademarks or service marks (including without limitation
Service Agreements), as follows:
"-copyright- 199_, Licensed to [Freei.Net] along with applicable
trademarks and intellectual property. All Rights Reserved."
7.3 INFRINGEMENT OR PROPRIETARY RIGHTS.
Either party shall notify the other of any action by any third party
known or suspected by the other to constitute an infringement of either
parties proprietary rights. Either party shall honor all reasonable
requests by the other party, other than engaging as a party of
litigation, to perfect and protect any rights in the Services, the
Network or Intellectual property or trade secret rights of the other.
PSINet - Freei.Net - DIAL ACCESS AGREEMENT
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<PAGE>
PSINET PROPRIETARY AND CONFIDENTIAL INFORMATION
8. INDEMNITY PROVISIONS.
8.1 BY PSINET.
PSINet will defend, indemnify and hold Freei.Net harmless from and against
any losses arising out of any claim by an END-USER which is based on any
warranty, promise or representation made by Freei.Net under this Agreement
relating to PSINet's obligations to provide the Service, except as related
to the local call information provided under Section 2.2.2. Failure by
Freei.Net to include in its Service Agreements with END-USERS the
provisions required by this Agreement shall relieve PSINet from the
responsibilities set forth in this Section 8.1.
8.2 BY FREEI.NET
Freei.Net will defend, indemnify and hold PSINet harmless from and against
all claims, complaints, losses, costs and expenses asserted by third
parties to the extent they arise out of or in connection with (a)
Freei.Net's breach of or default of any covenant or provision of this
Agreement, or (b) any negligent or willful act or omission or violation of
Section 3.4 by Freei.Net or any of its END-USERS, or their respective
directors, officers, owners, employees or agents.
8.3 DEFENSE OBLIGATIONS.
The indemnifying party under Section 8.1 or 8.2, above, shall assume the
defense of any claim qualifying for indemnification with counsel reasonably
satisfactory to the other party, and the other party shall cooperate to the
extent reasonably requested by the indemnifying party. The other party may
employ its own counsel in any such case, and shall pay such counsel's fees
and expenses. The indemnifying party shall have the right to settle any
claim for which indemnification is available; provided, however, that to
the extent that such settlement requires the other party to take or retrain
from taking any action or purports to obligate the other party, then the
indemnifying party shall not settle such claim without the prior written
consent of the other party, which consent shall not be unreasonably
withheld, conditioned or delayed.
9. NONDISCLOSURE.
9.1 NONDISCLOSURE AGREEMENT.
The Bliateral Nondisclosure Agreement (NDA) signed by the parties and dated
5/19/99, 1999 is hereby Incorporated hereto. The terms and conditions of
the NDA which are Incorporated herein by reference in their entirety, shall
govern the exchange of all confidential information between the parties,
including all such exchanges which have taken place prior to the execution
of this Agreement (without regard to whether information has been expressly
marked or otherwise designated as confidential or proprietary), and shall
continue to bind PSINet and Freei.Net and thus survive termination of this
Agreement.
9.2 PRICING DISCLOSURE
Freei.Net shall not disclose the pricing set forth in Schedule B to any
third party, without PSINet's prior written consent. PSINet reserves the
right to terminate this Agreement or pursue any other available legal
remedies, upon such notice of such disclosure.
9.3 LIMITATION ON DISCLOSURES.
Neither party shall use the other party's name, trademark, service mark or
any other identifying symbols, directly or indirectly, in any advertising,
new release, web page, or any other professional or trade publication, and,
except as may be required by law, neither party shall make any press
release, public announcement, or any other disclosure concerning this
Agreement, without PSINet's prior written consent.
10. DISPUTE RESOLUTION.
Any disagreement or dispute between the parties shall, if not promptly resolved
by mutual agreement, be reduced to writing and submitted to the executive
officers or each party designated to handle such disputes. Within 30 days of the
submittal, the executive officers may, upon mutual agreement, meet to resolve
the dispute and to hear any arguments that a party wishes to make in connection
therewith. If the executive officers reach agreement on the disposition of the
dispute, they shall promptly issue their joint written decision resolving the
dispute. Any dispute so dealt with shall be considered conclusively and finally
decided shall not be the subject of any litigation. Any dispute, which such
executive officers are unable to promptly decide, may be taken by the aggrieved
party to litigation in the appropriate forum.
PSINET - FREEI.NET-DIAL ACCESS AGREEMENT
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PSINET PROPRIETARY AND CONFIDENTIAL INFORMATION
11. GENERAL TERMS.
11.1 INDEPENDENT CONTRACTORS.
The Parties hereto are acting as independent contractors and under no
circumstances shall any of the employees of one party be deemed the
employees of the other for any purpose. Except as otherwise expressly
provided in this one party be deemed the employees of the other for any
purpose. Except as otherwise expressly provided in this Agreement, this
Agreement does not constitute either party as the agent or legal
representative of the other party and does not create a partnership or
joint venture between the parties. Except as otherwise expressly
provided in this Agreement, neither party shall have any authority to
act for the other party or to contract for or bind the other party in
any manner whatsoever. This Agreement confers no rights of any kind
upon any third party.
11.2 FORCE MAJEURE.
a. Neither party shall be deemed in default of this Agreement or liable
to the other party to the extent that any delay or failure in
performance of its obligations results, without its fault or
negligence, from any cause beyond its reasonable control, such as
acts of God, acts of civil or military authority, criminal activity,
embargoes, epidemics, wars, riots insurrections, fires, explosions,
earthquakes, floods, unusually severe weather conditions or strikes.
In the event of any such excused delay, the time for performance
shall be affected by such delay without any termination charges or
other charges.
b. If any such excused delay results in a delay in the performance of
all or part of a party's obligations for more than thirty (30) days,
the other party may, by written notice given to the party whose
performance is delayed, terminate all or part of those service which
may be affected by such delay without any termination charges or
other charges.
11.3 DELAYS OR OMISSIONS.
No delay or omission to exercise any right, power or remedy accruing to
a party under this Agreement shall impair any such right, power or
remedy of such party nor shall it be construed to be a waiver of any
such breach or default, or an acquiescence therein, or of any similar
breach or default thereafter occurring; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or
default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of either
party of any breach or default under this Agreement, or any waiver on
the part of either party of any provisions or conditions of this
Agreement, must be made in writing and shall be effective only to the
extent specifically set forth in such writing. All remedies, either
under this Agreement or by law or otherwise afforded to a party, shall
be cumulative and not alternative.
11.4 BINDING AGREEMENT.
This agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns as
permitted hereunder. No person or entity other than the parties hereto
is or shall be entitled to bring any action to enforce any provision of
this Agreement against either of the parties hereto, and the convenants
and agreements set forth in this Agreement shall be solely for the
benefit of, and shall be enforceable only by, the parties hereto or
their respective successors and assigns as permitted hereunder.
11.5 NOTICES
All notices and other communications required or permitted hereunder
shall be in writing and shall be mailed by certified or registered mail
(return receipt requested), overnight express air courier, charges
prepaid, or facsimile addressed as follows:
<TABLE>
<CAPTION>
To Freeinetworks Inc: with a copy to:
<S> <C>
Freeinetworks Inc. Attn: Gregory Cavagnaro, General Counsel
909 South 336th Street E, Suite 110 401 Second Avenue South, Suite 700
Federal Way, WA 98003 Seattle, WA 98104
Attn: Robert (Bob) McCausland, President/CEO
Phone: 253-796-8500 Fax: 253-661-3431 Phone: 253-443-0800 Fax: 253-682-5556
</TABLE>
<TABLE>
<CAPTION>
To PSINet: with a copy to:
<S> <C>
PSINet Inc. PSINet Inc.
510 Huntmar Park Drive 510 Huntmar Park Drive
Herndon, Virginia 20170 Herndon, Virginia 20170
Facsimile: 703-397-5318 Facsimile: 703-904-4200
Attn: John Kraft, President Attn: David N. Kunkel, General Counsel
</TABLE>
PSINET - FREEI. - DIAL ACCESS AGREEMENT
11 of 22
<PAGE>
or to such other address as either party shall have furnished to the other in
writing:
If a notice is given by either party by certified or registered mail, it will
be deemed received by the other party on the third business day following the
date on which it is deposited for mailing. If a notice is given by either
party by overnight air express courier, it will be deemed received by the
other party on the next business day following the date on which it is
provided to the air express courier. If a notice is given by facsimile, it
will be deemed received by the other party after confirmation of receipt.
Notwithstanding the foregoing, any payments made under this Agreement shall
be deemed received only when actually received.
11.6 COMPLIANCE WITH LAW.
Both parties are responsible for complying with all applicable rules,
regulations, statutes, codes, ordinances and other requirements, whether
federal, state, local, foreign, or international, in connection with the
matters contemplated by this Agreement.
11.7 ASSIGNMENT.
Freei.Net's rights under this Agreement are non-transferable, and may not
be assigned or sub-licensed without the prior written authorization of
PSINet whose shall not be unreasonably withheld.
11.8 NO THIRD PARTY BENEFICIARIES.
No provision to this Agreement is intended, nor shall any be
interpreted, to provide or create any third party beneficiary rights or
any other rights of any kind in any affiliate, shareholder, partner of
any party hereto or any other third party; including any END-USER,
unless specifically provided otherwise herein, and except as so
provided, all provisions hereof, shall be personal solely between the
parties to this Agreement.
11.9 EXPORT CONTROLS.
Freei.Net agrees and acknowledges that any export of the Services and
the subsequent use thereof is subject to U.S. export control laws and
regulations. Freei.Net shall not directly or indirectly transfer the
Services, or the documentation relating thereto, to any country or
location outside of the United States without obtaining the prior
written consent of PSINet.
11.10 SEVERABILITY.
In case any provision of this Agreement shall be invalid, illegal or
unenforceable, such provision shall be construed so as to render it
enforceable and effective to the maximum extent possible in order to
effectuate the intention of this Agreement, and the validity, legality
and enforceability of the remaining provisions hereof shall not in any
way be affected or impaired thereby.
11.11 ORDER OF PRECEDENCE.
In the event of any conflict or inconsistency between this Agreement and
any attachments, schedules, or exhibits, the provisions of the Agreement
shall control.
11.12 TITLES AND SUBTITLES.
The titles of any sections or provisions of this Agreement are for
convenience of reference only and are not to be considered in construing
this Agreement.
11.13 GOVERNING LAW.
This Agreement and any issues arising out of or in relation thereto
shall be governed by the law of the State of Michigan applicable to
contracts to be performed wholly within that state.
11.14 ENTIRE AGREEMENT/AMENDMENTS.
This Agreement and the attachments, schedules and exhibits incorporated
herein by reference constitute the entire understanding and agreement
between the parties with regard to the subjects hereof and supersede all
prior oral and written agreements, commitments and understanding with
respect to such matters. Neither this Agreement nor any term hereof may
be amended, waived, discharged or terminated, except by a written
instrument signed by the parties hereto.
11.15 COUNTERPARTS.
This Agreement may be executed simultaneously in two or more
counterparts, each counterpart shall be deemed to be an original, and
all counterparts individually or together shall constitute one and the
same instrument.
12 of 22
<PAGE>
EACH PARTY REPRESENTS AND WARRANTS THAT THE PERSON WHOSE SIGNATURE APPEARS
BELOW IS DULY AUTHORIZED TO ENTER INTO THIS AGREEMENT ON BEHALF OF THE PARTY.
IN WITNESS WHEREOF, THE PARTIES HAVE ENTERED INTO THIS AGREEMENT AS OF THE
DATE SET FORTH:
FREE NETWORKS INC. PSINET INC.
By: /s/ Bob McCausland BY: /s/ John Kraft
---------------------- ----------------------------
Name: Bob McCausland Name: John Kraft
Title: President, CEO Title: President, PSINET INC,
Northeast Region
Date: 10-14-99 Date: 10-18-99
--------------------- --------------------------
ATTACHMENTS
SCHEDULE A - CERTAIN TERMS AND CONDITIONS DEFINING THE SERVICES
SCHEDULE B - PRICING SCHEDULE
SCHEDULE C - IDENTIFICATION OF TIERED CITIES
SCHEDULE D - SHARED HUNT DEPLOYMENT
13 of 22
<PAGE>
PSINET PROPRIETARY AND CONFIDENTIAL INFORMATION
SCHEDULE A
FREEI.NET END-USER SERVICE AGREEMENT
1.Freei.Net will execute Service Agreements(In whatever form or mechanism
determined by Freei.Net). between Itself and its END-USERS, which shall
contain the terms and conditions set forth below:
[to be provided by Freei.Net]
14 of 22
<PAGE>
Freei.Net System User Agreement
Freei Networks, Inc. (hereinafter referred to "Freei.net") services may be
used for lawful purposes only. ECPA NOTICE: Freei.net reserves the right to
monitor any and all communications through or with Freei.net facilities. Each
user agrees that Freei.net is not considered a secure communications medium
for the purposes of the ECPA and that no expectation of privacy is afforded.
Freei.net may choose to cease providing service to any person(s) or
organization(s) at its sole discretion. No notice will be required to be
given of such action.
Transmission of or solicitation for reception of any material which violates
any US Federal law(s), any state law(s); any city legal code(s) or
ordinance(s) or any of the laws governing the locality where the user resides
is prohibited. This includes material which is legally obscene, threatening,
libelous or violates any provision of intellectual-property law method
material which would be illegal to distribute to any person of any age within
the boundaries of the United States of America--including, but not limited to,
adult materials. Freei.net is not responsible for any materials viewed over
the internet. The user agrees to indemnify, hold harmless and defend
Freei.net from any legal action, which results from their use of the
Internet, without limitation.
The Service provides access to many areas of the Internet, including the
World Wide Web, Usenet discussion groups and IRC (Internet relay chat)
channels. Some of these areas may contain text, graphics and other materials
and content intended for adult audiences. By accepting this Agreement, you
certify that you are at least eighteen (18) years of age. If you are the
parent or legal guardian of a minor, you may authorize the minor's use of
Freei.net's service and you hereby agree to assume any and all liabilities
resulting from the minor's use of the Service. Freei.net believes that
children should get their parents' consent before giving out any information.
Freei.net encourages parents to participate in their children's Internet
experience.
The transmission of unsolicited advertising through electronic mail and
Usenet postings to inappropriate groups is explicitly prohibited. Each user
agrees to respect the Copyright of all data items on the Internet. Freei.net
is not responsible for the contents of the user's mailbox, any personal
storage, or other materials in their account(s) at the time of termination of
services--regardless of the cause of termination. Freei.net does not provide
mail or web page forwarding at termination.
Freei.net may wish to verify the accuracy of the information you submit in
connection with your registration for the Service (including, without
limitation, performing cross tabulations with external databases) and you
hereby consent to Freei.net's verification of such information.
Each user agrees that the security of their account(s), including data
stored, transmitted and received through it, is their sole responsibility.
Each user further agrees that if they believe their account security has been
compromised in any way, to notify Freei.net immediately via telephone and a
written notification.
<PAGE>
Each user agrees that they are responsible for any and all use made of their
account(s) until they so notify Freei.net in the event of an Intrusion.
Freei.net does not guarantee the safety and security of any transmission(s).
Freei.net retains any and all access to any and all service(s) or location(s)
attached to the internet and its discretion.
Material passed via Freei.net to or from other networks must comply with the
other networks rules and regulations. Each user agrees that Freei.net has the
right to cooperate in any investigation which is requested by parties
alleging that a user may have violated any law which is enforceable in that
user's jurisdiction and/or in Freei.net's jurisdiction--this also includes
any provision of this agreement. Each user agrees that Freei.net has the
right to turn over any evidence of illegal activity that Freei.net may
discover in the course of any investigation requested by an outside party, or
discovered in the routine operation and maintenance of the Freei.net
services and network components to the appropriate authorities. Freei.net may
be required by law to disclose and release any information it may have to any
officials of the law. This includes all federal, state, and local
jurisdictions. Each user agrees and understands that the disclosure of such
information will be upon presentation of a valid order of a court or
government entity. Each user agrees and understands that Freei.net's
judgement as to the validity of any court order or subpoena is considered
proper and final. Each user further agrees that Freei.net may make copies of
the user's material for the use of those authorities in their investigation,
if requested for the purpose of preservation of evidence.
User is responsible for obtaining, at user's own expense, all input/output
devices to access the Service (such as modems, terminal equipment, computer
equipment and software) and communications services (including, without
limitation, long distance or local telephone services). User is responsible
for protecting the secrecy of their login identification, password, file
name(s), and any security lock code that they use to protect access to their
data. The Service is for personal use of registered members only and may not be
resold, used for sale, exchange, barter, or otherwise. Member accounts cannot
be transferred or used by anyone other than the registered account holder.
The Service is provided without charge by the support of Freei.net's sponsors
and advertisers. Each user understands and agrees to fully complete
questionnaires when registering and periodically thereafter. Freei.net will
assign each user a blind user identification number, which will be used to
track your usage of the Service from time to time. Freei.net will gather
information that you provide and may disclose this information (including
information about your computer system and platform) to third parties,
including advertisers, clients, marketing organizations and others, in its
sole discretion. Unless specifically requested by user, personally
identifying information such as your name, address, telephone number, e-mail
addresses, and other personal and confidential information will not be
disclosed by Freei.net without user's consent, except as may be required by
law. Freei.net will not collect information regarding software programs,
utilities or other materials that reside on your computers.
Payment of Fees: Except as provided below, the Service is provided without
charge. Each user acknowledges and understands that user will be responsible
for all amounts charged by your local telephone company for all calls made to
Freei.net's customer support lines and to access the Service.
Cancellation of Account: In order to cancel your account, you must submit
your request to Freei.net via e-mail, fax, or U.S. Mail at the address
provided below.
Each user agrees not to attempt to cause, or actually cause, any disruption of
<PAGE>
service on Freei.net or any other network or subscriber, including, but not
limited to mallicious traffic generation, attempted or actual violation of
any security system in place on the Internet and its resources, or any
unauthorized access to any computer or resource on the Internet.
Freei.net does not guarantee connectivity at any time, for any length of time
or at any speed. Freei.net makes no warranties or representations of
merchantability or fitness for any purpose. Freei.net is not responsible for
any loss a user may suffer as a result of using Freei.net--including but not
limited to, loss resulting from delays in service, incorrect or incomplete
delivery of information, possible computer viruses, operation system failure
or interruption of service, regardless of cause. Freei.net is not responsible
for any information or computer data lost because of Freei.net's
software/service installation or usage. Additional statements such as
presentations, whether oral or written, do not constitute warranties by
Freei.net and should not be relied upon.
Each user agrees not to attempt to defeat any idle timer or system tool
intended to enforce the part-time and personal nature of your connection,
including the use of pingbots and other methods of avoiding timed
disconnection. Each user agrees to remain signed into the network only when
actually making use to same and to disconnect when idle for significant
periods of time (more than 30 minutes). Each user authorizes Freei.net to
enforce this restriction by appropriate software and network
measures--automated or manual.
Each user may not assign this Agreement to anyone else. This Agreement will
be governed by and constructed in accordance with the laws of the State of
Washington, excluding its conflict of law principles. The application of the
United Nations Convention of Contracts for the International Sale of Goods is
expressly excluded. The exclusive personal jurisdiction of and venue for all
disputes arising out of this Agreement shall be the state and federal courts
located in King County, Washington, USA and you consent to such jurisdiction
and waive all objections to such jurisdiction and venue. If any provision of
this Agreement is held to be unenforceable for any reason, such provision
shall be reformed only to the extent necessary to effect the original
intentions of the parties, and the remainder of this Agreement shall remain
in full force and effect.
Each user may contact Freei.net at the following address: Freei.net, 909 S.
338th Street Suite 110, Federal WA 98003 or you may send e-mail to
[email protected].
Any failure of Freei.net to enforce any provision of this Agreement shall not
constitute a waiver of any rights under such provision or any other provision
under this Agreement.
Each user agrees that Freei.net may modify any of the terms and conditions
given here. Any changes or modifications will be posted in a conspicuous
place on the system.
The agreement supercedes any written or oral communication a user may have
had with Freei.net. This agreement is the complete and total agreement.
<PAGE>
between the parties. Violation of any of the terms and conditions of this
agreement may result in the immediate, no-notice cancellation of services.
Serious violations may subject a user to criminal or civil prosecution.
[LOGO]
<PAGE>
PSINet PROPIETARY AND CONFIDENTIAL INFORMATION
SCHEDULE B
PSINet Dial Access Pricing Schedule
1. RAMP PERIOD MINIMUM NET MONTHLY REVENUE.
THE RAMP PERIOD IS THE INITIAL TEN (10) MONTHS FROM THE EFFECTIVE DATE OF THE
AGREEMENT. Freel.Net commits to the following minimum Net Monthly Revenue
(meaning the total monthly amount invoiced by PSiNet, excluding taxes but
including any deductions for early terminations) during and after the Ramp
Period as follows:
<TABLE>
<CAPTION>
Net Monthly Revenue per month
<S> <C>
Month 1 to 3 Usage Only, No Minimum
Month 4 to 6 $250,000.00
Month 7 to 10 $500,000.00
(End of Ramp Period)
Month 11+: $1,000,000.00
</TABLE>
If Freel.Net fails to achieve the Net Monthly Revenue indicated for Month 10 by
the end of the initial ten (10) months of the Dial Access Agreement (the Ramp
Period) PSINet may declare a material breach and may terminate this Agreement in
accordance with the provisions of Section 5.3.1 thereof.
2. POST-RAMP PERIOD MINIMUM NET MONTHLY REVENUE.
$1,000,000.00 (US) shall be the minimum Net Monthly Revenue billed to Freel.Net
for all Services provided by PSINet to End-Users after the initial 10 month Ramp
Period set forth above in Section 1. Should Freel.Net's revenue to PSINet in any
month thereafter be less than the required minimum, Freel.Net shall promptly
remit to PSINet an amount equal to the difference between the aforesaid minimum
Net Monthly Revenue and the actual revenue billed to Freel.Net in that month.
In the event that Freel.Net chooses not to remit to PSINet the amount stated
above, PSINet may declare a material breach and may terminate this Agreement in
accordance with the provisions of Section 5.3.1 (a) thereof, and hold as
liquidated damages owed to PSINet, the foregoing minimum Net Monthly Revenue
amount.
3. DIAL SERVICE PRICING.
Dial Service Pricing (Analog Dial Service).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Hourly Rate Pricing
Total # of Hours Per Month Applicable Charge
<S> <C>
0-3,000,000 $[*] per hour, per month
3,000,001-5,000,000 $[*] per hour, per month
5,000,001-8,000,000 $[*] per hour, per month
8,000,001-12,000,000 $[*] per hour, per month
12,000,000 or more $[*] per hour, per month
</TABLE>
- --------------------------------------------------------------------------------
EXPLANATION OF DIAL SERVICE PRICING.
Upon the Effective Date, and as of the first day of each month thereafter
throughout the initial or any successive terms of this Agreement, Freel.Net
agrees to pay PSINet for each Hour an Applicable Charge pursuant to the above
schedule and subject to adjustments as provided below. The Total # of Hours Per
Month shall be a total aggregate of the number of hours accumulated by all
END-USERS on the Network for a given month.
The Applicable Charge above is to be applied to all Hours irrespective of the
rate that previously was applied to that group of Hours. For example, if there
are a sufficient number of Hours to satisfy the second-tier price of $[*] per
Hour, that price shall apply to all Hours for that month. Should the number of
Hours subsequently fall below the second-tier threshold, then the first-tier
price of $[*] per Hour shall apply to all Hours for that month.
PSINET-FREEI.NET-DIAL ACCESS AGREEMENT 8/99
15 of 22
[*] = Confidential Treatment Requested
<PAGE>
PSINet PROPRIETARY AND CONFIDENTIAL INFORMATION
4. DIAL SERVICE PRICE ADJUSTMENTS.
As set forth herein, PSINet reserves the right to adjust the Dial
Service Pricing as set forth below:
A. SHARED HUNT DEPLOYMENT (SECTION 2.2.9). If Freei.Net exceeds the maximum
allowable hours in a given hunt number identified in the Implementation
Schedule. PSINet reserves the right to charge an additional fee equal to
30% of the Dial Access Pricing multiplied by the total number of hours
utilized for that particular hunt where the maximum number of hours were
exceeded.
B. PREDOMINANT USE OF TIER 1/TIER 2 CITIES (SECTION 3.5.2). If Freei.Net
exceeds the ratio of End-Users hours allocated between Tier1/Tier 2 and
Tier 3/Tier 4 cities, as set forth below PSINet may adjust the Dial
Service Pricing for the total number of hours used by Freei.Net in the
given month, as follows:
Hourly Rate Pricing Adjustment
Allocation of End-Users hours in
Tier 1/Tier 2 Cities in a given month Dial Service Price Adjustment
greater than or =80% None
lesser than 80% 15% increase
Freeinetworks Inc has read, and agrees to, the terms presented in PRICING
SCHEDULE B.
Freeinetworks Inc. PSINet Inc.
By: /s/ Bob McCausland By: /s/ John Kraft
--------------------------------- ---------------------------------
Name: Bob McCausland Name: John Kraft
Title: President, CEO Title: President, PSINet Inc.,
Northeast Region
Date: 10-14-99 Date: 10-18-99
------------------------------- -------------------------------
PSINET--FREEI.NET--DIAL ACCESS AGREEMENT
16 of 22
<PAGE>
PSINet PROPRIETARY AND CONFIDENTIAL INFORMATION
SCHEDULE C
IDENTIFICATION OF TIER CITIES
<TABLE>
<S> <C> <C>
1 Phoenix AZ
1 Mountain View CA
1 Los Angeles CA
1 Malibu CA
1 San Jose CA
1 San Francisco CA
1 Oakland CA
1 Burbank CA
1 Van Nuys CA
1 Sacramento CA
1 Denver CO
1 Washington DC
1 Miami FL
1 Atlanta GA
1 Douglasville GA
1 Evanston IL
1 Champnurben IL
1 Elmhurst IL
1 Aurora IL
1 Geneva IL
1 Downers Grove IL
1 Big Rock IL
1 Tinley Park IL
1 Calumet City IL
1 Beecher IL
1 Oak Lawn IL
1 Plainfield IL
1 Lockport IL
1 McHenry IL
1 Woodstock IL
1 Gardner IL
1 Kankakee IL
1 Manhattan IL
1 Morris IL
1 Ottawa IL
1 Utica IL
1 Crescent City IL
1 Joliet IL
1 Libertyville IL
1 Lake Forest IL
1 Antioch IL
1 Algonquin IL
1 Elgin IL
1 Park Ridge IL
1 Franklin Park IL
1 Hampshire IL
1 Elk Grove IL
1 Northbrook IL
1 Indianapolis IN
1 New Orleans LA
1 Holden MA
</TABLE>
PSINET-FREEI.NET-DIAL ACCESS AGREEMENT
17 of 22
<PAGE>
PSINet PROPRIETARY AND CONFIDENTIAL INFORMATION
<TABLE>
<S> <C> <C>
2 Orlando FL
2 Tampa FL
2 St. Petersburg FL
2 Jacksonville FL
2 Ft. Wayne IN
2 Louisville KY
2 Berwyn MD
2 Gaithersburg MD
2 Hagerstown MD
2 Bowie MD
2 Arbutus MD
2 Brooklyn Park MD
2 Glen Burnie MD
2 Ellicott MD
2 Elkridge MD
2 Columbia MD
2 Catonsville MD
2 Severn MD
2 Odenton MD
2 Portland ME
2 Pontiac MI
2 Royal Oak MI
2 Birmingham MI
2 Lansing MI
2 Kalamazoo MI
2 Grand Rapids MI
2 Ann Arbor MI
2 Centerline MI
2 Flint MI
2 Kansas City MO
2 Charlotte NC
2 Winston-Salem NC
2 Durham NC
2 Raleigh NC
2 Hackensack NJ
2 Fairlawn NJ
2 Mount Holly NJ
2 Atlantic City NJ
2 Mercerville NJ
2 Merchantville NJ
2 Albuquerque NM
2 Reno NV
2 Las Vegas NV
2 Albany NY
2 Buffalo NY
2 Youngstown OH
2 Dublin OH
2 Dayton OH
2 Oklahoma City OK
2 Tulsa OK
2 Reading PA
2 Millersville PA
2 Providence RI
2 Columbia SC
2 Charleston SC
2 Austin TX
2 Leesburg VA
2 Richmond VA
</TABLE>
PSINET-FREEI.NET-DIAL ACCESS AGREEMENT
19 of 22
<PAGE>
PSINet PROPRIETARY AND CONFIDENTIAL INFORMATION
<TABLE>
<S> <C> <C>
2 Tacoma WA
2 Vancouver WA
2 Green Bay WI
2 Milwaukee WI
2 Morgantown WV
3 Huntsville AL
3 Mobile AL
3 Chico CA
3 Calton CA
3 Concord CA
3 Bishop Ranch CA
3 Colorado Springs CO
3 Winter Park FL
3 Sarasota FL
3 Ft. Myers FL
3 Margate FL
3 Augusta GA
3 Marietta GA
3 Albany GA
3 Des Moines IA
3 South Bend IN
3 Wichita KS
3 Lafayette LA
3 Shreveport LA
3 Baton Route LA
3 Springfield MA
3 Billerica MA
3 Jackson MI
3 Bay City MI
3 Saginaw MI
3 Pascagoula MS
3 Jackson MS
3 Rocky Mount NC
3 Asheville NC
3 Fayetteville NC
3 Southern Pines NC
3 Greensboro NC
3 Fargo ND
3 Lincoln NE
3 Manchester NH
3 Perth Amboy NJ
3 Princeton NJ
3 Riverton NJ
3 Syracuse NY
3 Poughkeepsie NY
3 Rochester NY
3 Harrisburg PA
3 York PA
3 State College PA
3 Altoona PA
3 Valley Forge PA
3 Allentown PA
3 Carlisle PA
3 Scranton PA
3 Greenville SC
3 Knoxville TN
3 San Antonio TX
3 Fredericksburg VA
</TABLE>
PSINET-FREEI.NET-DIAL ACCESS AGREEMENT
20 of 22
<PAGE>
PSINet PROPRIETARY AND CONFIDENTIAL INFORMATION
<TABLE>
<S> <C> <C>
3 Lynchburg VA
3 Danville VA
3 Burlington VT
3 Rutland VT
3 Everett WA
3 Janesville WI
3 Charleston WV
4 Hutchinson KS
4 Concord MA
4 Salisbury MD
4 Midland MI
4 Duluth MN
4 Billings MT
4 Medford OR
4 Waco TX
4 Amarillo TX
4 Lubbock TX
4 San Angelo TX
4 El Paso TX
4 Midland TX
4 Abilene TX
4 Ogden UT
4 Provo UT
4 Roanoke VA
4 Wheeling WV
</TABLE>
PSINET-FREEI.NET-DIAL ACCESS AGREEMENT
21 of 22
<PAGE>
PSINet PROPRIETARY AND CONFIDENTIAL INFORMATION
SCHEDULE D
SHARED HUNT DEPLOYMENT
<TABLE>
<CAPTION>
Monthly
Hours
PRIs Available Ports Available Cannot
PSI NPANXX City State by November by November Exceed
<S> <C> <C> <C> <C> <C>
303285 **Denver CO 23 531 159,300
410880 **Laurel MD 14 310 93,000
330572 Akron OH 10 220 66,000
408380 Alameda CA 10 227 68,100
415442 Alameda CA 28 634 190,200
505998 Albuquerque NM 10 220 88,000
612735 Austin TX 14 331 99,300
248435 Birmingham MI 8 193 57,900
704334 Charlotte NC 11 262 78,600
704372 Charlotte NC 8 193 67,900
216367 Cleveland OH 12 282 84,600
614324 Columbus OH 14 331 99,300
937910 Dayton OH 14 317 95,100
919572 Durham NC 7 158 47,400
915496 El Paso TX 8 179 53,700
314244 Florissant MO 9 207 62,100
314516 Florissant MO 11 248 74,400
864751 Greenville SC 7 158 47,400
713767 Houston TX 26 607 182,100
816221 Kansas City MO 15 351 105,300
423558 Knoxville TN 16 358 107,400
517267 Lansing MI 7 151 45,300
502992 Louisville KY 12 276 82,800
809667 Moorestown NJ 7 165 49,500
815780 Nashville TN 17 386 115,800
248475 Pontiac MI 8 193 57,900
248972 Pontiac MI 7 151 45,300
210576 San Antonio TX 14 331 99,300
206812 Seattle WA 14 331 99,300
253579 Seattle WA 12 276 82,800
813386 Tampa FL 7 158 47,400
TOTAL 380 8749 2,620,500
</TABLE>
Average
** denotes SuperPOP
PSINET-FREEI.NET-DIAL ACCESS AGREEMENT
22 of 22
<PAGE>
PSINET
ADDENDUM
TO
DIAL ACCESS AGREEMENT
This addendum ("Addendum") to the Dial Access Agreement ("Agreement") dated
October 10, 1999 is made by and between PSINet Inc. ("PSINet") and Freei
Networks Inc. ("Freei.Net") as of December __, 1999, and serves to modify the
terms and conditions of the Agreement as provided below. Unless otherwise
specified herein, the terms and conditions of the Agreement shall apply to this
Addendum. All other terms and conditions of the Agreement not expressly modified
herein shall remain in full force and effect. The parties agree to change the
language of the Agreement as follows:
A. CHANGED SECTION 5.1 TO READ AS FOLLOWS:
"5.1 TERM. The term of this Agreement shall be two (2) years beginning on
January 1, 2000. The parties agree to meet, no later than ninety (90) days
prior to the end of the initial term to discuss possible renewal of this
Agreement. If mutually agreed to by the parties, the parties will enter into
an Agreement through a written addendum to this Agreement."
B. CHANGE SCHEDULE B. SECTION 1 AND 2, AS INDICATED BELOW:
"1. Ramp Period Minimum Net Monthly Revenue.
THE RAMP PERIOD IS THE INITIAL SIX (6) MONTHS FROM THE EFFECTIVE DATE OF THE
AGREEMENT (1/1/00). Freei.Net commits to the following minimum Net Monthly
Revenue (meaning the total monthly amount invoiced by PSINet, excluding taxes,
based on a per port pricing of $[*] during and after the Ramp Period as follows:
<TABLE>
<CAPTION>
NET MONTHLY REVENUE PER MONTH
<S> <C> <C>
Month 1 to 3: Usage Only, No Minimum (Jan. 2000 - March 2000)
Month 4 to 6: $250,000 (April 2000 - June 2000)
Month 7 +: $500,000.00 (July 2000 through Dec 2001)
</TABLE>
If Freei.Net falls to achieve the Net Monthly Revenue indicated for Month 7 by
the end of the initial six (6) months of the Dial Access Agreement (the Ramp
Period), PSINet may, in addition to other potential remedies, declare a material
breach and may terminate this Agreement in accordance with the provisions of
Section 5.3.1 thereof.
2. Post-Ramp Period Minimum Net Monthly Revenue.
$500,000.00 (US) shall be the minimum Net Monthly Revenue billed to Freei.Net
for all Dial Access Service provided by PSINet to Freei.Net after the initial 6
month Ramp Period set forth above in section 1. Should Freei.Net's revenue to
PSINet in any month thereafter be less than the required minimum, Freei.Net
shall promptly remit to PSINet an amount equal to the difference between the
aforesaid minimum Net Monthly Revenue and the actual revenue billed to Freei.Net
in that month.
In the event that Freei.Net chooses not to remit to PSINet the amount
stated above, PSINet may declare a material breach and may terminate
this Agreement in accordance with the provisions of Section 5.3.1 (a)
thereof, and hold as liquidated damages owed to PSINet, the foregoing
minimum Net Monthly Revenue amount."
C. CHANGE SCHEDULE B. SECTION 3, AS INDICATED BELOW:
3. Dial Service Pricing. Per PSINet port into the PSINet Network ("Port") is
fixed at $[*] per Port.
Explanation of Port Pricing. Upon the Effective Date, and as of the first day
of each month thereafter throughout the initial or any successive terms of
this Agreement, Freei.Net agrees to pay PSINet for each Port at the per Port
pricing of $[*] as stated above and subject to adjustments as provided below.
During the initial three months, PSINet and Freei.Net will agree on the
applicable number of Ports, and the allocation of such Ports in PSINet covered
cities to be made available to Freei.Net and such amount shall be set forth in
a
[*] = Confidential Treatment Requested
<PAGE>
change order to be agreed to by the parties. During the second three month
period, PSINet will make available to Freei.Net a minimum 4545 Ports on the
PSINet Network, with the allocation of Ports in designated cities, to be
agreed to by the parties in a change order. After the initial six (6) months,
PSINet will make available to Freei.Net a minimum of 9090 Ports on the PSINet
Network, with the allocation of Ports in designated cities, to be agreed to by
the parties in a change order.
IN WITNESS WHEREOF, the duly authorized representatives of the parties hereto
have executed this Amendment as of the last data specified below, effective on
that date.
FREEI NETWORKS INC. PSINET INC.
By: /s/ Bob McCausland By: /s/ John Kraft
----------------------------- -----------------------------
John Kraft
President, Northeast Region, PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 20170
Date: 2-3-2000 Date: 2/14/00
------------ --------------
<PAGE>
Exhibit 10.18
[Logo]
UNITED STATES INTERNET CONTENT (WORLD WIDE WEB SITE) DISTRIBUTION AGREEMENT
THIS AGREEMENT, dated as of March 30, 2000 (the "Effective Date"), is
made by and between InfoSpace.com, Inc., a Delaware corporation,
("InfoSpace"), with offices at 15375 NE 90th Street, Redmond, WA 98052, and
FreeInternet.com __________________________, a __________________________
corporation ("Company"), with offices at 909 South 336th St. Suite #110,
Federal Way, WA 98003.
RECITALS
This Agreement is entered into with reference to the following facts:
A. InfoSpace maintains on certain locations of the InfoSpace Web Sites
(as defined below) and makes available to Internet users certain content,
resources, archives, indices, software, catalogs and collections of
information (collectively, such materials are identified in Exhibit A and
referred to herein as the "Content").
B. InfoSpace wishes to grant certain rights and licenses to Company with
respect to access to the Content and certain other matters, and Company
wishes to grant certain rights and licenses to InfoSpace with respect to the
Company Web Sites (as defined below) and certain other matters, as set forth
in this Agreement.
AGREEMENT
The parties agree as follows:
SECTION 1. DEFINITIONS.
As used herein, the following terms have the following defined
meanings:
"BANNER ADVERTISEMENT" means a rotating banner advertisement of up to
approximately 468 x 60 pixels located at the top and/or bottom of a Web Page,
or other advertisements, sponsorships or other promotions on or related to a
Personal Desktop Portal Page, as may be designated by InfoSpace.
"CO-BRANDED PAGES" means, collectively, Query Pages, Results Pages and
Personal Desktop Portal Pages.
"COMPANY MARKS" means those Trademarks of Company set forth on Exhibit B
hereto and such other Trademarks (if any) of Company which Company may own or
use from time to time.
"COMPANY WEB SITES" means, collectively, all Web Sites maintained by or
on behalf of Company and its affiliates.
"GRAPHICAL USER INTERFACE" means a graphical user interface, to be
designed by Company and InfoSpace and implemented by InfoSpace pursuant to
the terms of this Agreement, that contains or implements branding, graphics,
navigation, content or other characteristics or features such that a user
reasonably would conclude that such interface is part of the Company Web
Sites.
"IMPRESSION" means a user's viewing of any discrete screen of a
Co-branded Page containing any Banner Advertisement.
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"INFOSPACE MARKS" means those Trademarks of InfoSpace set forth on
Exhibit B hereto and such other Trademarks (if any) as InfoSpace may from
time to time notify Company in writing to be "InfoSpace Marks" within the
meaning of this Agreement.
"INFOSPACE WEB SITES" means, collectively: (a) the Web Sites, the
primary home page of which is located at http://www.infospace.com; and (b)
other Web Sites maintained by InfoSpace and its affiliates.
"INTELLECTUAL PROPERTY RIGHTS" means any patent, copyright, rights in
Trademarks, trade secret rights, moral rights and other intellectual property
or proprietary rights arising under the laws of any jurisdiction.
"PERSON" means any natural person, corporation, partnership, limited
liability company or other entity.
"PERSONAL DESKTOP PORTAL APPLICATION" (or abbreviation PDP, Desktop
Portal, or the like used herein) means a version (as designated by InfoSpace)
of a downloadable software application currently known as "The InfoSpace
Personal Desktop Portal" whereby end users are able to access and display
certain content, and any successors and/or revisions to such application as
InfoSpace may designate in its sole discretion.
"PERSONAL DESKTOP PORTAL PAGE" means any page hosted on the InfoSpace
Web Sites, and served to an end user who accessed such page through a version
of the Personal Desktop Portal Application that such end user downloaded from
a Query Page or Results Page, which may incorporate a Graphical User
Interface and/or which users may input queries and searches relating to the
Content.
"QUERY PAGE" means any page hosted on the InfoSpace Web Sites which may
incorporate the Graphical User Interface and/or on which users clicking
directly from the Company Web Sites may input queries and searches relating
to the Content or may include download of or access to Content.
"RESULTS PAGE" means any page hosted on the InfoSpace Web Sites which
may incorporate the Graphical User Interface and/or displays Content in
response to queries and searches made on a Query Page or Personal Desktop
Portal Page.
"TRADEMARKS" means any trademarks, service marks, trade dress, trade
names, corporate names, proprietary logos or indicia and other source or
business identifiers.
"WEB SITE" means any point of presence maintained on the Internet or on
any other public data network. With respect to any Website maintained on the
World Wide Web, such Website includes all HTML pages (or similar unit of
information presented in any relevant data protocol) that either (a) are
identified by the same second-level domain (such as infospace.com) or by the
same equivalent level identifier in any relevant address scheme, or (b)
contain branding, graphics, navigation or other characteristics such that a
user reasonably would conclude that the pages are part of an integrated
information or service offering.
2. CERTAIN RIGHTS GRANTED.
2.1 INFOSPACE GRANT. Subject to the terms and conditions of this
Agreement, InfoSpace hereby grants to Company the following rights:
(a) the right to include on the Company Web Sites hypertext links
(whether in graphical, text or other format) which enable "point and click"
access to locations of the InfoSpace Web Sites specified by InfoSpace (and
subject to change by InfoSpace from time to time); and
(b) the right to permit users to link to Results Pages via Query
Pages and/or to Personal Desktop Portal Pages hosted on the InfoSpace Web
Sites.
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2.2 COMPANY GRANT. Subject to the terms and conditions of this
Agreement, Company hereby grants InfoSpace the following rights:
(a) the right to include on the InfoSpace Web Sites hypertext
links (whether in graphical, text or other format) which enable "point and
click" access to locations of the Company Web Sites specified by Company (and
subject to change by Company from time to time);
(b) the right to sell and serve Banner Advertisements and other
promotions on the Co-branded Pages; and
(c) the right to track the number of Impressions.
2.3 LIMITATIONS. Company and its affiliates shall have no right to
reproduce or sub-license, re-sell or otherwise distribute all or any portion
of the Content to any Person including via the Internet (including the World
Wide Web) or any successor public or private data network. This Agreement and
delivery of the Content or any portion hereunder to Company shall not cause
InfoSpace to be in violation of any law of any jurisdiction or third party
agreement, and InfoSpace may at any time modify its grant of rights to the
extent necessary to ensure compliance. InfoSpace may from time to time issue
additional guidelines with respect to use or display of any of the Content,
or issue requirements based upon InfoSpace's obligations to third party
Content providers, and Company will implement such requirements. Company
shall implement and/or cooperate with InfoSpace in its implementation of bug
fixes, updates, and minimum build requirements for any Content supplied by
InfoSpace, promptly upon the request of InfoSpace. Company shall not have any
right to: (a) edit or modify any Banner Advertisements submitted for
Co-branded Page; (b) "frame" Content unless expressly allowed by InfoSpace;
or (c) remove, obscure or alter any legal notices, including notices of
Intellectual Property Rights appearing in or on any materials (including
Banner Advertisements). No Banner Advertisements for a Co-branded Page shall
advertise or promote a direct competitor of Company or InfoSpace.
2.4 COMPANY MARKS LICENSE. Subject to Section 2.6, Company hereby
grants InfoSpace the right to use, reproduce, publish, perform and display
the Company Marks: (a) on the InfoSpace Web Sites in connection with the
posting of hyperlinks to the Company Web Sites; (b) in and in connection with
the development, use, reproduction, modification, adaptation, publication,
display and performance of the Graphical User Interface, Results Pages and
(if applicable) the Personal Desktop Portal Pages; and (c) in promotional and
marketing materials, content directories and indexes, and electronic and
printed advertising, publicity, press releases, newsletters and mailings
about InfoSpace.
2.5 INFOSPACE MARKS LICENSE. Subject to Section 2.6, InfoSpace hereby
grants the right to use, reproduce, publish, perform and display the
InfoSpace Marks; (a) on the Company Web Sites in connection with the posting
of hyperlinks to the InfoSpace Web Sites; (b) in and in connection with the
development, use, reproduction in promotional and marketing materials,
content directories and indexes, and electronic and printed advertising,
publicity, press releases, newsletters and mailings about the Company.
2.6 APPROVAL OF TRADEMARK USAGE. InfoSpace shall not use or exploit
in any manner any of the Company Marks, and Company shall not use or exploit
in any manner any of the InfoSpace Marks, except in such manner and media as
the other party may consent to in writing, which consent shall not be the
unreasonably withheld or delayed. Either party may revoke or modify any such
consent upon written notice to the other party.
2.7 PREFERRED CONTENT PROVIDER. InfoSpace will be the primary and
preferred content provider for the Freei.net portal in content categories
where InfoSpace provides content; provided that InfoSpace will not be
exclusive content provider. Freei may add enhanced vertical content to
complement existing InfoSpace content, and Freei may fulfill any current
contractual content obligations. InfoSpace shall have first right of
consideration on all technology solutions that Freei may implement on its
portal site.
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3. CERTAIN OBLIGATIONS OF THE PARTIES.
3.1 GRAPHICAL USER INTERFACE AND CO-BRANDED PAGES. To the extent
provided in this Agreement, Company and InfoSpace will cooperate to design
the user-perceptible elements of the Graphical User Interface, with the goals
of: (a) conforming the display output of the "look and feel" associated with
the applicable Company Web Sites; and (b) maximizing the commercial
effectiveness thereof. Following agreement by the parties upon the design
specifications thereof, InfoSpace will use commercially reasonable efforts to
develop the Graphical User Interface and to implement the same on Co-branded
Pages. InfoSpace shall have no liability or obligation for failure to develop
or implement the Graphical User Interface or any Co-branded Pages as
contemplated by this Section 3.1, or for any nonconformity with the design
specifications agreed upon by the parties, provided InfoSpace has used
commercially reasonable efforts to develop and implement the same as provided
in this Section 3.1. The URL for the Co-Branded Pages shall not include
Company's domain name. Any re-designs or non-standard designs requested by
Company (beyond the initial single standard template design contemplated by
this section) shall be charged at InfoSpace's then current rates.
3.1.1. INFOSPACE AND COMPANY DEVELOPMENT EFFORTS. InfoSpace and
company shall use commercially reasonable efforts to complete the development
and mutual distribution activities set forth in Exhibit D.
3.2 COMPANY OBLIGATIONS. Company shall integrate links to pages of the
InfoSpace Web Sites determined by InfoSpace (and subject to change by
InfoSpace from time to time) on the primary home page for each of the Company
Web Sites. In addition, and unless otherwise designated by InfoSpace, the
InfoSpace logo and at least one other link pointing to pages of the InfoSpace
Web Sites specified by InfoSpace (and subject to change by InfoSpace from
time to time) will be present on all Co-branded Pages. Each link contemplated
by this Section 3.2 shall be: (a) prominent in relation to links to other Web
Sites on the applicable page (and in any event at least as prominent as any
link to any third party Web Site); and (b) above-the-fold (i.e., immediately
visible to any user accessing the applicable page without the necessity of
scrolling downward or horizontally).
3.2.1. RE-SALE OF CONTENT SERVICES. During the term, Company will
distribute Content services (e.g. the Personal Desktop Portal Application),
or appropriate portions thereof as agreed by InfoSpace and Company, to Company
Affiliates ("Company Affiliates" shall include only Web Sites of companies
who are referred directly by Company for provision of the Content and which
would comply with all provisions of this Agreement). Company and Company
Affiliates shall agree to all terms and conditions of InfoSpace's provision
of the Content. Company shall comply with all other reasonable requirements,
guidelines, terms and conditions that InfoSpace may from time to time advise
with respect all aspects of the resale to Company Affiliates, InfoSpace
reserves at all times the right to refuse to provide access to all or any
portion of the content any Company Affiliate(s) under this Agreement.
Company shall keep records of distribution of the Content to Company
Affiliates, and provide them quarterly to InfoSpace attention: Accounting.
InfoSpace may request that Company provide co-branded navigation elements
(customized header and/or footer) for the co-branding of Web Sites of
Company's Affiliates. InfoSpace may incorporate these co-branded navigational
elements into the sites of Company Affiliates who enter into an agreement
with InfoSpace for the provision of the Content. Unless otherwise specified,
the Company Affiliate sites will receive standard templates designed for
Company and will involve only basic changes (which Company will supply).
InfoSpace reserves the right to charge the requesting party (Company or it's
affiliate, as the case by be), a fee for any special requested additional
changes by a Company Affiliates to the templates.
3.3 ACCESSIBILITY OF WEB SITES. Each party will use commercially
reasonable efforts to maintain accessibility of its Web Sites.
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3.4 IMPRESSION INFORMATION. InfoSpace shall track and allow the
Company to remotely access in electronic form information maintained by
InfoSpace concerning the number of Impressions.
3.5 PUBLICITY. The parties may work together to issue publicity and
general marketing communications concerning their relationship and other
mutually agreed-upon matters, provided, however, that neither party shall have
any obligation to do so. In addition, neither party shall issue such
publicity and general marketing communications concerning their relationship
without the prior written consent of the other party (not to be unreasonably
withheld). Neither party shall disclose the terms of this Agreement to any
third party other than its outside counsel, auditors, and financial advisors,
except as required by law.
4. ADVERTISING AND REVENUE.
4.1 PLACEMENT OF BANNER ADVERTISEMENTS. In addition to the terms and
conditions otherwise set forth in this Agreement, Banner Advertisements sold
on the Co-branded Pages shall be governed by the terms and conditions set
forth on Exhibit C.
4.2 REMUNERATION; COLLECTION. The Company will pay to InfoSpace the
amounts as set forth on Exhibit C and Exhibit D. Any amount not paid when
due, or as invoiced, will be subject to a finance charge equal to one and
one-half percent (1.5%) per month or the highest rate allowable by law,
whichever is less, determined and compounded daily from the date due until
the date paid. Payment of such finance charges will not excuse or cure any
breach or default for late payment. InfoSpace may accept any check or payment
without prejudice to its rights to recover the balance due or to pursue any
other right or remedy. No endorsement or statement on any check or payment or
letter accompanying any check or payment or elsewhere will be construed as an
accord or satisfaction. Unless explicitly stated on Exhibit C or Exhibit D,
all amounts payable under this Agreement are denominated in United States
dollars, non-refundable, and Company will pay all amounts payable under this
Agreement in lawful money of the United States In the event Company fails to
make timely payment, InfoSpace shall have the right, in addition to all other
rights under this Agreement, to terminate, after ten days prior written
notice, all links, content, or services provided to Company under this
Agreement. If Company fails to make timely payment, Company will be
responsible for all reasonable expenses (including attorney fees) incurred by
InfoSpace in collecting such amounts.
5. WARRANTIES, INDEMNIFICATION AND LIMITATION OF DIRECT LIABILITY.
5.1 WARRANTIES
The parties to this Agreement represent and warrant as follows:
a) Each party warrants that it has the full corporate right, power and
authority to enter into this Agreement and to perform the acts
required of it hereunder;
b) Each party warrants that its execution of this Agreement by such
party and performance of its obligations hereunder, do not and
will not violate any agreement to which it is a party or by which
it is bound; and in performance under and related to this
Agreement, the parties shall comply with all applicable laws, rules
and regulations (including, without limitation, privacy, export
control and obscenity laws); and
c) Each party warrants that when executed and delivered, this
Agreement will constitute the legal, valid and binding obligation
of such party, enforceable against it in accordance with its terms.
d) Each party warrants that its Web Sites and the content contained
therein, and all Banner Advertisements served or submitted for the
Co-branded Pages, as the case may be, will not contain any material
that is obscene, pornographic, profane, fraudulent, libelous or
defamatory, or infringing of any third party Intellectual Property
Rights.
5
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5.2 INDEMNIFICATION. Each party (the "Indemnifying Party") will
defend, indemnify and hold harmless the other party (the "Indemnified
Party"), and the respective directors, officers, employees and agent of the
Indemnified Party, from and against any and all claimS, costs, losses,
damages, judgments and expenses (including reasonable attorneys' fees)
arising out of or in connection with any third-party claim alleging any breach
of such party's representations or warranties or covenants set forth in this
Agreement. The Indemnified Party agrees that the Indemnifying Party shall
have sole and exclusive control over the defense and settlement of any such
third party claim. The Indemnified Party shall promptly notify the
Indemnifying Party of any such claim of which it becomes aware and shall:
(a) at the Indemnifying Party's expense, provide reasonable cooperation to
the Indemnifying Party in connection with the defense or settlement of any
such claim; and (b) at the Indemnified Party's expense, be entitled to
participate in the defense of any such claim. The Indemnifying Party shall
not acquiesce to any judgment or enter into any settlement that adversely
affects the Indemnified Party's rights or interests without prior written
consent of the Indemnified Party.
5.3 LIMITATION OF LIABILITY; DISCLAIMER.
(a) Liability. UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE
LIABLE TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR
EXEMPLARY DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES), ARISING FROM ANY PROVISION OF THIS AGREEMENT, SUCH AS, BUT NOT
LIMITED TO, LOSS OR REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS. NEITHER
INFOSPACE NOR COMPANY'S LIABILITY (WHETHER ARISING IN TORT, CONTRACT OR
OTHERWISE AN NOTWITHSTANDING ANY FAULT, NEGLIGENCE (WHETHER ACTIVE, PASSIVE
OR IMPUTED), PRODUCT LIABILITY OR STRICT LIABILITY OF SUCH PARTY) UNDER THIS
AGREEMENT OR WITH REGARD TO ANY OF THE PRODUCTS OR SERVICES RENDERED BY
EITHER PARTY UNDER THIS AGREEMENT (INCLUDING ANY SERVERS OR OTHER HARDWARE,
SOFTWARE AND ANY OTHER ITEMS USED OR PROVIDED BY INFOSPACE, COMPANY, OR ANY
THIRD PARTIES IN CONNECTION WITH HOSTING THE CO-BRANDED PAGES OR PROVIDING
CONTENT), THE INFOSPACE WEB SITES AND ANY OTHER ITEMS OR SERVICES FURNISHED
UNDER THIS AGREEMENT. IN NO EVENT WILL INFOSPACE OR COMPANY'S AGGREGATE
LIABILITY TO THE OTHER UNDER THIS AGREEMENT EXCEED THE COMPENSATION PAID BY
COMPANY TO INFOSPACE UNDER THIS AGREEMENT.
(b) No Additional Warranties. EXCEPT AS SET FORTH IN THIS
AGREEMENT, NEITHER PARTY MAKES, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS,
ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED (INCLUDING ANY IMPLIED
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED
WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE), AND EACH
PARTY HEREBY SPECIFICALLY DISCLAIMS ANY CLAIM IN TORT (INCLUDING NEGLIGENCE),
IN EACH CASE, REGARDING THEIR WEB SITES, ANY PRODUCTS OR SERVICES DESCRIBED
THEREON, ANY BANNER ADVERTISEMENTS, ANY SOFTWARE, OR ANY OTHER ITEMS OR
SERVICES PROVIDED UNDER THIS AGREEMENT. WITHOUT LIMITING THE GENERALITY OF
THE FOREGOING, COMPANY AND INFOSPACE ACKNOWLEDGE THAT THEIR RESPECTIVE WEB
SITES AND THE CONTENT (INCLUDING ANY SERVERS OR OTHER HARDWARE, SOFTWARE AND
ANY OTHER ITEMS USED OR PROVIDED BY THE PARTIES OR ANY THIRD PARTIES IN
CONNECTION WITH HOSTING THE WEB SITES OR THE CONTENT OR PERFORMANCE OF ANY
SERVICES HEREUNDER) ARE PROVIDED "AS IS" WITHOUT ANY WARRANTIES OF ANY KIND.
COMPANY AND INFOSPACE ACKNOWLEDGE THAT INFOSPACE AND COMPANY MAKE NO WARRANTY
THAT IT WILL CONTINUE TO OPERATE ITS WEB SITES OR OFFER THE CONTENT IN ITS
CURRENT FORM, THAT ITS WEB SITES OR THE CONTENT WILL BE ACCESSIBLE WITHOUT
INTERRUPTION, THAT THE SITES OR THE CONTENT WILL MEET THE REQUIREMENTS OR
EXPECTATIONS OF THE OTHER PARTY, OR THAT THE CONTENT, SOFTWARE OR ANY OTHER
ANY
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MATERIALS ON ITS WEB SITES OR THE SERVERS AND SOFTWARE THAT MAKES ITS WEB
SITES AVAILABLE ARE FREE FROM ERRORS, DEFECTS, DESIGN FLAWS OR OMISSIONS.
6. TERM AND TERMINATION.
6.1 TERM. The term of this Agreement is as set forth on Exhibit C and
(Exhibit D regarding email services).
6.2 TERMINATION. Either party may terminate the Term upon not less than
thirty (30) days' prior written notice to the other party of any material
breach hereof by such other party, provided that such other party has not
cured such material breach within such thirty (30) day period.
6.3 EFFECT OF TERMINATION. Upon termination or expiration of the Term for
any reason, all rights and obligations of the parties under this Agreement
shall be extinguished, except that: (a) all accrued payment obligations
hereunder shall survive such termination or expiration; and (b) the rights
and obligations of the parties under Sections 4.2, 4.3, 5,6,7 and 8 shall
survive such termination or expiration.
7. INTELLECTUAL PROPERTY
7.1 COMPANY. As between the parties, Company retains all right, title and
interest in and to the Company Web Sites (including, without limitation, any
and all content, data, URLs, domain names, technology, software, code, user
interfaces, "look and feel". Trademarks and other items posted thereon or
used in connection or associated therewith; but excluding any Content or
other items supplied by InfoSpace) and the Company Marks along with all
Intellectual Property Rights associated with any of the foregoing. All
goodwill arising out of InfoSpace's use of any of the Company Marks shall
inure solely to the benefit of Company.
7.2 INFOSPACE. As between the parties, InfoSpace retains all right, title
and interest in and to the Content and the InfoSpace Web Sites (including,
without limitation, any and all content, data, URLs, domain names,
technology, software (including, without limitation, the Personal Desktop
Portal Application), code, user interfaces, "look and feel". Trademarks and
other items posted thereon or used in connection or associated therewith; but
excluding any items supplied by Company), user data gathered from or through
any InfoSpace tools or applications, and the infoSpace Marks, along with all
Intellectual Property Rights associated with any of the foregoing. All
goodwill arising out of Company's use of any of the InfoSpace Marks shall
inure solely to the benefit of InfoSpace.
7.3 COPYRIGHT NOTICES. All Co-branded Pages will include the following
acknowledgment, along with the InfoSpace logo.
"Powered by InfoSpace" or "Powered by InfoSpace.com"
InfoSpace and Company acknowledge that the Co-branded pages may also
contain copyright and patent notices of copyrighted or copyrightable works,
including those of InfoSpace Content providers. InfoSpace will be given
credit in advertisements of Company which promote the Content services
provided by InfoSpace in a manner such as "brought to you by InfoSpace.com"
or similar text.
7.4 OTHER TRADEMARKS. InfoSpace shall not register or attempt to register
any of the Company Marks or any Trademarks which Company reasonably deems to
be confusingly similar to any of the Company Marks. Company shall not
register or attempt to register any of the InfoSpace Marks or any Trademarks
which InfoSpace reasonably deems to be confusingly similar to any of the
InfoSpace Marks.
7.5 FURTHER ASSURANCES. Each party shall take, at the other party's
expense, such action (including, without limitation, execution of affidavits
or other documents) as the other party may reasonably request to effect,
perfect or confirm such other party's ownership interests and other rights as
set forth above in this Section 7.
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8. GENERAL PROVISIONS.
8.1. CONFIDENTIALITY. Each party (the "Receiving Party") undertakes to
retain in confidence the terms of this Agreement and all other non-public
information and know-how of the other party disclosed or acquired by the
Receiving Party pursuant to or in connection with this Agreement which is
either designated as proprietary and/or confidential or by the nature of the
circumstances surrounding disclosure, ought in good faith to be treated as
proprietary and/or confidential ("Confidential Information"); provided that
each party may disclose the terms and conditions of this Agreement to its
immediate legal and financial consultants in the ordinary course of its
business. Each party agrees to use commercially reasonable efforts to protect
Confidential Information of the other party, and in any event, to take
precautions at least as great as those taken to protect its own confidential
information of a similar nature. Company acknowledges that the terms of this
Agreement and user information are Confidential Information of InfoSpace. The
foregoing restrictions shall not apply to any information that: (a) was known
by the receiving Party prior to disclosure thereof by the other party: (b)
was in or entered the public domain through no fault of the Receiving Party;
(c) is disclosed to the Receiving Party by a third party legally entitled to
make such disclosure without violation of any obligation of confidentiality;
(d) is required to be disclosed by applicable laws or regulations (but in
such event, only to the extent required to be disclosed); or (e) is
independently developed by the Receiving Party without reference to any
Confidential Information of the other party. Upon request of the other party,
or in any event upon any termination or expiration of the Term, each party
shall return to the other all materials, in any medium, which contain,
embody, reflect or reference all or any part of any Confidential Information
of the other party. Each party acknowledges that breach of this provision by
it would result in irreparable harm to the other party, for which money
damages would be an insufficient remedy, and therefore that the other party
shall be entitled to seek injunctive relief to enforce the provisions of this
Section 8.1.
8.2 INDEPENDENT CONTRACTORS. Company and InfoSpace are independent
contractors under this Agreement, and nothing herein shall be construed to
create a partnership, joint venture, franchise or agency relationship
between Company and InfoSpace. Neither party has any authority to enter into
agreements of any kind on behalf of the other party.
8.3 ASSIGNMENT. Company may not assign this Agreement or any of its
rights or delegate any of its duties under this Agreement without the prior
written consent of InfoSpace; except that either party may, without the other
party's consent, assign this Agreement or any of its rights or delegate any
of its duties under this agreement; (a) to any affiliate of such party; or
(b) to any purchaser of all or substantially all such party's assets or to
any successor by way of merger, consolidation or similar transaction. Subject
to the foregoing, this Agreement will be binding upon, enforceable by, and
inure to the benefit of the parties and their respective successors and
assigns.
8.4 CHOICE OF LAW; FORUM SELECTION. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of Washington
without reference to its choice of law rules. Company hereby irrevocably
consents to exclusive personal jurisdiction and venue in the state and
federal courts located in King County, Washington with respect to any
actions, claims or proceedings arising out of or in connection with this
Agreement, and agrees not to commence or prosecute any such action, claim or
proceeding other than in the aforementioned courts.
8.5 NONWAIVER. No waiver of any breach of any provision of this
Agreement shall constitute a waiver of any prior, concurrent or subsequent
breach of the same or any other provisions hereof, and no waiver shall be
effective unless made in writing and signed by an authorized representative
of the waiving party.
8.6 FORCE MAJEURE. Neither party shall be deemed to be in default of
or to have breached any provision of this Agreement as a result of any delay,
failure in performance or interruption of service, resulting directly or
indirectly from acts of God, acts of civil or military authorities, civil
disturbances, wars, strikes or other labor disputes, fires, transportation
contingencies, interruptions in telecommunications or
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<PAGE>
Internet services or network provider services, failure of equipment and/or
software, other catastrophes or any other occurrences which are beyond such
party's reasonable control.
8.7 NOTICES. Any notice or other communication required or permitted to
be given hereunder shall be given in writing and delivered in person, mailed
via confirmed facsimile or e-mail, or delivered by recognized courier
service, properly addressed and stamped with the required postage, to the
individual signing this Agreement on behalf of the applicable party at its
address specified in the opening paragraph of the agreement and shall be
deemed effective upon receipt. Either party may from time to time change the
individual to receive notices or its address by giving the other party notice
of the chance in accordance with this section. In addition, a copy of any
notice sent to InfoSpace shall also be sent to the following address:
InfoSpace.com, Inc. Freei Networks, Inc.
15375 NE 90th Street 2505 S. 320th
Redmond, WA 98052 Federal Way, WA 98003
Fax: (425) 883-4846 Attention: Gregory P. Cavagnaro
Attention: General Counsel
8.8 SAVINGS. In the event any provision of this Agreement shall for any
reason be held to be invalid, illegal or unenforceable in any respect, the
remaining provisions shall remain in full force and effect. If any provision
of this Agreement shall, for any reason, be determined by a court of
competent jurisdiction to be excessively broad or unreasonable as to scope or
subject, such provision shall be enforced to the extent necessary to be
reasonable under the circumstances and consistent with applicable law while
reflecting as closely as possible the intent of the parties as expressed
herein.
8.8 INTEGRATION. This Agreement contains the entire understanding of the
parties hereto with respect to the transactions and matters contemplated
hereby, supersedes all previous agreements or negotiations between InfoSpace
and Company concerning the subject matter hereof, and cannot be amended
except by a writing signed by both parties. This Agreement does not
constitute an offer by InfoSpace and it shall not be effective until signed
by both parties.
8.9 COUNTERPARTS; ELECTRONIC SIGNATURE. This Agreement may be executed
in counterparts, each of which will be deemed an original, and all of which
together constitute one and the same instrument. To expedite the process of
entering into this Agreement, the parties acknowledge that Transmitted Copies
of the Agreement will be equivalent to original documents until such time as
original documents are completely executed and delivered. "Transmitted
Copies" will mean copies that are reproduced or transmitted via photocopy,
facsimile or other process of complete and accurate reproduction and
transmission.
9.0 PRESS RELEASES. Both Parties agree to issue a mutaully agreed upon
press release (Joni Hanson must sign off on the press release for InfoSpace)
within a reasonably prompt time after the mutual execution of this Agreement.
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as of the Effective Date.
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<PAGE>
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as of the Effective Date.
Freei Networks,Inc. InfoSpace.com, Inc.
("Company") ("InfoSpace")
By (signature) /s/ Bob McCausland By (signature) /s/ Naveen Jain
- ---------------------------------- -------------------------------
Name Bob McCausland Name Naveen Jain
- ---------------------------------- -------------------------------
Title CEO Title CEO
- ---------------------------------- -------------------------------
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<PAGE>
EXHIBIT A
CONTENT
The Content consists of, but is not limited to, the following indexes,
directories and other items and services (as the same may be updated, revised
or modified by InfoSpace in its sole discretion from time to time):
1. Yellow Pages
2. White Pages
3. Netsearch
4. Classified
5. City Guides
6. Finance
7. News
8. Sports headlines
9. Community (standard network chat)
10. Government
11. E-Shopping
12. International Listings
13. Business Services
14. Entertainment
15. ActiveShopper
16. InfoSpace "Personal Desktop Portal"
17. Web Page Creator
18. Event Manager
19. Forums
20. Web-based email
21. Address Book
22. Chat
23. Other items and services that may from time to time be added to certain
of the InfoSpace Web sites by InfoSpace (in its sole discretion)
The above listed Content is limited to the Content that InfoSpace
makes available on the InfoSpace Web Site, the primary home page of which is
http://www.infospace.com, but excludes content that is only available on
country-specific InfoSpace Web Sites, such as the InfoSpaceCanada Web Site, the
primary home page of which is located at http://www.infospace.com/canada. The
actual name of these services may change. Company must obtain the prior
approval of InfoSpace if Company desires to change the name of any of these
services.
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<PAGE>
EXHIBIT B
TRADEMARKS
<TABLE>
<CAPTION>
COMPANY MARKS
- -------------
[All Company marks and logos, or Company to supply list]
<S> <C>
INFOSPACE MARKS InfoSpace.com-SM-
- ---------------
ActiveCalendar-SM- InfoSpace in Every Space-SM-
ActiveCommunity-SM- InfoSpace-Registered Trademark- Publisher
ActiveMoney-SM- Merchant.com-SM-
ActiveOrganizer-SM- MyAgent-TM-
ActivePromo-SM- MyInfo-SM-
Outpost Network-Registered Trademark-
ActivePromotion-SM- PageExpress-TM-
ActiveShopper-SM- PageGreetings-SM-
AprilFools.com-SM- Personal Desktop Portal-SM-
Cobrand.com-SM- Portal in a Box-SM-
EZPage-TM- Powered by InfoSpace-SM-
EZStore-TM- Powered by InfoSpace.com-SM-
InfoSpace-Registered Trademark- RubberChicken.com-SM-
Unibasket-SM-
[LOGO]
Valentine.com-SM-
Virtual Outlet-Registered Trademark-
</TABLE>
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<PAGE>
EXHIBIT C
1. TERM. The term of this Agreement shall commence on the Effective Date
and, unless earlier terminated or extended as provided below, shall end upon
the [*] anniversary of this Agreement (with the exception of email services,
as set forth in Exhibit D 1, which shall terminate [*] months after the
Effective date) ("Term"); provided that the Term shall be automatically be
renewed for successive one (1) year periods unless either party provides
written notice of termination to the other party at least thirty (30) days
prior to the end of the then-current Term.
2. BANNER ADVERTISEMENTS. InfoSpace and Company shall have the right to
sell Banner Advertisements on the email Co-branded Pages. InfoSpace shall
serve all Banner Advertisements on the email Co-branded pages. In addition,
InfoSpace may sell and retain the gross revenue of up to [*]% of the available
Banner Advertisements Inventory for the email Co-branded pages. The
appearance of the Banner Advertisements will be as reasonably determined by
InfoSpace; provided, that either party may reject any Banner Advertisement if
such Banner Advertisement would materially adversely affect the download time
or performance of such email Co-branded page; or advertises or promotes a
competitor of Company or InfoSpace. Neither party will submit for any email
Co-branded Page any Banner Advertisement which contains any material that is
libelous or defamatory or that infringes any Intellectual Property Right or
other right of any third party.
3. COMPANY RIGHT TO SELL BANNER ADVERTISEMENTS. Company shall have the
right to sell up to [*]% of the available Banner Advertisement Inventory on
the email Co-branded Pages. All available inventory of Banner Advertisements
sold by the Company for the email Co-branded Pages which shall be "run of
site" (e.g., not targeted to any specific type or area of the email
Co-branded Pages). Each party shall be entitled to retain all sums received
by such party from any such Banner Advertisement sales.
4. RECORDS AND AUDIT; LATE PAYMENTS. During the Term the Company shall
maintain accurate records of the fees payable to InfoSpace under the
Agreement. InfoSpace may, upon ten (10) days' advance notice to the Company,
examine and audit such records of the Company in order to verify the figures
reported in any quarterly reports made to InfoSpace and any amounts owed to
InfoSpace by the Company under this Agreement. Any such audit shall be
conducted, to the extent possible, in a manner that does not interfere with
the ordinary business operations of the Company. In the event that any audit
shall reveal an underpayment of more than five percent (5%) of the amounts
due to InfoSpace for any quarter, the Company will reimburse InfoSpace for
the actual costs of such audit.
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[*] = Confidential Treatment Reqested
<PAGE>
EXHIBIT D
Work to be performed by InfoSpace with cooperation of Company:
1) EMAIL SERVICES:
- - InfoSpace will build a customized Email solution for Company.
- - InfoSpace will provide a IMAP web-mail solution that allows for the mail
storage functionality to remain at Company. Company shall pay for and
provide a dedicated VPN to InfoSpace data center.
- - Both in-coming and out-going emails will go through a Freei.net gateway.
This will maximize Company's flexibility to filter, modify and customize
the transmission of emails to its users.
- - Included in this functionality, InfoSpace will build up to [*] unique
co-brands with unique domain names for Company's private labeled Company
Affiliates Web Site customers. Each additional co-brand beyond the [*], will
incur a one time cost of $[*].
- - InfoSpace will allow for the provision of each of the Company users their
own personal calendar as part of the application.
- - Maximum Size per account: [*] MB.
Pricing for email services:
- - Term for email services: [*] for provision of email services
- - Fixed [*] Payments to InfoSpace [*] shall be the figures set
forth in the table below:
<TABLE>
<CAPTION>
- --------------------------------------------
[*] Fees
- --------------------------------------------
<S> <C>
[*] [*]
- --------------------------------------------
[*] [*]
- --------------------------------------------
[*] [*]
- --------------------------------------------
[*] [*]
- --------------------------------------------
[*] [*]
- --------------------------------------------
</TABLE>
- - Company will pay the [*] fees on the [*] beginning on the Effective Date.
- - There shall be a cap of [*] Web-mail accounts over the [*] period.
- - Web-mail accounts beyond [*] will be charged $[*] per user.
PRODUCT SPECIFICATIONS FOR INFOSPACE EMAIL SERVICE:
Traction-TM- Series: Email Module
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[*] = Confidential Treatment Requested
<PAGE>
GENERAL OVERVIEW OF FEATURES (WHICH MAY BE MODIFIED OR ENHANCED BY INFOSPACE):
InfoSpace's E-mail Module is a flexible, customizable email solution that
satisfies the messaging needs of web communities. The E-mail Module enables
individual members of a community to set up free, comprehensive web-based
email accounts under the umbrella of the community site. All email accounts
use the communities' domain name in order to promote the site and increase site
traffic. InfoSpace's email also enables messages to be downloaded from
multiple POP Mail accounts. Email folders can be added to the individual
users Start Page to easily access information. In addition, users can add
their favorite contacts to their Start Page to easily access that contact's
information or to email that contact directly from the Start Page.
SPECIAL FEATURES
InfoSpace's E-Mail Module supports and manages user-generated email
lists, auto-subscribe and unsubscribe to newsletters, as well as newsletter
subscription confirmations. Synchronize Outlook-TM- with InfoSpace.com email
service to easily access email, calendars and contacts from anywhere.
FEATURES
- - Secure, password protected, Web-based service
- - Manages POP accounts
- - Branding: customer defined layout and navigation
- - Scalable
- - Customers can create a unique domain name for community
- - Large inbox capacity - [*] megabytes
- - Saves sent messages as well as drafts of messages and permanent message
archiving Time stamps messages
- - Customizable & expandable mail folders
- - Standard mail features: reply, reply to all, forward, cc, bcc
- - Attachments-no larger than 2 megabytes
- - Personalized signature setting
- - Preview messages prior to sending
- - Outlook-TM- synchronization
- - Customer defined Stock Messages-New Member Welcome, Password Reminder, etc.
- - Customer defined footer advertising your organization and free email
accounts
- - Integrates with relationship manager for easy addressing and management of
contacts
- - List management allows user to easily create and manage group emails
- - Message sent confirmation
2) DESKTOP PORTAL [*]
- [*]
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[*] = Confidential Treatment Requested
<PAGE>
- [*]
3) RE-SELLER DISTRIBUTION OF INFOSPACE PRODUCTS.
- InfoSpace's Personal Desktop Portal products and other Content, as
provided in this Agreement, shall be [*] content and commerce
offering to Company's customer base when company offers co-branded
or private labeled portal solutions to its customers.
4) RE-SELL COMPANY'S PRODUCT.
- InfoSpace will in consideration for the compensation below offer
"free Internet access" to the segments of its customer base for which
InfoSpace has appropriate arrangements in place.
- If InfoSpace is instrumental in the referral to Company of a
co-brand Partner who enters into an Agreement with Company, the
parties hereto shall agree upon a satisfactory referral fee payable
to InfoSpace.
The Company shall compensate InfoSpace for distribution of its
"free Internet access" product, in addition to other compensation
under the Agreement, as follows:
- Company will pay InfoSpace $[*] that a "free Internet access"
product user generated through InfoSpace remains an "Active User".
For the purposes of this Agreement, an "Active User" is defined as
a Company Product User who has logged on through the Freei Client
for at least [*]. InfoSpace at its sole discretion may use any
promotions to encourage new user of Company's product offering.
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[*] = Confidential Treatment Requested
<PAGE>
LICENSE AGREEMENT
This Freei.net License Agreement ("Agreement") is dated as of March 31,
2000, between Freei.net Sdn. Bhd. or its designee ("SEA") and Freei Networks,
Inc. ("FN") for the Freei.net software, technology, trademarks and brand names
described below, including any updates and supplements to the original
Technology provided to SEA by FN.
RECITALS
A. Freei.net is a free-of-charge Internet access and email service provider (the
"Service") for the general public in the United States.
B. FN desires to expand the Service into certain Asia Pacific Markets in
accordance with the terms of this Agreement and has accepted payment of
US$[*] from and signed a Draft Terms Sheet, dated 15 December, 1999, with
Alexander Wong Shoon Choy for and on behalf of SEA.
C. SEA wishes to operate the Service within those markets in accordance with the
terms of this Agreement.
AGREEMENT
In consideration of the mutual covenants contained in this agreement, the
parties agree as follows:
1. GRANT OF TECHNOLOGY LICENSE. FN hereby grants to SEA a license to use FN's
dial-up client software, ad banner viewing and delivery technology, banner ad
reporting software and system, default pages with news content, chat rooms,
Freei.net electronic mail system and related programs for complete
implementation of Service including updates, revisions, improvements and
modifications (together, the "Technology") within the Territory (as defined
below) during the terms of this Agreement. The Technology is protected by
copyright laws and international copyright treaties, as well as other
intellectual property laws and treaties. The Technology is being licensed, not
sold, to SEA in accordance with the terms of this Agreement.
2. OTHER RIGHTS AND LIMITATIONS.
(a) Limitations on Reverse Engineering, Decompilation, and Disassembly. SEA
may not reverse engineer, decompile or disassemble the Technology.
[*] = Confidential Treatment Requested
<PAGE>
(b) Rental. SEA may not rent, lease, sell, sublicense or lend the
Technology without the prior written consent of FN, and any such sublicenses
shall be in accordance with Section 11 hereof. FN recognizes that SEA will be
venturing to promote the Service in the Territory via its subsidiaries or
partnerships in the event of which to give business efficacy to implementation
of the Service in the Territory by SEA, the consent of FN to rent, lease, sell,
sublicense or lend the Technology shall not be unreasonably refused.
(c) Transfer. SEA may not transfer or assign SEA rights or obligations
under this Agreement to any person or entity without the prior written consent
of FN.
(d) Support Services. FN shall provide SEA with technical support
services related to the Technology ("Support Services") as described in Section
11 below. Any supplemental software code provided to SEA as part of the Support
Services shall be considered part of the Technology and shall be subject to the
terms and conditions of this Agreement. In order to facilitate communications
and development of the Service in the Territory, FN shall:
(i) provide SEA assistance in connection with the development of
the Service in the Territory and training in the standards,
procedures, techniques and methods comprising the Service;
(ii) deliver to SEA sufficient copies of the Operating Manual and
any other training materials deemed appropriate on loan to
SEA.
(e) Complimentary Technology. If the Technology is labeled
"Complimentary" or "Comp", then, notwithstanding other sections of this
Agreement, SEA's use of the Technology is limited to use for demonstration, test
or evaluation purposes. Complimentary Technology is new or different technology
that is being distributed on a test basis and not to be implemented or included
in the Service.
(f) Reservation of Rights. FN reserves all rights not expressly granted
under this Agreement.
3. TRADEMARK LICENSE. SEA is hereby granted [*] license, during the
term of this Agreement, to use Freei.net's name, logo and product likenesses
("the Trademarks") within the Territory, as defined below, provided, however, FN
retains the right to enter into private label and other business development
relationships within the Territory, pursuant to which the "powered by Freei.net"
logo may be licensed or otherwise used provided that such private label and that
such business is non-competitive with the Service. SEA agrees to use the
appropriate trademark, product descriptor and trademark symbol (either "tm" or
"R"), and clearly indicates FN's ownership of the trademark(s) whenever the
Trademarks or Service are first mentioned in any manner in connection with the
Trademarks or Services. SEA will not undertake an action that could interfere
with or diminish the other's right, title and/or interest in trademark(s), trade
name(s) or service name(s). SEA shall not make any false or misleading
representations to its customers or others regarding the Service. SEA shall not
make any representations, warranties, or guarantees with respect to the
specifications, features or
-2-
[*] = Confidential Treatment Requested
<PAGE>
capabilities of the Service. SEA agrees that it will not impugn the quality of
reputation of the Trademark or the Service, or engage in any misleading or
deceptive statements or advertising about the Service.
4. TERRITORY. The licenses granted by this Agreement shall be applicable in
the following territories: [*] (together, the "Territory"). SEA shall not have
any rights under this Agreement or otherwise in any other territories. SEA
shall have the right to pursue partnerships and other business relationship
within and outside the Territory. SEA will not pursue any deals without the
express written and signed consent of FN prior to contacting any potential
business partner. Violation of this section of Article 4 is an event which
may trigger immediate termination. Disputes about this section of Article 4,
upon request, shall be submitted to binding arbitration through American
Arbitration Association ("AAA") before immediate termination becomes
effective.
In respect of the territories of [*], FN will disclose to SEA its
activities provided that FN may not be able to involve SEA in deals where FN
had previous contacts, existing relationships or ongoing discussions.
5. ROYALTIES AND FEES.
(a) SEA will pay to FN a one-time licensing fee of US$[*]. US$[*] has been
received by FN and US$[*] is payable upon the signing of this Agreement. The
balance shall be payable as follows: US$[*] by the end of April, US$[*] each
by the end of May and June, 2000.
(b) SEA will pay to FN a [*] royalty based on the gross advertising revenue
received by SEA. This royalty will be paid quarterly, with monthly reports
provided to FN.
(c) SEA will pay to FN US$[*] per new registered Freei.net subscriber only
within the Territory excluding Singapore. This royalty will be paid quarterly,
with monthly reports provided to FN.
(d) SEA and FN will pay to each other [*]% of revenues from advertising
sold by the other party and generated in its own territory.
(e) Business development activities will be finalized in a separate
addendum.
6. RIGHTS TO SUBSCRIBERS. Subject to the subscriber fees set forth in
Section 5(c) above, for purposes of this Agreement, FN and SEA will jointly own
rights to subscribers obtained during the term of this Agreement within the
Territory, as well as all demographic information of each subscriber. Upon the
termination of this Agreement for any reason, SEA will use its best efforts to
transition all such subscribers to FN's Service.
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[*] = Confidential Treatment Requested
<PAGE>
7. NONCOMPETITION PROVISION. SEA agrees that during the period beginning on
the date of this Agreement and ending [*] months following termination of this
Agreement for any reason, it will not engage in the business of [*] unless
it secures the prior written permission of FN, directly or indirectly:
(a) be employed by, act as the agent for, or consult with or otherwise
perform services for a Competitor (as defined below);
(b) own any equity interest in, manage or participate in the management (as
an officer, director, partner, member or otherwise) of, or be connected in any
other manner with, a Competitor; provided, however, that nothing in this
Agreement shall restrict SEA from owning less than one percent (1%) of the
equity interests of any publicly held entity; or
(c) induce or attempt to induce any employee, officer, director, agent,
independent contractor, consultant, customer, supplier or other service provider
of FN to terminate its relationship with, or cease providing services or
products to, or purchasing products from Freei.net.
For purpose of this Agreement, a "Competitor" is any entity or individual which,
directly or indirectly, engages in the same or similar business as FN or is
preparing to engage in the same or similar business as FN anywhere in the world,
including, without limitation, the provision of Internet access services on a
free-of-charge basis. SEA agrees that the duration of the restrictions under
this Section 7 shall be extended by the duration of any period during which SEA
is in violation of this Section 7. SEA acknowledges that the covenants in this
Section are reasonable in relation to the licenses SEA has been granted under
this Agreement. However, should any court find that any provision of such
covenants is unreasonable, whether in period of time, geographical area, or
otherwise, then in that event SEA agrees that such covenants shall be
interpreted and enforced to the maximum extent which the court deems reasonable.
Any items not covered by this Agreement shall be resolved in an addendum.
8. RESPONSIBILITY FOR SERVICE. SEA will be solely responsible for the
content, quality and performance of the Service within the Territory and for any
warranty, return, support, maintenance or other obligations related to the
Service within the Territory, and Freei.net will have no responsibility or
liability whatsoever for the foregoing. SEA will be solely responsible for the
quality and performance of its products including any warranty, return, support,
maintenance, and other obligations related to the product and that FN shall have
no responsibility or liability whatsoever for the foregoing. SEA hereby agrees
to indemnify and hold harmless FN and its officers, directors and controlling
persons from and against any and all claims, liabilities or expenses (including
court costs, attorneys' fees and costs of settlement) incurred by any of them in
connection with or arising out of the provision of the Service within the
Territory.
9. CO-BRANDING AND PRIVATE LABELING. SEA agrees that in the event of any
permissible co-branding project it undertakes, it will as part of such project
cause the FN brand
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[*] = Confidential Treatment Requested
<PAGE>
logo to be displayed at the same size, and with at least equal prominence, as
that of the co-brand partner's logo. SEA further agrees that in the event of any
permissible private label project it undertakes, it will as part of such project
cause the "powered by Freei.net" mark to appear in a prominent position at a
size no smaller than 120x60 pixels. In the case of both co-branding and private
labeling, the marks shall appear on the default pages and all pages within the
relevant internal service system. In all such case, SEA will also the FN
trademark/copyright statement to appear with equal prominence, and will provide
a hyperlink to a FN end-user license page.
10. OEM AGREEMENTS. If, in connection with the transactions contemplated by this
Agreement, SEA desires to enter into permissible relationships with third party
distribution partners, SEA may use FN's form of OEM Agreement and/or Technology
Distribution Agreement in substantially the forms attached hereto as EXHIBIT A
and EXHIBIT B respectively. In good faith, details of Exhibits A and B will be
presented to SEA post signing of this Agreement.
11. STAFF TIME AND INITIAL TRAINING. FN will furnish SEA, without further
consideration, with the services of [*] on-site and [*] in Seattle,
Washington, for the full initial software installation, localization and
customization. FN will also furnish SEA with additional staff to provide the
technical training, know-how, consulting and maintenance for the software and
other system programs necessary for the functionality of the Service; all such
training, consulting, maintenance and other staff personnel will be compensated
at a rate of US$[*] per hour beyond the five days.
12. HARDWARE AND SOFTWARE; REPRODUCTION. SEA will obtain all hardware,
equipment, software and systems necessary to implement the Service in the
Territory. For purposes of quality assurance, such purchases will be made with a
party or parties with the consent of FN, such consent not to be unreasonably
refused. In addition, SEA shall be required to use a CD producer specified by
FN, which producer shall have the right to provide reports to FN regarding CDs
produced for on behalf of SEA.
13. STAFFING AND CUSTOMER SUPPORT. SEA will be required to maintain its own
staff to build and maintain the Service within the Territory, including, but not
limited to, technical, administrative, operations and marketing; provided, that
SEA shall be required to outsource any and all technical customer support
services through the FN customer support center.
14. TAXES AND FEES. SEA will be responsible for all local and national
taxes and any fees or other expenses incurred in connection with implementing
the Service in any country within the Territory.
15. DURATION. Duration shall initially be [*]. At the end of the [*] or
during the [*], SEA may ask for and receive a rollup into a FN subsidiary to
be called [*], to be formed later. [*], as the wholly-owned subsidiary of
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[*] = Confidential Treatment Requested
<PAGE>
FN, will have the rights to the following countries: [*]
If a rollup occurs, SEA and [*] will be appraised and valued by an
independent company that the parties mutually select or Goldman Sachs, on a Fair
Market Value basis. Then, the owners of SEA will receive the share value of SEA
in [*] stock, dollar for dollar.
At the end of the initial [*], SEA may extend for [*] more years if they
meet mutually agreed performance standards which shall not be unreasonable.
If SEA decides to extend, then a rollup can occur only if both parties agree.
If SEA violates any term of this Agreement, except Section 4, FN may issue
a notice to SEA at the address hereinbefore stated or at its last business
address requiring it to remedy or rectify the breach within one (1) month of the
date of receipt of the said notice. In the event that SEA fails at the end of
the expiry of the notice to remedy or rectify the breach complained of, FN may
terminate this Agreement without waiving any other rights.
In addition, if SEA has not made reasonable efforts to begin providing the
Service within the Territory within [*] months of the date of this Agreement,
FN may terminate this Agreement immediately provided that FN shall first
issue a minimum of one (1) month's notice to SEA requiring it to immediately
take reasonable effort to provide the Service failing which FN shall then be
entitled to terminate the Agreement.
It is hereby expressly declared that save and except for the terms
contained herein nothing in this Agreement shall give the right to FN to
terminate this Agreement or to disconnect, discontinue or disrupt in anyway
whatsoever the Service otherwise other than by due process of law before the
expiry of the term.
16. SAFEGUARDS / AUDIT RIGHTS. SEA agrees to (i) implement internal
safeguards to prevent any unauthorized copying, distribution or use of the
technology; (ii) provide FN with written certification of the number of
copies or concurrent usage of the Technology on request; and (iii) to allow
FN to audit SEA's premises and systems for compliance with this Agreement
during regular business hours. FN will pay for the cost of the audit unless
the audit shows a discrepancy which is [*] or more of the revenue amount
reported by SEA, in which event SEA shall pay for the cost of the audit and
give two (2) days notice.
17. UPGRADES. As and when there are any upgrades, changes, modifications, FN
will make efforts to furnish SEA without delay such upgrades, changes,
modifications of the FN software. Technology acquired as an upgrade replaces
and/or supplements all prior versions. SEA may use the resulting upgrade only in
accordance with the terms and conditions of this Agreement.
18. OWNERSHIP. All right, title and interest in and to the Technology, the
Trademarks and the Service (collectively, the "IP"), including, without
limitation, all applicable copyrights,
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[*] = Confidential Treatment Requested
<PAGE>
trade secrets and other intellectual property ownership or distribution rights
in and to the IP, and any and all modifications, improvements or derivative
works of or to the IP (the "Derivatives") shall remain exclusively with FN
regardless of which party developed the Derivative. SEA shall do nothing to
divest or disturb FN's title to the IP. SEA shall take all steps reasonably
requested by FN to protect any of FN proprietary rights in connection with the
IP and any Derivatives. Except as set forth in this Agreement, SEA will have no
proprietary rights in or to the IP at any time; and SEA's rights are limited to
those set forth in this Agreement. SEA shall be granted a royalty fee,
non-exclusive license in the Derivatives where SEA developed or assisted in the
development of such Derivative.
19. EXPORT. SEA agrees that SEA will not export or re-export the Technology,
any part thereof, or any process or service that is the direct product of the
Technology (the foregoing collectively referred to as the "Restricted
Components"), to any country, person or entity subject to U.S. export
restrictions. SEA specifically agrees not to export or re-export any of the
Restricted Components (i) to any country to which the U.S. has embargoed or
restricted the export of goods or services, which currently include, but are not
necessarily limited to, Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria,
or to any national of any such country, wherever located, who intends to
transmit or transport the Restricted Components back to such country; (ii) to
any person or entity who SEA knows or has reason to know will utilize the
Restricted Components in the design, development or production of nuclear,
chemical or biological weapons; or (iii) to any person or entity who has been
prohibited from participating in U.S. export transactions by any federal agency
of the U.S. Government. SEA warrants and represents that neither the Bureau of
Export Administration of the U.S. Commerce Department nor any other U.S. federal
agency has suspended, revoked or denied SEA's export privileges.
20. GOVERNING LAW AND ATTORNEYS' FEES. This Agreement is governed by the
laws of the State of Washington, USA, excluding its conflict of laws, rules, and
specifically excludes the United National Convention on Contracts for the
International Sale of Goods. The parties agree that any dispute arising under
this Agreement shall be brought in federal district court in Seattle,
Washington, USA, and hereby submit to such jurisdiction and venue. In any action
or suit to enforce any right or remedy under this Agreement or to interpret any
provision of this Agreement, the prevailing party will be entitled to recover
its costs, including reasonable attorneys' fees.
21. MAIN AGREEMENT. This Agreement constitutes the Main Agreement between
SEA and FN with respect to the Technology, the Trademarks and the Service, and
replaces all other agreements or representations, whether written or oral. The
terms of this Agreement can only be modified by express written consent of both
parties. If any part of this Agreement is held to be unenforceable as written,
it will be enforced to the maximum extent allowed by applicable law, and will
not affect the enforceability of any other part.
22. NOTICES.
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23. LIMITED WARRANTY. For a period of ninety (90) days from the date SEA
receives the Technology or from the date of performance of Support Services by
FN, FN warrants that (a) the unmodified Technology will perform substantially in
accordance with the accompanying written materials when used as directed, (b) FN
media will be free of defects, and (c) such Support Services will be performed
in a manner consistent with generally accepted industry standards. Any implied
warranties are limited to the 90-day period. This Limited Warranty is void if
failure of the Technology has resulted from modification, accident, abuse or
misapplication. Some jurisdictions do not allow limitations on duration of an
implied warranty, so the above limitation may not apply to SEA.
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<PAGE>
24. FREEI.NET SDN.BHD. REMEDY. Freei.net Sdn.Bhd.'s remedies will be set forth
in the Service Level Agreement.
25. FN warrants that it is entitled to license the Technology and trademark and
that the same will not constitute an infringement of the rights of any third
party and will fully and effectively indemnify SEA for and against all
proceedings, loss, damages, costs, claims and expenses arising out of any such
infringement.
26. NO OTHER WARRANTIES. TO THE FULL EXTENT PERMITTED BY LAW, FN AND ITS
SUPPLIERS DISCLAIM ALL OTHER WARRANTIES, WHETHER ORAL OR WRITTEN, EXPRESS OR
IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE, TITLE, AND NON-INFRINGEMENT, WITH REGARD TO
THE SOFTWARE AND THE PROVISION OF OR FAILURE TO PROVIDE SUPPORT SERVICES. THIS
WARRANTY GIVES SEA SPECIFIC LEGAL RIGHTS. SEA MAY HAVE OTHERS, WHICH VARY FROM
JURISDICTION TO JURISDICTION.
27. LIMITATION OF LIABILITY. FN AND ITS SUPPLIERS WILL NOT BE LIABLE FOR ANY
SPECIAL, INCIDENTAL, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT
LIMITATION, DAMAGES FOR PERSONAL INJURY, LOSS OF BUSINESS PROFITS, BUSINESS
INTERRUPTION, LOSS OF BUSINESS OR CONFIDENTIAL INFORMATION, LOSS OF PRIVACY, OR
ANY OTHER PECUNIARY LOSS) ARISING OUT OF THE USE OF OR INABILITY TO USE THE
SOFTWARE OR THE PROVISION OF OR FAILURE TO PROVIDE SUPPORT SERVICES, EVEN IF FN
OR ITS SUPPLIERS HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN ANY
CASE, THE ENTIRE LIABILITY OF FN AND ITS SUPPLIERS UNDER THIS AGREEMENT AND
LIMITED WARRANTY SHALL BE LIMITED TO THE AMOUNT ACTUALLY PAID BY SEA FOR THE
SOFTWARE OR SUPPORT SERVICES THAT CAUSE THE DAMAGE. BECAUSE SOME JURISDICTIONS
DO NOT ALLOW THE EXCLUSION OR LIMITATION OF LIABILITY, THE ABOVE LIMITATION MAY
NOT APPLY TO SEA.
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Any items not covered in this Agreement shall be resolved in addendums. The
parties agree to negotiate in good faith any issues raised by their respective
counsel after further review of this Agreement by such counsel. The parties
further agree that any such issues will initially be handled directly by Bob
McCausland and Rod Hamlin on behalf of FN, and by Alex Wong Shoon Choy on behalf
of Freei.net Sdn.Bhd.
FREEI NETWORKS, INC. FREEI.NET SDN.BHD.
/s/ Rod Hamlin /s/ Alexander Wong Shoon Choy
- -------------------- --------------------------------
By ROD HAMLIN By ALEXANDER WONG SHOON CHOY
Its VICE PRESIDENT OF Its PRESIDENT & CEO for and on behalf
BUSINESS DEVELOPMENT
Witnessed by: Witnessed by:
/s/ Bob McCausland /s/ Bernard Wong
- -------------------- --------------------------------
Bob McCausland Bernard Wong
President & CEO
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated March 29, 2000, relating to the financial statements of Freei
Networks, Inc., which appear in such Registration Statement. We also consent to
the reference to us under the heading "Experts" in such Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Seattle, Washington
April 7, 2000
